An article published in The Australian last week suggested that the entire financial planning industry “looked the other way” while these schemes thrived.
In fact, the financial planning profession has been at the forefront of exposing these failures and is currently engaged in supporting the victims. Under current laws, financial planners who had nothing to do the with these failures will most likely be the ones who ensure consumers receive compensation.
Financial planning has become a profession fairly recently – in the last six years. “Financial adviser”, “financial planner” and like terms can only be used by those who’ve met the stringent requirements of the profession.
To become a financial adviser, you now need to complete an approved financial planning degree, then complete a professional year, comprising 1,600 hours of structured work experience and training, and pass a national exam.
You must be appointed and registered by a licensee, meeting all their requirements to practise. Thereafter, you must complete 40 hours of regulated Continuing Professional Development each year (lawyers only need to do 10 hours per year).
Depending on where you are employed and your areas of practice, you might need to comply with the requirements of a long list of regulators (including ASIC, APRA, the ACCC, the ATO, the Tax Practitioners Board, the OAIC, AUSTRAC, Treasury) and be a member of the external dispute resolution body (AFCA).
You must exhaustively document every piece of advice you give and your interactions with clients and fully disclose every fee you receive. And you must, at all times, adhere to a legislated code of ethics, which not only requires you to put your clients’ interests first at all times but also to report any business or colleague that you suspect is not doing so.
You must maintain adequate professional indemnity insurance, and you must also pay significant levies each year to ASIC and the Compensation Scheme of Last Resort (CSLR) – more on this one later.
So, what on earth is going on? How is it possible for massive failures like Shield and First Guardian to happen, given all this regulation and oversight?
The first point to make is that while the scale of the failures is large, the number of those involved is relatively small. ASIC has recently published information about the financial advice licensees it believes have been involved in the distribution of these products (summarised in the table below).
If ASIC is correct, four advice licensees were involved with Shield, and three with First Guardian – and of these, two were involved with both – five in total.
Of course, five licensees is five too many. The sorts of behaviour that have been alleged are reprehensible and include accepting illegal marketing payments, trying to evade anti-hawking laws by engaging third parties to cold call investors, recommending investors place a majority or all of their portfolio in a single relatively high-risk product, and making untrue claims about the past performance of the product, as well as unfounded promises about future performance. If true this is disgraceful, illegal and should be appropriately and swiftly punished.
But to suggest that the financial planning profession is responsible for the failures of Shield and First Guardian, or allowed them to happen, is clearly incorrect.
Apart from the obvious point that it’s the arrangers and operators of these products who are the most to blame, financial advisers were among the first to blow the whistle on these schemes. In cases that we are aware of, advisers saw and were horrified by advice they had been asked to review as a second opinion – and reported the entities involved to ASIC (which has, to its credit, acted swiftly and devoted substantial resources to these investigations). And many advisers are currently working with the victims, doing everything they can to help them recover as much as possible and get their financial plans back on track.
There are currently 1,700 advice licensees in Australia, and 15,300 advisers. The vast majority run excellent, compliant small businesses that are doing difficult and important work every day, helping their clients to make and implement good financial decisions and achieve their goals and dreams. Great financial advice has become an essential service in our highly complex financial system, one that’s become almost impossible to navigate for anyone who isn’t an expert.
It’s incredibly disheartening for these capable professionals to be tarred with the same brush as the tiny minority who have broken the law.
I promised earlier to touch on the CSLR. This newly-established scheme exists to support consumers who have suffered a loss associated with poor financial advice, when all other avenues have failed.
This important scheme is under threat, because the funding mechanism is deeply flawed. It is paid for by financial advisers who have done nothing wrong yet nevertheless must compensate the clients of those who’ve broken the law. Wrongdoers who have in many cases avoided their responsibilities by embezzling money, phoenixing subsidiary entities and siphoning money offshore.
In most cases we’ve seen so far, product failure is the root cause of the consumer losses, but product issuers currently make no contribution at all to this consumer compensation.
There aren’t many financial advisers left, and our numbers are falling – at 15,300 we are down 47 per cent on the peak numbers in 2019. This means, among other things, that each year there are fewer advisers left to fund consumer compensation.
There’s another failure on the horizon – called Brite Advisors. It’s still under investigation, but the collapse of this multinational firm could be associated with consumer losses of up to $1 billion. Coupled with Shield and First Guardian, that’s the potential for almost $2 billion in compensation required. It doesn’t take a financial expert to figure out that with only 15,300 advisers available to pay it, either the scheme or the financial advice profession (conceivably both) cannot be sustained.
Treasury has been working on a review of the CSLR, and its report is expected imminently. We can only hope that government will act swiftly and decisively on its recommendations.
Sarah Abood is the CEO of the Financial Advice Association Australia.
Why can’t we have regulators ASIC and APRA who do the job they are there to do? Simple. They got plenty of warning and they did nothing to stop or minimise it.
The super funds who approved these funds need to compensate for the fraud of the managers they approved.
The advisers did not commit the fraud of investing outside of their disclosed TMD. How the RE and their auditors did not relaize the managers were investing outside of their disclosure documents is the true issue at hand.
