‘Something isn’t right’: CSLR admin costs under the microscope

Shadow financial services minister Luke Howarth and the Financial Services Council (FSC) have both called for reductions in the costs associated with administering the Compensation Scheme of Last Resort (CSLR), noting that the numbers are significantly exceeding initial Treasury estimates of $3.7 million in July 2021.

In its submission to the Senate’s inquiry into the collapse of Dixon Advisory and its impact on the CSLR, the FSC said the administrative costs for the scheme have increased 73 per cent to $6.4 million for FY25.

According to the FSC, this highlights a “clear need to review the operational model of the CSLR and its scope as administration costs are unacceptably high”.

“Nearly 27 per cent of total levies in FY25 are being allocated toward scheme administration, which reduces the funds available to compensate consumers or reduce total levies,” the submission said.

“There needs to be a greater focus on keeping administrative costs as low as is reasonably practical as it is unacceptable for administrative costs to represent such a high proportion of the CSLR’s expenditure.”

Speaking at an AIOFP dinner in Canberra on Tuesday night, Howarth echoed this sentiment, adding that the costs have “blown out”.

“If that was in the private sector, in your business, you’d either be going broke or someone will be getting sacked,” he said.

“But 70 per cent higher than what Treasury estimated, something isn't right. You have enough of your own admin to do, as a lot of you would probably be small traders or just with a couple of staff, you've got a lot of admin to do and pay for, let alone paying for the CSLR’s admin costs as well.”

The shadow minister argued that there is a vital need to get the cost of the CSLR down, saying “we need to take the razor to this”.

“They [the government] need to start by admitting that this is out of control and not what was intended,” Howarth said.

“The solution can't be just to issue more levies, but right now, that is the Albanese government and Stephen Jones’ plan.”

Over the period from July 2021, total levies are up 200 per cent to $24.1 million from Treasury’s estimate of $8.1 million.

This jump, according to CSLR chief executive David Berry, highlights an important factor in the debate over administration costs – “since then, Dixon happened”.

“It's not a little playing field to compare it to,” Berry told ifa.

“When you look at the $6.4 million, there's a couple of things that contribute to that. A lot of it is we're starting something from scratch, and because we're starting from scratch, there's a lot of one-off type expenses that come with the start-up of any organisation that certainly features in there.

“The other is, we took an approach of quality is more important here, and so we've got to make sure we've got it right. We have taken our time that we have made sure that our interpretation of legislation aligns with the actual legislation. So, a lot of those expenses in managing the organisation have played a big part in this levy period.”

He added that going forward, even with an increasing workload the CSLR expects administration costs to go down.

“Quality of process right up front usually means you go slower, and you make sure you invest in all the things which you need to,” Berry said.

“The evidence points for this will be in the future, but when you look at the forecast moving forward, it's going to be a lower absolute figure, year on year, and it's going to be three times the amount of claims we're planning to get through.

“I've come from a corporate background, and that corporate background requires me to do things faster and cheaper year on year. So, we're dealing with the current situation, but that's not reflective of what is likely moving forward, we will continue to see improvements in cost and efficiency as we as we work through this.”

The FSC, however, believes that among the contributing factors to the high administration costs are a duplication of functions between the CSLR and the Australian Financial Complaints Authority (AFCA, as well as “number of advocacy and marketing activities” that “stray beyond” its core responsibilities.

“Given the present strain on the CSLR operator’s budget stemming from the Dixon cohort and the high likelihood of a special levy being imposed, the FSC does not consider it appropriate for the CSLR operator to undertake activities beyond those which are strictly required for it to perform its statutory functions,” it said in its submission.

“If the CSLR operator continues to duplicate functions of AFCA, the FSC notes that under section 1060 of the Corporations Act it is possible for the entities to be merged, which might represent an alternative means of reducing the scheme’s administration costs.”

Accordingly, among the FSC’s recommendations to the inquiry was the government funding the administration costs.

“The FSC supports imposition of a limitation on the funds raised by annual and special levies to prevent them from being spent on the CSLR operator’s administrative costs,” it said.

“This would necessitate Government funding for the very modest annual expenditure that ought to be required to operate the CSLR, while earmarking funds collected from industry to be expended on victim compensation.”

Senator Andrew Bragg had previously raised concerns over the CSLR’s administration costs and a job ad for a communications partner during a Senate estimates hearing.

When Treasury officials were unable to provide clarity on these issues, he requested they take questions on notice about “why they’re spending so much money on administration and what this communications partner job is going to do”.