An unworkable scheme

In January, the levy advisers will have to pay for the Compensation Scheme of Last Resort for the 2026 financial year was announced and it highlighted one of the many problems identified with the measure. Penny Pryor examines the associated industry concerns and the changes needed to make the framework workable.

The Compensation Scheme of Last Resort (CSLR) levy for the 2026 financial year was announced a few months ago, coming in at $77.98 million in total, of which $70.1 million is for financial advice. The amount may not have been a surprise, given expectations recent high-profile collapses had pushed the levy well over the $20 million cap, but it is still shocking.

No one in the industry disputes the existence or the unfortunate necessity of a compensation scheme for investors, however, many in the advice profession have understandable concerns around how the levy will be paid and what this will mean for the industry.

When announcing the estimate, the CSLR reiterated the amount above $20 million for the financial advice sub-sector required funding via a special levy, with formal notification of this requirement to be made to the financial services minister early in the 2026 financial year.

Consistent with the legislation, the CSLR will complete a revised levy estimate for 2025/26.

The direct costs

In its initial estimate for 2025/26, the CSLR outlines that 92 per cent of the expected claims paid for that year are from two failed firms – Dixon Advisory Superannuation Services and United Global Capital (UGC).

More than half of the $70.1 million estimate for the 2026 income year, or $45.6 million, is related to claims expected against UGC, with an average selected outcome amount of $145,000 after applying the $150,000 cap.

The Financial Advice Association Australia (FAAA) in its submission to Treasury on the “Consultation – Post-Implementation Review: Compensation Scheme of Last Resort”noted the large scale of the expected UGC claims may have been somewhat unexpected, while the Dixon Advisory cases were less than predicted.

The total expected cost of the UGC claims is $48.5 million, meaning the majority of it will be born in 2025/26.

The FAAA has anticipated a potential cost in 2026/27 of $123.3 million based on careful analysis of the number of Dixon Advisory cases to be dealt with and the expected ramp up in the 2027 financial year. Its submission also points out “a further financial firm collapse could lead to a substantial increase in costs in the 2025/26 and 2026/27 years”.

FAAA policy, advocacy and standards general manager Phil Anderson says the estimate per adviser (not advice business) outlined in Table 1 is based on the 15,300 advisers who have been used for the purposes of the Australian Securities and Investments Commission funding levy.

Source: FAAA

“If you’ve got six or seven advisers, you’re talking about over $100,000,” Anderson notes.

“If you’ve employed a few younger advisers, including professional-year students that are on the financial adviser register, as well as a business owner, you can be facing a very, very large bill for this.”

“We are talking about $212 million across the first three years, $193 million for the next two years and an overall cost of more than $13,500 for each financial adviser. This is an unreasonable, unsustainable amount and the scheme has to be fixed. It has to be fixed, not just to deal with what happens in 25/26 and 26/27, it has to be fixed in a way that ensures it’s sustainable in the future.

“There’s nothing stopping further collapses happening in the future and it’s all going to flow to financial advice unless there is an adequate solution.”

The financial services industry is mostly united in its condemnation of the scheme and is hopeful the reviews will result in some important changes.

Financial Services Council (FSC) chief executive Blake Briggs also believes the scheme is unsustainable in its current form.

“For a significant proportion of existing cases the compensation being paid by the scheme is for hypothetical capital gains, not just the losses a consumer has incurred. In addition, the existing scheme also carries disproportionately high administration costs and includes legacy cases,” Briggs points out.

The indirect costs

Unfortunately, the flow-on effects of the levy will be an increase in the cost of financial advice for Australians as advisers and their businesses will be required to raise their fees.

“We already know there are issues with the cost of advice and the government is trying looking at that and at measures to reduce the cost of advice. And this is going the other way. This is a measure that will increase the cost of advice,” SMSF Association chief executive Peter Burgess suggests.

Sonas Wealth director Liam Shorte estimates it currently costs close to $120,000 just to open the door to see a financial planner with a decent licensee.

“We are being crippled by additional costs like this. I am now turning people away that I would have helped over the last 20 years because I know I cannot charge them enough to cover my basic costs. I work in the suburbs and these mum and dads were my best clients in the past where I could make a big difference and charge a fair fee acceptable to all, but that time has gone,” Shorte notes.

He is directly assisting at least two clients that were caught up in the UGC failure. Here clients were urged to establish an SMSF and then invest as much as possible of the rolled over funds into the related Global Capital Property Fund. That fund, at the time of being placed in liquidation, had 15 individual property development investments, only one of which had been completed.

“The two people I am helping have invested over $400,000 (90 per cent of their super) and $200,000 (40 per cent of their super) respectively via UGC in this one fund,” Shorte reveals.

Advice accountability versus product liability

Burgess says it’s important any changes to the system apportion fault to the right parties and that involves looking at the insolvency laws and making sure companies can’t walk away from their liability.

“We’ve seen situations where parent companies have just closed down their subsidiaries, put them into administration and then they’ve avoided any liability. And that’s not right either,” he stresses.

