The Association of Financial Advisers (AFA) says it is “very concerned” about the cost of the proposed Compensation Scheme of Last Resort, in particular the potential risk in the event of a black swan product failure.

AFA spoke out after Treasury released draft documents for the scheme for industry consultation. The scheme is a recommendation from the Hayne royal commission.

“The [Compensation Scheme of Last Resort] is a scheme to meet the cost of unpaid [Australian Financial Complaints Authority] determinations that arise as a result of a licensee being unable to pay or refusing to pay,” AFA said.

“The AFA has previously agreed to the introduction of a [Compensation Scheme of Last Resort], however that support was on the basis that it would be broadly based and that financial advisers would not be expected to pick up the cost of product failures.

“Unfortunately that is not the case.”

AFA says the proposed scheme, as outlined in the draft documents, means financial advice will “seemingly be expected” to pick up three-quarters of the cost of the program.

It says the range of included products and services is very narrow, including financial advisers, credit providers, credit intermediaries, insurance distributors, and securities dealers.

“Some members will fit into multiple categories,” AFA said.

The Compensation Scheme of Last Resort, to be funded by industry levies, aims to ensure consumers receive compensation decided by the Australian Financial Complaints Authority even if a financial firm involved in a dispute has become insolvent.

The closing date for submissions to the Treasury consultation is August 13.

Click here for the AFA statement.