Underfunded From Inception
The operator of CSLR has released the latest actuarial report commissioned on the scheme and the initial estimates of projected levies for 2025 / 26 (3rd levy period), triggering widespread concern across the financial services industry and immediately prompting the Treasury to announce a comprehensive review of the scheme.
The proposed financial advice sub-sector levy for 2025 / 26 of AU$70 million will significantly exceed (by nearly four times) the legislated AU$20 million sub-sector cap in only its second full year of operation with the main drivers of the increase being:
- The recent failures of a second advice firm, United Global Capital, which in addition to Dixon Advisory are responsible for 92% of the claims estimated to be paid by the scheme for 2025 / 26; and
- The failure by Government to ensure that the scheme was adequately funded at commencement bearing in mind the then known failure of Dixon Advisory.
Prior to this latest announcement from CSLR the Senate had already launched an inquiry into the collapse of Dixon Advisory and the implications for the establishment of the CSLR.
K&L Gates has assisted in the making of submissions to the Senate inquiry late last year and identified a number of significant flaws in the design and implementation of the CSLR. The release of the projected levies for the 3rd levy period bears out many of the concerns which were raised in those submissions including the following:
- There was an insufficient understanding of the potential claims emerging from the known circumstances of Dixon Advisory at the time of commencement of CSLR.
- This led to insufficient initial contributions from both the Federal Government and Australia's 10 largest financial institutions to fund the commencement of the CSLR.
- The role of AFCA in assessing claims results in claimants more often than not being eligible to receive compensation payments near the maximum amount available from CSLR.
- The inclusion in CSLR funding estimates of projected liabilities of the fees and costs incurred by AFCA, CSLR, and ASIC have added significantly to the total liabilities which needs to be funded by the advice sub-sector.
- There is no evidence that claimants are required to demonstrate that they have exhausted all other compensation avenues such as against product issuers in the case of Dixon Advisory.
- The existence of compensation available through CSLR reduces the incentive for parent companies' administrators and other stakeholders to contribute to the administration of insolvent firms.
- These factors undermine the CSLR's objectives of enhancing trust and confidence in the Australian financial system and promoting sound and ethical business practices.
The release of the actuarial report confirms that without significant and prompt remedial action, the CSLR will be a material and growing liability for the advice sub-sector for years to come.
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