How Labor ignored its own CSLR recommendation

Documents published this week have revealed that the Labor government ignored a crucial recommendation made by its own senators when it proceeded to legislate the Compensation Scheme of Last Resort (CSLR) in 2023.

Namely, the government has only just published its response, provided in May this year, to a recommendation made by its own senators back in 2022 regarding the need to expand the scope of the CSLR to include managed investment schemes.

The recommendation was made when Labor was in the opposition, just months before it assumed government, by senators Anthony Chisholm and Jess Walsh.

The recommendation reads: “Labor senators recommend that the Australian government expand the scope of the Compensation Scheme of Last Resort to include managed investment schemes.”

In its response, the Labor government said: “The government notes this recommendation. However, given the passage of time since this report was tabled, a substantive government response is no longer appropriate.”

The CSLR legislation was originally introduced into Parliament by the Morrison government in October 2021.

Labor broadly supported the bill, but at the time said it was “concerned by the narrow focus of the proposed compensation scheme and the decision by the government to exclude managed investment schemes from coverage”.

However, Parliament was dissolved in April 2022 and the bill had not passed. The Labor government then introduced its own package of bills which included the CSLR in September 2022.

In a Senate committee report on the September 2022 version of the bill, Liberal senators Andrew Bragg and Dean Smith drew attention to Labor’s apparent change of mind regarding the scheme’s scope.

“When the committee reported on those bills in February 2022, Labor recommended that the Compensation Scheme of Last Resort (CSLR) be extended to cover managed investment schemes (MIS’s),” the Liberal senators said.

“In these bills put forward by the Labor government, neither the $150,000 cap nor the scope of this scheme have been altered.”

Indeed, in the report, Labor did not mention managed investment schemes once.

The bill was delayed again following operational concerns around the one-off levy that would be imposed on Australia’s 10 largest banking and insurance groups to cover the pre-CSLR backlog of complaints.

Speaking in Parliament during the March 2023 introduction of the third CSLR bill, which would eventually pass later that year, Financial Services Minister Stephen Jones identified that a “material event occurred in the market that significantly increased the amount that would need to be paid out” by the one-off levy.

Essentially, the Dixon Advisory collapse and subsequent cost explosion played a role in the government’s decision to pause the bill and make amendments.

At the time, Jones did not provide insight into why managed investment schemes were once again excluded.

However, a Treasury Q&A document released recently under the Freedom of Information (FOI) Act, which relates to the version of the CSLR bill that was legislated, attributes the exclusion of managed investment schemes to their level of risk.

“Although the government acknowledges evidence of unpaid Australian Financial Complaints Authority (AFCA) determinations relating to managed investment schemes, it considers that these financial products are unsuitable for inclusion at this time,” the document reads.

“The scope of the CSLR reflects financial products that have undergone significant regulatory reform which have reduced the risk of misconduct and failure. Managed investment schemes can involve high-risk investments.”

The government originally announced a review of the regulatory framework for managed investment schemes in the October 2022–23 budget, with a consultation paper released in August 2023.

While the Treasury website still lists a report on the MIS review as being due in “early 2024”, the wholesale investor test portion proved contentious and was spun into its own parliamentary joint committee inquiry that has delayed Treasury’s findings.