Last resort: How do you fix an $80m mess?

Financial advisers are incensed at eye-watering bills to compensate victims of poor advice, and want an overhaul of the scheme.

Financial Advice Association Australia CEO Sarah Abood says financial products need to be captured in the CSLR, not just advice.

The Compensation Scheme of Last Resort has been in operation for less than a year and is already a complete disaster.

Early warnings from the financial advice industry now appear well-founded: Dixon Advisory claims are not even in the rear-view mirror and already a second failed firm, United Global Capital (UGC), is set to cost the under-pressure sector tens of millions of dollars.

After advisers had a collective heart attack last month over the proposed levy for 2026 — a $78m bill, up from $24m this year — the government appears to be listening, with a review now underway.

Its findings can’t come soon enough. The 2027 levy is already looking like it will soar well past $100m and it’s clear the scheme as it currently stands is unsustainable.

And yes, there is a fail-safe for the industry in the form of an annual levy cap of $20m on each sector. But, advisers could still be forced to pay more, with any amount above the cap requiring funding via a special levy to be determined by the minister for financial services.

As the industry of fewer than 16,000 advisers comes to terms with the rocketing costs — and figures out how much they can pass on to clients — the biggest complaints over the scheme are retrospectivity in terms of Dixon claims, the ‘but for’ test used to determine compensation, and that advisers are footing the bill for product failures.

“No sector can indefinitely underwrite every failure. It’s not just the injustice of it, but the unsustainability of it,” says Financial Advice Association Australia chief executive officer Sarah Abood.

“Because the CSLR only compensates for financial advice failures and not product failures, it is expedient that every product failure is defined as an advice failure, and that’s what’s happening,” she argues.

“As long as financial advice is involved, everybody is casting this as an advice failure, because if they can claim that then there’s compensation available. If it’s not an advice failure, no one gets any money. Our very strong advocacy position from even before the scheme was legislated, was that it ought to cover products as well.”

Proposed by the Ramsay Review in 2017 and backed by the banking royal commission, the CSLR came about because there was a gap in consumer protections for those unable to get compensation from insolvent firms.

The scheme allows victims of poor advice and financial misconduct, unable to access redress through other avenues due to insolvency, to claim compensation up to $150,000.

But, one of the major gripes with it is the application of a ‘but for’ test by the Australian Financial Complaints Authority, the body which determines just how much compensation victims will get.

The vast majority, 80 per cent, of Dixon Advisory claims which have gone through AFCA and on to the CSLR for compensation payment are “but for” cases, where investors didn’t actually lose money but could have been better off “but for” the advice received. This means just 20 per cent of claims involve an actual capital loss.

Alan Dixon, left, and David Evans joined forces in 2017 to form Evans Dixon, with Dixon Advisory becoming a subsidiary. Picture: Stuart McEvoy

In one case, a couple with a SMSF who were clients of Dixon’s 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.

AFCA determined the couple was worse off to the tune of $270,000 and sent its findings to the CSLR to pay out. The scheme paid this couple $150,000 (the cap).

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.

The industry’s argument is clear: this is not a true “last resort” system.

“This is not the scheme that industry envisaged when it was originally implemented, and it simply is not sustainable if we want a CSLR that enjoys the trust of the industry and general public,” says Blake Briggs, chief executive officer of the financial services council.

To ensure it is true to label — a genuine last resort — compensation should be restricted to those who have actually lost money due to poor financial advice, Briggs argues. But, he also doesn’t want other industries caught in its snare.

“The solution is not to expand the CSLR into other sectors, including superannuation, funds management or insurance products. Inclusion of more sectors would create the perception that the scheme underwrites investment losses, introducing significant moral hazard to our financial system,” he warns.

CSLR chief executive officer David Berry agrees there is room for improvement.

“We’ve been pleading our case to Treasury and the minister’s office for some time. I am looking forward to the review. I think it’s a positive step,” he tells The Australian.

“We want to make sure the scheme is sustainable, and if it’s an industry funded scheme, levies of the numbers we’re talking about, have a significant impact on the industry, and we’re quite aware of that.”

While the FSC doesn’t want super funds to take any of the weight, there is a chance this multi-trillion dollar industry could soon be paying a chunk of the levy.

Under the second tranche of the Delivering Better Financial Outcomes bill, yet to be legislated, outgoing minister for financial services Stephen Jones has proposed super funds be allowed to employ a “new class of adviser” to open up the advice industry to the average worker.

These advisers would have lesser qualifications than a fully qualified adviser, but they’ll still be giving advice on retirement and investments. And, keeping in mind there’s an election coming and the Coalition may take an entirely different view, pushing super funds further into the advice space provides another avenue for funding the levy.