Dixon compensation scheme is ‘unsustainable’, advisers warn

Financial advisers warn the compo scheme of last resort is ‘unsustainable’ after Dixon Advisory victims were paid hefty sums not for financial losses but for unrealised potential capital gains.

Dixon Advisory filed for voluntary administration in 2022.

Financial advisers have sounded the alarm on the ballooning cost of the Compensation Scheme of Last Resort as victims of Dixon Advisory are awarded hefty sums not for financial losses but for unrealised ­potential capital gains.

The Financial Services Council has warned the scheme is unsustainable, and risks driving up the cost of financial advice and pushing advisers out of the industry, with similar warnings from the ­Financial Advice Association Australia.

The compensation scheme launched in April this year and ­already advisers are bracing for a $135m bill for claims related to Dixon, which collapsed in 2022. The scheme is being funded by an annual levy imposed on Australia’s 15,000-odd advisers.

But even the industry has been shocked at the determinations handed down by the ombudsman, the Australian Financial Complaints Authority. AFCA has in recent months ruled in favour of claimants in more than 100 cases against Dixon, with the ombudsman assessing not only realised losses but also theoretical unrealised gains.

In one case, a couple with an SMSF who were clients of Dixon from 2013, made a profit of a little over $1m by the time the firm collapsed. Under AFCA’s “but for” scenario, which estimates what the profit would have been if the victims had been invested in a more appropriate asset, they could have made a profit of $1.3m.

Financial advisers have sounded the alarm on the ballooning cost of the Compensation Scheme of Last Resort.

AFCA determined the couple was worse off to the tune of $270,000 and sent its findings to the CSLR, which is slowly paying out all of the Dixon claims. CSLR payments are capped at $150,000, regardless of AFCA’s determination. In another case, a couple invested in Dixon and made a profit of $651,000. But they could have made a profit of $875,000, according to AFCA. Again, the case was sent to the CSLR to award the couple the top limit of $150,000.

FAAA general manager for policy and advocacy Phil Anderson acknowledged the “but for” process at AFCA was a longstanding policy but argued CSLR cases should be treated differently.

“It’s not the firm that gave the poor advice paying for (the determinations) in this case. It’s other firms, it’s (the broader advice industry),” he said. “So is there a basis to say the way it is treated for a CSLR (claim) should be different to the way it is treated for a conventional complaint? And a loss is being assessed on a ‘but for’ basis, in that there’s not actually an underlying capital loss. Should there be a limit to how much is allowed to be paid out? Should it be a lower cap than the $150,000?”

CSLR chief executive David Berry this month said that of the 100 claims that had come through from AFCA so far, just 20 per cent had seen an actual loss of capital, with the rest being compensated under the “but for” scenario that assesses unrealised potential capital gains. The ombudsman is at the beginning of a long road of Dixon cases, with the final tally of complaints standing at 2773 as of June 30. The FAAA’s Mr Anderson also raised the issue that AFCA ­assesses each case by looking at a complainant’s whole portfolio, rather than the amount each SMSF had invested in failed Dixon products, such as its URF property fund.

In its submission to the Senate economic references committee, seen by The Australian, the FSC warned the CSLR was not sustainable. “There is mounting evidence the Compensation Scheme of Last Resort has become unsustainable, in large part because 80 per cent of the compensation being paid by the scheme is for foregone capital gains, not just the losses a consumer has incurred,” FSC CEO Blake Briggs said. “The CSLR should be true to label, and subject to a wholesale review and reform to make it a genuinely ‘last resort’ option for consumers who have lost money due to poor financial advice.

“The scheme costs have blown out from an initial levy estimate of $8.1m to $24.1m – an increase of 200 per cent. This is not the scheme industry supported when it was originally implemented.”

The FSC has called on Treasury to conduct a full review of the scheme to consider the impact, sustainability, and consumer outcomes and wants AFCA to change how it determines client losses.

“The FSC supports scoping the CSLR to compensate victims for capital losses but not for unrealised, hypothetical capital gains. This would require AFCA to determine actual losses rather than applying ‘but for’ compensation principles,” the lobby group wrote in its submission.

The FSC is also calling for an annual cap on the CSLR levy for advisers.

A Senate inquiry into the collapse of Dixon Advisory and its impact on the CSLR is due to take place and report on its findings in March 2025.