‘We want to get rid of CSLR’, says Howarth

While he said that the Coalition would reform the scheme, he told financial services delegates at the event that he “didn’t even believe in the CSLR”.

In a Q&A session following his address, he said: “I think the whole thing’s stupid. It’s ridiculous ... It’s not a go at anyone who’s running it … the reality is it shouldn’t have been set up to start with.

“So we don’t want to expand it. That’s the last thing we want to do. We want to get rid of it, ultimately, and we want to reduce the cost, until we can do that, for advisers.”

Currently, 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:

• Financial advice, $18.5 million.

• Credit provision, $1.5 million.

• Credit intermediation, $1.8 million.

• 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 responsible 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.

What would the Coalition do to ‘fix’ CSLR?

At the Election 2025 event, shadow treasurer Angus Taylor confirmed that the Coalition would “fix the CSLR’s costs, making it fair and sustainable”, saying that the fee structures were “onerous”.

“We’re conscious of the fact that this has been a big impost on your industry”, he told advisers and brokers in the room, adding that the cost of supporting the scheme was “preventing people from serving their clients” and “making it harder”.

Delving into how the Coalition would do this, Howarth later said that – should he become Financial Services Minister following the federal election – he would make ‘fixing’ the CSLR a “top priority”.

“Earlier this year, it was revealed, as well, that financial advisers, mortgage brokers and other sectors are set to be slugged with record CSLR levies this year, and urgent action is needed to get the cost down,” Howarth said.

He slammed the Albanese government for enabling the costs of the scheme to have “blown out $77 million for the next financial year alone” and criticised its move to announce a review of the scheme just “weeks before the election”.

“Now it’s kicking the can down the road,” he said.

“The advice community has been outraged by this [scheme] for at least the last two years. It’s too little, too late.

“The only chance you’ve got to get this cleaned up is if a Coalition government is elected in its own right.”

Howarth said that if he were to be the next Financial Services Minister, he would “look at immediately reinstating the subsector cap of around 10 million,” which was the Coalition’s original policy.

“This will immediately halve the next industry levy … bringing it down to around $650,” the shadow financial services minister said.

“We’ll also rule out any additional special levies for this year.

“And importantly, we want to exclude the ‘but for’ compensation,” which he said comprises around 80 per cent of CSLR claims.

The Liberal MP said he believed the ‘but for’ compensation was “a rort” as it was compensation for people who did not necessarily have a capital loss.

“I don’t agree with the premise of the scheme. There is clearly a moral hazard,” he said, highlighting that the ‘but for’ claims are seeing people reimbursed for investments that didn’t provide expected yields.

“If people invested $1 million and they get $1.2 million back, they go: ‘Oh, we should have got 1.4 [million], we want another 200 grand.’ That’s not the last resort. You know, that was not what was intended as part of Michelle Levy’s review or the [banking] royal commission. So that has to go, and then that’s what we’ll be focusing on.

“The scheme is not a last resort scheme anymore. It’s guaranteeing investment performance. It is clear that we need to limit or filter out these claims when there’s a CSLR footing the bill.

“Advisers deserve certainty, not a government that sits on its hands and lets this spiral further and further out of control and urgent action is needed.”

Speaking at the event, Howarth said that the Coalition would also look to remove “phoenixing situations” (as seen in the Dixon Advisory collapse), where “vertically integrated advice businesses shed liabilities for product failures”.

He also pledged to reduce “excessive administration costs” (currently about $6 million), which make up about a third of the levy.

What does the Labor Party want to do on CSLR?

The outgoing Financial Services Minister Stephen Jones MP also acknowledged that the CSLR “absolutely was not designed to provide guaranteed investment opportunities when something goes wrong”.

“The very nature of investing is that sometimes things don’t go as we hope they would,” he told the Election 2025 event.

The Financial Services Minister told delegates: “It is quite clear to me that we don’t have stable, sustainable settings of the CSLR. Reform is needed. Anything we do in this area will mean altering rates.

“While everyone in this room might be cognisant of the fact that we’ve got some problems in CSLR, I guarantee you that everyone outside this room, in the world at large, does not understand. So a deliberative approach is necessary, and it is why I asked the Treasury to conduct a rapid review to ensure that we have a focus on these problems.

“I know a lot of people want a quick fix. I wish there was one … I think we do need to go back and have a look at it.”

However, Jones said he believed that there was “no universe and no Parliament” that he could imagine that “would move forward and say: ‘We shan’t have a CSLR’.

“So we need to ensure that moving forward, we have stable settings.

“Once you make two decisions – the first being that we have a Compensation Scheme of Last Resort (not first resort) and that it is industry-funded – we then only have two decisions to make. What are the events that are compensated? And how do you distribute that?”

What does the broking industry want?

The broking industry has been advocating CSLR reform to the ongoing review, with the Mortgage and Finance Association of Australia (MFAA), saying earlier this year that four key reforms could be made to improve the scheme.

These include:

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.

[Related: MFAA shares CSLR review recommendations]