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A submission to a Parliament inquiry has voiced concern about how special levies from the CSLR could burden small broking businesses.
The Mortgage and Finance Association of Australia (MFAA) has lodged a submission to the parliamentary inquiry into the collapse of Dixon Advisory and how its failure has influenced the development and ongoing viability of the Compensation Scheme of Last Resort (CSLR).
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In it, the broker association is urging the Financial Services Minister and Assistant Treasurer, Stephen Jones MP, to “balance fairness and sustainability” when it comes to determining how the finance industry will cover the excess costs of the CSLR, given blowouts.
What is the issue?
The CSLR offers up to $150,000 compensation to consumers who have received a favourable determination from the Australian Financial Complaints Authority (AFCA), but haven’t been paid by the financial firm because it has gone insolvent.
It started making its first payments earlier this year and expects that the four subsectors will pay the following for the financial year 2024–25:
The estimate for each subsector is:
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Financial advice, $18.5 million.
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Credit provision, $1.5 million.
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Credit intermediation, $1.8 million.
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Securities dealing, $2.3 million.
The financial advice industry shouldered the burden of costs in FY24 and is expected to see an even larger levy imposed in 2025–26 given major collapses in this sector.
According to The Adviser sister brand ifa, the CSLR is expecting the levy for personal financial advice to exceed the $20 million subsector cap.
When compensation claims exceed a subsector’s levy cap, the minister may then impose a special levy to cover the excess, either on the responsible subsector or across multiple subsectors, as appropriate.
Questions are therefore being raised about how the Financial Services Minister would choose to apportion any special levy above $20 million.
MFAA highlights concerns
The MFAA is seeking to “ensure that there are no unintended consequences for the mortgage and finance broking industry arising from this inquiry.”
In it, the association cited concerns about “potential cross-subsidisation and the increased regulatory cost burden this could place on the credit intermediary sub-sector”.
The MFAA said that the mortgage and finance broking sector has “a markedly low reliance” on the CSLR, with “minimal claims and complaint volumes”.
The industry body said it was therefore crucial that any adjustments to the CSLR arising from the inquiry “do not inadvertently impose a greater financial or regulatory burden on mortgage and finance brokers”.
The submission said: “Placing a disproportionate financial burden on a sector with minimal claim activity not only challenges the principles of equitable treatment but also risks creating incentives that allow higher-risk sectors to rely on cross-subsidisation rather than addressing risk exposures within that sub-sector.
“We welcome the opportunity for dialogue on solutions to address the issue of exceeding the subsector cap without imposing additional cost burdens on credit intermediaries and recommend further consultation on this issue.”
MFAA CEO Anja Pannek said that while the association “supports the intent” of the CSLR in ensuring consumers impacted by financial misconduct can receive fair and timely compensation, it has repeatedly flagged the risk of cross-subsidisation within the scheme.
She said: “Asking the mortgage broking industry – the majority of which are small businesses – to fund misconduct in unrelated sectors not only creates an unfair financial burden but also risks creating a moral hazard,” highlighting that 41 per cent of broking businesses are solo operators while 80 per cent have fewer than 10 brokers.
“This approach sets a dangerous precedent of reducing accountability in higher-risk sectors through the CSLR, while penalising those who have very low complaints and very low unpaid determinations.
“The mortgage broking industry is characterised by only a handful of unpaid determinations and has low complaints with AFCA.”
The association said that analytics firm Finity has also forecast that credit intermediation will account for just 10 complaints, or 5.1 per cent, of the total complaints the CSLR is expected to finalise in its second levy period ending June 2025.
“The Minister for Finance, the Hon. Stephen Jones, who has responsibility for CSLR, needs to balance fairness and sustainability in the way he exercises his powers with respect to any special levy,” she said.
The submission from the MFAA comes after growing calls for the CSLR to be reviewed.
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