Australia’s general insurance industry is pressing the federal government to pursue root-cause reform of the Compensation Scheme of Last Resort (CSLR), contending that reshuffling who pays the bill does not fix why the bill keeps growing. The Insurance Council of Australia (ICA) made the case in a formal submission responding to Treasury’s options paper on CSLR sustainability. At its core, the submission holds that the scheme’s escalating costs reflect deeper regulatory and structural failures – and that without correcting those failures, any funding fix simply moves expenses around the financial services sector rather than reducing them.
The numbers behind the submission are considerable. The CSLR operator, working with independent actuaries, has put the initial levy estimate for FY2027 at $137.5 million – a figure that covers the processing of 912 claims. Personal financial advice dominates the breakdown, accounting for $126.9 million of the total. Securities dealing contributes $6.5 million, credit intermediation $2.2 million, and credit provision $2.0 million. CSLR chief executive David Berry described the situation as a persistent trend rather than an isolated spike. “The rate and scale of firm failures aren’t slowing. The number of impacted consumers continues to rise, and the proportionate negative impact caused by a relative few remains significant,” Berry said.
The figure carries an important caveat: it does not account for the collapses of Shield and First Guardian, two entities whose potential liabilities remain difficult to quantify. “Right now, there are too many uncertainties to reliably estimate the potential impact of Shield and First Guardian on the scheme,” Berry said, flagging that the revised estimate expected in June 2026 could move higher. Because the personal financial advice sub-sector’s projected contribution far exceeds the $20 million annual cap that applies to any single sub-sector, a revised levy estimate and special levy request are expected to follow July 1, 2026.
The ICA’s submission identifies four principles it wants to anchor any reform:
On the question of who should pay, the submission is unambiguous about general insurance. The ICA argues the sector has no role in the misconduct generating CSLR claims and that its customers have no avenue to use the scheme – meaning any levy on general insurers would amount to a subsidy extracted from policyholders for problems they did not cause and cannot benefit from resolving. Deputy chief executive Kylie Macfarlane framed it directly. “The fairest approach is for the sub-sector responsible for the misconduct to fund the compensation, supported by reforms that ensure firms can meet their obligations in the first place. General insurance customers cannot access the CSLR, so general insurers should not be asked to subsidise losses from other parts of the sector,” Macfarlane said.
The submission also raised the broader insurance affordability context. The ICA’s own flood analysis found that approximately 35% of households in the highest-risk flood locations sit below the poverty line in terms of median income, and that only around 23% of the estimated 225,000 homes in those locations carry flood cover. Against that backdrop, the submission argues that adding costs unconnected to the provision of general insurance risks compounding an affordability problem that already has measurable gaps in coverage.
Treasury’s options paper floats a tiered approach to special levies, and the ICA’s response draws clear distinctions between the tiers it accepts and those it rejects. The submission backs the first tier – placing cost responsibility squarely with the sub-sector whose conduct gave rise to the claims – as the default starting point. It supports allowing that tier to absorb costs beyond existing annual caps, provided those costs can be spread across multiple years to avoid abrupt financial shocks. This approach, the submission argues, keeps accountability with the source of the problem.
A second tier – covering sub-sectors that materially benefited from or contributed to the misconduct – receives conditional support. The ICA says any second-tier designation must rest on clear, evidence-based criteria demonstrating an actual connection between the sub-sector and the conduct at issue. Without that standard, it argues, the tier becomes a vehicle for diluting accountability rather than extending it appropriately. The third tier proposed in the options paper –applying levies to retail-facing sub-sectors holding an Australian Financial Services Licence (AFSL), regardless of any link to the underlying misconduct – receives no support from the ICA. The submission describes a structure in which unconnected sub-sectors face a $30 million levy while the primary responsible sub-sector is capped at $20 million as inequitable on its face. More broadly, the ICA contends this approach would normalise cross-subsidisation, weaken compliance incentives across the sector, and do nothing to address the conditions producing CSLR claims.
Beyond the levy framework, the submission targets how compensation is calculated at the Australian Financial Complaints Authority (AFCA) level before claims reach the CSLR. The ICA supports confining CSLR-eligible compensation to actual capital losses, which would strip out hypothetical or modelled loss figures from AFCA’s determinations. The submission holds that this change would reduce the volume of contested claims and constrain the scheme’s overall cost trajectory.
On professional indemnity insurance, the ICA takes a sceptical view of proposals to give the CSLR operator the ability to pursue recoveries directly from a firm’s PI insurer. The submission notes that a substantial portion of claims the CSLR handles fall outside the scope of PI coverage anyway, limiting the practical benefit of such a mechanism. It also argues the change would loosen the connection between a firm’s own conduct and its financial exposure, reducing incentives for sound risk management.
Running through the submission is a consistent point: that the CSLR was designed as a last-resort mechanism for exceptional circumstances, not as a recurring industry-funded pool that absorbs the costs of foreseeable regulatory failures. The ICA argues that repeated special levies, rather than representing a feature of the scheme, signal that the regulatory settings governing the financial advice sector are not working as they should.
Macfarlane made that connection explicit. “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. We welcome Treasury’s focus on this issue and look forward to working together on reforms that protect consumers and keep the scheme sustainable,” Macfarlane said. The revised CSLR levy estimate for FY2027 is expected in June 2026.
