In a major win for victims of financial misconduct, the Federal Parliament has passed legislation that will give thousands of Australians a fighting chance to recover their losses.

The Compensation Scheme of Last Resort (CSLR) will draw on funding from the financial industry to reimburse Australians who’ve seen their financial lives upended at the hands of wrongdoers in the sector.

The scheme will cover many people who’ve been awarded compensation by the Australian Financial Complaints Authority (AFCA) but never received it because the firm in question had gone bankrupt.

Compensation under the CSLR will be capped at $150,000 per case and claims can be lodged from April 2024.

AFCA backlog in the thousands

In April 2020, AFCA made the decision to stop processing complaints against schemes that had been wound up until a last resort compensation scheme was established.

As of July 2021, 1165 AFCA complaints were on hold because the firms in question were insolvent. The potential amount of compensation awarded in these earlier cases could easily exceed $30 million.

There are now over 2000 AFCA complaints waiting to be decided.

The result of a long fight

����Vlog ramped up its campaign for the establishment of a CLSR after it was recommended by the banking royal commission in February 2019 but not enacted.

“The compensation scheme has been a missing link in Australia’s financial system and will ensure that many forgotten banking victims will receive the redress they deserve,” says ����Vlog CEO Alan Kirkland.��

“Thousands of Australians, whose complaints have been paused at the Australian Financial Complaints Authority, will now be able to have their cases heard,” he adds.

The scheme in its current design isn’t perfect – it won’t, for instance, cover victims of managed investment schemes such as Sterling First, which went bust in 2019, robbing about 100 people of a collective $18.5 million.����

Kirkland acknowledges there’s room for improvement.

“Once in operation, the federal government should consider whether the scheme needs to be expanded to other industries, including managed investment schemes.”

In a statement, Assistant Treasurer and Minister for Financial Services Stephen Jones said “the successful implementation of the CSLR will further strengthen consumer trust and confidence in Australia’s financial system”.

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The federal government has been delivered a strong message in recent weeks – many Australians think sweeping financial reforms are needed to restore trust in our financial system.

The banking royal commission underscored the need in no uncertain terms, and its 2019 report laid bare the many misdeeds of Australia’s financial sector and made a number of critical recommendations.

Foremost among them is a compensation scheme for victims of financial crimes that were awarded compensation but never received it because the investment scheme or other financial entity had gone bust.

The government’s current draft bill for a compensation scheme of last resort falls woefully short. It excludes managed investment schemes, which would leave thousands of victims empty-handed, and it limits any compensation to $150,000 regardless of how much was lost. (We’re calling for a compensation cap of $542,500 for individuals, in line with the Australian Financial Complaints Authority cap.)

In the government’s proposed scheme, for instance, victims of the recent Sterling First collapse would end up with nothing.��

Majority of people want compensation scheme

In mid-October, a diverse coalition of 15 organisations, including ����Vlog, called on the government to honour the spirit of this key recommendation from the banking royal commission and expand its proposed compensation scheme. We delivered a petition signed by 21,707 concerned Australians.

Now Australians as a whole have spoken, and the message is once again clear: in a recent nationwide survey, 73% say we need a compensation scheme.

“Justice delayed is justice denied,” says ����Vlog banking policy adviser Patrick Veyret.

“Over 1300 people have had their complaints and compensation awarded paused until the government passes the scheme. People have lost their entire life savings and are stuck in limbo.��

“For many, compensation is the difference between living a secure retirement and facing a life on the aged pension in the insecure private rental market.”

Verdict: Banking executives should be held accountable

But Australians also have a further message for the government: we think executives in the financial sector should be held accountable for the wrongdoing of the institutions they run.

In our recent national survey, only 15% of Australians say they trust Australian finance executives to treat their customers fairly, and 9 in 10 Australians (90%) agree finance executives should be subject to personal fines when they break the law.

As it stands, the people on top face no penalties at all when the widespread malfeasance occurs on their watch and with their knowledge.

The banking royal commissions recommended a Financial Accountability Regime (FAR) to address this longstanding impunity, but the government has yet to act on this recommendation.

“The Australian community expects that banking executives are held to account when misconduct occurs under their watch. Executives who appeared before the royal commission admitted to targeting vulnerable consumers with harmful products, yet not a single banking executive was prosecuted,” says Veyret.

Legislation for both the compensation scheme and financial accountability regime is expected to be debated in the coming days. With the lessons learned at the banking royal commission as a guide, Australians are calling on government to put the interests of the people above those of the financial services sector.��

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When the federal government released a draft bill in July that would set up a system to compensate victims of financial misconduct, it fell short on a number of fronts.