How did the trustees of the super funds miss this .
The super funds insurer should lodge a claim against their policy for the managers fraud so they can compensate their members for the fraud that occured within their product.
Seems like a typcial PI claim of the super funds to me and should not be sent to CSLR.
How could an adviser be ever able to know such a fraud existed within such large super funds like Macquarie and Netwealth
The CSLR was always terrible policy – a lazy regulatory “solution” that punishes the innocent to avoid the hard work of pursuing actual criminals. Its removal should be immediate and absolute, though a sunset clause might be the political compromise needed to kill it. The scheme has already spawned its own parasitic ecosystem of administrators, consultants, and bureaucrats who now have vested interests in its continuation and expansion. This is how bad policy becomes permanent: it creates its own constituency of beneficiaries who will fight to preserve their rice bowls regardless of the damage to the profession and small business owners who actually create value.
The FAAA’s failure to kill this in the cradle reflects its deeper institutional weakness – a legacy of being a creature of bank-owned licensees rather than a genuine professional association. During the era of bank dominance, the FAAA reliably backed whatever position the major institutions and government had already agreed upon, functioning more as an echo chamber than an advocate. They should have fought the CSLR with everything they had from day one, mobilizing members, threatening industrial action, and making it politically toxic. Instead, they probably sent some polite submissions and hoped for the best, allowing this existential threat to metastasize. At minimum, they should have demanded hard subsector caps with zero ministerial discretion – a fixed statutory maximum that no minister can override when the next billion-dollar fraud emerges.
That accommodationist DNA still infects the organization today. Abood’s article perfectly exemplifies this – identifying a profession-ending threat but offering only meek suggestions about “swift action on recommendations.” The FAAA needs to rediscover what it means to be a fighter for the profession, not a polite participant in consultations. The message must be binary and uncompromising: either abolish the CSLR entirely or implement rigid statutory caps that remove all ministerial discretion to increase levies. The current system where a minister can simply decide advisers must pay more whenever there’s a scandal is intolerable. Every day they fail to demand one of these two outcomes is another day closer to the profession’s collapse. The time for genteel lobbying is over; it’s time for hardball politics and absolute demands.
So if the loss is $2 Billion across the various investments then the CSLR compensation per adviser will be about $130,000?
A Ponzi scheme buying Lamborghini’s for their management … how is this remotely my fault as a financial adviser.
Where were ASIC and the auditors in all of this mess. Answer … they were busy ticking boxes, rather than looking forward attempting to take evasive action.
It’s a pity that the compliance regime is focussed purely on box ticking rather than work to protective investors.
Shame on the audit firm and shame on ASIC.
Our industry is in crisis. I’m pretty confident in saying the FAAA does have all stakeholders best interests at heart. However if we are unable to make legislative change in a positive direction I fear the industry will be doomed. It’s blatantly obvious the current regime is flawed and is costing the public and industry participants.
Is there any hope of actually making legislative changes? or does ASIC and Government literally not give a shit.
Is the FAAA actually lobbying the polititions for positive change? and if so how is that going?
I am not in business to solve the Financial Services problems with fraud. Neither are the other financial planners who are like me trying to help their clients. I am not here to pay for the fraud that is happening and neither are other businesses who are doing the right thing by their clients. 47% down is a telling number. If you want it 100% down, keep going the way you are CSLR. No one is stupid enough to stay working as a financial planner to pay for the wrong doings of others. And guess what – who would dob in places like Shield or the multitude of others you are finally catching after years and years? And then for doing the right thing get a CSLR levy as a result. Come on – do you think we are all STUPID?
Oh, the “100% down” of which you speak is highly on the cards and by no means an exaggeration. It is already closing fast on Risk Specialist advisers due to idiotic compliance and time wasting red tape PLUS all the other constraints and impositions mentioned in the article. Next will be the Investment Advisers (AKA financial planners) as, again, you correctly stated ” No one is stupid enough to stay working as a financial planner to pay for the wrong doings of others”. This is only one of the many reasons financial advice will be impotent in Australia by EOFY ’27-’28 and specialist risk advice gone one year earlier. This is a very confident prediction as I know politicians and currently there is zero appetite for them to change or reduce imposts on advisers. The advice landscape will be unrecognizable for risk AND investments come 2027.
I never give up and this has always been something I have held to my whole life but for the first time at age 59 I am considering an early retirement of sorts and getting as far away from financial advice as possible. I have won many awards and been a “top” adviser for over 30 years and deal with HNW clients mainly and still I see the writing on the wall. FAAA is trying but I don’t think the politicians give a shit and those in ASIC and Treasury have some sort of vendetta against us. Such is Life.
You’re correct in all that, of course. I left at 60, 4 years ago. Sold my clients, invested my super properly and high tailed it OUT. My only real regret, besides missing many of my clients is that I didn’t do it 5 years earlier. Being a risk adviser the low remuneration had become an insult and the red tape and compliance was salt in the wounds. Life is most definitely too short for that sort of abject nonsense and now I’m free and enjoy each day as I damn well please. Such a relief now. If you can . . . DO IT!