Rising claims linked to failed financial products have increased pressure on the Compensation Scheme of Last Resort (CSLR), with the Insurance Council of Australia (ICA) calling for structural changes to secure the scheme’s future.
In a submission to Treasury on its consultation into the use of professional indemnity insurance to meet compensation claims, the council said reform must focus on the root causes of losses.
“We want to see a CSLR that works for consumers over the long term. That means tackling the underlying causes of claims rather than shifting costs around the system,” ICA chief executive Andrew Hall said.
The council argues that professional indemnity insurance is not suited to the types of claims now flowing into the CSLR. Such policies are designed to cover negligence by professionals. They do not cover fraud, criminal conduct or systemic failures, which account for a significant share of CSLR claims.
According to the submission, broadening professional indemnity cover to capture those risks would not fix the funding gap. Instead, it would move costs elsewhere in the system and add to premiums.
The CSLR was introduced in April 2024 to ensure consumers receive compensation when a financial firm fails and cannot pay an award from the Australian Financial Complaints Authority (AFCA). Under current rules, it can pay up to $150 000 per eligible claim for matters such as personal financial advice, credit intermediation and securities dealing.
Since commencing operations, the CSLR’s funding model has been under strain. Treasury has had to impose a $47.3 million special levy for the 2025–26 year after the financial advice subsector hit its levy cap, and early estimates suggest future levies could exceed $100 million.
Identifying managed investment schemes as the main source of CSLR claims, ICA is calling for stronger regulatory oversight. It suggests considering an ASIC-approved list of products that can be distributed to retail investors.
ICA also proposes narrowing how compensation is paid. The submission recommends limiting CSLR payments to actual capital losses and introducing means testing so support is directed to those most in need.
Another recommendation is to review minimum professional indemnity coverage limits, which have been largely unchanged since 2008, to ensure they reflect current market conditions.
“Professional indemnity insurance is fundamentally the wrong instrument for the problem at hand. Better regulation of high-risk financial products, a more targeted Scheme, and stronger enforcement of existing professional indemnity requirements are the reforms that will make a real difference,” Hall said.
ICA said it will continue working with the Government and Treasury on reforms aimed at improving the CSLR’s long-term financial sustainability. The full submission has been published on its website.
