Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697640920680.pdf (Australia)
GPO Box 144, Sydney, NSW 2001 Suite 902, Level 9, 130 Pitt Street, Sydney, NSW 2000 T: +61 (0)2 8905 1300 W: www.mfaa.com.au 18 December 2021 Senate Economics Legislation Committee PO Box 6100 Parliament House Canberra ACT 2600 By electronic upload Attention: Senator Paul Scarr Dear Mr Scarr Financial Services Compensation Scheme of Last Resort Levy Bill 2021 The Mortgage and Finance Association of Australia (MFAA) welcomes the opportunity to make a submission to the Senate Standing Committee on Economics in relation to the Compensation Scheme of Last Resort (CSLR).
Our submission relates only to the Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (the Bill) and specifically in relation to credit intermediation.

As context to this submission, the MFAA is Australia’s leading professional association for the mortgage and finance broking industry with over 14,000 members.

Our members include mortgage and finance brokers, aggregators, lenders, mortgage managers, mortgage insurers and other suppliers to the mortgage broking industry.
Brokers play an important role in intermediated lending, providing access to and promoting choice in both consumer and business finance.

Brokers facilitate almost two thirds all new residential home loans 1 and four in ten small business loans2 in Australia.

The MFAA’s role, as an industry association, is to provide leadership and to represent its members’ views.
We do this through engagement with governments, financial regulators and other key stakeholders on issues that are important to our members and their customers.

This includes advocating for balanced legislation, policy and regulation and encouraging policies that drive competition and improve access to credit products and credit assistance for all Australians.
OUR SUBMISSION We welcome the announcement by the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume that the Government will fund the establishment of the CSLR and contribute to scheme costs in the first year.
This announcement aligns with Government’s approach to funding the establishment of the Australian Financial Complaints Authority (AFCA) and satisfies a key recommendation in our submission to the Compensation Scheme of Last Resort Proposal Paper (previous submission) 3.
1 MFAA Industry Intelligence Service Report 12th Edition pg 4 2 Productivity Commission research paper Small business access to finance: The evolving lending market pg 44 3 MFAA Response to consultation on Compensation Scheme of Last Resort Proposal Paper: f265b1091b9de07655997db673380c36004532e8.pdf (sanity.io) 1 Financial Accountability Regime Bill 2021 [Provisions] and Financial Services Compensation Scheme of Last Resort LevyBill 2021 [Provisions] and related billsSubmission 23 The MFAA supports the implementation of Financial Services Royal Commission Recommendation 7.1 - that the Government establish an industry compensation scheme, consistent with the Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework (Ramsay Review).
The Scheme will provide an additional layer of protection to remediate consumers that have suffered loss resulting from poor conduct by financial firms.

However, as noted in our previous submission, we believe that it is important to carefully consider the scope of such a compensation scheme, and specifically, the key objective of the Ramsay Review, which was a response to the number of unpaid determinations relating to the provision of financial advice and offer of managed investment schemes.
The funding model and levy components of the scheme must appropriately consider the risk and proportion of certain sectors having unpaid determinations.
Any imposed levy that does not correlate to the probability, risk or level of previous unpaid determinations by other sectors will cause harm to credit intermediaries (specifically mortgage and finance brokers, many of which are small businesses), create further barriers for new entrants into the market and negatively impact competition and access to credit within the industry.
Therefore, significantly and importantly, for the scheme to fulfil its intended purpose, it must be fair, efficient and cost effective.

RECOMMENDATIONS RECOMMENDATION 1: LEVIES SHOULD BE BASED ON RISK OF UNPAID DETERMINATIONS WITHIN EACH SUB-SECTOR We noted in our previous submission that there should be no cross subsidisation of subsectors if levies raised from a particular subsector is insufficient to meet claims.
The levies set for each subsector must correlate to the level of risk of unpaid determinations generated by that subsector.

This will avoid the need for cross-subsidisation between subsectors.

The key objective of the Ramsay Review centred around the number of unpaid determinations relating to the financial advice, investment products and managed investment schemes.

In the last financial year, the mortgage broking industry accounted for just 0.39% of all banking and finance complaints received by AFCA.
4 The financial advice industry has traditionally received a higher level of complaints and historically had a higher value of unpaid determinations.

