The Compensation Scheme of Last Resort (CSLR) was established with bipartisan parliamentary support as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Hayne Royal Commission) and the Ramsay Review.

The Hayne Royal Commission and the Ramsay Review found that existing dispute resolution frameworks were insufficient to compensate individuals impacted by conduct that fell below regulatory standards and expectations.

The primary purpose of the Scheme is to enhance consumer trust in Australian financial services through supporting victims of financial misconduct and providing compensation when all other efforts have failed.

Eligible consumers can lodge a claim with the CSLR to recover the amount determined under an AFCA award after all other avenues of recovery have been exhausted. The Scheme is legislated to provide up to $150,000 in compensation.

Compensation is available to eligible claimants for matters in relation to the following financial services sub-sectors:

• Personal financial advice provided to retail clients
• Securities dealing for retail clients
• Credit intermediation
• Credit provision.

Why do we need a Scheme of ‘last resort’?

At the foundation of financial services is trust that the organisation and people supporting individuals through complex and challenging financial products and services are doing the right thing. Any experience where financial misconduct is evident will erode trust in the entire financial system.

Additionally, the social impact is significant, with the majority of victims seen by the CSLR losing life savings and reaching an age where it is difficult to recover financially.

The Ramsay review expressed a basic presumption available to all users of financial services, namely:

The Corporations Act 2001 (Corporations Act) and the National Consumer Credit Protection Act 2009 (National Consumer Credit Protection Act) impose an obligation on licensees to have arrangements for providing compensation where certain specified losses occur. As a result, consumers and small businesses have a reasonable expectation that they will receive compensation in these circumstances

There is, however, clear evidence that current arrangements are failing to meet this expectation¹.

The Ramsay review, along with the Hayne Royal Commission, established the need to ensure stronger support for uncompensated losses. The social impact of financial losses was demonstrated via research carried out by ASIC¹ that found that the effects of financial misconduct and the consequential monetary loss felt by some victims led to some or all of the following outcomes²:

• Loss of their home, leading them to be at risk of, or experience, homelessness. Some found themselves living in a motor vehicle.
• Serious illness, either a new medical diagnosis or the aggravation of an existing illness due to excess stress.
• Going without food and avoiding using heating and cooling despite extreme temperatures.
• They found themselves embarrassed or ashamed to disclose their loss to friends and family, leading to isolation, putting them at risk of mental ill health.

[1] ASIC, July 2017, Response to Supplementary issues paper: Review of the financial system external dispute resolution framework, accessed February 2025.

[2] Australian Government, Department of Treasury, 2017, Review into Dispute Resolution and Complaints Framework, Supplementary Final Report

What does it mean to be a Scheme of ‘last resort’?

It is important to acknowledge that by the time a claim reaches the CSLR, the consumer has, in most cases, experienced a stressful, lengthy, time-consuming and sometimes expensive process to unsuccessfully recover their funds.

Whilst the time and events that have taken place are an important consideration, last resort is a reflection that all reasonable avenues to recover the funds from the firm in question have been exhausted with little or no expectation of payment.

The impact this has on the consumers is significant, with consistent concern for mental health and financial security especially as they enter retirement.

Under the relevant legislation, the CSLR has a mandatory obligation to ensure the following steps in relation to the payment of a claim:

1. An individual has received an eligible AFCA determination that remains unpaid;
2. the individual is not eligible under any other scheme; and
3. the CSLR has formed a reasonable belief that the payment will not be made by the financial firm against whom the AFCA determination was made.

The mandatory obligation to pay compensation to a person is not contingent on:

• private legal action being taken by a person against a relevant entity (i.e. through a Court);
• the payment of any proceeds or dividends as a result of insolvency or class action
• claims, or attempts to claim, against the financial firm’s professional indemnity insurance policy; or
• enforcement action being taken on behalf of a person/s by a regulatory body.