Thursday, 8 September 2022
Financial Sector Reform Bill 2022; Second Reading
That this bill be now read a second time.
The Financial Sector Reform Bill 2022 is part of a package of bills that finalises a number of remaining recommendations from the banking royal commission. It also delivers on the government's commitment to ensure safe and well-regulated consumer markets for credit products, such as small amount credit contracts—also known as payday loans—and consumer leases.
It is disappointing that I have to introduce these measures here today. These measures all should have been implemented and introduced by the previous government.
In February 2019, the former Treasurer promised to deliver his response to the banking royal commission within two years. Even with Labor's full support, the coalition chose not to prioritise the measures contained within this bill that implement the response to the banking royal commission.
The measures relating to small amount credit contracts date back even further—back to a 2016 report that laid out a clear path for the government to act on payday lending. For nearly six years, the Turnbull-Morrison government failed to act on this report.
These failures reflect the coalition's continued unwillingness to stand with Australians against misconduct in the financial services sector. This is a coalition that voted against the banking royal commission 26 times before finally acceding to it.
Nevertheless, I hope that we are able to secure the parliament's and the opposition's support to make the sensible measures that I am introducing today. Schedules 1 and 2 to the bill make minor and consequential amendments to various Commonwealth laws to support the Financial Accountability Regime and to provide transitional arrangements relating to the repeal of the Banking Executive Accountability Regime (BEAR).
Schedule 3 to the bill establishes a financial services Compensation Scheme of Last Resort, the CSLR. The government has committed to introducing a CSLR and today we deliver on this commitment. This bill is part of a package of bills that establish and fund the CSLR.
In 2019, the banking royal commission endorsed the three principal recommendations of the 2017 supplementary final report of the review of the financial system external dispute resolution and complaints framework, the Ramsay review, regarding the establishment of a CSLR. The Ramsay review noted the inadequacy of existing redress measures in ensuring all consumers are compensated for losses and recommended the establishment of an industry-funded and forward-looking CSLR that targets the areas of the financial sector with the greatest evidence of need.
The CSLR is designed to provide compensation to consumers who have received a relevant determination in their favour by the Australian Financial Complaints Authority—hereafter AFCA—where that determination remains unpaid.
Claimants may receive compensation of up to $150,000 where they have an unpaid AFCA determination in their favour for the following financial services or products: personal advice on relevant financial products to retail clients, credit intermediation, securities dealing and credit provision. The cap on claims helps maintain the ongoing financial sustainability of the scheme, at the same time as balancing the interests of consumers.
The operator of the CSLR will be a subsidiary of AFCA, limited by guarantee and operates on a not-for-profit basis. The operator must act in line with the primary legislation and regulations, with compliance ensured by ASIC. The operator will be managed by a board consisting of an independent chair appointed by the minister, a person who is a member of the board of AFCA, and an actuary who has at least five years of actuarial experience.
The CSLR is designed to act as a last resort mechanism. After the claimant has notified AFCA that their determination remains unpaid, AFCA will be required, where appropriate, to take steps to ensure the relevant entity pays the compensation owed. The CSLR operator will also need to confirm that no other scheme is available to pay all or part of the compensation owed, including any state or territory arrangements.
Measures have been added to reduce the inclination of financial firms from relying on the CSLR and to facilitate better compliance with AFCA determinations. For example, ASIC must cancel an AFCA member's Australian financial service licence and/or Australian credit licence if the CSLR provides compensation to a claimant.
The government notes the recommendations made by the former Senate Economics Legislation Committee, which were tabled on 15 February 2022, on the CSLR bills introduced by the previous government, including the recommendation to include managed investment schemes in the scope of the CSLR. There have been no changes to the scope of the CSLR and the provisions being introduced today are substantively the same as those considered by that committee. The CSLR provisions have only been subject to minor and targeted amendments to reflect the passage of time and further stakeholder feedback. The scope of the CSLR reflects financial products that have a history of unpaid determinations and have been subject to significant regulatory reform which have reduced the risk of misconduct. This is an important point. The government will continue to consider potential enhancements to the regulatory framework of managed investment schemes.
Schedule 4 to the bill amends the National Consumer Credit Protection Act 2009(hereafter the credit act) to strengthen the consumer protection framework for consumers of small amount credit contracts and consumer leases through the introduction of new obligations for providers of these credit products.
SACCs are loans of up to $2,000 where the term of the contract is between 16 days and 12 months while a consumer lease is typically a contract longer for household goods longer than four months where the consumer does not have the right or obligation to purchase the goods.
These measures give effect to the government's response to the 2016 review of small amount credit contract laws which identified a number of predatory lending practices that lead to some consumers experiencing financial hardship.
Key reforms include strengthened caps on the amount of income a consumer can spend on repayments before they are ineligible to enter into certain credit products; caps on the cost of consumer leases; equal repayment intervals for small amount credit contracts; and prohibitions on certain types of unsolicited communications and referrals. Combined with anti-avoidance provisions, these reforms will enhance the existing consumer protections, including responsible lending obligations, while making sure that these credit products are more affordable and less harmful.
The government acknowledges that most of these reforms will require some time for industry to implement, so the bulk of the proposed changes will commence six months following royal assent.
The Legislative and Governance Forum for Corporations was notified of this bill, as required under the Corporations Agreement 2002 and the National Credit Law Agreement 2009.
Full details of all of the measures are contained in the explanatory memorandum.