The Compensation Scheme of Last Resort anticipates the upcoming financial advice levy to blast past the $20 million subsector cap, setting up a potential showdown with the government for how the excess will be funded.
In an announcement on Wednesday morning, the CSLR said the total levy estimate is expected to be lodged with Parliament when it resumes sitting early next year.
To exceed the subsector cap, the difference would have to be approved by the minister of the portfolio, currently Minister for Financial Services Stephen Jones. The minister would also be required to choose how the additional levy is funded.
Financial Advice Association general manager for policy Phil Anderson said the association had “long feared” the FY26 subsector cap would be $20 million, calling for more funding from outside the advice profession.
“We have for some time been calling for the amount in excess of $20 million to be spread across a broader range of sectors, effectively capping the impact on the advice profession to $20 million in any one year,” Anderson said in a statement to Professional Planner.
Actuarial consultant Finity, who has been entrusted to help with the scheme, formulated the estimate for FY26 – the third levy period.
The CSLR noted the process of confirming the levy estimate is complex and heavily dependent on both the number of complaints that will be resolved by AFCA and proceed to the CSLR in FY26 and d the inclusion of any other large-scale failures.
Amid calls for controlling costs of the scheme, which is currently costing the advice profession a collective $18.5 million for FY25 – or $1186 per adviser – Shadow Minister for Financial Services Luke Howarth told an industry event earlier this year the Coalition will look to reduce the subsector cap to $10 million.
“The Albanese Government is struggling to legislate even its highest priorities, and the advice community is right to doubt whether the Government will act quickly, or even at all, to address the CSLR levy’s blowout,” Howarth said in a statement to Professional Planner on Wednesday afternoon.
Legislation for the CLSR passed Parliament in June 2023, but the launch of the scheme went off to a troubled start after it commenced in April. While it was expected the government would fund the first year of the scheme, it ended up only covering the final quarter of FY24 instead of a full 12-month period.
Howarth accused the government of amending the design of the legislation of the scheme to raise the subsector cap to $20 million, knowing there would be a shortfall under the original $10 million figure.
“Now, with the CSLR saying that new cap will be exceeded, advisers face the risk of the minister using his power to sign off on additional levies,” Howarth said.
“The Government also reneged on covering the first year of the scheme, instead only paying three months and leaving advisers to pick up the bill.”
Dixon disaster
The announcement comes as the CSLR met with financial sector leaders at the inaugural industry forum in Sydney on Wednesday morning, where an overview of the scheme was presented along with the progress made since its launch six months ago.
The CSLR also reiterated its commitment to working closely with Treasury, ASIC, AFCA and the minister in providing early insights into the operation of its legislative framework.
“Whilst concerning, it was good to be briefed on emerging matters that are likely to impact the CSLR and the cost of the scheme to the advice profession,” Anderson said of the meeting which the FAAA attended.
The CSLR also noted that whilst the total amount of projected compensation for victims of Dixon Advisory is unlikely to change, this amount is still to be spread out over multiple years due to the timings of the complaints.
The cost impact of covering Dixon victims drove industry advocacy to push for a parliamentary probe into the ill-fated vertically integrated investment manager, which was secured by One Nation Senator Pauline Hanson.
Dixon fell under the purview of the scheme after its parent company, Evans and Partners, placed the company into voluntary administration due to mounting legal liabilities including expected regulatory enforcement and a class action suit.
However, the opposition said the government needs to act and make changes to the scheme instead of waiting for outcomes from the inquiry.
“The Government’s recent mea culpa on the CSLR by supporting a Senate inquiry is welcomed but more urgent action is required,” Howarth said.
“With time running out before an election, the government must work quickly to ensure financial advisers aren’t lobbed with another excessive levy next year.”
But the ability for a parent company to wash its hands of liabilities by placing subsidiaries into administration has been a concern for the profession, with Sequoia Financial Group having followed a similar path with AFSL Libertas.
The impact of advice professionals paying for the misconduct of unrelated parties has led to attempted protests, like the Principals’ Community campaign for the industry to make levy payments “under protest”.
Anderson said the meeting discussed the importance of early action by the regulator and the necessity to review every entity causing CSLR payments, particularly in respect to compliance with insolvency laws.
“The meeting has highlighted the likely ongoing significant impact of the CSLR on the financial advice profession, and reinforced the importance of the Senate Economics References Committee Inquiry into Dixon Advisory and the CSLR,” Anderson said.
“The impact the CSLR will have on the advice profession is unsustainable and it is essential that an appropriate solution is found as a matter of urgency.”
Millions in compensation
So far, the claims of misconduct that have gone to the CSLR have largely centred around inappropriate usage of SMSFs to borrow to invest in property; misleading, deceptive advice or unauthorised transactions; failure to implement a Statement of Advice; failing to regularly review investment strategies; advice provided without considering personal situations; and failure to disclose material information.
CSLR chief executive David Berry said 91 claimants have been paid $9.1 million in compensation so far.
“These claimants who previously had no opportunity to recover the loss from their experience with financial misconduct have now been able to access some form of compensation,” Berry said in a statement accompanying Wednesday’s announcement.
