Treasury has released a discussion paper on its plans to set up an industry-funded compensation scheme of last resort by December.

The proposed measure is one of 76 recommendations made by the Hayne royal commission in its final report to the Government, which has committed to adopt every suggestion.

The “forward-looking” scheme will extend beyond personal advice failures, according to the discussion paper.

“The Government will establish a compensation scheme of last resort to ensure that consumers and small businesses receive compensation where a financial service provider is found to have engaged in misconduct and the provider is unable to pay,” the paper says.

Treasury wants feedback on the proposed scheme’s scope of coverage, funding arrangements, compensation to be paid, and management.

The Australian Financial Complaints Authority, which will run the scheme, has backed the move as one that would play a “significant role” in restoring trust in the financial services sector.

“It is vital that this scheme is appropriately funded and governed and has coverage across all financial services,” the authority says.

The Insurance Council of Australia, which has opposed a compensation scheme when it was flagged in the past, says it “continues to have reservations about whether it’s necessary” to have such an arrangement in place.

“However, ICA recognises the Government has decided to establish a scheme as recommended by the [Hayne] royal commission, and is participating constructively in the discussions on its design,” spokesman Campbell Fuller told insuranceNEWS.com.au.

The Financial Rights Legal Centre says the proposed scheme “needs to have broad coverage… that includes insurance” in order to be effective.

“We recognise that the likelihood of a large insurer failing to pay a determination is low, but a large insurer failing is not without precedent,” Director of Casework Alexandra Kelly told insuranceNEWS.com.au.

“Further, some of the poor-value products that have been developed by large insurers have played a role in the misconduct and mis-selling by intermediaries that have gone bust and left vulnerable consumers holding the bag.”

Submissions must be received by Friday. For more information, click here.