'Flawed' CSLR model needs to be redesigned: SMC

The latest proposal from the government to see super funds contribute to the Compensation Scheme as a Last Resort (CSLR) would force everyday Australians to fund failures which arose in unrelated high-risk financial services, the Super Members Council (SMC) warned in a submission to the consultation.

SMC said while it "strongly supports" the existence of the CSLR, and recognises the growing cost on advice firms who did not cause the losses, millions of Australians should not be forced to cross-subsidise a bigger share of the bill.

Under the current design proposals, the personal advice sector's Tier 1 contribution is now proposed to halve - cutting its share of the bill from $20 million to $10 million, and '"connected-sector'' recoveries are projected to fall from $87 million to $40 million (Tier 2).

The organisation said as Tier 1 and Tier 2 contributions shrink, the gap is spread across trustees that "had no part" in the collapses of First Guardian and Shield Master Funds.

SMC added the government has also failed to address a viability assessment or any evidence supporting these changes.

"Although the government describes this mechanism as risk-based, put plainly: it is not," the submission noted.

"The proposed 2026-27 allocation does not distribute the projected excess compensation bill according to risk. It weakens the link between where unpaid compensation costs arise and who pays for them, does not transparently assess the activities that caused or enabled the losses, and transfers most of the funding shortfall onto Tier 3."

It is arguing the proposal is shifting responsibility away from the sectors "most closely connected" to the losses and further onto those with none.

The SMC is now calling for the government to adopt a comprehensive harm prevention and risk-based funding model, which prevents the occurrence of catastrophic consumer harms and empowers regulators to recover costs from the individuals and firms responsible in the first instance.

The model will also apportion the cost of a much smaller residual unpaid compensation funding shortfall via a risk-based formula reflective of the sub-sectors from which actual unpaid compensation orders arose.

"In a genuinely risk-based model, levy costs would sit most closely with the sub-sectors from which these unpaid compensation orders arise and where entities are best placed to prevent or mitigate consumer harm," the paper noted.

"A genuine risk-based model would not push such a large proportion of costs onto millions of low-income everyday Australians who choose the safeguards and protections of the mainstream super system."

SMC said events like the collapses of Shield and First Guardian, which were distributed mostly through a small number of for-profit super platforms, must never happen again.

There are now 17 separate court proceedings over the collapses of the two schemes and heightened regulatory scrutiny around participants in those arrangements.

"The largest costs borne by the CSLR have repeatedly originated from the same type of business model: individual firms who channelled clients into related-party or high-risk managed investment schemes. Dixon Advisory, United Global Capital, and Shield and First Guardian together account for $147 million, or 87%, of the 2026-27 compensation costs," it said.

"A key design principle for the scheme at the outset was that the part of the financial system from which the consumer harms and unpaid compensation orders had arisen should bear the costs of funding it."

The SMC said the government's latest proposal "breaches that principle" and forces Australians, including most of the nation's lowest-paid workers, to pay an even bigger share of the bill.

Commenting, SMC chief executive Misha Schubert said government's levy proposal has failed the pub test.

"Everyday working Australians should not have their retirement savings docked to pay a bigger share of the compensation bill for collapses and misconduct in unrelated, higher-risk parts financial services," she said.

"A scheme described as risk-based should actually follow and reflect the relative risks. The government has simply not explained why sectors closer to the harm would now be handed an effective discount, and why the bill pushed onto everyday Australians would rise even higher."

This comes after the CSLR operator announced in July estimated claim costs for 2026-27 were $190.3 million. As the costs exceed the annual levy cap, the CSLR legislation provides for the imposition of a special levy to fund the excess costs so the scheme can continue paying compensation to eligible consumers.

The Financial Advice Association Australia also urged Treasury to cut the CSLR special levy on the advice sector to zero and for super trustees to stump up for the scheme in the same consultation.