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.
Lobbying is well underway to see who will be responsible for funding the scheme that compensates Australians who lose money due to bad financial advice or product failures.
The competition among advocates is to be excluded from (rather than included in) the finance sub-sectors that pay levies supporting the Compensation Scheme of Last Resort (CSLR), which pays up to $150,000 to compensate consumers with unpaid determinations from the Australian Financial Complaints Authority.
This is not a club you want to join if you can avoid it.
The super industry has been ensnared in this issue for the first time, with members having to help foot the bill for a special levy the Assistant Treasurer Daniel Mulino has introduced to meet a funding shortfall for 2025-26.
A special levy may be imposed if the levy estimate amount exceeds the $20 million sub-sector cap, which was the case for the year in question.
The $47.3 million levy will be split between financial advisers (22%), credit providers (15.3%), responsible entities (13.7%), superannuation trustees (12.9%) and all other ‘retail facing’ sub-sectors (<10%).
Critics line up
But the major issue going forward is whether the scheme should be extended on a permanent basis from financial advisers to super funds regulated by the Australian Prudential Regulation Authority (APRA), self-managed super funds (SMSFs) and even managed funds.
At a news conference in December before hosting a roundtable to discuss CSLR funding, Mulino said he expected that making SMSFs contribute would be “one of the issues that we’ll consider”.
The temptation for the government to go broader is strong, given the size of these other sub-sectors, which must look like honey pots.
The super industry had funds under management of $4.3 trillion at 30 June, of which APRA-regulated funds had $3.1 trillion, SMSFs had $1.1 trillion, and managed funds had $2.7 trillion.
Their scale dwarfs many of the parts of the financial services industry responsible for funding it since June 2024, such as personal advice licensees, credit intermediaries and securities dealers, many of which are small businesses without the scale of super or managed funds.
The exceptions are the major banks, which may also fall into the credit/credit provision category and are clearly huge.
The underlying problem stems from investment losses suffered by Australians in scandals like the Shield and First Guardian master fund collapses, which have cost fund members about $1 billion.
Those in the government’s sights for contributions are not happy, with the peak super body, Super Members Council (SMC), claiming it would “embed and escalate moral hazard”.
The peak body representing industry, public sector and corporate funds argued a clear principle of the CSLR was that the part of the financial services system causing consumer harm should bear the cost of misconduct, which was clearly a reference to the financial advice sector.
“It would be a major breach of that key principle to ask 12 million hard-working Australians who put their super into the safety of highly regulated profit-to-member funds to pay into the scheme,” the SMC said in a blog.
Also lining up in opposition is the SMSF Association, whose CEO Peter Burgess said he did not support a levy on any super funds, noting the levy could be imposed on his members without a change in the law.
“These funds will never be in a position to benefit from this scheme. SMSF trustees are not the cause of the misconduct or the product failures,” he told Azzet.
Burgess urged the Government to impose the levy on managed investment schemes because some investment losses arose from the failure of the products they sell.
“We have seen product failures. We think it’s appropriate for them to be supportive of the scheme,” Burgess said.
He also believed it was unsustainable for the vast majority of the impost to be on financial advisers, whose peak body, the Financial Advice Association Australia (FAAA), has pointed out that most of its members were small, privately-owned firms with very limited capacity to absorb extra costs.
Not surprisingly, the organisation representing managed investment schemes, the Financial Service Council (FSC), also lined up on the other side of the government.
FSC CEO Blake Briggs said spreading the special levy across all retail-facing sectors, including managed investment schemes (MISs), was the most equitable approach.
This aligned with the FSC’s long-held view that responsibility for paying a special levy should not fall on one sub-sector.
But he insisted the CSLR should not be expanded permanently to include MISs within its funding and eligibility base.
“The scheme was never intended to underwrite investment losses, and embedding MISs on an ongoing basis would entrench moral hazard and expose the scheme to volatile and unsustainable liabilities, especially in a GFC-style event,” Briggs told Azzet.
"Urgent design changes are needed to bring the cost of the scheme down to sustainable levels including means testing, removing compensation for hypothetical gains, reducing administration costs, and allowing recovery from at fault parent companies.”
Engagement continues
This at a time when the Government is engaging with industry about ways to make the CSLR more sustainable, with submissions on the Enhancing the effectiveness of financial service professional indemnity consultation paper being sought by Treasury until 13 February.
One long-time super industry observer believed SMSFs and managed funds would not be tapped for future funding, nor would the responsibility be left with financial advisers, because the exploding costs could threaten their viability.
“I think at the end of the day, super funds will probably end up paying more than their share of the costs because the Government isn’t prepared to bite the bullet,” he told Azzet.
“They’ll scream bloody murder but they have the capacity to pay.”
