Compensation Scheme of Last Resort

Your hub for the latest updates and developments relating to the Compensation Scheme of Last Resort

Background

Recommendations to establish a Compensation Scheme of Last Resort (CSLR) go back as far as the Ramsay Review (in 2017), and the proposal was supported by the Hayne Banking Royal Commission in 2019. Legislation was introduced by the former Coalition government in October 2021 but not passed. After the change of government in 2022, legislation enabling the scheme was eventually passed in June 2023 after multiple delays.

Establishment of the scheme was supported in principle by all major players in financial services including the FAAA. There is general agreement that the CSLR is an important mechanism to ensure consumers who have suffered a loss have recourse, and it gives consumers greater confidence in engaging with the financial services sector.

The scheme was not designed to be retrospective and was specifically called a “last resort” for consumer compensation.

The CSLR, launched in April 2023, provides compensation to consumers of up to $150,000 per claim, if they have an unpaid determination from the Australian Financial Complaints Authority (AFCA – the external dispute resolution provider to the financial sector) in the fields of financial advice, credit provision, credit intermediation and securities dealing.

Dixon Advisory – highlighting a flawed model

In January 2022, Dixon Advisory (Dixons) went into administration following a significant collapse in the value of a related-party product, the US Masters Residential Property Fund (URF) and an influx of complaints. A total of 2773 complaints about Dixons have now been lodged. All of these complaints will fall within the CSLR, despite the fact the misdeeds took place before the CSLR was officially established.

The impact of the collapse of Dixons demonstrates the clear flaws in the CSLR model.

For media enquiries please see our Press Centre

Direct Advocacy

Phase 1

Early campaigning from May 2024 included supporting over 250 members to send over 2,700 individual letters to nearly every parliamentarian.

Phase 2

In September Sarah Abood wrote to every parliamentarian encouraging them to support our campaign for a public inquiry into Dixons Advisory and its impact on the CSLR.

Other Advocacy Activity

As part of our broader advocacy campaign, we have:

Written and spoken to the Minister

Highlighted the issues with the Opposition

Faciliated our member advocacy campaign and resultant conversations with politicians

Had regular meetings with AFCA and highlighted the extended membership of Dixons

Held regular meetings with the CSLR Operator

Met with the Dixons Administrator

Published media releases and remained engaged with the media

Published articles and posts to highlight the Dixons and CSLR issues
Called for a public inquiry on Dixon Advisory and the establishment of the CSLR

Timeline – CSLR establishment and Dixon Advisory

8 reasons why the CSLR is a flawed model

The scheme is being applied retrospectively. Despite the Ramsay Inquiry, the Banking Royal Commission and the Government’s initial response all suggesting that the scheme would be forward-looking, it is weighed down by substantial legacy complaints, particularly those related to Dixons, which went into administration more than two years before the scheme commenced.
It is not clear that everything has been done to recover funds from the Dixon Advisory business. Dixons was a subsidiary of the large, listed E&P Financial Group (which reported revenues of $173m in the 2023 financial year). When Dixons was put into administration, a number of advisers (and presumably clients) were transferred to another entity in the group. ASIC is currently taking legal action against a Dixons’ Director alleging failures in directors’ duties. No other director, senior manager or financial adviser has been prosecuted or banned by ASIC in relation to the product or advice related issues with this matter. The URF continues to operate and earn fees for its parent group.
The per-sector cap has been doubled. The former Government set a per-sector cap for the CSLR of $10m in the initial legislation – which was the maximum amount that any one sector could be levied by the scheme without the direction of the Minister. However, this was doubled to $20m by the current Government in September 2022. We question whether this was done in light of information coming to hand about the cost of the Dixons matter.
The Government is paying less than it committed to. The Government promised to pay for the first 12 months of claims and operating costs of the CSLR. However, in fact they are only paying for three months of operations from 2 April to 30 June 2024.The financial advice profession will be paying for all financial advice compensation payments issued after 30 June 2024. In practice this will include all of the Dixons’ complaints received by AFCA after 7 September 2022, other than the single claim the government will pay.
Managed investment schemes are excluded from the scope of the CSLR. Not all sectors covered by AFCA are part of the CSLR; the scheme only covers financial advice, credit provision, credit intermediation, and securities dealing. Managed investment schemes are a notable and problematic exclusion from the scope of the CSLR, as failures of these products are responsible for substantial consumer harm that currently has no recourse if the firm fails. Our sector is also concerned that product failures will be re-defined as advice failures in cases where product failure has contributed to consumer harm, because otherwise consumers will not receive compensation.
Small business financial advisers are being asked to pay compensation to the clients of a large listed entity, one which continues to profitably operate after simply putting one subsidiary into administration and moving advice operations to another subsidiary. There appears to be nothing stopping other firms using this strategy in the future.
New advisers entering the profession now could be paying for the past misdeeds of Dixons for many years to come – some of whom had not finished high school when Dixons failed.
There is no party left to review, investigate and defend complaints against Dixon Advisory, resulting in a one-sided process. We recognise that there has been a serious failure in the Dixon’s business. However, every complaint should be robustly investigated and defended as a matter of process and natural justice to determine the most appropriate outcome is reached for each specific case.

