Ignored warnings led to unsustainable CSLR

Mike Taylor

Managing Editor and Publisher

15 January 2026

ANALYSIS

The Australian Financial Complaints Authority (AFCA), one of the strongest supporters of establishing the Compensation Scheme of Last Resort (CSLR), warned the Government in 2020 of the perils of failing to establish a broad funding base.

As Treasury works to address the failures of the scheme’s funding arrangements while imposing a special levy because of a sectoral over-run, it would do well to reflect on the warnings it was receiving from industry stakeholders, including AFCA, more than five years ago.

The warnings sounded by stakeholders in 2020 failed to be heeded by then Treasurer, Josh Frydenberg, resulting in the narrowing funding base which has proved the Achillies heel of the existing regime.

AFCA, in February 2020, said it strongly supported the ‘broad coverage approach’ outlined in the Treasury discussion paper, including locking in Managed Investment Schemes (MISs).

“In our view, it is essential that the CSLR covers financial firms of all forms of regulated financial services, financial advice or financial products,” AFCA said.

“If a consumer has been awarded compensation and this has not been paid by the firm due to insolvency, the type of financial service or product it concerns should not be a determining factor as to whether or not the consumer is compensated for their loss. It would raise significant issues of fairness and cause confusion for consumers if certain types of financial services are excluded from the scheme.

“While many of the unpaid determinations have arisen from the provision of financial advice that has caused financial loss, the evidence indicates non-compliance with determinations is not limited to financial advice firms. The types of firms who have unpaid determinations extends past financial advisers who provide personal and general financial advice to include; credit providers; managed investment scheme operators; finance brokers; mortgage brokers; securities dealers and derivatives dealers.

“In our view, all firms are responsible for restoring trust in financial services and ensuring that their EDR obligations are met.

“In our view, it is important that the CSLR also covers managed investment schemes (MIS). This is due to:

• the potential for unpaid determinations and consumer detriment to flow from this group;
• the involvement of other financial firms or their subsidiaries in the funding, distribution or other arrangements with MIS, and
• funding contributions to a scheme across the whole ‘value chain’ would support increased accountability of all participants, including MIS operators.

“In our view including MIS and other financial products in the CSLR coverage should also be considered in the context of other relevant regulatory reform that has been implemented, including the recent introduction of ASIC’s product intervention powers and unfair contracts legislation which apply to this group,” AFCA told Treasury.

“As outlined in a range of submissions previously made on establishing a CSLR, the need for a CSLR is separate to considerations of professional indemnity (PI) insurance-coverage and reform. PI covers business risk and is not a consumer compensation mechanism. Notwithstanding any need for further PI reform in relation to how firms meet their legal obligation to have adequate compensation arrangements in place, there is a need for a CSLR to cover loss where PI will not respond. These circumstances include fraud, amounts above PI limits and other situations where PI does not provide coverage or is not available.

“We also consider that a broad-based scheme would assist in spreading the funding load across sectors, while including appropriate mechanisms in its funding model to minimise cross subsidisation. The CSLR is of benefit to all the financial services sector as it will help re-build trust in the industry as a whole. Without a broad funding base, the cost could fall heavily on parts of the sector that are least able to fund it. AFCA believes there is significant advantage in keeping the scheme and its administration as simple as possible.”