The long-deferred Compensation Scheme of Last Resort (CSLR) is meant to cover people who’ve been awarded compensation but never received it because the schemes they invested in were no longer solvent.

But the government’s proposed laws would leave many of these victims empty-handed.��

The draft bill covers only a limited number of products and services and, crucially, excludes victims of managed investment schemes, an area where many collapses have happened and wiped out the life savings of thousands of Australians.

The government has also proposed that unpaid Australian Financial Complaints Authority (AFCA) determinations that are paid though the scheme be capped at $150,000. This is well below the government’s original commitment to align the cap with AFCA’s compensation cap of $542,500 for individuals.

Collective call for a better CSLR

Now a diverse coalition of 15 organisations is calling on the federal government to honour the spirit of this key recommendation from the banking royal commission and expand its proposed compensation scheme.��

The coalition includes professional financial advice associations, financial counsellors, professional accounting associations, community legal centres – and consumer groups such as ����Vlog.

“When the government announced its response to the banking royal commission, we welcomed the commitment to establish a compensation scheme,” says ����Vlog CEO Alan Kirkland.

“Now, some 32 months since that commitment, the scheme proposed by the government is incredibly disappointing. It will leave too many victims of financial misconduct without access to the compensation they deserve.”

Those victims would include the many older Australians who recently lost their savings through the collapse of the��Sterling First investment scheme, as well as First Nations communities tricked into paying for funeral expenses policies from the��Aboriginal Community Benefit Fund (now trading as Youpla).

��for stronger laws to protect Australians from financial crimes.

‘Faith in the system’

CEO of the Financial Planning Association of Australia, Dante De Gori, says consumers should be compensated for a failed financial service or product across the spectrum of financial services.

“They deserve the same protections and access to compensation, regardless of where they make their purchase,” De Gori says. “A last resort compensation scheme must operate equally and fairly across the entire sector to ensure consumers have faith in the system.”

The Sterling First victims we met through our��earlier investigation have certainly lost faith. And they’re relying on the government to come around to doing the right thing.

‘It has destroyed me’

Annette Taylor, 69, summed up the devastation of many: “To do this to pensioners, some in their 80s and 90s, it’s just shocking, and the government has done absolutely stuff-all to help us,” she says.��

“It has destroyed me. I just want the money back and to get on with my life.”

And as Alan Fardo (pictured), who heads up a group that has banded together to recover their Sterling First losses, told us in August, the Sterling First scheme had all the hallmarks of a legitimate investment.��

“I had a degree of confidence because the money was going to Sterling income trust, not realising that the word trust doesn’t have to be a proper trust,” he says.

Petition calling for stronger laws

More than 21,000 Australians have signed a petition to Treasurer Josh Frydenberg, calling on the federal government to pass strong laws that hold finance executives to account and compensate victims of financial crime.��

We’re pushing the passage of the compensation scheme with key amendments, including broadening the scope to cover managed investment scheme collapses like Sterling First and raising the compensation cap to $544,000.��

We’re also fighting for strong new laws to hold finance executives to account for misconduct that takes place under their watch.

��for stronger laws to protect Australians from financial crimes.

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Many hundreds of Australians who’ve lost their life savings to dodgy financial advisers and failed investment schemes have filed complaints and been awarded compensation.��

But, despite rulings in their favour by the Australian Financial Complaints Authority (AFCA) and its predecessors, they remain empty-handed. Why? The financial firm in question went bust and there was no money to be found.

For nearly a decade, ����Vlog and other consumer advocates have been calling for the establishment of a compensation scheme of last resort funded by the financial services industry to address this issue.��

The federal government committed to establishing one by 30 June 2021 in line with one of the chief recommendations of the financial services royal commission report back in 2019. It missed that deadline, but released a paper outlining its of the scheme in mid-July.��

Government proposal falls short��

In our February 2020 joint submission to government, advocating for the establishment of the scheme, ����Vlog called for a broad approach, where compensation would be available to out-of-pocket customers of any financial service that’s required to be a member of AFCA, including credit providers, insurance and superannuation.��

In July 2021, the government released draft laws that cover a limited number of products and services. Crucially, the draft laws excludes victims of managed investment schemes, an area where many collapses have occurred and left blindsided investors in their wake.��(We highlight the stories of some of them below.)��

The government also proposes that unpaid AFCA determinations that are paid though the scheme be capped at $150,000.��

In our submission, we argued that victims of financial misconduct should be compensated for their full loss, but that if caps had to be set to ensure the financial viability of the scheme, they should be no lower than AFCA’s cap on compensation, which is $542,500 for individuals.��

“When the Government released its response to the banking royal commission, it gave victims of financial scandals hope that they would finally be compensated. For many victims, those hopes have now been dashed,” says ����Vlog CEO Alan Kirkland.

