Bodies call for removal of ‘but for’ CSLR claims driving cost blowout

With the broader financial services sector now facing the possibility of footing the bill on a $47.3 million special levy, the Insurance Council of Australia (ICA) said there are a number of factors that need to be addressed before any decision is made.

Namely, the ICA stated in its submission to Treasury that removing “but for” claims from the CSLR would “significantly reduce” cost pressures on the scheme.

“Currently, these claims account for 80 per cent of all CSLR claims. This is despite these types of claims having only a hypothetical loss, not a capital loss, and should not qualify under a ‘last resort’ scenario,” the submission said.

Similarly, the Stockbrokers and Investment Advisers Association (SIAA) in its submission to Treasury said: “One impact from AFCA’s approach to calculating claims is that the scheme is not just paying for investors’ actual financial losses but covering their unrealised estimated profits.”

This, it said, is particularly the case for Dixon Advisory complaints.

“The CEO of the scheme, David Berry, has recently revealed that about 80 per cent of amounts paid by the CSLR to Dixon Advisory complainants are ‘but for’ losses, leaving just 20 per cent as involving an actual capital loss,” SIAA said.

It advised that the scheme must be redesigned to ensure that it responds to actual losses rather than guarantee an investment return for investors.

“The CSLR was never intended to underwrite investment risk or pay complainants’ hypothetical ‘but for’ gains they did not receive because of their investment decisions.

“That is what is currently taking place, with the CSLR essentially guaranteeing the investment returns of claimants. This is another key reason for the FY26 levy blowout.”

‘Consider eligibility’

ICA further argued that government should reconsider eligibility and compensation thresholds on claims to contain future blowouts.

“This may include a reduction in the cap and establishing a means-based test for eligibility,” it said.

“Should the government proceed with a special levy ahead of a formal review of the CSLR, it should be spread as broadly and thinly as possible to only capture subsectors connected to the underlying conduct, including managed investment schemes.”

The council also stated that parent companies with holdings over financial advice subsidiaries, which are generally exempted from the industry levy because of their structure under the Corporations Act, could be levied to cover excess costs incurred by the scheme.

“Not only are these parent companies generally not required to pay, the structure also means liability for wrongdoing cannot be borne by the parent company even if the holding company has become illiquid and unable to fulfil its financial obligations,” the submission said.

“Addressing this loophole would create a far more equitable funding system that would not punish unrelated sectors, while also elevating pressure on smaller financial advice firms.”

Reiterating a point it raised in January, ICA said it is against cross-subsidisation, an option that would see industries outside the bounds of the CSLR issued a special levy to finance the scheme.

“Cross-subsidisation creates many challenges, including raising moral hazard as it essentially requires companies that meet expected ethical and prudential standards to underwrite those who do not,” it said.

“Given any funding contribution by general insurers will ultimately come from premiums paid by consumers for general insurance products, it is unfair for these consumers to be asked to fund a compensation scheme to which they have no access.”

Noting that the top 10 financial institutions by income paid an upfront levy of approximately $241 million at the inception of the scheme to cover the backlog of complaints lodged with AFCA between 1 November 2018 and 2 September 2022, the ICA said it is “not appropriate for these institutions to be continually called upon to meet funding shortfalls”.

“Levying large entities to pay valid claims against other subsectors subverts principles of accountability, regulatory certainty, transparency, fiscal responsibility, sectoral risk differentiation, sustainability and equity. We suggest these principles should underpin the CSLR,” the submission said.

With the cost of the CSLR not expected to ease in the coming years, ICA suggested the current blowout is “indicative of broader scheme sustainability issues”, arguing that a full review of the scheme is required to prevent repeated overflow.

“Any determination on how to fund excess claims should be paused until the government has finalised its review of the CSLR and made amendments to the scheme design to make it fairer and more sustainable.”

Released earlier this week, the Financial Advice Association Australia (FAAA) said in its submission on the matter that advisers should not be forced to pay above their $20 million sector cap, arguing instead that it should be spread across other financial sectors with capacity to pay.

In an accompanying statement, FAAA chief executive Sarah Abood said: “The $20 million sector cap is already very high, particularly when you bear in mind that the vast majority of this levy is paid by small, privately owned firms with very limited capacity to absorb extra costs.”

Without an appropriate mechanism to allocate costs more fairly, Abood said the CSLR is at risk of becoming “unsustainable and ultimately collapsing”.