Should investors contribute to compensation scheme?

The collapse of the Shield and First Guardian investment schemes has sent shockwaves through the financial advice sector and left investors facing devastating losses.

For older Australians, the situation has raised a confronting question: how well are investors really protected when things go wrong? 

At the centre of the debate is the Compensation Scheme of Last Resort (CSLR) – a government-backed safety net designed to compensate clients when licensed financial advisers fail and no other source of compensation is available. But the scale of recent failures has led the government scrambling to find ways to raise the funds required. 

It has led to a war between advocates of different parts of the superannuation system after government moved to spread the cost of the scheme beyond financial planners to include superannuants invested through Self-Managed Super Funds (SMSFs) and regulated industry funds.  

It has culminated in the release of several consultation papers to reform superannuation rules to protect consumers, including a paper on the CSLR proposing options to improve funding arrangements and enhance funds recovery – more on that later. 

A safety net under strain 

Losses linked to the Shield/First Guardian collapse are expected to far exceed the amount of money currently available through the CSLR. Many of the claims reaching the scheme come from investors who were encouraged – or pressured – to shift their retirement savings out of large, regulated superannuation or managed funds into bespoke, high-risk investment vehicles by financial advisors via SMSFs. 

In many cases, financial advisers received opaque or conflicted commissions, while investors were left without clear information about the risks they were taking – or the limits of the compensation system meant to protect them. 

When the CSLR is not well understood, it can unintentionally reassure investors that “everything will be covered” if things go wrong. Unfortunately, that is not the case. For example, many don’t realise the CSLR can only pay out a maximum of $150,000 to an affected investor. 

Currently, the scheme is funded by industry, with levies applying to sub-sectors of the broader financial advice sector. It has been estimated that advisors alone will need to contribute $126.9 million in FY2027, around double the estimate for FY2026 (this doesn’t yet include compensation payouts for Shield/Guardian collapse!). 

With the Shield/First Guardian collapse likely far outstripping the CSLR pool, government has been considering making all superannuants contribute to the CSLR.  

Superannuation industry bodies, such as the Super Members Council have pushed back on these plans arguing that government should not spread excess costs across unrelated subsectors, making low- and middle-income superannuants pay for the collapse of the Shield/First Guardian schemes. 

The CSLR consultation paper has laid out changes to the scheme to make it more sustainable. This includes a new special levy to apportion higher costs of the CSLR when the annual levy cap is breached and a proposal to require SMSFs to opt in to be eligible for compensation. 

In response, the Self-Managed Super Fund Association (SMSFA) have argued that SMSF trustees should not be required to contribute to be eligible for compensation. 

But then who should pay. And how can investors be better protected when seeking greater returns on their savings.

Is an opt-in “insurance” model needed to help save the CSLR?

With the consultation live, are there alternative ways to strengthen the CSLR to better educate and protect superannuants at risk of losing their life savings? 

Could an opt-in, insurance-style obligation be used to make it more sustainable and alert investors to the risks of seeking higher returns with greater risks? 

Under such a proposition, individual investors who want access to compensation could register for and pay a modest annual premium to be protected under the CSLR. This would help further spread the cost and make investors more aware of risk. 

Under this idea: 

• All financial advisers would be obligated to provide clear information about the CSLR when proposing that a client make an investment covered by the scheme (including those operating within large APRA regulated funds). 

• ASIC would provide standardised consumer facing information about the CSLR, including examples of red flags regarding investments that may increase the risk of triggering a compensation claim. 

• Investors would need to acknowledge in writing that they have received this information by signing a disclosure statement and pay an annual premium relative to the amount of money being invested through a financial advisor. Every time an investor changes their investment, they would update their details and adjust their premium, in this regard, an investor moving money out of advice products into less riskier products would pay a lower premium. 

• Advisers who fail to disclose CSLR information outlining the obligation of an investor to opt in to be covered would face penalties – including being liable for any premium an investor should have paid to be eligible for the CSLR. 

• APRA regulated funds would be obliged to provide information about the CSLR when a member withdraws funds above a threshold (e.g. more than $25,000) This would trigger a requirement to provide information about reinvestment risks and the CSLR so that investors could make an informed decision if investing their funds elsewhere. 

The intention is not to limit choice, but to ensure that choice is informed and transparent – especially when it comes to retirement savings many Australians cannot afford to lose. 

Why does this matter? Having a visible, ongoing cost attached to compensation protection, aligns with an insurance model, and may prompt investors to pause and think carefully before moving large sums of money into complex or risky products – especially those offering high or unrealistic returns. 

Importantly, the proposal would place stronger obligations on financial advisers to explain the CSLR clearly but also create trigger points for trustees to inform members shifting funds out of more highly regulated products. 

What do you think? 

Should access to the CSLR require investors to opt in and pay a modest insurance-style premium? 

Would clearer disclosure and adviser accountability help prevent future losses? 

This article is part of a new policy lab series, where we pitch novel policy ideas for your consideration, so please complete the poll below to have your say.