Jones and Howarth agree 'but for' test has no place in CSLR scheme

In late January it became clear that the Compensation Scheme of Last Resort (CSLR) needed an urgent fix, after the levy estimate for the upcoming financial year revealed a staggering total of $78 million across all sectors, with the bulk or $70.11 million charged to financial advisers.

The CSLR, designed to compensate consumers who have suffered financial loss due to misconduct by financial services providers, has become a contentious issue for financial advisers, who are facing significant levies despite not being involved in the wrongdoing.

But while the profession has lobbied for changes for months, it took the cost surpassing $70 million - well above the $20 million sector cap – for the minister to announce a comprehensive review of the scheme to test its sustainability.

Namely, in January, Financial Services Minister Stephen Jones said the Albanese government is instructing the Treasury to conduct a comprehensive review of the CSLR to ensure the scheme remains sustainable into the future for consumers and for the industry.

Over the past year, industry experts have questioned whether AFCA’s use of “but for” determinations, which include hypothetical missed gains, should be covered under the CSLR, arguing that the scheme should focus solely on actual losses, not opportunity costs.

While the minister has repeatedly failed to address these concerns, this week at an event in Canberra he acknowledged that the CSLR is “not about guaranteeing investment returns”.

The scheme, he said, is “about ensuring genuine victims have access to some redress”.

“This is an important part of the financial system for advisers. Because it gives Australians confidence that there is a back stop in situations of genuine last resort,” Jones said.

“It’s in all our interests to ensure that is what it is doing”.

In comments made to ifa on Tuesday, shadow financial services minister Luke Howarth agreed that the "but for" issue is of key concern.

Citing data which suggests 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, the shadow minister called on the government to “intervene to limit or filter out these claims”.

“I think everyone supports a sustainable scheme with a reasonable cost – that’s not what we have now. It is not a scheme of ‘last resort’,” Howarth said.

“It is out of control and the solution can’t be just to issue more levies”.

However, it appears that simply eliminating “but for” will not solve the CSLR cost blowout.

Namely, while Dixon Advisory was the most publicised failure behind the scheme’s inception, the focus has shifted to United Global Capital (UGC), with its CSLR cost for 2025-26 estimated at $44.57 million, compared to $12.25 million for Dixon.

ifa understands that while a large number of Dixon complaints are focused on hypothetical capital gains, this is not the case with UGC - one of the three published determinations related to UGC includes more than $300,000 in capital losses, without even getting to the “but for” test.

This was alluded to by the minister this week, who said: “Unfortunately, two of the biggest cases to hit the CSLR – Dixon and United Global Capital – have very different characteristics that make a quick fix very difficult”.

AFCA has previously defended the use of the “but for” approach, highlighting that the standard actually predates AFCA’s existence.

Namely, the Supreme Court of Western Australia ruled in favour of the approach back in 2015, when Patersons Securities launched action against the Financial Ombudsman Service.

However, FAAA’s CEO Sarah Abood late last year said that while AFCA’s methodology is not new, how it interacts with the CSLR is.

“I think, certainly from our perspective, it seems completely unfair, but also obviously unsustainable,” she said.

“That a compensation scheme of last resort should be paying, basically an income guarantee to those clients. So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.”

The submissions to the government’s CSLR review are due 28 February, however it is as yet unknown when the government will issue a formal response.