Last resort compensation scheme

Last week, Bob Scealy participated in a panel conducted at the Financial Services Council Leaders Summit on the potential costs of a financial advice compensation scheme of last resort.

He was speaking to some economic modelling undertaken by Cadence Economics commissioned by the FSC to estimate potential costs of a statutory compensation scheme of last resort to compensate retail clients who suffer losses due to insolvency of Australian Financial Services (AFS) licensees in the event of inappropriate advice, negligence, fraud or other actions.

The modelling showed a scheme covering financial advice only would cost more than $100 million annually. This equates to an annual cost of $4,549 per financial planner, or $28,354 per AFS licensee. Scheme costs rise to $310 million if the scheme is extended to cover product failures.

Not only that, but in public finance terms the modelling also shows that additional deadweight losses to the economy will accrue to the tune of 47 cents for every $1 paid in compensation. These additional losses would shrink investment and jobs in the economy.

In other words, taxing financial services is one of the most inefficient forms of tax that a government could introduce.

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