Government announces major changes to CSLR

The reforms come amid substantial CSLR liabilities linked to investment failures and the prospect of a significant financial year 2026–27 special levy.

Mulino said the government would put the CSLR on a “firmer and fairer footing so it can continue to provide meaningful protection when all other safeguards have failed”.

A central change would limit CSLR payments to a consumer’s actual financial loss for applications made to AFCA after 30 June 2027.

The government stressed that the measure would not alter AFCA’s existing compensation powers or consumer entitlements through the external dispute-resolution body.

Instead, the proposal would limit the amount payable by the CSLR once a firm is unable to satisfy an AFCA determination.

This would remove the scheme’s exposure to compensation calculations that include hypothetical returns or gains an investor may have achieved had misconduct not occurred.

Waterfall proposed for exceptional levies

The funding of exceptional losses is the most consequential element of the package for the broader financial-services industry.

Mulino said the government would introduce a more predictable framework for funding extraordinary CSLR costs through a special-levy waterfall.

He said the model was intended to better connect funding responsibility with the sector responsible for, or associated with, the underlying consumer harm.

Under the proposed approach, the subsector most closely connected to the claims would be considered first, followed by other connected subsectors, before a wider funding base could be called upon if costs remain.

The structure is designed to reduce the likelihood that sectors with little relationship to a major failure carry a disproportionate share of its costs.

The government has also committed to using the waterfall framework for the FY26–27 special levy while conducting further analysis and consultation before Mulino decides precise allocations across the first two tiers.

The Mortgage and Finance Association of Australia (MFAA) said the direction of the reforms was an “important” step towards a more sustainable scheme.

MFAA CEO Anja Pannek said the announcement reflected sustained industry engagement with government and addressed the fundamental question of whether extraordinary losses should be transferred across unrelated sectors.

“This is an important step forward. We are pleased to see key principles the MFAA has consistently advocated for now reflected in the Government’s reforms,” Pannek said.

“We have been clear throughout our engagement with government that we strongly support the CSLR’s role in protecting consumers. But consumer protection and funding fairness are not competing objectives. A sustainable scheme needs both.”

Push for closer connection to losses

The MFAA has repeatedly said that CSLR funding should account for the origin of claims rather than relying on a broad distribution of costs across levy-paying participants.

“Mortgage and finance brokers have an exceptionally low claims profile under the CSLR. Businesses doing the right thing should not be required to disproportionately fund significant failures occurring elsewhere in the financial services system,” Pannek said.

“In particular, we have advocated for a more predictable and equitable approach to exceptional losses, where funding responsibility better reflects the sectors responsible for, or connected to, the underlying harm. The government’s new waterfall approach represents important progress towards that principle.

“The move towards stronger recovery mechanisms and compensation based more closely on direct financial loss also responds directly to issues the MFAA has raised through the reform process.”

Alongside the special-levy changes, the government has proposed to extend the CSLR operator’s statutory recovery rights to additional available sources.

Mulino said this was intended to increase the operator’s capacity to pursue recoveries before the residual cost is passed through to levy payers.

Other administrative measures include allowing the CSLR operator to notify the minister of a revised levy estimate before a levy period begins and fixing firm-level levy metrics at a defined point.

The latter would mean that correcting a single firm’s data would not trigger recalculation across an entire subsector.

The government said it would also shorten the disallowance period for CSLR levy instruments from 15 sitting days to five, matching the time frame used for ASIC levy instruments.

Further proposed changes would remove the need for consumers to notify AFCA about non-payment when AFCA was already aware that the firm could not pay.

Mulino also said that under the changes, the CSLR would now be able to direct compensation to more than one account or payee where necessary, while a retail-facing metric would be developed for large securities and futures exchange participants.

SMSFs added to future funding base

The package also broadened the funding base for future exceptional losses.

The government said that it would add SMSFs as Tier 3 levy payers under the waterfall, with contributions scaled according to assets under management.

The government also said it intended to correct the special-levy formula to ensure the intended $100 minimum operated as designed while accounting appropriately for SMSFs.

Pannek said including a wider funding base was consistent with the accountability principle the MFAA had pressed throughout the review.

“From the outset, our position has been that the CSLR should protect consumers while preserving accountability for where failures occur,” Pannek said.

“A system where well run businesses continually subsidise misconduct in unrelated parts of the financial services sector is neither fair nor sustainable.

“These reforms move the scheme materially closer to the principles we have been advocating for: stronger accountability, better recovery, greater predictability and a closer relationship between the source of losses and who ultimately pays for them.”

The MFAA also welcomed the government’s decision not to settle FY26–27 special-levy allocations before further consultation and analysis.

“Given the scale and exceptional nature of those losses, the final allocation must be evidence based, proportionate and properly consider which parts of the financial services ecosystem are connected to the underlying harm,” Pannek said.

[Related: CSLR levy jumps $60.7m after revision]