Op-Ed: Your super is footing the bill for someone else’s gamble

This opinion was first printed in the the Australian Financial Review

When an investment goes wrong, who bears the loss? The question seems straightforward. Investor responsibility and the principle of caveat emptor (or “let the buyer beware”) certainly have their place. Yet when misconduct or breaches of standards occur in financial services, Australians should rightly expect those responsible to pay.

The real difficulty arises when the party responsible for the misconduct – be it a financial adviser, firm, or product provider – collapses, becomes insolvent, or simply cannot pay.

The Federal Government’s Compensation Scheme of Last Resort, which began operating in April 2024, was designed to address exactly that scenario.

The CSLR was conceived as a genuine last resort for victims of financial misconduct, paying up to $150,000 per eligible claim where the Australian Financial Complaints Authority rules misconduct and the responsible party is insolvent or unable to pay. The scheme covers personal financial advice, securities dealing, credit intermediation, and credit provision.

The scheme shares the cost of these unpaid claims to designated sectors across the financial services industry.

This invites a complex question: if the responsible party cannot pay, under what circumstances should we be asking the shareholders and owners of law-abiding entities to pick up the bill for the misconduct of others?

The escalating moral hazard inherent in this scheme is that compliant entities, which are meeting their regulatory standards, are effectively underwriting those who do not.

The banking sector, through the Australian Banking Association, has long advocated for a genuine scheme of last resort that compensates victims when they have suffered actual financial loss due to misconduct.

“The CSLR needs to be urgently redesigned into a genuine scheme of last resort, or its very sustainability will be at risk.”

However, it is clear that the current scheme is not operating as it was intended and needs to be changed for the sake of fairness and ensuring investors are supported for the right situations, but not as a wicketkeeper for undue risks being taken.

A particularly pressing issue is the current approach to compensation, which extends beyond actual capital losses to include unrealised profits or hypothetical gains. While well-intentioned, this transforms the CSLR into an underwriter of high-risk investment outcomes. Limiting payouts to verifiable losses only would better align the scheme with its last-resort intent and help contain spiralling costs.

Consistent with the enabling legislation, CSLR administrators explicitly state on their website that “we don’t cover certain financial services and products, including managed investment schemes”. Yet claims related to losses in managed investment schemes are entering through the back door by being attributed to failures in the financial advice that exposed investors to these products. This is driving a massive surge in claims.

In 2024, Australia’s 10 largest financial institutions (mainly banks and insurers) contributed $241 million to cover claims dating back to 2018. New claims are escalating rapidly: $24 million last financial year, $76 million this year, and projections likely exceeding $137 million for next year.

Superannuation funds are now being drawn in alongside banks, insurers, and advisers to help fund these rising costs.

It is true that many of these entities deal in big dollars, but those dollars belong to everyday Australians: innocent super fund members saving for retirement and shareholders who have done nothing to cause these losses. Good financial advisers face higher levies because of bad ones, in a sector already struggling to provide accessible advice to many Australians.

This is a wicked problem, but Assistant Treasurer Daniel Mulino deserves credit for acknowledging it and beginning to confront it head-on. His task is to deliver solutions before too many people pay too much more for the sins of others.

The minister’s reform agenda focuses on three key areas: strengthening professional indemnity insurance for advisers, improving regulation of high-risk products driving the losses, and creating a fairer regime for CSLR payouts and funding. The last two are especially urgent.

Win-win territory

Stemming the flow of claims through more stringent regulation of sectors that demonstrably pose significant risk to investors is win-win territory. This is especially so in the managed investment schemes sector, given the recent losses experienced by Australians.

The aim should always be to stop the losses, so long as the means to doing so don’t stifle necessary innovation and legitimate risk-taking. MIS should also be either clearly included or firmly excluded from the CSLR. There should be no back door for them to be introduced through financial advice claims.

If MIS remain outside the CSLR, as is currently intended to be the case, stronger disclosure and clear risk warnings should be required to enable fully informed choices, recognising that higher potential returns often come with greater risks. If a return looks too good to be true, it probably is.

If included, then the sector generating the losses – MIS themselves – should bear the primary funding responsibility for those losses, which are mostly being incurred within self-managed superannuation funds.

In addition to ending compensation for unrealised profits as well as lost capital, CSLR also needs to stop allowing people to make multiple claims from multiple entities. If you have multiple entities, then surely you warrant treatment as a more sophisticated investor.

Better target compensation

Consideration should also be given to better target the payment of compensation towards those for whom compensation is necessary for their financial security and wellbeing.

The CSLR was intended to give a basic, last resort protection to mum and dad-type investors. The CSLR should not be a collectively funded vehicle for removing investment risk from society. Nor should it operate as a large penalty on financial service providers that are meeting their obligations.

The CSLR needs to be urgently redesigned into a genuine scheme of last resort, or its very sustainability will be at risk.

ABA CEO Simon Birmingham

Compensation Scheme of Last ResortCSLROp-edSimon Birmingham