Room for optimism as government looks to tackle CSLR before it goes too far

In January, Financial Services Minister Stephen Jones announced that financial advisers will be on the hook for $70.11 million for the Compensation Scheme of Last Resort (CSLR) 2025–26 levy as a result of determinations against collapsed firms United Global Capital (UGC) and Dixon Advisory.

Considering this, Lifespan chief executive Eugene Ardino pointed out that these levels of claims have occurred in what he considers to be a “pretty benign economic and investing environment”, highlighting that if and when that turns, the inflow of complaints could be overwhelming.

“Equity market returns have been fantastic. We’ve had a few bumps in the road, but for the most part, there hasn’t been that pressure that comes when you’re in a really bad equity and capital market, right?” Ardino said on The ifa Show.

“So, when we then see an event like that, dare I say, another [Global Financial Crisis] type event or something close to that, you’re going to get more and more claims, right? … I think everybody supports the concept of a CSLR, including myself. I support that because I think it also brings confidence for the consumer, which is extremely important as well.

“But the way in which it’s funded needs a massive restructure because the $20 million cap, it just isn’t a drop in the ocean when one of these big blow-ups occurs.”

While a number of submissions to the CSLR inquiry have argued that the subsector cap should be lowered from the current $20 million, the issue is that when the cap is exceeded, the minister has the ability to issue a special additional levy to cover the costs, among other measures, essentially making the cap redundant.

“The cap’s important, but what’s more important is what happens when we exceed the cap. Which, I mean, is the CSLR there to fund the odd small failure or is it there to fund the big failures that were the Dixons and some of the others that are making their way into the press?” Ardino said.

“If it’s there to fund those, which I think it is, then the cap is kind of irrelevant. What’s more important than the cap is what happens when the cap’s exceeded? Who funds that and how is it funded?”

Including MIS in the CSLR to split the liability

Unsurprisingly, the majority of submissions regarding the CSLR have called for managed investment schemes (MIS) to be included, as product failures continue to appear in a number of cases being paid for through the CSLR.

Keeping with the general thinking of financial advisers, Ardino argued that including MIS or super funds into the CSLR would be a lot “cleaner” as they would be easily able to levy the cost from investors while advisers are forced to either absorb the cost or pass it on to clients.

“I mean, all of our expenses trickle down to our customers, that’s just how business works, but it’s not automatic. It just goes in as another cost item. It creates uncertainty and it’s a lot more difficult to recover that from clients,” he said.

“MIS schemes could just levy all of their customers, it could be mandated to levy all of their customers and then it’s no longer even really a conversation, it will just happen. It doesn’t create a competitive disadvantage or anything like that if everybody’s treated the same. But in any case, it’s just not sustainable.”

As discussions regarding the possibility of restructuring the CSLR heat up, Ardino said he was pleased that this is being looked at relatively early on rather than waiting for it to do irreparable damage to the advice profession.

“You look at the Life Insurance Framework, which I think anyone with a bit of common sense saw was going to do what it did, which is decimate the insurance industry and further exacerbate the underinsurance problem we have in Australia. But we’re only now talking about reversing some of that. What are we, eight, nine years from when it started?” he said.

“I’m really glad that we’re talking about reforming CSLR now, a year or two in, than after it’s done a lot of damage.”

Ardino added: “I think if we’re going to take something positive out of it, it’s that and I think government is listening. They don’t know what to do yet but you know, we’ll get there.”

CSLR hurting industry efforts to rebuild

Looking beyond the financial ramifications of the CSLR, having this exorbitant levy in place also acts as a significant deterrent for would-be financial advisers, a fact that is even more concerning as the profession desperately tries to bolster its ranks after swiftly losing half its numbers following the royal commission in 2018.

“How are we going to do that with something like CSLR that’s obviously not sustainable hanging over its head? It’s something that needs to be resolved and resolved quickly,” Ardino said.

“I’ve been saying this for some time, as the profession has started to lose advisers over the last five or six years, how do you attract more people in? And I think one of the things that we’ve got to solve for is to make the profession an attractive place for an 18-, 19-year-old person deciding what they want to do with their lives to join.

“To be honest, it was already like that even before CSLR but throw in CSLR where, if the advice sector has to fund the 70 million odd dollars that’s been projected for the next financial year, that’s gonna be around $4,500 a head.

“And then they’re projecting $120 million for the next financial year. That’s almost double that.”

With the Financial Advice Association Australia predicting a potential loss of around 1,000 advisers come the education requirement deadline of 1 January – which would consequently see the CSLR levy jump per adviser – Ardino suggested that addressing this must be a top priority.

To hear more from Eugene Ardino, tune in here.