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By Jason Spits, Senior Journalist, selfmanagedsuper
If you have been tracking the history of the Compensation Scheme of Last Resort (CSLR), you will have seen that what was proposed as a consumer protection measure has morphed into a scheme where every failure is now parked with the expectation that someone else will pick up the tab.
Many of those currently being forced to dig deep are financial advisers and planners who have recently received their latest assessments for their contribution to the scheme. That mandatory contribution has blown out again due to an ongoing string of failed investment schemes that started with Dixon Advisory and was followed by United Capital Group and then the Shield and First Guardian master funds.
Knowing this was going to happen, the federal government announced a review of the CSLR, acceding to a request from the financial advice sector, which also called for the load to be shared among other sectors until the issue of funding could be sorted out.
While that request has not been followed up, the government has released a consultation paper. This document puts forward suggested measures to address the phoenixing of failed entities that have skipped out on their obligations to consumers and the CSLR, and the inclusion of managed investment schemes, which are often the underlying source of the failures being sheeted home to the advice sector.
While these changes will go some way to addressing problems with the funding and operation of the CSLR, it is an additional proposal to consider a levy on self-managed superannuation funds (SMSF) that is of genuine concern.
Proposal six of the paper is titled “Considering responses to the role of SMSF losses in reducing pressure on the CSLR” and puts forward the inclusion of SMSFs within the CSLR special levy framework as a subsector, and funds that choose to opt out of paying that levy would become ineligible for any future compensation through the scheme.
To justify this proposal, the government stated SMSF complainants accounted for around 93 per cent of all paid and pending CSLR cases.
Now keep in mind this is a paper presumably written, but at least released, by Treasury, and that fact is important because the proposal suggests superannuation and SMSFs are a failure point that led to investors in Dixon Advisory, United Capital Group, Shield and First Guardian heading to the CSLR.
The failure of these schemes was the underlying investment, that is, the managed investment schemes that are currently not covered by the CSLR, and not the vehicle by which people accessed them. It is similar to blaming a brokerage account for the decline in value of a stock or the poor performance of a listed company due to mismanagement.
The problem with the CSLR and its blowout costs is not whether SMSFs or any superannuation vehicle should be included in the scheme, which was an idea floated earlier this year, but that some product providers and advice firms that funnelled people into poor products are able to dodge their moral and financial responsibilities to clients, often to the tune of millions of dollars.
It is also concerning a paper from Treasury cannot make the distinction between underlying causes of failures and legitimate investment vehicles, which in the case of Shield and First Guardian also included superannuation investments on retail platforms and those made by large profit-to-member super funds.
A further implication from this paper is that fault lies with some superannuants due to the way they chose to invest rather than the practitioners who advised them to do so. More than a dozen of those advisers are now subject to banning orders from the Australian Securities and Investments Commission, whose job it is to watch over and prevent such advice and investment schemes from reaching consumers.
It is said success has many parents, but failure is an orphan. The CSLR was introduced into parliament under the previous coalition government, but passed under the current Labor government, which quickly walked away from commitments to fund its initial operations.
It has since morphed into something that has outgrown its original intent – a scheme of last resort – resulting in increasingly desperate measures to feed it rather than contain it.
Looking to the superannuation sector, or any part of it, as a source of funding would be a quick fix that feeds this problem child for a time, but doesn’t deal with its growing appetite, nor does it commit to the hard yards needed to fix the scheme and extract compensation from those responsible for product failures.
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