Is the Compensation Scheme of Last Resort Sustainable?
The Compensation Scheme of Last Resort (CSLR) in Australia is at a crossroads and may be due for an overhaul. This initiative, which has often relied on major banks as a source of last resort funding, is now under scrutiny, with the goal of enhancing its sustainability and predictability. The Australian Banking Association (ABA) has welcomed the government’s move to consult on the CSLR’s future to ensure its financial viability.
Banking Industry Supports CSLR Overhaul
The ABA’s CEO, Simon Birmingham, has expressed the banking industry’s support for a genuine scheme of last resort that compensates victims who have suffered financial losses due to misconduct. Birmingham pointed out that the current model is not operating as it was intended, and steps need to be taken to reduce investment losses and redesign the CSLR to make it more sustainable.
“Banks support a genuine scheme of last resort that compensates victims when they have suffered financial loss due to misconduct,” said Birmingham. “The current model is no longer working and banks welcome steps by Minister Mulino to ensure it becomes more sustainable, including stemming the incidence of losses, containing claims and better aligning costs to sectors generating losses.”
CSLR: Not a Bailout for Wealthy Investors
Birmingham further emphasized that the CSLR should serve as a genuine scheme of last resort for everyday Australians, and not as a vehicle for affluent investors to recover losses from high-risk strategies that have not yielded the expected returns.
Pressure on the CSLR’s Funding
The Treasury has noted that the CSLR has been under significant pressure due to claims surpassing initial expectations. Since its inception, large-scale failures, including those of Dixon Advisory and United Global Capital, have driven costs beyond what was initially anticipated. This situation has necessitated extraordinary funding measures, including a one-off levy on the ten largest financial institutions to fund legacy claims.
The pressure on the CSLR’s funds has continued, with an estimated scheme cost of $75.7 million and a funding shortfall of $47.3 million for the 2025-26 period, largely attributable to the personal financial advice sub-sector. The CSLR operator projects costs of more than $137 million for 2026-27, with over $126 million attributable to the financial advice sub-sector, excluding potential liabilities from the Shield and First Guardian collapses.
These figures clearly highlight the unsustainable nature of the CSLR in its current form and the urgent need for a comprehensive review and overhaul to ensure its continued viability.
The proposed changes to the CSLR are aimed at ensuring it continues to provide a safety net for those who have genuinely suffered financial loss due to misconduct, while also taking steps to ensure that it is not exploited by wealthier investors looking to recoup losses from high-risk strategies that have not delivered as expected.
The consultation paper on the CSLR is an important step towards achieving these goals, and the banking industry’s support for these changes is a positive sign that the CSLR can be reshaped into a more sustainable and equitable scheme for all Australians.
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