Last year’s freeze of the graduated ASIC levy came as a welcome reprieve for many advice businesses – both because of the substantial cost reduction and the apparent acknowledgement from Government that things were getting out of control.
The freeze was announced just a few months after the regulator released its indicative levy figures for 2021 ($1,500 per licensee and $3,138 per AR) which represented a 34% increase over the cost spike of the previous year. At the time, adviser advocacy bodies reiterated the most common complaints about the levy (and the framework underpinning it): it’s inconsistent, unpredictable and increasing at a rate that surpasses the rate of revenue of growth for most financial advice businesses.
Despite disagreement from certain corners of the Morrison Government, ASIC representatives maintained that there was very little the regulator could do to address advisers’ concerns. The levy calculations were “mechanical,” as former ASIC chair James Shipton put it, and recent increases could be attributed to the “numerator and denominator” effect of the substantial cost pipeline following the Royal Commission being spread across an ever-shrinking adviser cohort.
The silver lining, if you could call it that, was that once ASIC completed its post-Royal Commission litigation work, advisers could expect some reduction in levies. But there was some uncertainty here, too, because as ASIC acknowledged in response to a question in Parliament, “As a matter of law, penalties go directly to the Commonwealth Consolidated Revenue Fund. Penalties are imposed as a deterrent and bear no relationship to ASIC’s regulatory costs.”
ASIC’s initial estimates raised other questions, too. For example, its indicative Cost Recovery Implementation Statement (CRIS) from July last year cited the policing of unlicensed advice as one of the drivers of increased costs (and therefore increased adviser levies), even though it’s very difficult to imagine how or why licensed providers should be held responsible for this activity.
All of this serves to underline that the key problem with the adviser levy is not so much how it’s calculated each year – although ASIC commissioner Danielle Press acknowledged the regulator would “take some heat” for the discrepancies between initial estimates and final levies – but the framework described in the underlying legislation. This is why the recently-announced review of ASIC’s industry funding model is so important.
In a statement, Treasury explained that it’s an appropriate time to review the model given that it’s now been in place for five years. Over that time, Treasury acknowledged, “there [have] been substantial regulatory and structural changes within industry sectors resulting in increased cost pressures within certain sub‑sectors.”
The review will address a range of issues including the types of costs ASIC recovers from the industry, who those costs are recovered from, how costs are allocated across different industry sub-sectors and whether changes to sub-sector composition (due to firm exits, for example) should impact those allocations. Recent volatility in levies will also be investigated along with the impact of time-lags between levy calculations and regulatory action.
Crucially, Treasury will also review the underlying legislation – both to determine whether levy metrics and sub-sector definitions should be revised in light of structural changes in relevant industries and whether there are any opportunities for simplification.
Revisiting the legislative framework for the industry funding model could potentially affect more than just the ASIC levy. As we’ve previously discussed, the compensation scheme of last resort (CSLR) will also be industry-funded, using a model that essentially mirrors the one used by ASIC – which means advisers will be on the hook for the majority of the scheme’s costs. Taking the opportunity to review how ASIC’s costs are apportioned across its regulatory remit would be the ideal time to also determine whether advisers will be charged fairly under the CSLR as it’s currently designed.
The advice industry has undergone significant changes over the past five years – it’s time the legislative framework reflected that.
