Last week, we examined ASIC chair James Shipton's comments regarding the future of FASEA, ASIC's new education administration responsibilities and how the cost of assuming these duties could, potentially, be passed onto financial advisers.
Speaking at a parliamentary joint committee, Shipton implied that if additional costs for ASIC are approved by budget for the purposes of facilitating adviser code monitoring and exam administration, there could be an increase in the adviser levy. He clarified that this was speculation currently, describing his response as "mechanical".
The idea that the individual levies ASIC charges to financial services businesses are mechanically prescribed by the industry funding legislation has been called into question by many industry associations, who jointly recommended a review of the recent levy hike. Indeed, Senator Jane Hume told the same committee in which Shipton made his comments that ASIC “does have some level of flexibility and discretion” regarding how these levies are imposed.
Just not enough
However this discretion is being applied, though, it appears that even the recent spike in costs passed onto the industry isn't enough. Responding to a question from Senator Deborah O'Neill regarding how ASIC monitors online scams targeting wholesale advice clients, ASIC deputy chair Karen Chester told the same joint committee that ASIC is a "capex-poor organisation" which makes it difficult to be a "lean, mean, data processing machine". To remedy this issue, Chester said ASIC is "in discussions with Treasury about making a case to the government about us getting some capex funding."
That ASIC is seeking further funding at a time when a decreasing cohort of financial advisers are bearing the rising costs of surveillance of their industry sub-sector may be a bitter pill to swallow. ASIC has previously explained that the reason levies increased so significantly this year is because of the litigation pipeline from the Royal Commission and the shrinking number of advisers left to cover the costs of said litigation.
Chester previously clarified there is gradation in the way costs are levied to the industry – indeed, the regulations pertaining to cost recovery for businesses that provide personal financial advice mandate a graduated levy (on top of the basic levy) which is proportional to the number of authorised representatives that business has. It follows, then, that if ASIC's operating costs balloon as the result of, say, an increase in litigation following the findings of the Royal Commission, financial advisers can expect to pay more in the relevant financial year – especially if there are fewer of them around.
Credit where credit is due
The problem with this – at least the problem that has been made clear in the past few months – is that this basic metric doesn't really consider the targets of said litigation, which mostly comprise some of the largest financial institutions in Australia. As LNP MP Bert van Manen put it in a recent joint committee meeting, there are concerns regarding ASIC's capacity to "ensure that the parts of the industry incurring these large costs actually bear the commensurate responsibility to pay the levy." Given Senator Hume's comments regarding ASIC's discretion in levying costs, one might wonder if there is actually a way to ensure this is the case.
Perhaps the bigger issue, though, is with the industry funding legislation itself. Per the ASIC Supervisory Cost Recovery Levy Act 2017, the objectives of the law are that the total amount payable by all leviable entities is equal to the costs of ASIC's regulatory activities for the financial year, and that the levy payable by all entities within a sub-sector is equal to the cost of ASIC's regulatory activities within that sub-sector for the financial year.
Given that the regulations pertaining to this law have the effect of grouping many different types of financial advice businesses together – from large bank-owned groups to small self-licensed advice practices – it's easy to see how pursuing action against a small group of major Australian financial institutions could create an apparently disproportionate cost burden for other players in the same regulated space.
The other problem was highlighted in the joint letter penned by Chartered Accountants Australia and New Zealand, CPA Australia, Financial Planning Association of Australia, Institute of Public Accountants and SMSF Association in response to the recent levy hike: namely, that the regular fines and penalties ASIC recovers throughout the year are diverted to the Government's Consolidated Revenue rather than being used to offset annual operating costs.
This is hardly a new argument: back when the industry funding laws were open for consultation in late 2016, numerous businesses and associations argued (unsuccessfully) that penalties and fines should contribute specifically to ASIC's funding. The FPA, for example, pointed out in its submission that those penalties "relate directly to the financial services regulatory activity undertaken by ASIC."
In a legislative and regulatory framework where the costs of litigation against specific industry players are spread across the entire industry – without being offset by the penalties recovered by ASIC for breaches of the laws it administers – it's hard to see how circumstances will improve until two things happen. First, ASIC will need to reach the end of "the Royal Commission pipeline" (as ASIC commissioner Danielle Press put it), and the advice industry will need to start seeing a net inflow of participants.
If the results from our recent survey are any indication, the latter seems increasingly unlikely this year – and that could partly be because of the situation described here. Perhaps the best hope advisers have now for some relief is the immediate review of the industry funding model as it currently stands.
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