Consumer groups seek to quadruple CSLR payment cap

Much of the focus from advice associations and other stakeholders in the outcome of the Compensation Scheme of Last Resort (CSLR) review has been on the unfair burden the ever-growing levies have on financial advisers.

The estimated $70 million cost of funding the advice sub-sector in 2025-26 – $50 million above the cap on the sector – as well as the projected blowout to more than $120 million in the following year, has added to the urgency of calls to reshape the scheme’s operation.

“We want action,” Financial Advice Association Australia (FAAA) general manager policy, advocacy and standards, Phil Anderson, told ifa last month.

“We don’t want sitting around for months waiting for action to be taken when there is no certainty of when that will occur.

“The problems are already known, the need for the government to take action has been fundamentally clear for a very long time.”

However, consumer groups have told the government that “years of evidence of [the CSLR’s] need should not be forgotten”.

In a joint submission to the Treasury post-implementation review of the CSLR – penned by Super Consumers Australia, CHOICE, Financial Counselling Australia, and three consumer legal rights bodies – said that if the scheme is successful, the “need for the CSLR should subside over time”.

“The role of the CSLR is novel and there may be opportunities to fine tune its operation to manage any teething issues or unexpected challenges,” the submission said.

It added: “CSLR must continue to play a key role in delivering justice to consumers who have suffered a loss due to the misconduct of financial service providers, thereby restoring and maintaining confidence in the industry.”

Among its recommendations on how to ensure the CSLR is “successful in its outcomes”, is to increase the cap on compensation payable by the CSLR, so that it is in line with the Australian Financial Complaints Authority (AFCA) compensation cap.

As things currently stand, the CSLR is limited in the amount it can pay to victims of financial misconduct, with the maximum amount per determination that reaches the scheme set at $150,000.

This is considerably less than the compensation that AFCA is able to award, which in most claims of direct financial loss is $631,500.

The submission noted that the Ramsay review recommended that a “compensation cap, aligned to ACFA’s, should apply”, which the financial services royal commission final report agreed with.

“I agree with the panel’s recommendations, including those it makes about design principles. The approach proposed by the panel should be followed,” commissioner Kenneth Hayne wrote in the report.

Bringing the two caps into alignment would more than quadruple the amount the CSLR could pay out, which would likely lead to a significant increase in the levy on financial advisers.

Looking just at claims against United Global Capital (UGC), which make up the bulk of the estimated FY26 levy, the CSLR actuarial report put the average cost per claim at $145,000 with the cap in place.

Based on the limited number of determinations that AFCA has published to date, increasing the cap to match what AFCA can award would put the average across the four decisions in favour of clients at around $250,000.

While it is a small sample size, were such a drastic increase to hold across all the decisions, the cost to advisers would blowout even further.

Expansion to include MISs

Where the consumer groups do align with the advice sector, however, is in urging the government to expand the scope of the CSLR to include managed investment schemes.

“A clear example of the problems with the current approach is with the blanket exclusion of managed investment schemes (MIS) from the scope of the CSLR,” the submission said.

“The Ramsay Review found that operators of managed investment schemes were the second highest category of non-compliant financial firms at the Financial Ombudsman Service, and recommended their inclusion in the CSLR.

“This high rate of non-compliance has continued in the AFCA era as well. Including MIS in the scheme may also help expand the sources of funding for the levy, and reduce the individual burden of the levy on financial advisers.”

It also argued that the reasons used to exclude MISs from the scheme are “weak”.

“MIS may sometimes be a high-risk investment, this may not be apparent to less financially competent individuals that are reliant on financial advisers, particularly when misconduct by the adviser has influenced their decision to invest,” the submission added.

“While the CSLR was not originally intended to cover reasonably known market risk, this is not a fair description of many cases involving MIS that have devastating financial consequences on the victims of financial misconduct.

“At a minimum, there should be scope for inclusion of consumers in these situations that fall outside the target market described in the design and distribution obligations for these products.”

The FAAA has previously singled out the inclusion of MISs as particularly important, though recommended that the CSLR’s scope cover all AFCA members.

“Substantial consumer harm has been caused by product failure rather than advice failure, harm that currently has no recourse (e.g. Sterling, Mayfair etc). People have lost their homes and life savings,” the FAAA said in its submission to the Senate inquiry in the Dixon collapse.

“The current situation encourages inappropriate risk-taking and higher risk products to be launched and sometimes targeting elderly consumers with insufficient financial resilience to withstand losses (as the wholesale limits are too low). These consumers then become entirely dependent on the social security system.”