Source: Australian Government, The Treasury, Compensation Scheme of Last Resort (CSLR): application of the waterfall framework for the 2026–27 special levy, Consultation Paper, September 2026.

Status: Consultation paper. Treasury expressly states that the principles have not received Government approval and are not yet law. The proposed allocations and connection assessments remain preliminary. [Consultation Process p 2; ¶6]

Consultation closes: Monday, 5 October 2026. [Consultation Process pp 1–2]

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1. Executive Summary

Treasury proposes the first practical application of a three-tier CSLR special levy waterfall framework to allocate the $170.262 million 2026–27 shortfall arising principally from the personal financial advice sub-sector. The CSLR operator’s revised estimate for 2026–27 is $198.068 million, of which $190.262 million is attributed to personal financial advice. The resulting excess activated the Minister’s existing powers under s 1069H of the Corporations Act 2001 (Cth). [¶¶4–7]

Treasury proposes:

• Tier 1 — Financial Advice: $10 million special levy, in addition to its $20 million annual levy.
• Tier 2 — Responsible Entities of Managed Investment Schemes: $40 million.
• Tier 3 — 21 remaining retail-facing sub-sectors: approximately $120.262 million, allocated by reference to ASIC regulatory effort, subject to adjustments identified in the paper. [¶20]

The critical policy development is Treasury’s proposed concept of “connection”. A product, service or regulated activity is connected where it formed a substantive part of the pathway to consumer loss. Merely incidental, administrative or facilitative involvement does not suffice. Importantly, Treasury states that connection does not constitute a finding of misconduct or legal liability. [¶¶11–12]

Treasury identifies Responsible Entities as connected to losses associated with Dixon Advisory and Shield/First Guardian, but not Brite, UGC/GCPF or “other personal financial advice”. This produces the proposed $40 million Tier 2 allocation. [¶¶16–19]

The paper also identifies an important structural limitation. Existing allocation metrics can concentrate liabilities among relatively few entities within a sub-sector, while the current framework provides no mechanism to redistribute liabilities according to individual entities’ circumstances. [¶¶23–26]

For governance and compliance purposes, the consultation therefore raises two distinct questions: which sectors should bear the cost, and whether the resulting allocation threatens sub-sector sustainability or viability. [¶¶27–30]

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2. Clarification Of Key Terms

Compensation Scheme Of Last Resort

The CSLR pays compensation where an eligible AFCA determination remains unpaid. Treasury states that the scheme was established under Part 7.10B of the Corporations Act 2001 and commenced operations in April 2024. [¶1]

Part 7.10B is confirmed in the Federal Register compilation of the Corporations Act 2001.

Corporations Act 2001 — Federal Register of Legislation

Special Levy

The CSLR is industry-funded through levies imposed on financial-services sub-sectors. Treasury identifies the Financial Services Compensation Scheme of Last Resort Levy Act 2023 and Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023 as establishing the funding model. [¶2]

The Levy Act expressly provides for special levies where a revised estimate exceeds the applicable sub-sector levy cap.

Financial Services Compensation Scheme of Last Resort Levy Act 2023

Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023

Waterfall Framework

Treasury describes a proposed sequential allocation mechanism comprising:

• Tier 1: the primary sub-sector associated with the losses pays up to $20 million;
• Tier 2: sufficiently connected sub-sectors pay up to $40 million per sub-sector;
• Tier 3: remaining retail-facing financial-services sub-sectors pay up to $30 million per sub-sector. [¶7]

A sub-sector’s absolute total contribution is capped at $40 million in a levy period after considering the annual levy and contributions across the tiers. Treasury states that the overall $250 million annual scheme cap remains. [¶8]

Connection

For proposed Tier 2 purposes, Treasury defines connection by asking whether a product, service or regulated activity formed a substantive part of the pathway to consumer loss. It may involve creating, distributing, acquiring or continuing a harmful product or arrangement. [¶11]

“Incidental, routine, administrative or merely facilitative involvement … would not be sufficient without evidence of substantive involvement.” [¶11]

