Compensation bill must be picked up by those causing harm, not everyday Australians

The Super Members Council says the Government should not hand the bill for the Compensation Scheme of Last Resort to millions of low-paid Australians, warning it would be a dangerous departure from both the scheme’s original risk-based design controls and its purpose as a genuine last resort.

“This should be a fair, sustainable compensation scheme of genuine last resort that doesn’t double-tax hardworking Australians in safe, well-regulated parts of the super system — not one that socialises the cost of financial misconduct to the nation’s lowest-wage earners instead of holding the people responsible to account,” says the Council’s CEO Misha Schubert.

In a submission on Treasury’s proposed reforms, the Council highlights that the scheme was originally intended to compensate victims of financial misconduct only as a very last resort after all other options to recover money had been exhausted.

But it has rapidly become overwhelmed in its first few years by the scale of collapses and misconduct in higher-risk pockets of financial services.

The collapse of one financial advice firm alone eclipsed several years’ worth of the original actuarial predictions for the scheme’s total costs – and a string of others has since followed. Soon thousands more claims from the Shield and First Guardian collapses will start to make their way onto the scheme.

A key design principle for the scheme at the outset was that the part of the financial system from which the consumer harms and unpaid compensation orders had arisen should bear the costs of funding it.

It would be a clear breach of that principle to expand the levy onto unrelated sectors that have not caused the underlying misconduct, and to force millions of everyday Australians - including the nation’s lowest-paid workers in safe, highly regulated profit-to-member super funds - to pay it.

Spreading surging costs to unrelated sub‑sectors would further embed and escalate moral hazard. If safe, highly regulated parts of the system foot the bill for unrelated misconduct elsewhere, it can only further escalate risky behaviour, weaken accountability, and incentivise misconduct and poor practices.

SMC’s submission highlights the unfairness of what occurred last December – when the Government forced 12 million Australians in safe, well-run super funds to pay a one-off special levy to fund the skyrocketing 2025 compensation bill but Australians with SMSFs did not pay.

The current reform consultation now canvasses a new levy ‘waterfall’, in which a levy would cascade down levels in the financial system starting with sectors closest to the causes of harm – but then also permanently pull parts of the safe mainstream super system into the scheme’s third tier of funding.

It also proposes to require everyday Australians in mainstream super funds to permanently pay the levy yet puts forward  the idea of giving SMSFs an opt-in/opt-out choice on whether to pay the levy and be able to claim.

Consistent with the principle that Australians in APRA-regulated superannuation funds should not be part of the scheme, the Council's view is that SMSFs should similarly be excluded — from both the levy and the ability to claim on the scheme. Both must be treated equally. SMSFs should not be afforded an opt-in/opt-out choice if 12.5 million Australians in mainstream super funds do not have that same choice.

“It would be deeply unjust for the Government to compulsorily force millions of the nations lowest-paid workers to pay a levy for this scheme they will never claim on but then give wealthier Australians with SMSFs a choice to opt in or opt out that no-on else gets,” Ms Schubert said.

The compensation system is now under severe strain, with major financial collapses exposing structural weaknesses in how losses are attributed and funded. In its first few years, the scheme has been flooded by a tsunami of unpaid compensation orders for losses caused by collapsed financial advice firms and managed investment schemes, with the victims often investing via SMSFs and super platforms.

To make the scheme more sustainable and restore it to its original purpose of truly being a mechanism of last resort, the Council is calling on the Government to:

• Scrap the proposed levy waterfall model in the consultation paper, which risks embedding cost‑shifting rather than fixing the underlying problems.
• Instead align the scheme’s funding levies more closely with the sources of consumer harm, in a model that ensures that higher-risk sectors from which misconduct has arisen bear the costs.
• Rule out an expansion of CSLR levies to safe, well-regulated APRA‑regulated super funds whose members already fund their own operational risk reserves.
• Include Managed Investment Schemes (MIS) in the funding base, to better align costs with where risks originate.
• Adopt clear, consistent treatment of SMSFs, including:
  • excluding SMSFs from both the levy and compensation scheme, or
  • if included, requiring mandatory and universal participation in funding (no opt‑in or opt‑out)
• Limit CSLR compensation to actual losses only, removing payments for hypothetical or “but‑for” investment returns.

“The scheme is now being flooded by a tsunami of compensation bills that should have been paid by the collapsed firms and schemes who lost Australians’ life savings and then left them in the lurch,” said Super Members Council CEO Misha Schubert.

“Prevention is always better than clean-up. Nothing short of large-scale consumer safety reforms that comprehensively lift the bar on consumer safety will stop continuous flooding of the scheme. Merely tinkering around the edges on safety will only lead to more Shield and First Guardian style collapses.”