How the Compensation Scheme of Last Resort is paid for continues to be a contentious issue across the SMSF sector and wider financial services industry. Ron Marney explores major stakeholder attitudes regarding this predicament.

The CSLR was originally conceived as a consumer protection mechanism following the financial services royal commission. Its role is to pick up the tab when consumers get a favourable determination from the Australian Financial Complaints Authority (AFCA), but the financial firm responsible cannot pay. It covers personal financial advice, securities dealing, credit intermediation and credit provision.

However, a succession of major failures, including Dixon Advisory, United Global Capital and, more recently, First Guardian and Shield, has transformed what was expected to be a modest industry levy into a rapidly growing liability, with CPA Australia estimating it will rise from $4.8 million in 2024 to $75.7 million in 2026 and possibly growing to $127 million by 2027.

So, to meet this rapidly growing shortfall, it has been announced the CSLR funding will be extended beyond financial advisers to Australia’s 1.1 million SMSF members and members of Australian Prudential Regulation Authority-regulated superannuation funds.

Specifically, Assistant Treasurer and Minister for Financial Services Daniel Mulino has said SMSFs will be included in the CSLR funding as tier-three levy payers in its ‘waterfall model’ in future years when a special levy is required.

The total sector levy for SMSFs will be scaled relative to assets under management when compared to the broader superannuation trustees sub-sector, with a flat levy amount applying to all funds.

At this stage, this impost is not expected to exceed $20 per fund.

The rationale is straightforward. Many of the largest compensation claims stem from investment products held within superannuation, particularly SMSFs advised by financial planners. If the beneficiaries of compensation are often superannuation investors, some argue the broader super system should help fund the safety net rather than relying almost exclusively on licensed advisers.

The broadening of the CSLR levy base has caused angst across the financial services industry, with submissions made to Treasury before Mulino’s announcement by the Financial Advice Association Australia (FAAA), CPA Australia and the Institute of Financial Professionals Australia (IFPA) also highlighting what they perceive to be its shortcomings.

What particularly riles them is the fact managed investment schemes (MIS) are getting a perceived free kick, while the advice sector, and potentially their SMSF clients, are being expected to carry a disproportionate share of the funding model.

The FAAA submission says: “Other sectors involved, in particular MISs and other super funds, should be able to be pursued by impacted clients who have suffered a loss rather than those sectors being protected by AFCA rules relating to the management of a fund or scheme as a whole, which only serves to disadvantage clients and redirect their attention to the advice sector.”

To reinforce its point about MISs, the FAAA contends “they have been a huge contributor to losses that result in CSLR payments, yet they are protected from the CSLR and have made little contribution to funding via special levies. This needs to be addressed”.

CPA Australia superannuation lead Richard Webb argues if the CSLR is to deliver the greatest benefit, it must truly be a scheme of last resort and that means the upstream links to the chain must work properly.

“A sustainable model requires all sectors responsible for those losses, particularly MISs, to contribute fairly. It’s critical that costs caused by product failures are internalised by relevant product issuers rather than being borne by unrelated sectors through special levies,” Webb points out.

Certainly, any funding model specifically targeting SMSFs risks solving the wrong problem, with Webb saying by adopting this approach, it simply shifts costs onto investors rather than addressing the systemic causes of loss.

“A sustainable CSLR requires contributions from all sectors responsible for those losses, particularly MISs, and must remain a true scheme of last resort, not a substitute for accountability elsewhere in the system,” he suggests.

“The CSLR must operate as a genuine last-resort scheme, supported by effective oversight and accountability right across the financial system.”

Regardless of the government’s recent announcement, there is universal agreement among organisations representing the advice sector the current levy arrangements are unsustainable. The original annual cap of $20 million for the advice sector has repeatedly been exceeded, requiring special levies approved by government. Claims linked to historical firm failures continue to dominate expected compensation costs.

Many advisers rightly contend they are paying for misconduct committed by businesses that no longer exist and, in many cases, for advice delivered years before the CSLR was established. So, unless the underlying drivers of claims are addressed, future liabilities may continue growing no matter who pays.

For SMSF Association chief executive Peter Burgess, regulatory failings go to the nub of the matter, that focusing on who pays the levy is putting the cart before the horse. In its Treasury submission, the association argues the sharp rise in CSLR costs points to regulatory failure, not a broad industry failing.

“The financial advice sector has undergone more than a decade of significant reform. Australian financial services licensees are subject already to clear obligations to act efficiently, honestly and fairly comply with financial services laws and manage conflicts of interest,” Burgess notes.

“Where misconduct is still occurring at scale, the answer is not simply more cost recovery. The answer is stronger, earlier and more effective enforcement of the existing regulatory framework.”

The FAAA is on a similar wavelength, saying those responsible for misconduct should be pursued to the fullest extent of the law to ensure the CSLR does not remain an option for wrongdoers to walk away from the collapse of a business with no consequence.

“These activities should be government funded to ensure this pursuit activity is prioritised over value judgments about whether this is in the best interests of other CSLR recipients. It is an essential measure to ensure that risk-taking and illegal behaviour have consequences for individuals and businesses that harm consumers,” it says.

Central to the levy is a four-letter word – cost. While all parties want a CSLR, all also want to minimise, if not eliminate, their financial contribution to pay for it. From the perspective of the advice sector, IFPA head of technical services Stuart Sheary puts it succinctly.

“The cost pressure on advisers is too much (already); they’re paying the biggest share for failures they didn’t cause,” Sheary says.

“But shifting that cost onto SMSF members won’t fix it. The cause sits with product failures, MIS collapses and misconduct in the way products are sold. The fix is to make product makers and responsible entities pay and limit compensation to actual loss.”

No one disputes the CSLR remains an important consumer protection mechanism, but the current funding arrangements appear increasingly difficult to sustain.

The government has made the decision to spread the cost of funding across all financial services sectors, which will reduce pressure on financial advisers and improve funding stability.

Yet taking this option raises legitimate questions about fairness, accountability and whether investors who played no role in generating claims should subsidise historic misconduct elsewhere in the financial system.

To this end, at the recent SMSF Association Technical Summit 2026, Burgess suggested other government agencies should be considered as a source before financial services industry stakeholders.

“If the government needs to find some funds, it doesn’t need to look very far. [It was reported] in the news just recently ASIC (Australian Securities and Investments Commission) [has secured] a record $830 million in fines. Now $644 million has been returned to clients [and that means] there is $200 million that hasn’t,” he said at the summit.

“Why can’t some of this be redirected into the Compensation Scheme of Last Resort? These collapses have occurred on the watch of successive governments [and] on the watch of our regulators, yet they’re not contributing to the cost of this compensation [and] it has been put back on industry.

“So we think there is a clear case here for the government to be contributing to the cost of this compensation.”

Ultimately, the debate is less about whether the CSLR should exist and more about who should pay for maintaining confidence in Australia’s financial advice and retirement savings system.