Super Nation is a fortnightly column that examines, explains and analyses key issues in one of Australia's largest, fastest-growing and most important industries: superannuation.
At a time when the Australian Government is on the back foot for introducing and watering down controversial tax changes in the face of growing criticism, it is being asked to contribute funds to an out-of-control compensation scheme.
The call for Canberra to support the Compensation Scheme of Last Resort (CSLR) came from the Joint Associations Working Group (JAWG), on behalf of organisations representing financial advisers, accountants, stockbrokers, licensees, self-managed superannuation fund (SMSF) professionals, investors and financial services firms.
This is relevant for the retirement savings sector super because the JAWG membership includes bodies representing super funds that are worried they may have to kick into a scheme their members cannot benefit from.
It is also significant as one of the few direct calls to put the onus back on taxpayers to help meet the costs of the scheme, which bails out victims of financial misconduct, albeit one made a month after the six-week consultation period ended.
Although submissions about proposed reforms to the CSLR closed on 22 May, the JAWG issued a statement on 22 June.
The JAWG is not alone in arguing the Government cannot simply stand on the sidelines, but few others were bold enough to say the Government should step into the fiscal fold.
An exception was the Association of Superannuation Funds of Australia (ASFA), which, in a submission, called on the Government to contribute funding toward the current, and any future, CSLR shortfall.
This is also effectively the position of the Financial Services Council, another body representing super funds, because it is a member of the JAWG.
If nothing else, they have moved the debate beyond who should pay onto whether government itself should help fund the scheme.
No word from Canberra
This comes at a time as the Albanese Government deals with criticism of its handling of capital gains tax (CGT) reforms announced in the Budget in May, which it watered down after a business and investor backlash over unintended impacts.
Although the planned changes were an attempt to address housing affordability and inequality, the outcry exposed the risk of the ruling Labor Party being portrayed as anti-investment and anti-business.
Azzet approached the Government to comment on how it would respond to this call or the other submissions, but had received no reply at the time of writing.
The media release announcing the start of the consultation in April made no mention of the public purse being opened, which may imply there is no current intention to do so.
But there was also presumably no plan to backslide on the CGT changes.
As costs linked to the $1 billion-plus collapse of the Shield and First Guardian managed investment schemes continue to mount, members of the JAWG have been warning that the scheme is drifting well beyond its original purpose.
The JAWG noted the associations it represented had different individual positions on some reform proposals, but it wished to draw Treasury’s attention to those that had consensus support of opposition.
It strongly supported limiting CSLR compensation to capital losses, which it saw as consistent with the concept of a scheme of last resort to compensate consumers for hypothetical investment returns.
It also agreed with:
- enabling the CSLR to deduct from compensation payments amounts recovered through external dispute resolution processes, insolvency proceedings, insurance arrangements and other sources of redress
- expanding the CSLR's rights to improve the prospects of funds being returned to the scheme, reducing the burden on levy-paying entities; and
- Treasury exploring mechanisms to improve the recovery of unpaid determinations by the Australian Financial Complaints Authority (AFCA).
Role seen for government
But one of the JAWG’s key statements was arguably this: “Given its role in setting, maintaining and enforcing the regulatory framework, the JAWG also believes the Government should share some responsibility for funding the foreseeable CSLR special levies.”
Although the super industry cannot agree on who should pay for the CSLR, submissions to Treasury suggest a growing consensus that the government itself should play some sort of role.
They just differ on what that role should be.
The concept behind the CSLR was simple: consumers denied compensation awarded by AFCA because a firm had failed would have access to a limited safety net.
It was never intended to become a broad compensation vehicle funded indefinitely by sectors that had no involvement in the original misconduct.
As the costs have ballooned due to collapses even before Shield and First Guardian, the industry has grown increasingly frustrated.
Advisers who never recommended dodgy products, super funds that had no exposure to the schemes and financial firms with no connection to the collapses were being asked to contribute.
This is where the place of Government comes in because it designs the regulatory architecture, appoints and funds regulators, and establishes the legal framework under which financial products are issued, distributed and supervised.
The last word on this for now comes from the Super Members Council.
Although the body advocating for profit-to-member super funds, including the giant industry funds, did not directly call for the Government to pay for compensation, it argued Canberra must:
- use its regulatory powers to prevent consumer harm in the first place
- change rules to limit compensation to capital lost due to misconduct
- allocate costs to ensure those who caused the problems pay for them
- make SMSFs pay the levy if they remain eligible to claim compensation, and
- introduce a related-entity liability mechanism to prevent businesses from avoiding responsibility by structuring activities across multiple entities.