Sterling First collapse leaves retirees high and dry��

Marsha Barber, 80, and her husband lost most of their life savings in the collapse of the property investment scheme Sterling First in 2019. The scheme was marketed as a cheaper option than going into a retirement village. Older Australians were persuaded to pay hundreds of thousands in upfront fees for long-term property leases. (The name of the scheme was later changed to Sterling New Life.)

Marsha and her husband sold their unit in a retirement village to enter into the Sterling First scheme, thinking they’d live out their days in secure accommodation.��

“We’ve lost $126,000 roughly,” Marsha says. “Emotionally it became very difficult for me because my husband had developed Alzheimer’s and he could not understand what was going on. So I pretty well coped with things alone and looked after him at the same time.”��

The Barbers were evicted from the unit and ended up with no place to live. Finding another home was not easy.��

“It was dreadful,” Marsha says. “There were very few properties available. Some of them were in areas you don’t want to be but you don’t have much choice.”

The Barbers have pinned their hopes on government-mandated compensation.

‘It has destroyed me’��

Annette Taylor, 69, another victim of the Sterling First collapse, lost her entire nest egg of $220,000 and now lives on the age pension, half of which goes to rent. Before going into the scheme, she owned her home. Now she struggles to make ends meet and can no longer afford internet access.��

When she read in the news that Sterling First had gone into receivership, “I felt absolutely sick,” Annette says.��“Our money was supposed to be in a trust fund, protected. That was my impression of what a trust fund is. Where was our money going? That’s what I’d like to know. To do this to pensioners, some in their 80s and 90s… it’s just shocking, and the government has done absolutely stuff all to help us. It has destroyed me. I just want the money back and to get on with my life.”��

‘Anxiety is through the roof’

When Graeme and Sheryl Sofield’s Sterling First investment disappeared, their options were few. They lost their life savings – about $155,000.����

“Our anxiety was just through the roof,” Sheryl says. “Sleepless nights. Devastation. If it wasn’t for our two children helping us out, I don’t know how we would have survived. It’s been a very hard two years. “

The Sofieds had lodged a complaint with AFCA, which got about halfway through the case, “and then, bang, it just stopped”, Graeme says.��

They thought they were investing in a legitimate scheme that would secure them a long-term place to live as they grew older. They now live in government housing.����

“There were no red flags whatsoever,” Sheryl says. “We first got wind that something wasn’t right when ASIC rang us.”��

Like other victims of the collapse, the Sofields see a compensation scheme as their only hope.��

‘I put everything I had into it’

Peter Holden, 69, has been just getting by since the Sterling First collapse and says he’ll probably file for bankruptcy soon to get out from under his credit card debts. He bought into the scheme after he retired.��

“It’s very stressful, it’s very worrying,” Peter says. “Some people were fortunate enough to have some money in reserve, but I put everything I had into it with the understanding that I could take it out whenever I wanted. That’s what they promised in the paperwork.”��

As with other Sterling First clients, the further promise was that the money would earn interest “and you would end up with more than what you put in”.

As it stands, Peter hasn’t been able to recover any of the $154,123 he paid for what was supposed to be a 20-year lease on his unit, with an option to renew for another 20 years.����

Peter does volunteer work in the area “to keep myself occupied and keep my mind off it”.

‘You’ve lost all your money’

Alan Fardoe heads up a group that has banded together to recover their Sterling First losses.��

He says he went into the scheme with eyes wide open. “We were looking for a lifestyle option and this one seemed to be the one that suited us best. I had a degree of confidence because the money was going to Sterling income trust, not realising that the word trust doesn’t have to be a proper trust.”��

Alan received the bad news in person.��

“We were called to a meeting in May two years ago,” he says. “Robert Marie [the managing director of the financial entity behind Sterling First] had the guts to actually attend the meeting. And he started it by saying, well, unfortunately, I’ve got bad news for you. You’ve lost all your money and you’re about to be evicted. So that was quite a sobering meeting. At that stage I said ‘We’re not going to take this lying down’.”��

