Coalition will ‘act quickly to fix the CSLR’: Howarth

According to shadow financial services minister Luke Howarth, the government relying on the financial services royal commission rather than conducting a timely regulatory impact analysis is “not surprising and financial advisers across the country are now wearing the consequences”.

Last week, the Financial Advice Association Australia (FAAA) called on the government to acknowledge the “scale of the exposure the financial advice profession faces” after freedom of information (FOI) documents showed no proper impact analysis on the Compensation Scheme of Last Resort (CSLR) had been undertaken.

FAAA chief executive Sarah Abood said the strain that has hit the advice profession on the back of the CSLR implementation should have been foreseen and could potentially have been avoided if a proper impact analysis had been conducted.

“There appears to have been no timely analysis done on the costs and benefits of the CSLR. Statements were made that the Hayne royal commission process was considered to be the equivalent of an impact analysis,” Abood said last week.

“We believe that this decision is deeply flawed and inappropriate in the circumstances. The royal commission had a different purpose and was finalised over four years beforehand: well before the extent of the failings at Dixon Advisory were known and well before the legislation for the CSLR was considered by Parliament.

“There appears to have been no attempt to calculate the likely costs to advisers who are funding the scheme, or to assess whether these costs are affordable or sustainable, and the likely impact on the overall cost of advice to consumers.

"This is deeply disappointing. We are calling for the government to acknowledge the scale of the exposure the financial advice profession faces and to undertake an urgently needed review of the CSLR legislation, to ensure that the CSLR is fairly and sustainably funded.”

Howarth echoed these concerns, arguing that the apparent lack of impact analysis is far from the only issue with the government’s handling of the CSLR.

“This poor process pales in comparison to the government’s total inaction since clear problems with the design of the CSLR were exposed at least a year ago,” the shadow minister said.

“The government has done nothing over the last year to address the CSLR’s cost blowout and excessive levies despite it being a major burden for financial planners and advisers. The next levy is fast approaching and there has been no solution offered up by Albanese’s minister.”

In September 2024, the Senate approved an inquiry into the collapse of Dixon Advisory, examining how the failure influenced the development and ongoing viability of the CSLR, which is scheduled to report by the last sitting day in March 2025.

However, Howarth said reform “can’t wait” for the inquiry process to be completed, adding that it is being used as “cover” for the government to “continue its inaction on its massive CSLR cost blowouts”.

“Urgent action is needed to make the scheme sustainable and reduce its costs in a fair way,” he said.

“The Coalition will act quickly to fix the CSLR and get costs down for advisers.”

How does Howarth plan to ‘fix the CSLR’?

At the top of the list for the shadow minister is phoenixing, calling the situations like Dixon Advisory, in which parent company E&P Financial Group largely avoided paying compensation to clients by shutting down its subsidiary, “unacceptable”.

“The CSLR needs to be a genuine ‘last resort’, not something that foots the bill when a parent company wants to shed its liabilities. This goes beyond the Dixon backlog and we need to make sure this situation can’t happen again,” Howarth said.

“If the scheme is to continue, it needs to be a genuine ‘last resort’ which has not been the case under Labor’s watch.”

In addition to shutting down Dixon Advisory, E&P also moved about 3,280 of its 4,100 clients to other AFSL holders within the group.

“Every DASS client was given a choice, with some choosing to leave and the majority deciding to stay withing (sic) the group,” ASIC said in response to questions on notice in July 2024.

Speaking with ifa in May, the FAAA’s Abood raised concerns around the role of E&P, including that it would indeed be a beneficiary of CSLR payments.

“When this compensation is paid, much of it will go to E&P as they still have many of these clients on the books,” Abood told ifa.

“It’s certainly what makes me the angriest, that advisers are on the hook for the failings of a listed entity. It’s unbelievable.”

The regulator also detailed that between 1 January 2021 and 10 May 2022, E&P appointed 39 advisers who were Dixon representatives.

While Howarth did not provide any specifics on how a Coalition government would seek to address the issue of phoenixing, the FAAA’s submission to the Dixon Senate inquiry recommended the introduction of legislation that would enable a special CSLR cost to be levied against an integrated financial group that has made a subsidiary entity bankrupt to avoid paying compensation to consumers.

“The government could establish a principle in the legislation based on common ownership and/or directorships, that a given proportion of revenue be levied against the parent entity if any subsidiary company has caused its customers to have recourse to the CSLR,” the submission said.

According to the FAAA, this would provide a “tangible disincentive to future phoenixing activity”, adding that there is no legal reason the government could not use this power in relation to E&P.

Remove the ‘but for’ from the CSLR

The Australian Financial Complaints Authority’s (AFCA) us of ‘but for’ determinations has become a hot button issue when it comes to the CSLR, with myriad submissions to the Senate inquiry seeking to limit payouts to capital losses.

This is another area that Howarth said the Coalition would address, saying the government should intervene to “limit these claims when it is the CSLR footing the bill”.

“Eighty per cent of claims are ‘but for’ compensation where people are claiming compensation where they did not have a capital loss. Rather, they just ‘could have been in a better position’ and are being compensated for the additional returns they missed out on,” the shadow minister said.

“The CSLR CEO himself said this ‘but for’ situation makes up 80 per cent of claims. This is the bizarre reality of what the CSLR is paying and is why the costs are blowing out.

“AFCA’s approach to making these compensation decisions is a major problem for the scheme and I met with AFCA CEO, David Locke, recently to directly raise my concerns about this issue.”

He also reiterated the Coalition’s concerns with the administration costs for the CSLR, which he said had “blown out” to about a third of the annual levy.

“This is 70 per cent higher than what Treasury estimated when designing the scheme and these costs need to be cut,” Howarth said.

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 FY2024–25.

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 level playing field to compare it to,” Berry told ifa in November.

“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.

However, Howarth has maintained that “advisers have enough of their own admin to do and pay for, let alone paying for the CSLR’s excessive admin costs too”.

“There are good intentions here and I support a sustainable scheme with a reasonable cost but that’s not what we have now. It is out of control and the solution can’t be Labor’s plan of just issuing more levies,” he said.