Australia's Compensation Scheme of Last Resort was designed as a genuine safety net for victims of financial misconduct — but the Australian Banking Association is warning the scheme is heading toward a funding crisis if structural reform is not addressed urgently.
In a submission to Treasury, the ABA revealed the CSLR operator's initial cost estimate for 2026–27 has reached $137.5 million, with $126.9 million of that attributable to the personal financial advice sub-sector alone.
That figure does not yet account for potential liabilities flowing from the Shield Master Fund and First Guardian Master Fund collapses, which could add anywhere from $70 million to $880 million depending on claim volumes and recoveries.
The scale of the problem is driven significantly by one source: self-managed super funds. As of 28 February, SMSF-related cases account for approximately 93.1% of all paid and pending CSLR cases, representing around $154.14 million in compensation. The average SMSF-related payout of $130,186 is nearly double the $75,980 average for non-SMSF complaints.
The ABA's clear position is that SMSFs should be excluded from CSLR eligibility entirely, given their nature as self-directed vehicles where trustees assume direct control over investment decisions.
Beyond the SMSF question, the ABA has put forward a series of structural reforms aimed at bringing the scheme back to its intended purpose. A capital loss-only approach to compensation — limiting payouts to what claimants actually lost rather than what they might have earned — would reduce CSLR outlays by approximately 43% across sampled cases, according to modelling cited in Treasury's options paper.
The ABA also wants stronger subrogation rights to allow the scheme to recover costs from parties connected to the underlying misconduct, and a related-entity liability mechanism to prevent corporate groups from stripping value from insolvent entities while leaving AFCA determination liabilities unpaid — a situation the Dixon Advisory collapse brought into sharp focus.
The push for reform is not coming from banks alone. The MFAA has made similar arguments, arguing that the scheme's funding design needs to more closely follow the source of consumer harm.
Alongside the levy debate, the ABA is pushing for tougher action on a separate but related problem.
On the lead generation front, the ABA is calling for licensing of higher-risk lead generation activity and stronger ASIC enforcement powers, while pushing back against further extensions to the anti-hawking framework. The existing prohibition is already sufficiently restrictive, the submission argues — the real problem lies in business models designed to operate at its margins.
"Legislative reform alone will not be sufficient," the ABA submission states. "Effective supervision and enforcement by ASIC will be critical, particularly in relation to lead generators and related entities that engage in misconduct or facilitate harmful conduct, especially in relation to higher-risk products and superannuation."
The ABA is also urging that any reforms be carefully calibrated to avoid capturing legitimate referral activity — a point that will resonate with mortgage brokers whose client referral models could otherwise be drawn into scope.
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