The Financial Advice Association Australia (FAAA) has expressed its concern over the “extremely disheartening” costs of the Compensation Scheme of Last Resort (CSLR).
In its 2024–25 pre-budget submission, the professional body outlined six key recommendations to improve the financial advice industry and reduce the cost of advice.
One of its recommendations focused on “ensuring fairness and managing the costs of the CSLR”.
Earlier this month, the estimated sum for the initial CSLR levy was revealed to be $241 million, according to its board.
This will be used to fund claims from eligible consumers who have been the victims of financial misconduct and lodged complaints with the Australian Financial Complaints Authority (AFCA) between 1 November 2018 and 7 September 2022.
In particular, the initial levy estimate includes provision for the majority of claims involving Dixon Advisory and Superannuation Services (DASS).
“We remain concerned that over time the costs of the scheme may become prohibitive for financial advisers to sustain,” the FAAA stated in its submission paper.
“In fact, the scheme is launching at a time when a major failure has already occurred. This is the matter of Dixon Advisory, which has been put into liquidation by its (still-operating) parent company.”
The FAAA is “very conscious” that more than 200 Dixon Advisory complaints were received after the first 7 September 2022 deadline.
The submission continued: “These complaints, in the context of over 2,000 Dixon Advisory complaints being assessed, are unlikely to be finalised by the 30 June 2024 deadline for historical complaints, where the cost will be picked up by the government.”
If the overall cap of $250 million is exceeded, there is a possibility that additional amounts would be required to be paid by the advice profession, the FAAA noted.
“Coming at a time when we are all working hard to reduce the costs of financial advice, such additional costs being charged to compliant small business financial advisers is extremely disheartening. Many advice businesses will be forced to pass these additional costs, which may be substantial, on to their clients,” the association described.
Its submission drew parallels to the ASIC levy – with Melissa Caddick’s case costing the financial advice sector nearly $700,000 – which force “compliant good” advice businesses to pay for the “misbehaviour and risk-taking of the bad”.
The FAAA continued: “Now such a scheme exists, we are concerned that the incentives to pursue failed businesses and their owners is less, as consumers will be compensated in any case. This factor could lead over time to costs escalating much more than they should.”
To counter this issue, the body urged the government to ensure compliant advisers are not paying for the “historical failures” of others in the industry and to cover any shortfall that could emerge for costs above the $250 million threshold.
Moreover, it pushed the government to “effectively manage” the ongoing costs of the CSLR by ensuring responsible firms and their insurers are pursued to the fullest extent before charging the broader profession.
Beyond its CSLR recommendations, the FAAA made five other suggestions to improve the state of the advice sector. These were:
- Implementing a fairer ASIC funding levy.
- Enhancing the tax deductibility of advice.
- Enabling advisers access to the Australian Taxation Office portal.
- Providing more support for adviser education through exam price reductions.
- Reversing proposed changes to the Reduced Input Tax Credits for advice fees.
