CSLR review not a ‘backdoor mechanism’ to roll in MIS: Jones

Speaking on a Financial Services Council (FSC) webinar on Thursday morning, Stephen Jones said the Treasury review of the Compensation Scheme of Last Resort (CSLR) would put a “spotlight on some of the issues” with the scheme for the broader Australian population, with the minister outlining some of his clearest statements on the future of the CSLR.

As FSC chief executive Blake Briggs noted on the webinar, there has been a shift in the debate over recent months that has seen both major parties recognising that the scheme is “unsustainable as currently designed” and that reform is necessary.

However, Minister Jones was definitive that managed investment schemes (MIS) should not be among those reforms.

“I want to ensure that what’s occurring doesn’t become a backdoor mechanism to drag that stuff in,” Jones said in reference to MISs.

“The conscious reason for doing that, it was going to add a whole bunch of risk into a compensation scheme that I don’t think is sustainably manageable.”

It isn’t the only issue with the CSLR that the minister acknowledged, noting that while he believes there is a “broad consensus” on the need for a genuine last resort compensation scheme with an industry funding model, the reality of its implementation has been lacking.

“What I’ve seen emerge over the two years of the scheme’s operation, there’s some stuff that just doesn’t, in my mind, seem to be consistent with those objectives,” Jones added.

“You know, hypothetical losses, for example, and some other issues. It troubles me, and I think that could, if let run, that could well and truly get away with us and build irreversible unsustainability within the scheme.”

Stressing that the scheme needs to be “sustainable over the long term”, he stated that, as things stand, “I don’t think we have that right now”.

“We’re not trying to have a backstop, de facto capital, stable investment product that the scheme guarantees. So, let’s work through those issues. I’ve got some thoughts – but you know, they’re only my thoughts at this stage – on some things that we could do pretty quickly to improve the scheme,” Jones said.

“But again, I stress that point, we’ve got to have an open and deliberative process. If you are going to be altering rights, people have got to understand why and what the underpinning of that is.”

The minister’s position on MISs is at odds with much of the advice profession, which has argued that unless product providers are added to the CSLR, advisers will continue to pay for product failures.

However, the FSC has been a notable outlier on this position, previously arguing that it could actually “potentially increase the cost burden on financial advisers” and that there are “more appropriate mechanisms that could reduce the cost burden”.

On Thursday morning, Briggs expanded on the FSC’s view, saying that adding more sectors to the CSLR is at odds with the push to make it more sustainable.

“I think one of the things that’s lost in this public debate around [the CSLR] is if the focus is about how to get the cost of the scheme onto a more sustainable footing, to make sure it’s still there in three years, five years, 10 years’ time and retains public interest, it seems to be in conflict with the proposition that more sectors should be dragged into the scheme,” he said.

“I look at events like the global financial crisis and the investment losses that [were] incurred during that time, and I just can’t escape the logic that, there will be some black swan event in the future, and people will incur investment losses.

“If we even indirectly hold out the expectation that they can get bailed out for those losses, the $70-odd million scheme blowout that we’re seeing now will be many, many times larger in that sort of event, and will cost financial advisors and everyone else so much more than they currently facing.”

Jones replied that he “wholeheartedly agrees” with that position, signalling that there is little desire within the current government to change its mind on this position.

“Turning something which is, in theory, a good idea to something that works and is sustainable in practice is the challenge of government,” he said.

“We had a bipartisan agreement on what we legislated, but I think both sides, both parties of government, realised that we’ve got an issue here that we’ve got to fix because we don’t have stable settings.”

Unfortunately for advisers, Jones also noted that the CSLR is simply not an issue that has garnered widespread acknowledgement – something he believes the Treasury review could change.

“There’s a small group of people who are very small relative to the broad economy, who are very, very attuned to it because they’re paying levies,” he added.

“But more broadly, there’s not an awareness of the issue and the problem. Having a deliberative process that puts a spotlight on some of the issues enables us – by us, I mean more broadly, the stakeholders and the population at large – to say, ‘OK, that’s not what we intended’.”