Message to Mulino – broad CSLR special levy should be one-off

The Minister for Financial Services, Daniel Mulino, is facing an exponential monetary imperative to find a solution to the funding shortfall for the Compensation Scheme of Last Resort (CSLR) – a widening gap between compensation decisions and the money to pay them.

But Mulino is being warned not to bake-in a succession of special levies even if the load is spread across the entire financial services sector.

The CSLR released the actuarial forecast for the 2027 financial year levy period revealing yet another over-run – this time $126.9 million beyond the initial estimate for the personal financial advice sub-sector.

CSLR chief executive, David Berry has told Financial Newswire that while the scheme continues to make decisions, the necessary compensation monies is not keeping pace – a shortfall that can only be addressed via a special levy.

What is more, Berry points to the impact in of events such as the collapse of the Shield and First Guardian funds as probably necessitating successive special levies.

The Government has been sent a message by key elements of the financial services sector that while it can spread a special levy load across multiple sub-sectors, it should regard this as a once-off solution ahead of a significant funding formula redesign.

Mulino and the Treasury have been mulling the options for funding a special levy since the end of August and an announcement is now expected within weeks about the Government intends to handle the thorny issue.

However, a significant segment of the financial services sector is warning that there is no appetite for a successive special levies.

Indeed, the Financial Services Council (FSC) said it “opposes normalising the use of special levies as a routine funding mechanism”.

“Special levies are inherently unpredictable, undermine industry confidence, and function as a de-facto tax on business,” FSC chief executive, Blake Briggs said.

However, Briggs threw the Government a bone in suggesting that “the wider financial services sector is willing to do its part to meet the existing shortfall, providing the costs are distributed widely and fairly”.

“A diversified approach avoid disproportionate impacts on individual subsectors and reduces the risk of cross-industry disputes,” he said.

“However, socialising the cost of underwriting investment losses is not a sustainable long-term solution for a scheme that is on track to have continued cost blow outs into the foreseeable future.”

The FSC urges the Assistant Treasurer to set out a clear pathway for reform to ensure the scheme is sustainable for the consumers who need it and aligned it to its original policy intent to provide compensation as a last resort.

The Financial Advice Association of Australia (FAAA) also continues to urge a rewrite of the CSLR funding regime, with its chief executive, Sarah Abood saying the latest estimate put further focus on the need to address the sustainability of the scheme.

“We have been saying for some time that it is imperative that financial advisers should not pay more than the $20 million sector cap which is already very high, particularly when you bear in mind that the vast majority of this levy is paid by small, privately owned firms with very limited capacity to absorb extra costs,” Abood said.

“We urge the government to make urgent and significant changes to the CSLR to ensure fairness and sustainability.”