Key issues we would like to see addressed

1. Remove the retrospectivity from the scheme

Who we are asking: Government

Status: Unresolved

Why we want to see this change

Retrospective laws are flawed in principle. They breach the reasonable expectations of citizens that future laws will not be passed that affect their conduct or obligations today. This principle goes back to Roman times – it is unjust to legislate for the past. However, this is a moral case rather than a legal case as the Australian constitution doesn’t prohibit making retrospective laws. We would argue that just because the government technically can do this, it doesn’t mean they should.
When originally proposed, the scheme was intended to be prospective
The moral principle as to why it’s fair for the many to pay for the sins of the few, is based on the idea that the many will act to stop poor behaviour. Retrospectivity breaches this principle of course. But the other issue is that advisers have little ability to prevent bad behaviour by other advisers or product providers – our only power is to report to ASIC, we then have no control over whether and when any action is taken.

2. The government should cover the first year of costs of the scheme as was originally promised

Who we are asking: Government

Status: Unresolved

Why we want to see this change

The government is only paying for three months of the scheme’s operations, including only one Dixons claim
Its contribution to supporting consumers has only been $4.8m in the context of a scheme that’s been launched with retrospective impact of what could be over $400m
This is a broken promise by government which is in fact contributing very little to helping consumers who’ve lost money

3. Re-instate the original sector cap of $10m, and apply the sector cap as a fixed cap for small business sectors that do not have the capacity to pay for large losses

Who we are asking: Government

Status: Unresolved

Why we want to see this change

The government’s doubling of the cap has doubled the cost for our sector without any consultation
As adviser numbers have been in steep decline for some time, the cost per adviser risks increasing and leading to a ‘vicious cycle’ in which fewer advisers pay higher costs, needing to increase their fees by more to pay for this
The impact this will likely have on the cost of advice for consumers is counter to the government’s agenda to improve the affordability of advice for Australians

4. If our sector has reported a financial firm or adviser of concern, and ASIC has chosen not to take any action, or has substantially delayed action, we should be indemnified against having to pay for any future CSLR claims

Who we are asking: Government

Status: Unresolved

Why we want to see this change

The only action advisers can take to protect themselves against future CSLR costs is by promptly reporting any problems they are aware of to ASIC to minimise any potential consumer loss. This is also the only possible moral justification for the scheme’s funding model in which advisers who are doing nothing wrong are being asked to pay for the misdeeds of others
However we have no control over whether or how quickly ASIC will act on reports of potential wrongdoing. In fact ASIC is only acting on approximately 1% of the reports made to it (Senate Economics Committee report – July 2024)
ASIC has no requirement to report back to our sector or publicly on how many matters they have been alerted to and whether they have actioned any of those reports. ASIC currently hold no risk in not taking action, or delaying action against wrongdoers. All their costs get paid by our sector: whether or not ASIC take action, and whether or not that action is successful.

5. Agree that any fines or penalties recovered in actions involving insolvent entities will be paid to the CSLR to fund consumer compensation

Who we are asking: ASIC/Government

Status: Unresolved

Why we want to see this change

Even though these amounts are unlikely to actually be recovered, if they are, it would be incredibly unjust for these to go into the government’s Consolidated Revenue rather than making good losses incurred by consumers
It is inappropriate for the Government to be making a profit out of consumers losing money, as they would be if fines and penalties continue to go to Consolidated Revenue.

