CSLR exposed to ‘credible constitutional challenge’

Associate Professor of tax law at Deakin Law School, Dr Mark Bowler-Smith, has told Financial Services Minister Daniel Mulino that “structural, constitutional and market flaws that have now materialised” related to the Compensation Scheme of Last Resort (CSLR).

In a letter to the minister, written alongside the Association of Independently Owned Financial Professionals (AIOFP) technical expert Lionel Rodrigues, Dr Bowler-Smith recommended that the window provided through the CSLR post-implementation review be used to “redesign the CSLR’s legislative footing, funding base and governance before further levies are imposed”.

“The CSLR’s design, conceived under earlier self-funding policy settings, functions as a compulsory private transfer rather than a true public-purpose levy. It is inequitable, distortionary and constitutionally exposed,” the letter said.

Among the concerns that the pair raised is that the CSLR levy operates as a private transfer rather than a tax for public purposes and the funds bypass Consolidated Revenue Fund and vest in private claimants.

They also argued that there is a weak regulatory link in the levy applying based on licence status, not trading conduct, and that AFCA determinations converted into statutory debts results in a “blurred separation of powers”.

The letter also pushed for a shared-funding model that would include a capped Commonwealth contribution funded from ASIC and court penalties, as well as risk-weighted levies that would scale by compliance record, complaint ratio and capital base.

They also argued that the special levy decision should replace ministerial discretion with transparent, rules-based formula.

“These measures would restore equity, efficiency and constitutional robustness while maintaining consumer protection,” it said.

The letter added: “The CSLR’s escalating levies and structural weaknesses confirm what industry and academics long predicted: a self-funded scheme without public anchor is unstable and potentially unlawful in character.

“Our recommendation is that Treasury’s comprehensive review explicitly address (i) constitutional validity and public-purpose justification, (ii) long-term funding architecture, including public co-funding options and (iii) governance and actuarial transparency to prevent future levy blow-outs.

“Early ministerial direction on these fronts will avert further sectoral damage and restore confidence in Australia’s financial system governance.”

AIOFP executive director Peter Johnston said the association has advised both Mulino and shadow minister Pat Conaghan that it intends to challenge the CSLR in the High Court if “fair amendments are not applied”.

“We support a fair, well‑funded CSLR. If the rules aren’t improved, we’re ready for a High Court challenge to ensure the funding model and the scheme’s use of AFCA decisions are lawful, fair and sustainable,” Johnston told ifa.

The key issues, Johnston added, are the AFCA determinations are coming from a non-judicial body that “permits no procedural fairness or natural justice for financial advisers”.

Minister Mulino did not respond to ifa’s request for comment by the time of publication.

Shadow minister for financial services Pat Conaghan said that his office will be looking at the briefing closely.

“Whatever the legality of the CSLR, the reality is that it’s running out of money while Labor sits on a decision. The industry and victims need certainty – and it’s fundamentally unfair that advisers continue to carry so much of the burden for things outside of their control,” Conaghan told ifa in a statement.

Earlier this year, the AIOFP sought advice on whether there are any potential legal challenges available to the CSLR and the financial burden the growing cost of the scheme has on advisers, however, King’s Counsel Bernard F Quinn said a challenge would be futile.

“In my view there is no arguable basis upon which AIOFP could challenge the legality or validity of CSLR or, more specifically, the legislative components of CSLR that impose levies,” Quinn stated in his advice to the AIOFP.

“The provisions that impose levies to fund CSLR are contained in the Levy Act and the Levy Regulations. These are supported by section 51(ii) of the Constitution of the Commonwealth of Australia (Constitution) (the taxation power).

“They satisfy the well-established requirements of laws with respect to taxation enacted under that placita. Further, in accordance with section 55 of the constitution, the Levy Act and the Levy Regulations contain only provisions with respect to the imposition of levies, and not other aspects of CSLR.”