FAAA backs CSLR reforms – but warns on ‘unworkable’ levy model

Earlier this month, Financial Services Minister Daniel Mulino announced three consultation papers, one set on focus on the CLSR and several proposed changes. These include:  

• Enabling CSLR to deduct payments from compensation 

• Expanding CSLR subrogation rights 

• Technical improvements 

• Revising the treatment of counterfactual loss for CSLR-eligible financial advice complaints 

• Embedding greater certainty within the special levy framework 

• Considering responses to the role of SMSF losses in pressure on the CSLR 

• Facilitating levying of Managed Investment Scheme (MIS)-related losses 

• Improving recovery of unpaid AFCA determinations within corporate groups 

“The collapses of the Shield and First Guardian Master Funds, which impacted over 11,000 consumers and more than $1 billion of superannuation funds, have highlighted the need for a comprehensive reform package which responds to the ecosystem of alleged misconduct surrounding these failures,” Mulino said. 

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“This includes protecting consumers as they are navigating the superannuation system, tackling high-pressure sales tactics like lead generation and ensuring the sustainability of the Compensation Scheme of Last Resort.” 

For FAAA general manager of policy, advocacy and standards Phil Anderson, this consultation presents some genuine positives.  

“I think there’s a lot of stuff in here that we can support and that has merit. If you go through it, things like enabling the CSLR to deduct payments from compensation, subrogation rights, and the ability to pursue wrongdoers – we absolutely support those. They are sensible measures that strengthen the scheme and make sure the right parties are contributing,” he told the latest episode of the ifa Show podcast.  

“More broadly, this consultation is putting ideas on the table, and that’s a positive. There are a range of ways to solve these issues, and we should be encouraging contributions from across the industry because there may be solutions that haven’t yet been considered.” 

Going into specifics, Anderson said he and the FAAA support measures that allow the scheme to pursue recovery from parties who have contributed to the loss. This Includes finding ways for parent entities of licensees that go into insolvency top contribute to losses, something the body has “pushed quite hard for”.  

“We’ve seen examples of phoenixing, and we think there should be better protections to ensure that the broader group that benefited from the business contributes to the compensation,” he said.  

However, Anderson and the FAAA are a long way from fully endorsing all the points of the consultation. One particularly contentious point is the “waterfall approach” where advisers essentially pay the first $40 million of any payout before other sectors begin to contribute.  

“That places a disproportionate burden on financial advisers and doesn’t reflect the broader range of parties involved in these failures,” Anderson explained.  

“If you look at it in a normal operating environment, not just the extreme cases, requiring advisers to fund that first $40 million is not appropriate. It’s a significant impost on a small business sector and it’s not conducive to what we’re trying to achieve, which is growing the profession.” 

He added: “We don’t think this should be framed as a choice between the current model and a $40 million cap. There are alternative approaches that could be considered – for example, a lower cap – that would better balance the burden across the system.” 

He also criticised the separation of SMSFs out from other investors: “It would require a completely different mechanism to collect levies, and it raises questions about whether that differential treatment is appropriate.” 

Speaking on this same issue, Peter Burgess, CEO of the SMSF Association told Sky News the association does not think it’s appropriate that the self-managed super fund sector should be asked to pay a compensation levy, an idea that’s been floated previously. 

“We need to remember, and this often gets lost when asking an SMSF trustee to pay a levy, that they have done nothing wrong. They’re not the perpetrators of this misconduct that has led to these compensation claims. They are quite often the victim of this misconduct,” Burgess said. 

“It doesn’t sit well with us that the SMSF sector should be asked to contribute to the cost of these compensation claims.” 

Ultimately, Anderson highlighted that any changes need to help the CSLR reflect its name: “This is a compensation scheme of last resort, and that principle needs to guide the design. It should provide a reasonable level of compensation while ensuring that the cost is shared fairly across those who contributed to the loss – not disproportionately borne by one part of the industry.” 

To catch the full episode, tune in here.