“Advisers are being asked to compensate clients when there’s been a product failure. We’ve always maintained that managed investment schemes should be part of this. So they should be a sub-sector, meaning if there is a failure of the managed investment scheme, that sector is called on to compensate victims. It shouldn’t be left with the financial advice sector to fund damages for those situations.”

Managed investments are not part of the CSLR so there is little point in pursuing any product responsibility as these structures cannot be drawn into the scheme’s regime.

“Where advice is involved and there’s a breach of the best interest duty, the law, according to the Australian Financial Complaints Authority (AFCA), says everything will be attributed to the financial advice business and there’s no mechanism to share that or apportion it to the product provider. So we’ve got some fundamental underlying legal issues that do not allow for the fair sharing of costs,” Anderson warns.

The FSC, which includes product providers in its membership, is a little more cautious around apportioning blame to product providers.

“Efforts to expand the CSLR to products would have the effect of underwriting investment losses. This would cause greater cost for the industry and financial advisers over time, establish unacceptable moral hazard and ignore that in every CSLR claim there was an existing advice relationship,” Briggs explains.

There are also other issues that the current system does not take into account. For example, Shorte highlights the Dixon scenario saw over 30 advisers moved to E&P Financial.

“Many clients burnt by them moved with them as the blame was put on Dixons the company and not on the individual advisers who made large sums recommending those in-house products. No adviser who knowingly recommends collapsed products should be able to walk away with such ease and no firm should be able to abandon its responsibilities morally, even if it is legally possible,” he says.

He knows of one paraplanner who had worked with UGC, but as he progressed through his studies, began to have serious doubts about the offer and left the company despite the difficulty of finding work during the COVID pandemic in Melbourne.

“We are all now picking up the CSLR levy and increased professional indemnity insurance costs, while the advisers and firms involved in the phoenix schemes are without any care in the world,” he points out.

The unfair ‘but for’ provisions

Another egregious element of the scheme raising questions around fairness is the ‘but for’ provisions, which allow for compensation for investors who may not have incurred a capital loss, but who would have been better off in another investment if they had not received inappropriate advice.

A benchmark industry return is used to calculate what is essentially the opportunity cost related to the investment in the failed product.

“Under the scheme, even though you may not have incurred a loss, you were compensated for the fact your return was not as good as what it should have been without the advice involved. Now that to us is not a scheme of last resort,” Burgess stipulates.

The FSC agrees a scheme that compensates unrealised capital gains and is subject to disproportionately high administrative costs is not the one for which industry signed up.

“The CSLR should be true to label and genuinely a ‘last resort’ option for consumers who have lost money due to poor financial advice,” Briggs says.

Shorte suggests removing the ‘but for’ provisions may help, but until the promoters are prevented from walking away without recompense, the burden will always fall on the rest of the industry.

“I am now seeing the rise in private credit funds which are very similar to the UGC Global Capital Property Fund in terms of being property development funding vehicles and fear this will be a neverending circle of risky investments failing – investments that would never be on our approved product list, but still we pick up the cost of their failure,” he says.

Where to from here?

The FAAA is seeking to amend the ‘nonapportionable claims’ classification under the proportionate liability statutes to allow AFCA to differentiate between the liability of complaints involving financial product failures and those regarding financial advice matters. This would include circumstances involving potential breaches of the best interest duty and failure to give appropriate advice obligations.

The industry body also wants greater certainty on what the minister will do in the event of a special levy being required and is also calling to limit the exposure of the financial sector to the original sector cap of $10 million instead of the revised $20 million. As it stands, the financial services minister has ultimate discretion in how a special levy is apportioned and will announce this come July.

According to Burgess, the SMSF Association’s biggest issue with the scheme is the ‘but for’ provisions, a view shared by most of the industry, and he is optimistic the government has been listening to its complaints.

“It was encouraging to hear both the minister, the shadow minister and the assistant shadow minister agree on that point – that they felt this ‘but for’ approach needed to be looked at. So it looks as if we’ve got bipartisan support for a change in that area,” he recognises.

The FSC also has the ‘but for’ provisions, as well as the scheme’s high administration costs, on its radar.

“There are practical avenues the Treasury review of the CSLR can explore to put the scheme on a more sustainable footing. These include ensuring compensation is strictly by reference to a consumer’s actual capital losses adjusted for the consumer price index, and reducing the scheme’s high administrative costs,” Briggs suggests.

Perhaps the last word should go to Shorte, who is also chair of the SMSF Association’s national membership committee. He proposes some simple but concrete measures that would have the effect of nipping these kinds of disasters in the bud.

These include the prevention of onestop shops of related parties providing cold calling, limited advice, fund setup, accounting admin and investment management. In addition, he is calling for having the ATO question every new SMSF trustee on why their fund is being set up and who recommended it.

He also suggests making all new offers report on the inflows to their funds and sample some of the investors on a quarterly basis to identify potential product collapses before they happen.

The responsibilities for these measures would run across different regulators, but if they can protect the retirement savings of Australians, they should be worth examining.