CSLR recommendation could see costs plummet by 80%

Among the key recommendations from the CSLR is a suggestion to change what is covered by the scheme so that is only provides compensation for the loss of the actual money victims invested (i.e. capital lost).

According to the CSLR, this would dramatically cut the scheme's overall cost and improve its sustainability.

The submission includes analysis of claims received to date and reveals that - had the "capital loss only" model been in place - the total compensation bill would have been nearly 80 per cent lower, saving millions for the financial services industry that funds the scheme through annual levies.

How would it change?

Currently, the CSLR compensates victims based on a full loss determination by the Australian Financial Complaints Authority (AFCA). This often includes a component known as "but for" interest. This calculates what the consumer would have earned had they been given correct advice and invested in an appropriate product, rather than the product that caused the loss.

As reported by our sister title Independent Financial Adviser (ifa), the compensation method has become a major flashpoint as it pushes the levy costs for the CSLR, which was originally designed as a backstop for failed firms, to unsustainable levels.

According to the CSLR's internal figures, the potential financial impact of the proposed change would be substantial.

It shows that between April 2024 and January 2025, the total compensation bill sat at $21.48 million (including "but for" interest).*

However, if compensation were limited to only the capital loss component, the total bill would have been just $4.78 million.

This difference of $16.7 million is attributable to the component calculating hypothetical investment gains and interest.

For claims involving personal financial advice (the subsector that has the largest compensation payment bill), the "but for" calculation alone accounted for roughly 75 per cent of the total compensation awarded across those cases.

In the largest category of claims, related to the failed Dixon Advisory & Superannuation Services (DASS), the $2.93 million in "but for" interest paid was over four times the actual capital loss component of $240,000 for those paid claims.

Due to large firm failures (DASS and United Global Captial), in two of the first three years of CSLR’s operation, the total levy estimate in respect of the financial advice sub-sector will significantly exceed the $20 million sub-sector cap and require a special levy to be paid.

What would it mean for broking?

However, such a change could negatively impact the broking industry.

Out of the five paid claims related to credit intermediation matters that were assessed by the CSLR up until 31 January 2025, only two required the complex 'but for' test to determine the award.

For those two claims, a total of $113,000 was paid.

However, unlike in wealth advice, the bill for the broking would have been larger if it was changed to only include capital loss.

If the compensation had been based on the proposed model, the compensation paid would have been $11,000 more - at $124,000.

Why make the move?

The CSLR submission clarifies that the recommendation is not a challenge to how AFCA determines losses for a complaint but a critical measure for a "scheme of last resort".

"The CSLR should make compensation for capital loss only," the submission states, noting that the move is necessary to "ensure that the integrity of the determination process remains intact while addressing the financial sustainability of the CSLR”.

“We understand that there may be cases where the capital loss component represents the majority or entirety of the loss suffered by a claimant,” the submission reads.

“Accordingly, several other measures and changes should be introduced to the legislative framework in conjunction with this to improve the sustainability of the scheme.”

The CSLR believes the core issue remains a reliance on the industry-funded scheme to cover hypothetical investment returns rather than just recouping lost capital.

The adoption of the capital-loss-only model, alongside recommendations to clarify the $150,000 compensation cap and increase the scheme's ability to recover funds from third parties, is viewed by the CSLR as essential for long-term viability and for reducing the burden on honest firms paying the annual levy.

What else does the CSLR want to change?

Other recommendations made to the government in the PIR include:

• P&I insurance requirements: Mandate AFS licensees to hold adequate Professional Indemnity (PI) insurance, ensure coverage scales with firm size, and require insolvency administrators to access PI to settle AFCA claims. Enhancing PI coverage aims to reduce firm failures and the volume of claims to the CSLR.

• Varying compensation caps: Give the Minister authority to adjust compensation caps for specific claimants or firm failures, as “significant” events occur every two years and “major” events every four years, often exceeding sub-sector levy caps.

• More time for special levy decisions: Allow earlier ministerial notification and a defined decision period to reduce the 12–18 month delay in receiving special levy funds.

• Reviewing capital reserves: Increase the $5 million reserve through actuarial assessment, a government-backed line of credit, or a government-funded reserve to cover higher claim volumes and operational costs, ensuring timely compensation.

• Avoiding double dipping: Shift the $150,000 compensation cap to a beneficial entitlement basis to prevent a single individual from receiving multiple caps across different claims.

• Introducing new regulations: Allow CSLR to reduce compensation payments when claimants have received funds through other channels, including class actions, insurance, or deeds of arrangement, and consider retained assets.

• Expanding subrogation rights: Broaden CSLR’s subrogation powers to recover funds from insurers, partnerships, or individuals, similar to UK and other Australian schemes.

• Ongoing work with AFCA: Provide clearer Ministerial directions to AFCA to streamline processes for large-scale failures with high volumes of similar complaints.

• Changing who can lodge CSLR complaints: Give CSLR the power to exclude certain paid representatives from lodging claims on behalf of clients where criteria are met.

• Streamlining procedure: Improve flexibility and speed in directing compensation, especially when awards involve deregistered companies or wound-up SMSFs, avoiding delays through ASIC’s Unclaimed Monies team.

• Clarifying joint payments: Require all joint holders to apply together, separately, or waive their rights to ensure CSLR does not make duplicate payments.

• Accelerating payments: Give CSLR powers to compel a firm or external administrator to access PI insurance for payments if they cannot pay the full amount immediately.

• Shortening disallowance period: Reduce Parliament’s disallowance period for annual and further levy instruments to 5 sitting days when amounts remain within sub-sector caps.

• Changing the reconciliation process: Allow pre-CSLR levy reconciliation to occur at any time, ensuring all claims are processed before adjustments.

• Changes for deregistered members: Amend regulations so deregistered or ceased members are charged NIL for further and special levies, as with the annual levy.

The release of the CSLR's submission to the PIR was one of several issuances from the body on Monday.

It also released its 2-25 impact report, which includes key metrics and observations from the scheme’s first full 12 months of operation, as well as a new list of all financial firms against which it has made compensation payments since commencing operations in April 2024.

*The full list of financial compensation up until 31 August 2025 shows this has increased to just over $54 million.

[Related: CSLR names and shames companies in new move]