Treasury expressly separates this allocation concept from wrongdoing:

Financial Sustainability And Viability

Section 1069H(5)(b), as described by Treasury, requires the Minister to consider the effect of a special levy on the financial sustainability and viability of a specified sub-sector and the broader financial system. Treasury states that neither the legislation nor extrinsic material specifies how to assess those concepts. [¶¶27–28]

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3. Key Observations

Observation 1 — The 2026–27 Shortfall Drives The Waterfall’s First Application

Summary

The proposed framework responds to a $170.262 million shortfall after the CSLR operator revised its 2026–27 claims, fees and costs estimate. This is the first practical application of the waterfall methodology, so Treasury treats the current consultation as relevant both to the immediate levy and the framework’s future operation. [¶¶4, 6, 10]

Quoted Evidence

“On 2 July 2026, the CSLR operator published a revised estimate of claims, fees and costs for 2026–27, totalling $198,067,614.” [¶4]

“As this exceeds the amount ASIC can collect through the annual levy process, a shortfall of $170,262,208 remains.” [¶4]

“The FY2026–27 levy period represents the first practical application of the waterfall framework.” [¶10]

Implications

• The proposed allocations are not merely mechanical extensions of an established waterfall practice. Treasury is testing the methodology through its first practical implementation.
• Stakeholder evidence supplied during this consultation may influence both the 2026–27 allocation and how Treasury develops the methodology for later levy periods. [¶¶6, 10, 31]

Related Law

• Corporations Act 2001 (Cth), s 1069H. [¶4]
• Financial Services Compensation Scheme of Last Resort Levy Act 2023. [¶2]
• Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023. [¶2]

The 2026–27 revised cost estimate is also registered on the Federal Register and took effect on 1 July 2026.

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Observation 2 — The Waterfall Creates A Sequential Cost Allocation Structure

Summary

Treasury proposes a three-stage framework that first allocates additional costs to the primary loss-associated sub-sector, then connected sub-sectors, and finally the broader retail-facing financial-services sector. The framework therefore distinguishes primary responsibility for levy allocation, substantive connection and residual sector-wide funding. [¶7]

Quoted Evidence

“Tier 1: The primary sub-sector associated with the losses whose annual levy cap has been exceeded pays up to $20 million.” [¶7.1]

“Tier 2: Any sub-sectors assessed as sufficiently connected to the losses pay up to $40 million per sub-sector.” [¶7.2]

“Tier 3: The remaining sub-sectors in the retail-facing financial services sector pay up to $30 million per sub-sector.” [¶7.3]

Implications

• Sub-sector classification can materially affect levy exposure because placement within the waterfall determines how costs are allocated.
• The proposed framework retains limits: Treasury states that a sub-sector cannot be levied more than $40 million in total for a levy period and that the $250 million annual scheme cap remains. [¶8]

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Observation 3 — “Connection” Requires Substantive Involvement In The Pathway To Loss

Summary

Treasury proposes a substantive rather than merely transactional connection test. The distinction matters because Tier 2 exposure depends upon identifying a meaningful role in the pathway producing consumer loss. [¶11]

Quoted Evidence

“To be considered ‘connected’ under Tier 2 of the waterfall framework, a product, service or regulated activity must have formed a substantive part of the pathway to consumer loss.” [¶11]

“This may include material involvement in creating, distributing, acquiring or continuing the harmful product or arrangement.” [¶11]

“A connection finding does not constitute a finding of misconduct or legal liability.” [¶12]

Implications

• Routine banking, payments, settlement, custody or administration does not establish connection without evidence of substantive involvement. [¶11]
• Governance reporting should distinguish levy connection from findings of breach, fault or legal liability because Treasury expressly treats these as different concepts. [¶12]

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Observation 4 — Treasury Uses A System-Level Rather Than Claim-By-Claim Methodology

Summary

Treasury maps connections against five loss-event categories from the CSLR revised actuarial estimate rather than tracing every claim individually. The methodology deliberately seeks system-level attribution and relies on a point-in-time forecast. [¶¶13–15]

