Last week, we discussed how the upcoming election might affect the shape (and fate) of proposed legislation that could have a material impact on the advice sector.
One such piece of legislation is the Financial Services Compensation Scheme of Last Resort Levy Bill 2021, which outlines the CSLR’s funding model – and, by extension, how much advisers will need to pay on an ongoing basis to support the scheme. As we’ve previously noted, the CSLR is designed as a means for consumers to receive compensation in situations where a determination by AFCA remains unpaid – but where AFCA hears complaints regarding virtually all licensed financial products and service providers, the CSLR has a somewhat narrower remit.
Crucially, that remit includes advisers but not managed investment schemes.
The prevailing argument as to why this is the case is that the CSLR, in the form recommended by both the Ramsay review and the Royal Commission, is not designed as a means for customers to seek redress for poor investment performance. Or, as Senator Jane Hume put it late last year, the CSLR is “not an insurance designed to pay compensation to any consumer who has lost money in an investment.”
“If you want to punt a portion of your savings on something speculative,” she said, “knock yourself out. No government should stand in your way. But you should be prepared to wear it when it goes wrong.”
Holding the bag
The problem, though, is that the current design of the scheme effectively funnels de facto responsibility for any product failure that arises as a result of factors other than market conditions (fraud or other misconduct, for example) down to the adviser who recommended the product – even if said adviser was, to the best of their knowledge, acting in their client’s best interests at the time. And with that responsibility comes the lion’s share of the CSLR’s industry-sourced costs.
It’s no surprise, then, that the proposed scope and funding model of the CSLR has attracted controversy within the advice community since its announcement. And with the CSLR levy bill currently stuck in pre-election legislative limbo, advisers have gone on the offensive.
Speaking at a recent Senate committee hearing, FPA senior manager, government relations and policy Brad Vermeer said the FPA “cannot provide support for a scheme which will see consumers of [managed investment schemes] unprotected. We’re also concerned about a model that is disproportionately funded by financial advisers, the majority of whom are themselves small-business owners.”
Vermeer noted that Treasury has “not been forthcoming with recent data” regarding which industry sectors are “driving unpaid determinations for at least the past two years”.
According to AFA CEO Phil Anderson, though, there’s already enough pre-AFCA data out there to suggest that managed investment schemes are “probably the second-largest contributor to unpaid determinations from external dispute resolution schemes.”
Speaking at the same hearing, Anderson said: “Our argument has always been that the impacted subsector that is responsible for the unpaid determination should pay for those unpaid determinations. In the ideal model, they’re not paying for unpaid determinations from other sectors.”
“In a black swan event,” he added, “there are powers within this legislation that might allow the minister to apply a broader funding mechanism, but our original thinking and starting point is that you, as a sector, should only be paying for the unpaid determinations from your sector.”
How many left to pay up?
While much of the Government’s publicly-expressed resistance to expanding the CSLR relates to the sustainability of the scheme, CPA Australia financial planning policy adviser Keddie Waller argued that the sustainability of those sectors paying for the scheme should also be taken into account.
She told the Senate committee that “the large proportion of those left in the financial services advice sector are small-business owners. They have faced considerable changes and regulatory costs over the last couple of years, and we’re looking at further costs with this scheme being introduced.
“We need to consider the sustainability of that sector in an environment where we’re seeing a considerable drop in the numbers. We now have fewer than 18,000 advisors in financial planning, and we had fewer than 100 new entrants to the sector. If we want to look at the sustainability of that scheme, we need to look at those who are going to be funding it as well.”
History repeating
Waller’s comments regarding the shrinking size of the advice sector are particularly pertinent given that the CSLR’s industry funding model has been designed to essentially mirror the same one used by ASIC – which famously resulted in adviser levies soaring so high that the Government had to step in and freeze them last year. ASIC’s explanation for the levy spikes frequently referenced the “numerator and denominator“ problem of a large volume of post-Royal Commission litigation costs being spread across a dwindling number of leviable entities in the advice sector.
Is there any reason to expect a similar justification wouldn’t be used in the event the CSLR’s operating costs run higher than projected in any given year – something that, according to FSC research, is actually quite likely?
Advisers need to see these issues addressed as a matter of urgency – with the fate of the CSLR levy bill hinging on its passage before the election is called, there isn’t much time left to design a more sustainable and equitable funding model.
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