FSC argues government should fund ‘one-off injection’ to cover Dixon CSLR hit

In September, Pauline Hanson’s One Nation moved a motion in the Senate that an inquiry be held to scrutinise the collapse of Dixon Advisory, examining how this failure has influenced the development and ongoing viability of the Compensation Scheme of Last Resort (CSLR).

While submissions to the Senate economics references committee inquiry were due on 1 November, they have yet to be released directly.

However, some of the stakeholders that responded have begun releasing their own submissions, the earliest of which came from Chartered Accountants Australia and New Zealand (CA ANZ), which argued it is “inappropriate” that small financial advice practices should “bear the brunt of the compensation payments” stemming from a large firm’s collapse.

The Financial Services Council (FSC) has now released its submission, setting out a comprehensive list of 20 recommendations to reshape the CSLR into a more workable scheme and attempt to prevent further wealth management collapses from happening in the future.

Among the recommendations is a push for a “one-off injection of government funding to fund claims arising from the Dixon Advisory collapse”.

As the FSC points out in its submission, the original plan for the CSLR was that the government would cover the first year of the scheme, beginning on 1 July 2023, while the 10 largest banking and general/life insurance groups would cover the pre-CSLR levy period.

This figure was set at $241 million, of which $203 million was earmarked for Dixon claims, however, delays to the start date of the CSLR officially kicking off, while not delaying when the second levy period would begin, meant the government only covered the cost of three months of the scheme.

“However, complaints against Dixon continued to be received after the pre-CSLR levy period. This was anticipated by Treasury. Documents released under freedom of information processes indicate the government nonetheless decided to retain the cut-off date of 7 September 2022 for the pre-CSLR levy period when designing the final version of the CSLR bills,” the FSC said.

“By 30 June 2024, AFCA had registered a total of over 2,773 complaints against Dixon, meaning an additional 1,135 complaints had been received since 8 September 2022. Since the pre-CSLR levy had been designed to raise funds for complaints lodged no later than 7 September 2022, the funds raised by the pre-CSLR levy are not expected to sufficiently fund the new complaints, a high share of which are – based on previous actuarial estimates – expected to be eligible for CSLR compensation.”

The submission added that the government had set a “clear expectation” that most claims related to the Dixon collapse would be covered by the pre-CSLR levy and government funding.

“This expectation was made clear on 8 September 2022,47 and materials released through freedom of information processes show that the Minister was advised by a submission dated 12 August 2022 that it was ‘possible, though unlikely’ Dixon costs end up ‘exceeding $250 million’, which would ‘expose the Government to increased costs in the first levy period (2023‐24)’,” the FSC said.

“Such wording clearly demonstrates the Government intended to contribute to the costs of the Dixon cohort.”

Given delays had pushed Dixon's complaints into levy periods that the FSC called “technically no longer covered by the Government’s commitment”, there is now an unexpected burden on financial advice licensees.

“As a result of these delays, the prospect of the Government providing financial support to the CSLR to assist with the Dixon cohort appears to have receded. Yet delays had been anticipated by Treasury: advice released under freedom of information laws was that a minimum of eight months would be required after the passage of the CSLR legislation for the scheme to become operational,” the submission added.

“This expectation and its implications for joint government funding of Dixon claims was not made clear to industry.”

While the FSC noted that the CSLR bill’s explanatory memorandum discussed the possibility of “black swan” events and thus required the need for ministerial discretion in exceeding the subsector caps, it argued the mechanism was never intended to be used to fund Dixon claims.

“A historical company collapse which predates the existence of the CSLR itself cannot be construed as an unanticipated ‘black swan’ event,” the FSC said.

“In light of the Government’s previous representations about contributing to the CSLR during its first year of operation, the FSC strongly supports a one-off Government contribution to the CSLR to resolve legacy Dixon issues and place the CSLR on a sustainable, future-focused foundation.

“This will be essential for the CSLR to face anticipated future challenges, such as the United Global Capital cohort (whose status is indeterminate as at the date of this submission).”