The quantum and setting of levies should reflect historical levels of complaints and the quantum of unpaid determinations.
The draft Bill does not specify the methodology nor framework for cross-subsidisation, instead simply noting that “before ordering cross subsidisation the Minister must have regard to the impact that imposing… the special levy may have on the financial sustainability and viability of the sub-sector and on the financial system more broadly.”5 If cross-subsidisation is unavoidable, then it is important that, in exercising ministerial discretion in relation to making an order for cross-subsidisation, the Minister considers: • Instead of cross-subsidisation, raising additional levies from the sub-sector incurring the shortfall either through a special levy or through additional levies in the following year for the subsector responsible for the use of the reserve.
That the credit intermediation segment are mostly small businesses with limited cash flow flexibility, and the impact of an additional special levy on those small businesses.

Raising a special levy from other sectors to address any shortfall is inequitable considering the different risk profiles and level of complaints between subsectors.
• • We support short term cross-subsidisation in the way any pool of funding is used, however the pool must be replenished or addressed by the subsector in question in some way, for example through a 4 See AFCA Datacube 5 Section 106H(f) Corporations Act 2 Financial Accountability Regime Bill 2021 [Provisions] and Financial Services Compensation Scheme of Last Resort LevyBill 2021 [Provisions] and related billsSubmission 23 larger future levy.
If any other subsectors are required to contribute to temporary shortfalls, then they should have their contribution remediated or made good by the subsector responsible for the initial funding shortfall.
RECOMMENDATION 2: LEVIES TO BE LEVIED IN A WAY THAT IS EFFICIENT AND AVOIDS CREATING AN ADMINISTRATIVE BURDEN The way the levy is to be calculated and set is to be specified in the yet to be available regulations.6 In our previous submission, we noted the importance of setting and apportioning levies in a fair way and that the collection of those levies is conducted in a way that is efficient and streamlined, avoids duplication, and does not create an extra administrative burden on licensees.
Collection of levies should leverage existing industry fee collection methods We note that the information to set the levies must be given to ASIC,7 which seems to contemplate that the process for collecting these levies will be separate to the administrative processes for the collection of other industry levies and fees.

Credit intermediaries currently pay both an annual AFCA membership fee and the ASIC supervisory cost levy.
There is a real opportunity to streamline the collection of the CSLR levy by combining the collection of this levy with the collection of those other established fees.

We therefore reiterate our recommendations in relation to the way in which these levies are set: • Option 1: levy the credit intermediation segment in the proportions used by ASIC in setting its supervisory cost recovery levy.
The segments specified in the ASIC Supervisory Cost Recovery Levy Regulations 2017 are the same as the segments proposed in the consultation paper for credit licensees and credit intermediaries.

ASIC determines its levy having regard to the number of credit representatives of each credit intermediary’s licensee, plus a base fee.

Whilst not a perfect metric, this approach provides a reasonable solution.

Option 2: levy in the proportions AFCA levies its membership fees (which may produce a fairer result).
• No cross-subsidisation within sub-sectors We do not support the proposal to only levy the larger licensees.

To do so will create, in effect, a cross-subsidisation within the subsector and, in our view, will not achieve the intent of the levy framework (i.e., that bigger businesses with more significant resources should bear the cost).
The commercial reality is that: • levies against licensees with a large number of credit representatives (aggregators for example) will be passed on or recouped from their members (whether licensees or credit representatives), a large portion of the broker population will not contribute (i.e., those with under 37 representatives), imposing a larger impost on the population that does; and the franchise aggregation model tends to have all brokers structured as credit representatives under the aggregator licence whereas wholesale aggregators have a mix of brokers as credit representatives and brokers with their own licences (most of whom will have less than 37 credit representatives themselves and as a result fall outside of the scheme).
The impact of this is that the average cost recovered from brokers by an aggregator under the franchise aggregation model will be higher than that recovered from brokers under the wholesale aggregation model creating a competitive disadvantage.
• • We therefore would recommend that a fairer and more pragmatic model is one levy for each credit licensee based on the number of credit representatives that the licensee has, but there are no limitations or requirements as to quantum of credit representatives of the licensee.

This model also accords with the ASIC supervisory cost levy model, i.e., that a levy is imposed on all licensees on a per representative basis.
6 See section 12 of the CSLR Levy Bill 7 S=See s8 Financial Services CSLE (Collection) Bill.

3 Financial Accountability Regime Bill 2021 [Provisions] and Financial Services Compensation Scheme of Last Resort LevyBill 2021 [Provisions] and related billsSubmission 23 Financial Accountability Regime Bill 2021 [Provisions] and Financial Services Compensation Scheme of Last Resort LevyBill 2021 [Provisions] and related billsSubmission 23