Quoted Evidence

“Connection has been assessed for each loss event identified in the revised estimate using publicly available firm, product, licensing, regulatory, and court information.” [¶14]

“The waterfall framework serves to attribute a greater share of costs to connected sub-sectors at a system level, rather than to achieve precise claim-by-claim attribution.” [¶15]

“Actual claims may differ from the forecast due to future developments such as changes in AFCA membership, insolvencies, or court outcomes.” [¶15]

Implications

• Treasury’s methodology accepts that the levy allocation need not reproduce exact causal attribution for individual claims.
• Forecast uncertainty remains material. The paper expressly recognises that later AFCA, insolvency and court developments may change actual claims. [¶15]

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Observation 5 — Responsible Entities Are The Proposed Tier 2 Sub-Sector

Summary

Treasury identifies the Responsible Entities sub-sector as substantively connected to two of the five mapped loss cohorts: Dixon Advisory and Shield/First Guardian. That assessment produces a proposed $40 million Tier 2 contribution. [¶¶16–19]

Quoted Evidence

“Dixon Advisory: Based on publicly available evidence, the responsible entities sub-sector is substantively connected to the losses arising from Dixon Advisory in FY2026–27.” [¶17]

“Shield/First Guardian: Based on publicly available evidence, the responsible entities sub-sector is substantively connected to the losses arising from Shield and First Guardian in FY2026–27.” [¶18]

“As a result, responsible entities would contribute up to the cap of $40 million as a Tier 2 sub-sector.” [¶19]

Implications

• Table 1 attributes $83.497 million of FY27 compensation costs to Dixon Advisory and $30.151 million to Shield/First Guardian, with Responsible Entities marked as connected for both cohorts. [Table 1, p 5]
• Treasury does not identify Responsible Entities as connected to UGC/GCPF, Brite or “other personal financial advice”. [Table 1, p 5]

The distinction is important. Treasury doesn’t state that every Responsible Entity contributed to the underlying consumer losses. The assessment operates at the sub-sector level. [¶¶12, 15–19]

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Observation 6 — The Proposed Levy Extends Across 23 Identified Sub-Sector Entries

Summary

Table 2 proposes $10 million for the Tier 1 financial-advice sub-sector, $40 million for Tier 2 Responsible Entities, and $120.262 million across 21 Tier 3 retail-facing sub-sectors. The proposed distribution therefore extends the financial consequences of the shortfall considerably beyond the sub-sector in which the principal CSLR costs arose. [¶20]

Quoted Evidence

“Tier 1: $10 million for financial advice (in addition to their $20 million annual levy).” [¶20]

“Tier 2: $40 million for responsible entities of managed investment schemes (MISs).” [¶20]

“Tier 3: $120.262 million remainer allocated via ASIC regulatory effort to the remaining 21 retail-facing sub-sectors who have not reached their levy cap.” [¶20]

Implications

• Among the larger proposed Tier 3 allocations shown in Table 2 are approximately $27.997 million for Credit Providers, $23.790 million for Superannuation Trustees, $12.969 million for Insurance Product Providers, and $11.382 million for Retail OTC Derivatives Issuers. [Table 2, p 6]
• Levy exposure differs substantially between Tier 3 sub-sectors because the proposed allocation uses ASIC regulatory effort rather than equal division. [¶20; Table 2]

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Observation 7 — Treasury Recognises Problems With Regulatory-Effort Metrics

Summary

Treasury acknowledges that ASIC’s Industry Funding Model metric can capture activity that may not align with the intended CSLR allocation base. It identifies wholesale activity in the large securities and futures exchange participant sub-sectors as a specific example. [¶¶21–22]

Quoted Evidence

“the metric used can inadvertently capture wholesale activity.” [¶21]

“a new metric [is] to be developed for the LSEP and LFEP sub-sectors which will reduce the potential distortion of wholesale and institutional activity on special levies.” [¶22]

Implications

• Treasury has already adjusted these sub-sectors’ proposed special-levy contributions as an interim measure. [¶22]
• The paper therefore expressly acknowledges that existing regulatory-effort metrics can produce distortions requiring methodological reform.

