Lower payouts to victims, get rid of ‘but for’ clause says Financial Services Council

Victims of poor financial advice must receive lower payouts if the industry’s compensation scheme of last resort is to survive, the Financial Services Council says.

Dixon Advisory was the fourth largest self-managed super fund provider in Australia. The company filed for voluntary administration in 2022. Pictured are Alan Dixon (L) and David Evans. Picture: Stuart McEvoy

The Financial Services Council is pushing for an overhaul of the Compensation Scheme of Last Resort that would mean victims of dud financial advice receive lower payouts, delayed potentially by years.

The industry lobby group has also asked the federal government to provide a one-off cash injection to fund claims arising from the Dixon Advisory collapse, currently estimated at around $100m. Without this, the 16,000-strong financial advice industry fears it will be left to foot the bill.

The FSC argues the current cap for the controversial CSLR, which is funded by the financial advice sector, should be lowered from $150,000, in a submission to Treasury seen by The Australian. It did not provide an alternative figure.

The Financial Services Council has also asked the federal government to provide a one-off cash injection to fund claims arising from the Dixon Advisory collapse.

The lobby group also argued for compensation payments to be staggered across multiple years “to smooth the impact of one-off large-scale insolvencies”, within the 35 recommendations put forward to Treasury as part of a government review of the scheme.

The Australian understands these staggered payments would only be in place until relevant legislation is changed to put the scheme on more sustainable footing.

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

It allows victims of bad advice and financial misconduct to be made partially whole in the event of an adviser collapse. Since July 1, the scheme has been funded by the industry.

After Dixons and United Global Capital went under, advisers fear they will soon be paying compensation to the 12,000 investors caught up in the failed Shield and First Guardian funds.

One of the FSC’s key recommendations is removal of the ‘but for’ clause that allows investors to seek compensation even if they haven’t suffered capital losses.

“The FSC wants to see a more sustainable scheme. This means reducing significant administrative costs and only providing compensation for actual losses. Hypothetical gains should not be compensated,” chief executive Blake Briggs told The Australian.

“Amending the scheme can significantly lower its near-term cost for the financial advice industry and avoids the need for excess costs to be distributed across the remainder of the financial services industry,” he said.

The vast majority, 80 per cent, of Dixon Advisory claims that have gone through the financial complaints authority to the CSLR are “but for” cases, where investors didn’t actually lose money but could have been better off “but for” the advice received.

In one case, self-managed super fund 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 stood to make a profit of $1.3m.

Financial Services Council CEO Blake Briggs.

AFCA determined the couple was worse off to the tune of $270,000 and forwarded its findings to the CSLR. The scheme paid this couple $150,000.

The FSC has also called on the complaints ombudsman, the Australian Financial Complaints Authority, to rein in its administrative costs. These costs are paid by the CSLR and are estimated to surge by 540 per cent over a two-year period, from $2.5m in the 2025 financial to an expected $16m by fiscal 2027.

“We ask that the Government first structurally lower the ongoing cost of the scheme before decisions are made around the funding of its operation, otherwise the financial services industry risks writing a ‘blank cheque’ for inefficient regulators and excessively generous compensation,” Mr Briggs said.