KC advises ‘no arguable basis’ to challenge legality of CSLR levies

Responding to an Association of Independently Owned Financial Professionals (AIOFP) request for advice on whether there are any potential legal challenges available to the Compensation Scheme of Last Resort (CSLR) and the financial burden the growing cost of the scheme has on advisers, King’s Counsel Bernard F Quinn said a challenge would be futile.

“In my view there is no arguable basis upon which AIOFP could challenge the legality or validity of CSLR or, more specifically, the legislative components of CSLR that impose levies,” Quinn stated in his advice to the AIOFP.

“The provisions that impose levies to fund CSLR are contained in the Levy Act and the Levy Regulations. These are supported by section 51(ii) of the Constitution of the Commonwealth of Australia (Constitution) (the taxation power).

“They satisfy the well-established requirements of laws with respect to taxation enacted under that placita. Further, in accordance with section 55 of the constitution, the Levy Act and the Levy Regulations contain only provisions with respect to the imposition of levies, and not other aspects of CSLR.”

According to the KC, who had previously provided an expert legal opinion on section 99FA of the SIS Act, neither the “broad social or economic policy objectives of such laws” nor their fairness and equity are “relevant to the validity of the laws”.

Specifically, while a tax cannot be “arbitrary”, Quinn said this “condition of validity does not permit any analysis of the fairness of the tax or of whether it targets some persons to the detriment of others on grounds that seem unreasonable, discriminatory, harsh or unjust”.

“Rather, in order that it not be arbitrary in the constitutional sense, it is simply necessary that the tax be based upon ascertainable criteria,” he said.

“That is, liability must be imposed by reference to criteria which are sufficiently general in their application, and which mark out the objects and subject matter of the tax, such that the tax is ‘contestable’ and not dependent upon the mere opinion or preference of government agencies.

Quinn added: “The reasonableness or fairness of the criteria are not relevant to validity. It follows that the legislation is not beyond power on the basis that it is arbitrary.”

The explosion in the cost of the CSLR on financial advisers, set to hit $70 million during FY2025–26, has inflamed questions about not just the fairness, but the sustainability of the scheme.

Likely anticipating the furious response of the advice sector, outgoing Financial Services Minister Stephen Jones announced a post-implementation review of the CSLR to “ensure the scheme is delivering its intended objectives”.

“Ensuring the scheme is sustainably funded will be an important focus of the review,” the minister said last month.

Hamilton Locke partner Simon Carrodus reiterated a number of concerns that have plagued the CSLR since it was established, including the impact of Dixon Advisory.

“It feels like almost everybody – advice firms, regulators and industry bodies – welcomes the CSLR review. The current structure is unfair and unsustainable,” Carrodus said.

“The scheme should be funded by all AFCA members, not just financial advisers. And all Dixon Advisory complaints should be excluded from the scheme – it was never supposed to be retrospective.”

Responding to Quinn’s legal advice, AIOFP executive director Peter Johnston lamented that any attempt to amend legislation that “attacks any government tax or levy is destined to fail in the High Court”.

“Simply put, you cannot beat ‘City Hall’ when it comes to their money supply. It is a shame this same attitude does not apply to consumer protection,” Johnston said.

“The only way this repugnant legislation can be amended is in the parliamentary process, the best time is over the next few months leading into the election when all politicians will listen.”

He is, however, not hopeful on the effectiveness of the Treasury review of the CSLR, arguing that Minister Jones “allowing Treasury to evaluate their own handiwork is farcical”.

“We also suggest this review is an effort to kick this very controversial and extremely ‘putrid can’ down the road until after the election,” Johnston said.

The resolution, he added, is to go back to the original intent and recommendations of the Hayne royal commission and the Ramsay report.

“Specifically, advisers must pay for poor strategic advice outcomes and manufacturers for the failure of their own products, it’s not rocket science and is painstakingly fair,” Johnston said.

“The fact that AFCA has cooperated with the flawed CSLR structure by using the ‘best interests duty’ to justify advisers being held responsible for product failure emphasises why the legislation needs amending.”

While Johnston believes the “political haggling process” will likely lead to the elimination of the retrospective nature of Dixon complaints, he said product manufacturers “must be held accountable for the performance of their own products”.

“It is time for all advisers to educate their clients on the insidious and expensive characteristics of this legislation and give them some direction on who they should NOT vote for in the upcoming election. This will certainly get the attention of the politicians, we need to act,” Johnston said.