AIOFP – CSLR – MORE INCONVENIENT TRUTHS

The Compensation Scheme of Last Resort [CSLR] should be a concept that is well received and accepted by all market stakeholders to protect Consumers. Unfortunately it is not, CSLR would have to be the most heavily politicised and commercially dangerous piece of legislation in our Profession’s history.

Like most controversial proposed legislative, it starts life as a commonsense approach, but the political antagonists get involved with their own objectives, and it quickly turns into a dishevelled conflicted mess of self – interested and unfair outcomes for many.

CSLR emerged out of the Ramsay Review, theoretically modeled on the United Kingdom’s regime but was subsequently severely distorted by a particular stakeholder’s lobbyist to suit their objectives in 2024.

Once you analyze the circumstances and sprinkle some ‘self interest dust’ on the carcass, the ‘lobbyist engineer’ is easily identified, and a INCONVENIENT TRUTH is exposed.

Fundamentally, CSLR is designed to settle AFCA consumer determinations where the targeted party cannot pay. The most common instances are Financial Advisers getting caught with a Product failure/fraud, their business is destroyed, they are subsequently stripped of all assets, bankrupted and CSLR pays the consumer. CSLR should then levy all industry stakeholders to fund the process.

The funding of the UK CSLR equivalent captures all stakeholders with the levy, something the Ramsay Review recommended in 2017. Inexplicitly in 2024, the ‘lobbyist engineer’ was able to convince Treasury Bureaucrats and the Ministers office [which employs  former Treasury Bureaucrats] that Managed Investment Scheme’s [MIS] should NOT be included in the CSLR Levy and this exemption was actually written into 2024 CSLR Legislation.

Considering MIS are close to 100% of all Product failures over the past 20 years, many ask how can they possibly be excluded?

Currently the Minister is mulling over whether to include MIS in the CSLR Levy which will need a change of Legislation, the real question should therefore be –

• ‘HOW CAN YOU JUSTIFY NOT INCLUDING THEM?’ – which demands a comprehensive response.
• rather than ‘SHOULD THEY BE INCLUDED?’ – which may produce a yes or no response.

Considering the majority of MIS’s are built, owned and managed by the Financial Institutions you don’t need too much imagination to work out that the Institutionally funded  Associations have been working hard in Canberra over the recent years to get this CSLR exemption outcome.

What other stakeholders would NOT want Financial Institutions to be held to account for the performance and failure of their own MIS? Not Advisers, certainly not Consumers it can only be the Financial Institutions themselves through their brilliant Association – the FSC.

We have the greatest respect for the FSC, they are well funded by the Financial Institutions, their Board comprises the Leaders from the Institutional space and have delivered numerous pieces of Legislation over the years. In fact their Honor Board of achievement is impressive –  FASEA, Grandfathered Revenue ban, ridiculous compliance, CSLR and of course LIF [which cost them the defection to CALI by Life Insurers].

Unfortunately these outcomes are all in favour of the Financial Institutions and the Adviser Profession has suffered immensely. The only reason FSC wants Financial Advisers in their membership is to use their political capital with Canberra to justify acting on behalf of the Adviser Profession because they have ‘Advisers in their membership’.

Considering the Institutions dominate the FSC Board and its funding, why do Advisers want to give their political capital to the FSC and as recent history reveals, to be ultimately used against Advisers best interests.

It does not make political or commercial sense.

CSLR strategy – if the MIS are excluded from the CSLR Levy we will implement the following action –

In the past we have sought high level legal advice on the constitutional validity of the CSLR and whether a High Court challenge is viable. The response was theoretically achievable  because a Levy is a TAX and it should not be targeted at a specific cohort in society, but the High Court rarely rules against a Government revenue source. Fundamentally it is therefore not viable to pursue High Court action.

Our best course of action however is through the Federal Court based on the unfairness of MIS getting a carve out, see below comments from Professor Mark Bowler – Smith a Harvard trained International Law expert and former London based Financial Adviser working at Deakin University in Melbourne.

If Government gives MIS special treatment, I wouldn’t frame the response as simply “the CSLR is unconstitutional”. That is too broad and, in my view, too easy for Government to dismiss.

The stronger approach would be to say that any MIS exclusion or carve-out must be legally justified, evidence-based and procedurally defensible. If Government grants preferential treatment to one part of the financial services sector while leaving advisers exposed to the levy burden, the first step is to require written reasons, the evidentiary basis for the distinction, and disclosure of the policy criteria used to separate MIS losses from adviser-related CSLR liabilities.

If those questions are ignored, the next legal step would be to explore a targeted challenge to the actual decision or instrument that gives effect to the MIS exclusion. Depending on how the exclusion is implemented, that could involve judicial review of the relevant ministerial, Treasury, ASIC or CSLR-related decision, or a challenge to the validity of the legislative instrument or levy determination. The likely grounds would not be “unfairness” in the political sense, but legal grounds such as irrelevant considerations, failure to consider relevant matters, irrationality/legal unreasonableness, improper purpose, inconsistency with the statutory scheme, or unequal treatment lacking a lawful basis.

The key point for members is this: if MIS receives special treatment, AIOFP should not merely complain about the politics. We should immediately ask: what is the legal source of the carve-out, what reasons support it, what evidence was relied on, and whether the decision can be challenged in the Federal Court. A carefully chosen test case may not only challenge the exclusion itself, but also force public scrutiny of how the CSLR burden is being allocated across the sector.

So the practical position is: ask the direct questions first; demand reasons and documents; identify the instrument or decision; then brief counsel on a targeted Federal Court challenge.

Professor Mark Bowler – Smith

The Canberra Bureaucrats chose to ‘stare’ everyone down over the profoundly conflicted Dixon manipulation where only the failed Dixon product received CSLR favourable retrospective treatment over another 170 failed products since 2007.

WHY? The DIXON business and client base was Canberra centric with a number of high ranking Bureaucratic Dixon clients who lost personal savings in the Dixon product failure.

We have come to the conclusion that carving out MIS from the CSLR Levy can only be recommended by those Bureaucrats/Lobbyists who are either –

• Incompetent,
• Corrupt
• Trading/negotiating  other political outcomes at the expense of Consumers.
• Working for the Financial Institutions.

This issue should not be treated as a minor skirmish by the Adviser Profession, this must literally be a fight to the death otherwise the Profession will be mortally wounded.

The future CSLR liability projections are frightening where –

• the cost will be handed onto to clients,
• the cost of advice will substantially increase.
• practices will fail.
• why would any new entrants even consider joining the Profession?

As already stated, if MIS gets a carve out from the CSLR Levy the AIOFP will be implementing Professor Bowler – Smith’s recommendations on behalf of the Adviser Profession.