Treasury told scrap CSLR model and start again

If the Government is to continue along the current path of the levy covering the Compensation Scheme of Last Resort (CSLR) then small financial service providers should be allowed a 10-month payment plan.

Treasury’s post-implementation review of the CSLR has been told by the Association of Securities and Derivatives Advisers of Australia (ASDAA) that, ideally, the existing scheme arrangements should be scrapped and more equitable arrangements put in place, but in the absence of that occurring a payment plan should be considered.

At the same time, the ASDAA submission has warned that the design of the CSLR inadvertently introduces a significant moral hazard stating “the scheme creates a scenario where financial service providers might feel less compelled to maintain high standards of conduct, knowing there’s a safety net to compensate consumers for their failings”.

It said that the Government also needed to take responsibility, particularly in circumstances where poor design led to systemic failures.

“If the CSLR is meant to compensate consumers for the failures of the financial advice sector, then the government, which regulates and oversees this sector, should share in the responsibility for any systemic failures or policy oversights that lead to such high compensation demands. The government’s role in setting up, managing, and now addressing the shortcomings of the CSLR cannot be ignored,” the submission said.

“If the CSLR is to continue in any form, the government must take financial responsibility for its part in the scheme’s design and oversight and pay the short fall above the $20 million sector cap. The current model where the industry alone shoulders the entire cost of government policy failures is untenable,” it said.

The submission then pointed to the escalating costs which had been faced by advisrs over the past half-decade noting as a ‘fun fact’:

The Securities Dealers Graduated fee from the Industry Funding levy is up 733% since FY 19 20! In FY 19 20 it was $0.03 per $10,000 of transactions. For FY 23 24 it was $0.25 per $10,000 of transactions.

The Adviser Levy fee component is up a ‘modest’ 135.7% since FY 18 19. In the two years of COVID (FY 20/21 & FY 21&22) it was reduced 53%

“ASDAA is fairly confident that no SME FSP’s have experienced a 135.7% let alone 733% increase in revenues in the same periods,” the submission said.

Arguing that the CSLR in its current form should be disbanded, the ASDAA said that if it could not protect consumers without endangering the sector meant to serve them, “it fails its primary objective”.

“The CSLR, as currently structured, fails to achieve its goal of uniform consumer protection. The inequity where financial advisers bear the brunt of compensation costs for failures that can equally, if not more so, be attributed to the products they recommend (like MIS), points to a flawed design.

“This selective application of the levy does not reflect the interconnected nature of financial services where the failure of one product can be a result of multiple parties’ negligence or misconduct, including those managing the investment vehicles,” it said.