‘Long way to go’ before CSLR is sustainable: What changes are on the table?

In August, Financial Advice Association Australia (FAAA) chief executive Sarah Abood and chair David Sharpe met with Minister Jones to raise the various issues with the Compensation Scheme of Last Resort (CSLR), including the cost being imposed on financial advisers and whether it is actually operating as a “last resort”.

“We have told the minister that although we support the scheme, the funding model is completely unsustainable,” Abood said.

“The financial advice profession does not have the capacity to pay compensation to the clients of large listed entities which have done the wrong thing, and nor should we. We are looking at losses approaching $135 million for Dixon Advisory alone, with nothing in place to stop similar situations happening in the future.”

The minister, she said, has heard the concerns and is “genuine in his intent to work with us to ensure that the CSLR achieves the goal that we all support”.

“He has advised us that the FAAA will have the opportunity to work with Treasury to outline unintended consequences of the CSLR and listen to pragmatic and feasible solutions,” Abood added.

Speaking on an ifa webcast breaking down the CSLR this week, FAAA general manager of policy, advocacy and standards Phil Anderson said the FAAA has had a “number of meetings with Treasury and put forward our views as to the things that need to be fixed”.

“I'll start with one at the outset, and this is something that the minister has the power to do without legislative change, and that's how you treat any excess above the sector cap of $20 million,” Anderson said.

“We are firmly asking that he makes a commitment that that will be distributed across other sectors, and the financial advice does not need to pay more than 20 million in any one year. We're a small business sector. We do not have the capacity to carry the potential costs that we might be seeing in the 25-26 or 26-27 year.”

Last month, the CSLR confirmed that it expects the upcoming 2025–26 levy attributed to personal financial advice to exceed the $20 million subsector cap.

According to the CSLR, the process of confirming the levy estimate is “complex and heavily dependent” on both the Australian Financial Complaints Authority’s (AFCA) estimates of how many complaints will be resolved and proceed to the CSLR in FY25–26, and “the inclusion of any other large-scale firm failures”.

“The practical reality is that we have around $135 million that will need to be paid for by the advice profession, or someone else on behalf the advice profession, over the course of the next three or four years,” Anderson said at the time.

He added that if there is a delay in AFCA’s processing of complaints related to Dixon, then the number may not be “as bad as the worst case" scenario – a subsector total above $50 million.

Addressing ‘core design issues’

How Financial Services Minister Stephen Jones decides to allocate a levy that exceeds the subsector cap is not the only change on the FAAA’s agenda, with Anderson stressing that it is still pushing for the “core design issues to be addressed”.

“The things like the retrospective nature of the scheme that was committed to be a prospective scheme. We're paying for the past. We're paying for the history stuff that happened before the scheme was established,” he explained.

“The original commitment was to pay for 12 months. The government only ended up paying for three months.

“Another thing that is really important to us is the extent to which the advice profession is paying for matters that deep down are product failures. There needs to be a better attribution of loss between advice and product.”

He pointed to the case of Dixon Advisory, which is set to be the subject of a Senate inquiry in the coming months, where the vast majority of client losses were related to the in-house URF fund where there were “deep product failures”.

“No one has really looked at attributing blame to other parts of the Dixon Advisory group, and the mechanisms don't seem to be there. So we need to see change in that space,” Anderson added.

“We also want to make sure that everything is being done to recover money from entities that go into administration. We've seen already examples where the clients have been transferred out for no consideration. We've seen cases of misconduct with respect to intercompany loans that seem not to have been handled as they should have been. We want to make sure that everything is being done and those people that put those entities into administration are held accountable for what they've done.

“We've detailed a very long list of recommendations that's in our submission to the Senate economic committee. I imagine that they will release that very shortly.”

Submissions to the inquiry closed on 1 November, however none have yet been released to the public.

‘Anybody can see it’s just not going to work’

Also appearing on the ifa webcast, Lifespan Financial Planning CEO Eugene Ardino said the CSLR has a “long way to go before it's anywhere close to sustainable”.

“There are some simple fixes, I think. I think the way it's funded, I mean, I'm comfortable for the advice sector to have to tip in an amount, but at the moment, it's unlimited, and $20 million doesn't go very far when you when you have an enormous collapse,” Ardino said.

“Virtually every collapse that we've seen, perhaps Storm is one that didn't involve product failure, but most of the others involve product failure. They mostly touch super. I mean, a really simple way to finance this would be to take a basis point or two from the superannuation pool or the funds management pool for situations where it exceeds the cap.”

He added that in the case of a failure that is even larger than that of Dixon Advisory, things begin to spiral very quickly.

“Anybody can see it’s just not going to work. The way it's funded needs to be restructured, perhaps how it operates also in terms of the sort of claims,” Ardino said.

“But I support a CSLR in principle. I think we all do. I think my father actually suggested it about 15 years ago, but it's got to be funded sustainably.

According to Ardino, it is also hindering the growth of financial advice at a time that when it is sorely needed.

“Why would you want to enter the industry? We're talking about having a shortage of advisers. Why do you want to enter an industry when you've got that potentially hanging over your shoulders in a few years’ time?” he said.

“We need to all get on board and support this [inquiry]. I think groups like us that are big enough have to be talking to government, particularly the associations. And I think advisers should be considering this and supporting it as best they can as well.”

Infocus managing director Darren Steinhardt agreed that the “exceptionally unfair” settings will impact new advisers joining the profession, adding that the issues need to be addressed before it ever gets to the CSLR.

“I think the way to address the settings is not the Compensation Scheme of Last Resort. That is an administrative function that this serves to exist when things go wrong. It's having the framework correct before that so things do not go wrong,” Steinhardt said.