CSLR levy reduction reveals a ‘substantially worse’ long-term hit

On Friday, the Compensation Scheme of Last Resort (CSLR) delivered a revised estimate for FY25-26, which reduced the $70.11 million attributed to the financial advice subsector to $67.3 million.

That’s a small piece of good news for advisers facing a raft of cost-related challenges, though even the most optimistic lens would note this only reduces the special levy that new Financial Services Minister Daniel Mulino is stuck apportioning out.

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The profession getting a second bill above the $20 million subsector cap of $47.29 million instead of $50 million is hollow succour.

It is unsurprising, then, that Financial Advice Association Australia (FAAA) chief executive Sarah Abood stressed that it is “increasingly critical that government steps in” to fix the CSLR before the long-term outlook deteriorates further.

“We are keen to see the release of the Treasury report into the CSLR and the government’s response. The problems will rapidly get substantially worse if urgent action is not taken, putting the ongoing existence of the scheme at risk,” Abood said.

“The reduction of $2.8 million in the total estimated CSLR cost for the financial advice sector for 2025–26, from $70.1 million to $67.3 million, is because of a delay in the processing of known complaints, not a reduction in expected claims.

“Effectively, this will push a significant additional cost into the 2026–27 year.”

As she noted, the outlook for financial advice-related complaints has not gotten better.

While there was little change in the overall assumptions related to Dixon Advisory, as previously reported by ifa, it was never the biggest issue for FY25–26.

The Australian Financial Complaints Authority (AFCA) is not simply ignoring complaints lodged against Dixon Advisory; however the determinations it makes over the FY25–26 period are largely going to be covering the backlog attributed to the pre-CSLR period that Australia’s 10 largest financial institutions have already paid.

Under the revised estimate, the number of post-CSLR Dixon claims will be even lower in FY25–26 – falling from 101 to 78. That’s essentially another 23 complaints pushed beyond FY25–26.

SMSF Association CEO Peter Burgess added that the revised levy of $67.3 million for the financial advice sector is simply “too high” for the sector to sustain.

“While the revised estimate is slightly lower than the initial estimate of $70.1 million, we are bitterly disappointed with the quantum of the levy amount that punishes the vast majority of advisers who act in the best interests of their clients,” Burgess said.

“The CSLR CEO David Berry explicitly acknowledged this when announcing the levy, saying ‘the harm caused by those in the finance sector doing the wrong thing disproportionately impacts and detracts from those acting correctly’.”

UGC worse than expected

The fallout of the United Global Capital (UGC) collapse was, and still is, the driving force behind the giant numbers that are attributed to financial advice for FY25–26, however it is now going to play a much larger role in FY26–27 than originally forecast.

The number of total complaints lodged with AFCA surged as UGC’s membership expulsion neared, with the 31 May deadline solidifying the need for impacted clients to take action.

May alone saw almost 350 complaints – tallying essentially on par with the entire initial estimate of 346 total complaints.

That number now sits at 684, though CSLR chief executive David Berry told ifa this will ultimately be reduced as some complaints are discontinued (there have been 36 of these as at 31 May) and AFCA removes duplicates as it works through the complaints.

“The membership of UGC with AFCA winding up at the end of May it just jumped up significantly. The final number will come down because AFCA are finding people have lodged multiple complaints,” Berry said.

“These are AFCA numbers, but we do know that there are duplicates in here so the number will come down slightly.”

According to the revised estimate, the CSLR will pay 292 determinations related to UGC in FY25–26 for a total cost of $37.37 million, down from 307 determinations and a cost of $44.57 million.

The reduction reflects not just the lower determination number, but also a considerably lower average claim size than originally predicted.

Due to the size of the investments in UGC, the majority of which exceeded the CSLR’s compensation cap of $150,000, the initial report put the estimated average outcome amount at $145,000.

Due to the size of the investments, the majority of which exceeded the CSLR’s compensation cap of $150,000, the report put the estimated average outcome amount at $145,000.

However, lower-than-expected claim amounts have seen this reduced to $128,000 per determination.

Coupled with the higher number of complaints that AFCA won’t get through in FY25–26, the CSLR has estimated the future impact of UGC is now going to hit $26.77 million – meaning UGC will cost advisers a total of $64.14 million, based on the latest estimate.

Beyond Dixon and UGC

Unfortunately, UGC wasn’t the biggest riser in the revised estimate.

Brite Advisors, which so far has been the subject of just a single, relatively minor determination of $21,888.20, has exploded.

At the time of the initial CSLR report, Brite was a blip on the radar. Now, the six complaints to AFCA as at 30 September 2024 has turned into 618.

“Brite was on our radar, but on our radar has a number of different Defcon levels and certainly it wasn’t where it’s at now,” Berry told ifa.

“When we were doing the initial estimates, we did not have an appreciation for how big this would be.”

There is, however, an enormous amount of uncertainty related to Brite, with the CSLR not even attempting a projection of the impact at this stage.

Abood highlighted the issues surrounding the “increasing prominence of Brite Advisors”, noting that the revised estimate includes only 10 claims out of the 618 complaints.

“Further, and most importantly, these numbers do not include any allowance for the impact of either Shield or First Guardian, although numerous announcements by ASIC suggest these are very substantial matters where financial advice complaints are likely,” she added.

“This paints a picture of multiple years of claims that are substantially above the sector cap. The vast bulk of CSLR claims have been generated by a small number of medium to large firms, and by the collapse of financial products: a sector that currently makes no contribution at all to consumer compensation under the CSLR.

“In contrast, the vast majority of those paying these levies run excellent compliant small businesses (92 per cent of advisers work in firms with 10 or fewer advisers) who have not done anything wrong.

“The government’s plans in relation to the allocation of costs above the $20 million sector cap are unknown – but clearly the financial advice profession should not and cannot cover this. Urgent action is needed to fix the CSLR funding mechanism, otherwise this will decimate the advice profession, further drive up the cost of advice and put professional financial advice completely out of reach for average Australians.”

Despite these collapses not being included and Brite’s uncertainties leaving the calculation of future costs a bridge too far at the moment, the CSLR is still projecting $122.3 million in post-FY25–26 costs to the financial advice subsector just from known complaints.

Throw in the potential hit of Shield, First Guardian, Brite – plus any other as-yet unknown failures – and there’s no telling what the bill to advisers could be in future years.

As Burgess noted: “It’s not just the scheme itself that needs to be reviewed, it’s what being done ’upstream’ by the regulator to detect and act on early signs of advice failures, that also needs to be reviewed.

“By the time the claims reach the CLSR, it’s usually too late to avoid or mitigate the cost of compensation.”