The Financial Advice Association of Australia has called for changing the Compensation Scheme of Last Resort legislation to halve the subsector cap, as well as the changing of insolvency laws.
Minister for Financial Services Stephen Jones launched a review into the scheme on the day it was announced the total advice subsector levy would be over $70 million in FY26, drastically exceeding the subsector cap of $20 million. CSLR chief executive David Berry told the Professional Planner Advice Policy Summit the levy is projected to be over $120 million for FY27.
While the subsectors can be levied up to $20 million, the minister is required to approve a special levy to cover funds beyond that figure.
Much of the controversy of the scheme has come from the ‘but for’ rule where AFCA determines in the client’s favour in circumstances where they haven’t suffered a capital loss but would’ve been in a better financial position ‘but for’ the adviser’s failing.
In its submission to the review, the association argued the scheme should only pay out when there is capital loss, without interest and only after all potential recovery action has been concluded.
The minister had suggested at the Advice Policy Summit this provision was likely to change to prevent these types of determinations reaching the CSLR.
But at the heart of the association’s criticism of the scheme was the implication that advisers were paying for product failures, despite AFCA only being able to make determinations on whether something is an advice failure.
The FAAA recommended the “non-apportionable claims” classification under the proportionate liability statutes change so AFCA can apportion liability to product manufacturers for product failures.
“The law needs to change so that financial advice is not taking full responsibility for product failures, when financial advice has been provided and a product fails,” the submission said.
The association recommended the government undertake a review “to assess potential changes” to insolvency laws to prevent parent companies from disassociating from a subsidiary to avoid liabilities and that there should be increased penalties for entities and directors that refuse to pay AFCA determinations.
The association also recommended returning the subsector cap to $10 million, which the Coalition committed to doing should they get elected in the soon-to-be-called federal election, as well as mitigating the exposure of a special levy to small businesses.
The association argued for the removal of the retrospective nature of the scheme or that the government should pay for any claims prior to the commencement of the CSLR, as well as following through on their commitment to pay for the full first year of the scheme, not the final three months of the financial year.
Additionally, any incidence where a CSLR claim was the result of an AFCA determination where holistic retail advice was mistakenly given as general advice or wholesale advice, should be applied to the general advice or wholesale advice sectors respectively.
The CSLR should have greater power to negotiate with AFCA and ASIC on the fees charged to the scheme.
“In our view there should be strong prospects of achieving substantial economies of scale in AFCA’s processing of complaints in the event of large-scale collapses like Dixon Advisory and UGC [United Global Capital],” the submission said.
“The CSLR should be able to negotiate their own pricing model and seek to drive improvements in the efficiency of AFCA. Likewise, the CSLR should be able to negotiate downwards the high fees that are being paid to ASIC for the processing of invoices.”