Alan has been awarded the only AFCA compensation so far in the Sterling First case, a determination of $118,957, which initially came as great news. But that didn’t last.��

“The administrator [Worrells Solvency and Forensic Accountants] said ‘yes we accept that claim, here’s your $120,000, minus the $100,000 excess from the clause in the insurance policy’, so that was quite the roller coaster of emotions.”��

(The $100,000 excess was apparently applied due to a clause in Theta Asset Management’s professional indemnity insurance policy.)��

“What we’ve got is their [Worrells’] word that each and every claim will require a $100,000 excess,” Alan says.��

He says, the group’s pro bono law firm, Clayton Utz, as well as ASIC and the WA Department of Consumer Affairs “have all tried to get some sense out of Worrells, but they’re not playing ball”.��

We asked ASIC about the matter but the regulator wouldn’t comment on the specific issue.��

“ASIC’s investigation into the conduct of a number of entities and officers within the Sterling Group of companies continues and we are monitoring relevant developments,” an ASIC spokesperson tells us.

A Worrells spokesperson tells us the firm couldn’t comment.��

“The insurance arrangements of Theta Asset Management Limited (TAM) are confidential,” the spokesperson says.��

“In its capacity as TAM’s Liquidators, Worrells is bound by those confidentiality obligations and is therefore not in a position to provide the explanation sought. Any claims lodged with AFCA in respect of TAM will be considered on a case-by-case basis.”

$2 million fine won’t be collected��

In November 2020, Theta Asset Management, the financial entity behind the Sterling Income Trust scheme, was fined $2 million by the Federal Court in Western Australia. Its managing director, Robert Patrick Marie, was fined $100,000 for, among other things, issuing misleading product disclosure statements.��

In May 2021, Marie was banned by ASIC from providing financial services for four years. (ASIC says it won’t collect the $2 million fine since it would reduce the amount investors may get back.)��

When Sterling went bust, about 100 people lost a collective $18.5 million or so. That money now seems to be gone.��

‘They shouldn’t have had a licence to begin with’

Another dudded investor we recently spoke to, Patrick Dunn, won a $90,000 determination in October 2019 from AFCA after a trading platform he was using went into liquidation and his funds disappeared.��

The platform was run by Berndale Capital Securities, whose Australian Financial Services Licence (AFSL) was cancelled by ASIC in November 2018.��

“This company had a valid AFSL, they had all the checks. On paper, if I’m an investor, it all looks kosher. But they shouldn’t have had that licence to begin with,” says Patrick.

Patrick is still out of pocket. “The company has 30 days to pay a determination. It’s been a lot longer than 30 days,” he says.��

Patrick believes his best hope is a government compensation scheme rather than waiting for the liquidators “to find money under a rock”.

Hundreds remain uncompensated

When AFCA became the one-stop shop for complaints in November 2018, it inherited cases from its predecessor schemes in which about $30 million had been awarded to around 400 people over the previous decade.��But as with others who have filed complaints since AFCA was established, these people have yet to see any money.��

(AFCA took over complaints that were originally filed with the now decommissioned Financial Ombudsman and Credit Investments Ombudsman services and the Superannuation Complaints Tribunal. Other dispute resolution services such as tribunals and courts have also awarded compensation that remains unpaid.)��

Complaints against defunct firms on hold

The proposed compensation scheme would only cover unpaid AFCA determinations made after AFCA was established in November 2018.

But in April 2020, AFCA made the decision to stop processing complaints against schemes that have been wound up until a last resort compensation scheme is established, a proposal that AFCA strongly supports.��

As of July 2021, 1165 AFCA complaints were on hold because the firms in question are insolvent. The potential amount of compensation awarded could easily exceed $30 million.��

“AFCA is concerned about putting consumers through the whole complaint resolution process if they still might not have any chance of getting compensation,” the agency said in 2020. It reaffirmed that stance for ����Vlog in July 2021.��

Despite the pause in processing such complaints, ASIC recommends that people who’ve lost their money to insolvent schemes still file AFCA complaints. The hope is that they’ll be processed once a compensation scheme is finally established.��

While some victims of the Sterling First collapse we interviewed were not optimistic about compensation, one, Alan Fardoe, says, “I have faith that eventually we will get the money back through AFCA.”

“If we don’t keep fighting we let them win,” says Annette Taylor, another Sterling First victim. “They’re [the people behind Sterling Trust] living the lives of Riley while we’re living in poverty.”��

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