Brokers have told the federal government they should not pay a special levy to cover a Compensation Scheme of Last Resort shortfall driven by other sectors.

The National Insurance Brokers Association’s submission to consultation on the funding model also proposes the scheme’s administration costs should be reviewed before a special levy is extended to subsectors with no connection to the losses. 

Revised scheme administration costs for this financial year total $31.1 million, including ombudsman fees, operating expenses and Australian Securities and Investments Commission costs. 

“Every dollar spent administering the scheme is a dollar that does not reach a consumer, and under tier 3 it is a dollar that unconnected subsectors are asked to fund,” NIBA said. 

Treasury has proposed a three-tier “waterfall” model for the levy, which is required as initial estimates for this financial year excluded impacts from the Shield and First Guardian Master Fund failures. 

The first tier taps the sector mainly associated with the losses, the second those “sufficiently connected”, and the third remaining subsectors in “retail-facing financial services”. 

The top tiers for this year’s special levy are the financial advice sector and responsible entities for managed investment schemes. 

Treasury’s consultation paper proposes tier 3 insurance product distributors will be levied about $1.444 million, which is about $100 for each broker. 

NIBA proposes a subsector with no connection should not be levied where its share is smaller than collection costs, and it recommends the government confirm expanded loss recovery powers reach professional indemnity insurers, including those of gatekeepers such as auditors. 

Levy application questions also ask if the viability or sustainability of any sector is threatened by proposed allocations. 

“Viability is the wrong test for an unconnected subsector; the right questions are connection and proportionality,” NIBA said.

The association says broking profession clients help fund a scheme they generally cannot use and it is not aware of any case in which a client has been left uncompensated because professional indemnity insurance did not respond. 

“The CSLR covers personal financial advice, credit and securities dealing, so a household or small business with an unpaid [ombudsman] determination against its insurance broker has no claim on it.”

The scheme was established to pay compensation when an eligible Australian Financial Complaints Authority ruling remains unpaid.

See the NIBA submission here.