Treasury opens CSLR funding, sustainability consultation

Treasury has opened its long-awaited consultation on the sustainability of the Compensation Scheme of Last Resort (CSLR) and the best way for the industry to fund it.

Minister for financial services Daniel Mulino is seeking options on how the CSLR can remain sustainable and effective, floating reforms that will potentially change its structure and how it is funded.

"The proposals are intended to improve the predictability and structure of funding arrangements, better align the scheme with its role as a mechanism of last resort, mitigate unnecessary cross-subsidisation and enhance recoveries," the newly published Reform options to support ongoing sustainability paper shows.

To address the incessant funding shortfall, Treasury is asking for stakeholder feedback on implementing "a rules-based special levy 'waterfall' framework to respond more predictably to large-scale, investment-related losses arising from personal financial advice misconduct where costs exceed the annual sub-sector levy caps."

This means that any funding shortfall would be allocated sequentially across up to three tiers, reflecting the relative connection of sub-sectors to the underlying losses.

The three tiers comprise the primary sub-sector or the first payer, a sub-sector whose annual levy cap has been exceeded and pays up to $20 million in special levies on top of the annual levy.

The connected sub-sector or second payer whose products and/or services are identified as being connected to the losses and pays up to $40 million per sub-sector in special levies.

The retail facing sub-sectors or final payers are the remaining sub-sectors that operate as a defined backstop if any shortfall remains and can pay up to $30 million per sub-sector in special levies.

The financial advice industry is expected to pay the $126.9 million CSLR levy for FY27. This amount does not account for First Guardian and Shield. The total amount for the wider industry, however, comes to $137.5 million.

The levy has jumped from an estimated $75.7 million, including $67.3 million attributable to the personal financial advice sub-sector, in FY26.

The scheme has been criticised for its constant depletion of funding. Last December, then shadow financial services minister Pat Conaghan slammed the CSLR, saying that a scheme designed to compensate victims must be sustainable.

"Right now, the CSLR is constantly running out of money, and almost a year after the government announced a post-implementation review, it still has no credible plan to stabilise the scheme. Once again Labor's solution is a bigger tax," he said at the time.

Mulino said the three-tier waterfall would provide a consistent and repeatable mechanism for allocating funding shortfalls.

"It would support the sustainability of CSLR funding and improve certainty for levy payers by providing clearer expectations about how future shortfalls would be managed, while continuing to support the timely payment of compensation," he said.

The proposed special levy caps, he added, are designed to provide clear limits on potential levy liability and support a sustainable and repeatable funding response that does not undermine sub-sector viability, while still ensuring the CSLR can raise sufficient funds in a timely manner to provide redress to consumers suffering from misconduct.

Other proposed reforms included enabling the CSLR to deduct payments from compensation and for SMSFs to potentially be included as a subset within the CSLR special levy framework as a connected sub-sector.

The other option is to exclude SMSFs from CSLR eligibility entirely but still be able to make a complaint with the Australian Financial Complaints Authority (AFCA).

For the next steps, Mulino said: "I will convene a second CSLR and consumer protection roundtable in the coming weeks, to hear directly from stakeholders on the reform options."

The CSLR consultation is one pillar of a three-part consultation in response to the fallout from the Shield and First Guardian master fund collapses that impacted 11,000 super members and put more than $1 billion of their savings at stake.

Running in parallel are the enhancing member protections in the superannuation system consumers and lead generation consultations.

All three consultations conclude on May 22.