In late January it became clear that the Compensation Scheme of Last Resort (CSLR) needed an urgent fix, after the levy estimate for the upcoming financial year revealed a staggering total of $78 million across all sectors, with the bulk or $70.11 million charged to financial advisers.
The CSLR, designed to compensate consumers who have suffered financial loss due to misconduct by financial services providers, has become a contentious issue for financial advisers who are facing significant levies despite not being involved in the wrongdoing.
But while the profession has lobbied for changes for months, it took the cost surpassing $70 million – well above the $20 million sector cap – for the minister to announce a comprehensive review of the scheme to test its sustainability.
Namely, in January, Financial Services Minister Stephen Jones said the Albanese government is instructing the Treasury to conduct a comprehensive review of the CSLR to ensure the scheme remains sustainable into the future for consumers and for the industry.
Over the past year, industry experts have questioned whether the Australian Financial Complaints Authority’s (AFCA) use of “but for” determinations, which include hypothetical missed gains, should be covered under the CSLR, arguing that the scheme should focus solely on actual losses, not opportunity costs.
While the minister has repeatedly failed to address these concerns, this week at an event in Sydney, he acknowledged that the CSLR is “not about guaranteeing investment returns”.
The scheme, he said, is “about ensuring genuine victims have access to some redress”.
“This is an important part of the financial system for advisers. Because it gives Australians confidence that there is a backstop in situations of genuine last resort,” Jones said.
“It’s in all our interests to ensure that is what it is doing.”
In comments made to ifa on Tuesday, shadow financial services minister Luke Howarth agreed that the “but for” issue is of key concern.
Citing data which suggests 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, the shadow minister called on the government to “intervene to limit or filter out these claims”.
“I think everyone supports a sustainable scheme with a reasonable cost – that’s not what we have now. It is not a scheme of ‘last resort’,” Howarth said.
“It is out of control and the solution can’t be just to issue more levies.”
However, it appears that simply eliminating “but for” will not solve the CSLR cost blowout.
Namely, while Dixon Advisory was the most publicised failure behind the scheme’s inception, the focus has shifted to United Global Capital (UGC), with its CSLR cost for 2025–26 estimated at $44.57 million, compared to $12.25 million for Dixon.
ifa understands that while a large number of Dixon complaints are focused on hypothetical capital gains, this is not the case with UGC – one of the three published determinations related to UGC includes more than $300,000 in capital losses, without even getting to the “but for” test.
This was alluded to by the minister this week, who said: “Unfortunately, two of the biggest cases to hit the CSLR – Dixon and United Global Capital – have very different characteristics that make a quick fix very difficult.”
AFCA has previously defended the use of the “but for” approach, highlighting that the standard actually predates AFCA’s existence.
Namely, the Supreme Court of Western Australia ruled in favour of the approach back in 2015, when Patersons Securities launched action against the Financial Ombudsman Service.
However, Financial Advice Association Australia’s CEO, Sarah Abood, late last year said that while AFCA’s methodology is not new, how it interacts with the CSLR is.
“I think, certainly from our perspective, it seems completely unfair, but also obviously unsustainable,” she said.
“That a compensation scheme of last resort should be paying, basically an income guarantee to those clients. So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.”
The submissions to the government’s CSLR review are due 28 February, however it is as yet unknown when the government will issue a formal response.
This CSLR is a MARXIST and corrupt scheme. Just bend over and cop it gently FAAA whilst the mortgage brokers, property developers, real estate agents, industry super funds, online financial fraudsters and other unlicensed charlatans laugh at you. In the meantime Jones to retire on a handsome parliamentarians lifetime pension.
What do you mean in late January it became apparent?
These problems have been well understood for 12 months or more.
How many articles on this website have there been pointing out that the CSLR was going to be an absolute mess?
Jones’ handling of this has been utterly atrocious.
Thankfully he is leaving.
ALP out.
CSLR is funded by taxpayers and the industry – it is tax by any other name, and it disciminates innocent and reputable advisers for no reason other than there was no legal recourse against whomever was to blame.
It has absolutely no limit on the amount it can award complainants, which is terrifying – and open ended, unpredictable, tax-payer burden – specifically tax-payers who are in the advice industry.
The CSLR does nothing for victims of misconduct in other industries that have no solution: shoddy property developments, phone and email scams, etc. All this despite Financial Advice requiring the most disclosure, transparency, fiduciary duty and multiple layers of confirming and recording client comprehension and consent – by comparison.
It’s an insurance that shouldn’t need to exist.
Immediate action should be:
– target legislation and regulation to ensure legal recourse for victims against buisnesses and persons responsible for misconduct that follows them despite changing business structures etc.
– Seek to improve Professional Indemnity / PL / insurance to become the last resort – factor it into the industry or the clients advice. Ombusman can help victims with cases.
– Put a hard cap on the amount CSLR can award / spend in a given year; all victims can share in that as something better than nothing and there should be no guarantee. Caveat emptor. CSLR should manage the stress of dividing up the resources it has and no more than that.
– Unwind all the regulation around remuneration and commissions, just leave the duties and disclosure. Else apply the same regulations on every other sector. It’s should never be about how a fee is paid or how much it is, if its transparent, understood and consented to. The issue was transparency, consent and risk of deception.
– Remove the weird conflict of interest non-sense around product and verticals. Focus on risk disclosure and product management – and if a product provider does something dodgy, suck the life out of them and all their family wherever they go or hide and remove a legal tricks to avoid it.
Anyway.. I’m not a fan of Trump but I am really liking the idea of gutting the public service atm.
I’m not used to so much sense coming out of Minister Jones’ office, but this is exactly right—the CSLR is not an industry-subsidized “return guarantee.” While I don’t agree with its entire construct in principle, if it’s going to be mandated on us, then it should be a “return of capital” scheme and not a “return guarantee” scheme.
In the case of Dixon, cheques are being cut for “victims” of bad advice with million-dollar SMSF balances that “didn’t make as much money as they should have.” For the vast majority of Dixon investors, it has turned out to be a welfare program for the well-to-do.
Anyway, Jones is talking sense on this. Shame he’s left his “common sense” to the very last minute. I would have liked to see more of it in the last three years, but instead, we got “industry super-captured Jones.”
Typical politicians, both parties had a hand in creating or establishing the CSLR mess, and now when the mess has got too hot, they are hiding behind a treasury review or blaming each other.