As pre-election chatter heats up, WT Financial Group chief executive Keith Cullen said that whoever takes power later this year urgently needs to address the Compensation Scheme of Last Resort (CSLR) as the mounting costs could put the future of the profession in jeopardy.
Released in January, the CSLR’s initial levy estimate for the upcoming financial year, calculated along with independent external actuaries Finity, came out to $77,975,000 across all sectors.
“Where we sit today, this $78 million is not the half of what it will be the following year because it is not the Dixon matters creating this $78 million. It’s one of these other debacles,” Cullen said.
While Dixon Advisory has overwhelmingly been blamed for the skyrocketing CSLR levy, Finity’s estimates have indicated that United Global Capital (UGC) could impact the FY2025–26 levy three times as much.
The CSLR has estimated that the total number of UCG-related complaints will be 346, with 307 of those being paid in FY25–26, though, speaking with ifa earlier this month, CSLR chief executive David Berry said this all depends on when the Australian Financial Complaints Authority (AFCA) will cease UGC’s membership so people can no longer lodge complaints.
“Now we don’t know what that actual number will be. It’s what the actuaries, using their experience with other modelling they’ve done, with other circumstances and with Dixon, that’s the number they’ve come up with. I think it’s unlikely we’re going to see a huge increase,” Berry said at the time.
While the CSLR undoubtedly impacts current financial advisers, Cullen noted that, in its current form, the CSLR is also acting as a massive deterrent for potential new entrants, a challenge that could cripple the profession in the future as it continues its struggle to maintain the number of advisers it has.
“I mean 5, 6, 7, 8, $9,000 on top of an ASIC levy at $2,800 or thereabouts is, it’s a big disincentive to start growing people. They’re massive taxes to be borne by a very small profession,” he said.
“Welcome to the profession. Here’s the bill for 10 grand.”
CSLR should be restricted to capital losses
Recently there has been a growing discourse regarding whether AFCA’s use of “but for” determinations, which includes hypothetical missed gains, should be covered under the CSLR.
While this is of concern, Cullen argued that this is more a discussion around whether the CSLR is operating appropriately and as intended.
“This is not a discussion about changing the AFCA rules, although that is a discussion that we should have at some point in time, now is not the time for it,” he said.
“This is a discussion about whether this should be a genuine scheme of last resort, which is what we all think it should be. I think you’ve seen concessions in the language that’s coming out of both the government and also the opposition at the moment and that’s just recognising this should cover capital losses, it should be restricted to capital losses.”
At an event in Sydney earlier this month, Jones acknowledged that the CSLR is “not about guaranteeing investment returns”, stating that the intention of the scheme is to ensure genuine victims have access to some redress.
Speaking with ifa later that same week, shadow financial services minister Luke Howarth agreed that the “but for” issue is of key concern, arguing that, in its current form, the CSLR isn’t acting as a scheme of “last resort”.
With the impending election top of mind, the shadow minister said in a statement in January, “The Coalition will act quickly to fix the CSLR and get costs down for advisers.”
As the possibility of a special levy looms, Cullen argued that addressing the faults of the CSLR needs to be a top priority to ensure the future of the advice profession.
“If the government and the opposition are serious about dealing with it and serious about us having a healthy, vibrant advice community that can assist Australians in their run-up to retirement in particular, we need to know what those numbers are,” he said.
Cullen added: “So, the government needs to sort this out. Regardless of who forms government, that needs to be sorted out urgently.”
To hear more from Keith Cullen, tune in here.
How many firms will now shed advisers that were just on the edge of being profitable?
When you add it all up on a “per adviser cost basis” with their salary, 12% super coming, their Licensee Fee, their cost of Xplan, cost of PI, cost of ASIC Levy, cost of CSLR, plus all the usual extras you would have to be very close to cost of $170k to $200k pa per employed adviser.
Neither one of the two major political parties cares and neither do the Green’s. Nothing will get better.
I have submitted to the Commonwealth Ombudsman that the ASIC SUPERVISORY COST RECOVERY LEVY ACT 2017 by reasonable analysis is Defective Legislation. One simple reason is that it breaches Common Law in procedural justice and distributive fairness (equity) against financial advisers and the clients of financial advisers, because the Levy creates no good for anyone. Please ask your professional association to do a Defective Legislation analysis on CSLR and publish it in the Australian Financial Review. Here are some things to consider about legislation defects in Australian Commonwealth legislation:
The CDDA Scheme
Provides compensation for people who have experienced detriment due to defective actions or inaction by government agencies. This scheme is generally used as a last resort when there is no other way to provide redress.
Formal defects
The Federal Court of Australia Act 1976 states that formal defects or irregularities do not invalidate proceedings in the Court, unless the court believes that substantial injustice has occurred.
Legislation review
Legislation should be regularly reviewed for readability, usability, and policy desirability. Reviews should also consider the legislation’s continuing relevance and the underlying policy.
Law reform
The Australian Government may identify areas of Commonwealth law that need to be reviewed, improved, or developed. This can be done for a variety of reasons, including:
• Community concern about a particular issue
• Recent events or legal cases that have highlighted a deficiency with the law
• Scientific or technological developments that have made it necessary to update the law.
Remember, Honourable Stuart Robert said in public in early 2023 that Treasury is making 1.6 times ASIC’s enforcement costs and the IFM levy Legislation should be repealed. I think it was designed before the Hayne Royal Commission as anticompetitive in favour of big banks and it should have been dumped after the Royal Commission.
Dixon and UGC handled client funds and lost it. Therefore, my analysis of CSLR is that AFS licensees which never handle client funds – they only do advice and arranging on product platforms under second degree supervision by platforms with their APL following research houses, should not have to pay CSLR compensation for those AFS licensees who handled clients funds and lost it.
7 advisers =70k CSLR & ASIC + another 70k per annum for PI. Never had a single claim. We actively remediate clients if there’s a mistake and ensure clients are no worse off. This is done prior to us ever even receiving a client complaint.
As a robust well run business, that’s 1.4mil over 10 years my clients are paying for. With zero return except that they’ve paid for unused insurance, unused regulators and have the privilege of their money being taken to compensate other people who invested in products that failed.
How is it my clients are paying for product failure when they didn’t invest in the product, didn’t deal with the adviser or AFSL and the federal regulator which they already pay for didn’t block or monitor the product and failed to regulate the adviser to prevent the failure in the first instance.
Make it make sense!
Should be sorted out immediately by the current gov, not next. It is already a crisis.
They should get a fixed budget and make best efforts out of that, not satisfying every complainant in full. This blank cheque approach is a nonsense.
I shouldn’t have to pay from my own pocket, for the failure of a competing business. full. stop.
I run my own business and have one staff member. After all the overheads, I pay myself a modest salary. This Levy then reduces that salary even further.
Why would anyone go into business in this country ?
Should never have got to this position to begin with.
Appalling.
ALP out.
Good Luck with that Keith Cullen if by urgently you mean in 9-12 months then maybe.
Who’d be in this business!
That’s why I laugh when people talk about “new entrants” and the PY.
You would need to be brain dead to enter this industry.
It won’t be fixed anytime soon.