MIS investors must accept the risk – Hume

The Government will not be moved on managed investment schemes (MISs) being forced to contribute to a compensation scheme of last resort (CSLR) with the Minister for Financial Services, Senator Jane Hume arguing it would amount to “tinkering” with the fundamental risk/return principal.

Amid a growing swell of industry voices pointing to the dangers of the MIS regime, the Minister for Superannuation, Financial Services and the Digital Economy also claimed the banks had already been made to pay towards the cost of establishing the CSLR.

What is more, she said the banks had been to pay notwithstanding the fact that she had yet to see a bank which had failed to pay an Australian Financial Complaints Authority (AFCA) determination.

“The CSLR is a targeted scheme that largely addresses personal advice failures, in line with the findings of both the Ramsay Review and Commissioner Hayne,” Hume told a Sydney conference. “If AFCA makes a determination in your favour, but the organisation who advised you has since shut up shop, that’s where the compensation scheme of last resort kicks in.”.

“It sounds simple, but let me make clear what the compensation scheme of last resort is not. The compensation scheme of last resort is not an insurance scheme designed to pay compensation to any consumer who has lost money in an investment. It is only intended to cover unpaid compensation awarded because of misconduct relating to a targeted range of financial products and services.”

“The CSLR will also not cover managed investment schemes or other high risk financial products,” Hume said.

“Two points need to be made here:

“First, the exclusion of MIS is not letting banks off the hook. We’ve made sure banks pay towards the cost of establishment of the CSLR, and I’m yet to see an example of a bank who has failed to pay a AFCA determination.”

“Second, any finance textbook will tell you, higher returns are compensation for higher risk. Governments tinker with that fundamental principle at our peril.”

“Why are these decisions so important? Because the cost of a broad-based scheme would also inevitably be borne by other investors – mum and dad investors and retirees.

“Everybody who makes sensible, cautious, informed investment decisions would end up having their returns clipped to underwrite people who punt their savings on emu farms, or tulips or other too-good-to-be-true high-return high-risk investments.”

“Now, if you want to punt a portion of your savings on something speculative – knock yourself out. No government should stand in your way. But you should be prepared to wear it when it goes wrong. And no government should pick up the tab with taxpayers money nor force industry – and thereby ultimately other savers – to underwrite any and every investment that consumers choose to make.”