6. Ensure that resources are made available to appropriately defend AFCA complaints subject to the CSLR, including Dixon Advisory

Who are we asking: AFCA/Government

Status: Unresolved

Why we want to see this change:

Every complaint should be robustly investigated and defended by all parties as a matter of process and natural justice to determine the most appropriate outcome is reached for each specific case.
Failure to adequately defend each case may result in an additional and unnecessary cost being added to the already unreasonable burden being imposed on financial advisers that are doing the right thing.

7. Legislate to enable a special CSLR cost to be levied against an integrated financial group that has made a subsidiary entity bankrupt to avoid paying compensation to consumers

Who we are asking: Government

Status: Unresolved

Why we want to see this change

It is deeply unjust that advisers are being asked to fund compensation for the clients of a large listed entity, like E&P Financial Group, that continues to profitably operate and in fact has retained many of the clients under advice. This equates to allowing phoenixing activity to occur to the detriment of consumers.

While insolvency law might be hard to change, the government has almost unlimited power to expropriate and has used that power already for the CSLR, against the 10 largest financial institutions.

The government could establish a principle in the legislation based on common ownership and/or directorships, that a given proportion of revenue be levied against the parent entity if any subsidiary company has caused its customers to have recourse to the CSLR.

This would be a tangible disincentive to future phoenixing activity.

There is no legal reason the government could not use its power to expropriate now to recover consumer losses against Dixons’ parent company, E&P Financial Group.

8. Extend the scope of the CSLR to cover Managed Investment Schemes (MISs)

Who we are asking: Government

Status: Unresolved

Why we want to see this change

This was Labor’s policy while in opposition
Substantial consumer harm has been caused by product failure rather than advice failure, harm that currently has no recourse (eg Sterling, Mayfair etc). People have lost their homes and life savings.
Without any coverage for product failure, our concern is that all future MIS failures will be defined as advice failures, even though many (including Dixons) are caused or substantially contributed to by product failure
The current situation encourages inappropriate risk-taking and higher risk products to be launched targeting often elderly consumers with insufficient financial resilience to withstand losses (as the wholesale limits are too low). These consumers then become entirely dependent on the social security system
Conversely by not including MISs, advisers are effectively forced to indemnify product issuers.
The fixed costs of the CSLR are not insubstantial and MISs benefit from the scheme’s existence although they are paying nothing towards its costs. Adding MISs will split the costs more fairly across a broader group.

9. Ensure the scheme is genuinely a last resort by taking every step to seek recovery from other parties before demanding money from the financial advice profession

Closed issues

Immediately cease Dixons’ membership of AFCA

Outcome: Successful (albeit belated). The AFCA board finally ended Dixon’s membership on 30 June 2024.

Who we were asking: AFCA

Why we wanted to see this change

Claims continuing to flow in from Dixons clients made an already enormous problem worse every day
2 previous announcements of the end date of Dixons’ membership had passed
Consumers have had ample time – almost 2.5 years – to lodge a claim

Resources

Dixon Advisory and CSLR anger – Part One

CSLR Fact Sheet

CSLR Briefing Paper

Dixon Advisory Litigation Review

CSLR related Media Releases

The Government are not delivering the CSLR as promised. The key commitments that were not met read more…

May, 2024

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Compensation Scheme of Last Resort

Your hub for the latest updates and developments relating to the Compensation Scheme of Last Resort

Background

Direct Advocacy

Other Advocacy Activity

Key issues we would like to see addressed

Closed issues

Phil Anderson on LinkedIn

Phil Anderson on LinkedIn

David Sharpe CFP® on LinkedIn

Phil Anderson on LinkedIn

Phil Anderson on LinkedIn

David Sharpe CFP® on LinkedIn

Phil Anderson on LinkedIn

Sarah Abood on LinkedIn

David Sharpe CFP® on LinkedIn

Jordan Vaka on LinkedIn

Phil Anderson on LinkedIn

Phil Anderson on LinkedIn

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