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The peak industry body has made four recommendations in its submission to the scheme’s post-implementation review.
The Mortgage and Finance Association of Australia (MFAA) has released its submission to the post-implementation review of the Compensation Scheme of Last Resort (CSLR), with the industry advocate outlining four recommendations for improving the scheme.
In its submission, the MFAA said it supported the CSLR’s ultimate goal of compensating customers for financial losses caused by misconduct in financial products but argued the current design must be amended “to ensure the scheme can be sustainable over time, while balancing fairness for consumers and sectors that fund the scheme”.
Introduced in 2024, the CSLR aims to recompense consumers who’ve received a favourable determination from the Australian Financial Complaints Authority (AFCA) but haven’t received any payment due to the firm responsible for the complaint falling into insolvency.
The CSLR provides compensation of up to $150,000, with funding raised from a levy imposed on financial services businesses.
But levy estimates skyrocketed to $77.97 million for the third levy period, covering the financial year ending 30 June 2026 (FY26).
By comparison, the total levy estimate for the previous financial year (FY25) was $24.1 million.
This projected cost blowout – driven mostly by the collapses of firms Dixon Advisory and United Global Capital (UGC) – has brought the scheme under scrutiny.
Estimates put the financial adviser subsector on the hook for a $70.11 million levy, but this figure exceeds what the Australian Securities and Investment Commission (ASIC) is authorised to levy ($20 million).
As such, the Treasury has sought feedback and commentary on ways to ensure the scheme is sustainably funded.
Sustainability in focus
The MFAA’s submission expressed concern regarding the sustainability of the scheme, with a funding shortfall potentially creating “risks of costs needing to be borne by other sub-sectors”.
Spreading the levy across multiple subsectors would “compromise fairness and proportionality”, according to the MFAA, placing an undue burden on industries with relatively small claims, such as broker businesses.
Brokers – which fall under the credit intermediary subsector – are set to contribute $2.72 million to the FY26 levy, which the MFAA noted is 66 per cent higher than the initial levy period.
As such, the MFAA has outlined four recommendations:
1. Adjust to become a “true last-resort scheme”
The CSLR should function as a true last resort scheme, only to be accessed after all avenues for compensation have been exhausted, including professional indemnity insurance.
2. Consider the impact of special levies
In terms of funding gaps, the Minister for Financial Services should consider the impact of a special levy both on the affected subsector and the broader financial industry. The current CSLR structure allows cross-subsidisation so that losses incurred by one subsector are distributed across other subsectors.
3. Assess claims on capital lost
Rather than AFCA’s ‘but for’ test, which is used to assess compensation claims relating to financial advice, the MFAA seeks the CSLR to be allowed to assess claims on capital loss.
4. Capping administration costs
Cap CSLR administration costs as a percentage of total levies to drive efficiencies and prevent excessive overheads.
Room for improvement
Speaking to The Adviser, MFAA CEO Anja Pannek commented on the group’s submission and said that the industry body will continue to consult with the Treasury.
“We have consistently supported the CSLR, it is an important avenue for consumers to seek compensation. However, the scheme needs to be fit-for-purpose, sustainable and proportionate,” Pannek said.
“There is negligible evidence of broad based or systemic consumer harm arising from the mortgage broking industry. We want to see this taken into account.
“Funding for the CSLR in instances like we see now – the $50m unfunded component, must take into consideration where harm emerges and how responsible sectors are then called on to fund shortfalls. To not do so will create moral hazard.”
Pannek also said the majority of the CSLR levy for the broking industry represented forecast administration costs rather than likely compensation claims.
“Our sector accounts for only 3.6 per cent of pre-CSLR claims determinations yet the levy for credit representatives is rising from $33.85 to $52.04 per credit representative – mainly due to increased operational costs of the scheme. Projections by AFCA for unpaid compensation that were mortgage broker related are forecast at $nil for the next levy period as well,” Pannek said.
“We also have concerns that AFCA’s ‘but for’ test in claims has resulted in compensation based on hypothetical gains for a consumer – rather than real capital loss. We feel this has led to a greater number of claims being pushed through to the scheme. Accordingly, our recommendation is that compensation should be based on capital or direct loss.
“We want the CSLR to provide fair compensation for consumers when all other avenues have run their course. It is in no one’s interest to have a scheme that imposes a financial burden on businesses that are overwhelmingly doing the right thing.”
[Related: Industry to pay $2.72m for CSLR]
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