Government puts forward 8 proposals to tackle CSLR funding crisis

A third looks at targeted, technical, and structural reform options for reforming the CSLR.

Under the current model, a maximum levy of $20 million can be applied to an individual subsector to fund claims - however, due to the collapse of a number of financial advice companies – including Dixon Advisory and UGC – these limits have been inadequate.

As a result, a special levy of $47.7 million is needed to cover the shortfall in the financial year 2026, blowing out to an estimated $106,851,002 in FY27.

This is because the costs for 2026–27 are estimated to be around $137.5 million, with $126.9 million attributable to the financial advice sub-sector. But this does not yet account for potential liabilities from the Shield and First Guardian collapses.

If Shield and First Guardian cases are included in a revised FY27 estimate, around $125 million of additional costs could be included. This would increase the personal financial advice funding cost from $126.9 million to over $250 million. But as the total amount levied cannot exceed $250 million, it is expected that the excesses would need to be rolled over into future years.

A consultation was undertaken earlier this year seeking feedback on how this levy shortfall would be funded. Submissions from the broker associations urged the government not to apply the special levy to mortgage brokers;

The government has now put forward eight proposals to improve the viability of the funding sources for the CSLR.

1. Deducting Payments from Compensation Enables the CSLR to deduct amounts a claimant may receive from other sources (such as class action settlements, insurance payouts, or liquidation distributions) from their CSLR payment. This ensures consumers don’t "double dip" and the scheme only pays the net loss.

2. Expanding Subrogation Rights Strengthening the CSLR’s power to "step into the shoes" of the claimant to pursue wrongdoers. This includes the ability to claim against the Professional Indemnity (PI) insurers of failed firms and extending recovery rights to individual or partnership members, not just large corporations.

3. Technical Improvements A suite of operational fixes, such as allowing compensation to be split across multiple bank accounts (useful for separated couples), aligning levy disallowance periods with ASIC’s 5-day window to speed up payments, and ensuring firms that exit a sector aren't unfairly hit with "zombie" levies.

4. Revising the Treatment of Counterfactual Loss The most significant change for consumers. It proposes limiting compensation to actual capital loss only. Currently, CSLR payments reflect the full AFCA determination, which often includes "lost opportunity" (what the customer would have earned) or continuing to include a counterfactual component, but the rate of return used when calculating the counterfactual position would be limited to a prescribed benchmark. This proposal explores removing that interest or using a lower, standardised benchmark like Consumer Price Index or the 10-year government bond rate.

5. Embedding a Special Levy Waterfall Creates a predictable, three-tiered "waterfall" for when costs exceed the $20 million cap:

6. Treatment of SMSF Losses Addresses the fact that SMSFs are the primary users of the scheme but don't pay the levy. Options include creating an "opt-in" levy for SMSFs to maintain eligibility or excluding SMSFs entirely from the scheme to reduce overall funding pressure.

7. Levying Managed Investment Scheme (MIS) Losses Considers how to apply special levies to the MIS sector. It explores a broad-based levy on all schemes or a "risk-informed" approach that exempts lower-risk, highly liquid MIS products (like those following the EU's UCITS standard) from contributing to the costs of higher-risk failures.

8. Recoveries within Corporate Groups Targets "asset shifting" where a parent company lets a subsidiary go bust to avoid AFCA determinations while keeping the profitable parts of the business. It proposes a related-entity liability mechanism to claw back compensation costs from solvent entities that benefited from the failed firm’s activities.

Introducing a ‘waterfall’ model

Under the proposed "waterfall" framework (proposal 5), the government aims to move away from the current ad-hoc method of spreading costs across the industry based on "regulatory effort." Instead, future shortfalls would be allocated based on a sub-sector’s "connection" to the underlying losses.

For example, if the levies were apportioned based on regulatory effort, credit intermediaries would be responsible for $1.5 million (1.41 per cent of the total). (To date, credit intermediaries have paid just eight claims totaling $704,530—representing only 0.58 per cent of total compensation paid).

Instead, the waterfall model would be allocated sequentially across up to three tiers, reflecting the relative connection of sub-sectors to the underlying losses.

Tier 1 would be the primary sub-sector, with Tier 2 being the connected sub-sector, and Tier 3 would be the remaining sub-sectors that operate as a defined backstop if any shortfall remains.

Within the special levy framework, the tier caps would be set as:

• Primary sub-sector: up to $20 million (in addition to the $20 million annual levy cap);

• Connected sub-sector/s: up to $40 million per sub-sector;

• Retail-facing sub-sectors: up to $30 million per sub-sector (noting sub-sectors already identified and levied under tier 2 connected would only pay again under this tier if their $40 million annual cap per sub-sector was not reached).

The waterfall model seeks to reflect relative connection without requiring definitive attribution of fault. Under this framework, a sub-sector may only be levied up to an absolute total of $40 million in a levy period.

The options paper suggests that such a model “is intended to provide a more targeted, transparent and repeatable basis for allocating large special levies than reliance on regulatory effort alone”.

The paper reads: “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.

“The framework would also help preserve a clearer link between CSLR-eligible losses and the parts of the financial system that are most closely connected to those losses. To the extent levy costs are passed through to consumers, this would create a price signal that better reflects the risk profile and regulatory obligations associated with particular products or services. In that way, the model would support the broader sustainability objective of the scheme.

“The ongoing inclusion of all sub-sectors within the scheme within the third tier of the waterfall is consistent with the overall policy rationale and shared benefits of the scheme, as its existence provides benefit to the entirety of the financial services sector through its role in supporting ongoing consumer confidence and trust in the financial system.”

Releasing the consultations on Wednesday, Minister Mulino stated: “The paper on the CSLR focuses on options to improve the predictability and structure of funding arrangements, better align the scheme as a mechanism of last resort, and enhance recoveries.”

Mulino has said he will convene a second CSLR and consumer protection roundtable in the coming weeks, to hear directly from stakeholders on the reform options.

“The Albanese Government will consider the outcomes of these consultations and progress a series of targeted, proportionate reforms which appropriately balance consumer protection, the risk of future collapses and the right of individuals to exercise choice in the superannuation system,” he said.

Interested parties are invited to provide responses to the consultation by 22 May 2026.

[Related: Industry demands clarity as CSLR costs soar 82%]