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Observation 8 — Intra-Sub-Sector Allocation Can Concentrate Liability

Summary

Treasury identifies a separate problem after costs reach a sub-sector: the prescribed allocation metric may concentrate liability among relatively few entities. The existing framework does not permit Treasury to correct that concentration according to individual entities’ circumstances. [¶¶23–26]

Quoted Evidence

“levy liabilities may be concentrated among a relatively small number of entities, notwithstanding the larger population of entities operating within the sub-sector.” [¶23]

“The current legislative and regulatory framework does not provide a mechanism for redistributing levy liabilities within a sub-sector based on the circumstances of individual entities.” [¶25]

“the capacity to address them through entity-specific adjustments is constrained by the current legislative and regulatory settings” [¶26]

Implications

• An entity’s liability may reflect the prescribed metric rather than revenue, profitability, financial capacity, market footprint or regulatory risk. [¶24]
• Treasury cautions that changing allocations at sub-sector level may simply redistribute substantial liabilities elsewhere and create unintended consequences. [¶26]

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Observation 9 — Viability Is A Required Consideration But Has No Prescribed Assessment Method

Summary

Treasury states that s 1069H(5)(b) requires consideration of both sub-sector viability and broader financial-system effects. However, the paper says the legislation and extrinsic material do not prescribe how to assess sustainability and viability. [¶¶27–28]

Quoted Evidence

“The legislation and extrinsic material do not provide for how financial sustainability and viability are to be assessed.” [¶28]

“measures of average revenue or profitability may not perfectly reflect a sub-sector’s capacity to pay without becoming financially unsustainable or non-viable” [¶28]

“such a decision would require evidence that the levy amount would pose significant viability risks.” [¶29]

Implications

• Treasury seeks evidence rather than assertion where stakeholders contend that an allocation threatens viability. [¶¶29–30]
• The absence of a prescribed viability methodology creates an acknowledged assessment issue rather than a settled quantitative test. [¶28]

Related Law

• Corporations Act 2001 (Cth), s 1069H(5)(b). [¶27]

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4. Analysis And Recommendations

Status Of The Framework

Interpretive Commentary: Governance bodies should treat the paper as a proposal, not a statement of current additional legal obligations. Treasury expressly states that the principles have not received Government approval and “are not yet law”, while ¶6 describes the proposed allocations and connection assessments as preliminary.

That distinction should remain visible in board papers, levy provisioning discussions and stakeholder submissions.

Practical Compliance Step: Licensees and Responsible Entities should consider separating:

• existing CSLR obligations;
• Treasury’s proposed 2026–27 allocation;
• estimated entity-level financial exposure; and
• assumptions dependent on the final Ministerial determination.

Relevant Audience: Licensees / Responsible Managers / Finance and Risk Teams.

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Responsible Entities Should Examine The Evidentiary Basis For Connection

Legal Basis: Proposed Tier 2 methodology described at ¶¶11–19.

Interpretive Commentary: The key consultation issue for Responsible Entities is not whether misconduct has been established. Treasury expressly says it has not. The relevant issue is whether the proposed substantive pathway-to-loss test and its application to Dixon Advisory and Shield/First Guardian appropriately establish sub-sector connection. [¶¶11–19]

Practical Compliance Step: Responsible Entities considering a submission should focus evidence on Treasury’s stated methodology: the nature and materiality of involvement in creating, distributing, acquiring or continuing the relevant product or arrangement. Evidence concerning purely administrative or facilitative involvement is directly relevant because Treasury expressly excludes such involvement unless it becomes substantive. [¶11]

Relevant Audience: Responsible Entities / Responsible Managers / Legal and Compliance Teams.

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Entities Should Quantify Metric Concentration Rather Than Rely On Sector Averages

Legal Basis: Treasury’s discussion at ¶¶23–30.

