Addressing the Long-Term Viability of the Compensation Scheme of Last Resort
The Insurance Council of Australia (ICA) has formally advocated for a comprehensive structural overhaul of the Compensation Scheme of Last Resort (CSLR). In a detailed submission responding to the Treasury’s recent options paper, the industry body warned that implementing new revenue mechanisms alone will be insufficient to ensure the scheme’s ongoing sustainability.
The urgency for reform stems from rising financial projections. According to the CSLR operator, projected costs for the 2026-27 period are expected to exceed A$137 million (approximately US$98 million). Of this significant figure, roughly A$127 million is attributed specifically to the financial advice sector.
Key Proposals for Reform
As these costs threaten to exceed the annual levy caps for individual sectors, the Treasury has proposed expanding levies to cover a broader range of the financial services industry. The ICA, however, strongly opposes including the general insurance sector in these levies, arguing that it has no connection to the complaints currently driving the scheme’s costs.
The ICA’s recommendations for stabilizing the scheme include:
- Limiting compensation: Capping eligible compensation at actual capital loss rather than incorporating hypothetical scenarios, which the council believes will reduce the volume and scale of disputes.
- Funding alignment: Adhering to the principle that funding obligations should match the causation of misconduct.
- Preventing cross-subsidization: Ensuring that sectors unrelated to specific complaints are not forced to subsidize the costs of others.
- Consumer protection: Maintaining the CSLR’s core identity as a genuine “last resort” mechanism.
The Impact on Policyholders
A primary concern for the ICA is the potential financial burden placed on consumers. Because consumers currently cannot access the CSLR for general insurance-related complaints, the council argues that imposing a special levy on general insurers would be inherently unfair, as these costs would inevitably be passed on to policyholders in the form of higher premiums.
“The CSLR plays an important role in protecting consumers harmed by financial misconduct and keeping it sustainable means addressing the conduct that drives claims rather than relying on repeated levies,” said Kylie Macfarlane, Deputy CEO of the Insurance Council of Australia.
Macfarlane emphasized that the most equitable approach involves holding the specific sub-sectors responsible for misconduct accountable for funding the necessary compensation, while simultaneously enacting reforms that better ensure firms meet their professional obligations from the outset.
By shifting the focus from revenue-generation to addressing the underlying drivers of claims, the ICA believes the CSLR can be positioned to better protect consumers while remaining financially viable for the long term.
