The financial advice sector will be on the hook for $18.5 million when industry takes responsibility for funding the Compensation Scheme of Last Resort in FY25.
The government is funding the first period of the CSLR – covering only the final quarter of FY24 – but the financial services industry is required to fund the scheme from FY25 onwards.
This is in addition to the already announced $241 million pre-CSLR complaint estimate that will be paid by the 10 largest banking and insurance groups in the establishment phase of the CSLR, and which is expected will largely cover complaints against Dixon Advisory.
The levy for the first period of the CSLR – from 2 April (after the CSLR officially commences) to the end of FY24 – has been estimated at $4.8 million.
Despite the government covering the levy, the CSLR board broke down the estimates for each subsector, with $2.4 million for financial advice, $900,000 for securities dealing, $800,000 for credit intermediation and $800,000 for credit provision.
The FY25 levy is estimated to total $24.1 million, which consists of $18.5 million for financial advice, $2.3 million for securities dealing, $1.8 million for credit intermediation and $1.5 million for credit provision.
‘Deep concern and disappointment’
In a media release, the Financial Advice Association expressed “deep concern and disappointment” about the cost to advisers. According to ASIC, the levy for advisers is a minimum levy of $100 plus $1186 per adviser.
“The CSLR is intended to promote trust and confidence in the financial services sector and in particular, financial advice,” FAAA chief executive Sarah Abood said.
“However, if advisers are driven out of business by rising costs, through being made to pay for the poor behaviour of those who left the sector years ago, there won’t be a financial advice sector left to have confidence in. Coming as it does on top of an historically high ASIC levy, this flies in the face of making advice more accessible and affordable for consumers, which is the stated aim of our government.”
While Dixon claims were meant to be classed as pre-CSLR complaints, the FAAA noted the $18.6 million levy on the financial advice sector is largely due to Dixon complaints, as noted in the actuarial report that details expenditure from the scheme.
The estimates report published by the scheme shows only one Dixon-related complaint will be funded by the government in the first levy period (in FY24), while 86 complaints – valued at $9.4 million – will be funded by the industry during the second levy period which covers FY25.
“This flies in the face of the intent when setting up the scheme, as it will now become almost wholly retrospective in the way it applies to financial advice, well into the second and later years of operation,” Abood said.
Abood said the shortening of the initial government funding period will have a highly retrospective and negative effect on the sector.
“It is extremely concerning that because of these issues, the high quality and compliant financial advisers of today are being asked to fund compensation for the clients of Dixons, a firm which has been in administration now since January 2022 – over two years ago and long predating the establishment of the scheme,” she said.
In action
The CSLR is responsible for determining annual estimates, while ASIC will issue the levy for each financial firm and collect levy payments.
The scheme said the FY25 levy period estimate is subject to a “disallowance” period, with parliament having the opportunity to object to the estimate within 15 parliamentary sitting days of the legislative instrument being published on the Federal Register of Legislation.
If there is no objection from parliament, ASIC will issue levies to financial firms.
The scheme said estimates for the first two levy periods are based on actuarial principles, and as required by legislation, it engaged actuarial consultancy Finity Consulting to establish a policy for estimates, which includes detailed modelling and analysis.
The policy report was reviewed by another consultancy, Taylor Fry, and made publicly available on the CSLR website.
Conceived during the Ramsey Review and recommended after the Hayne royal commission, the scheme will pay up to $150,000 to eligible consumers who have been the victims of financial misconduct and who have no other avenue for redress after legislation passed cementing the scheme last year.
The annual levy has a hard cap of $250 million, with a $20 million soft cap for each subsector that can be exceeded with a ministerial determination imposing a special levy.