Interpretive Commentary: Treasury expressly recognises that prescribed metrics may create highly concentrated entity-level liabilities and may not correlate with financial capacity or regulatory risk. [¶¶23–24] However, Treasury also says that the existing framework cannot readily provide entity-specific relief. [¶¶25–26]

Practical Compliance Step: An affected entity seeking to establish material adverse consequences should consider providing evidence that addresses the consultation questions directly, including how the prescribed metric operates, the resulting concentration of liability, and the material adverse outcome said to follow. Treasury expressly asks for evidence sufficient to justify changes that could redistribute liabilities elsewhere. [Questions 3–3(a)]

Relevant Audience: Licensees / Finance Teams / Responsible Managers.

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Viability Submissions Should Be Evidence-Based

Legal Basis: Corporations Act 2001 (Cth), s 1069H(5)(b), as expressly identified at ¶27.

Interpretive Commentary: Treasury has deliberately left the viability assessment open. It acknowledges that average revenue and profitability may imperfectly measure capacity to pay. [¶28]

Practical Compliance Step: A sub-sector arguing that its proposed allocation should be reduced should consider providing quantitative evidence on financial sustainability and viability, rather than relying solely on the size of the levy or comparisons with other sub-sectors. Treasury expressly says that reducing one sub-sector’s contribution increases liabilities elsewhere and therefore requires evidence of significant viability risk. [¶29]

Relevant Audience: Industry Associations / Licensees / Responsible Managers / Finance and Risk Teams.

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Firms Should Not Treat “Connection” As A Finding Of Wrongdoing

Legal Basis: Treasury’s proposed connection methodology at ¶¶11–12.

Practical Compliance Step: Internal governance documents and external communications should distinguish Treasury’s proposed cost-allocation assessment from legal liability or misconduct findings.

Treasury is explicit:

“A connection finding does not constitute a finding of misconduct or legal liability.” [¶12]

Relevant Audience: Boards / Responsible Managers / Legal / Compliance / Communications Teams.

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Methodology Risk Remains Material

Interpretive Commentary: Three uncertainties identified by Treasury remain important:

• the connection methodology is being applied practically for the first time [¶10];
• the underlying CSLR estimate is a point-in-time forecast that can change with AFCA membership, insolvency and court developments [¶15]; and
• the existing allocation metrics can produce concentrated or distorted results [¶¶21–26].

These are uncertainties identified by the consultation paper itself. They should not be treated as evidence that the final levy will differ from Treasury’s proposal.

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5. Conclusion

Treasury’s September 2026 consultation proposes a structured mechanism for distributing a substantial CSLR funding shortfall beyond the personal financial advice sub-sector from which most forecast costs arise. The central proposal is a three-tier waterfall: financial advice contributes at Tier 1, Responsible Entities contribute at Tier 2 because of Treasury’s proposed connection assessment, and 21 other retail-facing sub-sectors bear the residual Tier 3 amount. [¶¶7, 16–20]

The consultation also exposes important limitations in the proposed system. Connection is intended to operate at a system level, not through precise claim-by-claim attribution. Existing allocation metrics may concentrate liabilities among a relatively small number of entities. Treasury acknowledges that some metrics can capture activities that do not align neatly with the intended allocation base. The legislation also provides no prescribed methodology for assessing financial sustainability and viability. [¶¶15, 21–29]

For regulated entities, the immediate significance is therefore evidentiary. Treasury asks stakeholders to provide evidence about connection, repeatability, inappropriate inclusion or exclusion of sub-sectors, metric-driven adverse outcomes and threats to viability. [Questions 1–4]

The direction beyond this consultation is not settled. Treasury states that stakeholder feedback will inform advice to Government and the Minister’s final determination, including possible changes to both proposed levy allocations and connection assessments. [¶31]

Accordingly, the paper supports a forward-looking conclusion only to this extent: the final 2026–27 allocation remains subject to consultation and Ministerial determination. The source does not establish what changes, if any, will ultimately be made.