The Mortgage and Finance Association of Australia (MFAA) has welcomed the government’s reforms to the Compensation Scheme of Last Resort (CSLR), saying the changes will make the scheme fairer and more sustainable.
The reforms — which were announced by Assistant Treasurer and Minister for Financial Services, the Hon Daniel Mulino, during a speech at the National Press Club in Canberra on Wednesday — aim to better align CSLR costs with the sectors responsible for losses, compensate genuine direct losses, recover money from those responsible first, reduce administration costs and spread exceptional costs more fairly across the financial industry.
"The minister's address today was a positive signal that government is looking across the financial services ecosystem at both how we prevent consumer harm in the first place and how consumers are protected when things go wrong," MFAA Executive Policy and Legal Naveen Ahluwalia, who was on ground in the Australian Capital Territory (ACT) for the speech, told Australian Broker.
Concerns about the CSLR intensified following the 2024 collapses of the Shield Master Fund and First Guardian Master Fund, which drove a sharp increase in expected CSLR costs.
The CSLR’s FY2027 initial levy estimate highlights the significant gap between the sectors. Mortgage brokers, which are classified as credit intermediaries, are expected to face a levy of $2.156 million, despite generating only 15 complaints and 10 anticipated claims. The personal advice sector, meanwhile, is set to carry a $126.851 million bill, or roughly 92% of the total.
The MFAA has been advocating for reforms on behalf of mortgage and finance brokers since as early as May, when it participated in a roundtable convened by Mulino, alongside the Australian Securities & Investments Commission (ASIC), Australian Financial Complaints Authority (AFCA), Australian Prudential Regulation Authority (APRA), Treasury and other industry bodies, representing banking, insurance, superannuation and financial advice.
At the centre of the MFAA’s concerns has been the fairness and sustainability of the CSLR. Mortgage brokers have historically recorded relatively few complaints, yet have been required to help fund compensation arising from misconduct in other parts of the financial services system.
"For mortgage and finance brokers, the CSLR reforms are particularly important," Ahluwalia said. "Brokers have an exceptionally low claims profile under the scheme, yet have faced the prospect of contributing to significant losses generated elsewhere in financial services. We welcome the government recognising that the system needs greater accountability, with a stronger connection between where consumer harm occurs and where the responsibility for that harm ultimately sits.
“More broadly, we support the focus on addressing harmful practices earlier," she continued. "Strengthening oversight of lead generation and tackling practices that expose consumers to harm before they ever reach a regulated professional are important parts of protecting consumers and maintaining trust in financial services."
MFAA Chief Executive Officer Anja Pannek described the reforms as "an important step forward."
"We are pleased to see key principles the MFAA has consistently advocated for now reflected in the government’s reforms," Pannek said. "We have been clear throughout our engagement with the government that we strongly support the CSLR’s role in protecting consumers. But consumer protection and funding fairness are not competing objectives. A sustainable scheme needs both."
The CEO added that the CSLR needed a fairer approach to distributing costs across the financial services industry, arguing that businesses should not be forced to shoulder significant costs for losses they had no role in creating.
"Businesses doing the right thing should not be required to disproportionately fund significant failures occurring elsewhere in the financial services system," Pannek said. "In particular, we have advocated for a more predictable and equitable approach to exceptional losses, where funding responsibility better reflects the sectors responsible for, or connected to, the underlying harm.
"The government’s new waterfall approach represents important progress towards that principle," she added. “The move towards stronger recovery mechanisms and compensation based more closely on direct financial loss also responds directly to issues the MFAA has raised through the reform process."
The CSLR is a government-funded safety net that provides compensation to eligible consumers who have suffered financial loss due to misconduct by a financial services firm, but have been unable to recover the money awarded to them through the Australian Financial Complaints Authority (AFCA), typically because the firm has become insolvent. The scheme can provide eligible consumers with up to $150,000 in compensation, subject to the scheme’s eligibility requirements and limits, and is funded through levies on parts of the financial services industry.
Reforms include:
• A more predictable, rules-based framework for exceptional losses, with greater recognition of the connection between sectors and the losses giving rise to compensation.
• Reform of compensation settings, moving away from counterfactual “but for” losses and towards compensation based on direct financial loss.
• Stronger recovery mechanisms, so greater efforts are made to recover funds from those responsible before costs are passed to levy-paying businesses.
• Measures to improve the efficiency and operation of the CSLR, helping contain the costs ultimately borne by industry.
• A broader and more equitable funding base for exceptional losses, with contributions under the special levy waterfall more appropriately reflecting the capacity of relevant sectors to contribute.
• The government will also broaden the funding base for future exceptional losses, including self-managed super funds (SMSFs) as Tier 3 levy payers under the special levy waterfall, with contributions scaled relative to assets under management.
“Mortgage and finance brokers operate within a strong regulatory framework and play an important role in helping Australians navigate complex and significant financial decisions," Ahluwalia said. "It is important that reforms continue to support access to trusted guidance, competition and choice while targeting misconduct where it occurs."
