The Financial Services Council’s (FSC) green paper on the Value and future of advice licensing, released in late July, argued that licensees that have inadequate financial resources are more likely to fail during periods of financial strain, which leads to clients being “exposed to unaddressed compensation claims”.
“This not only undermines consumer protection but also erodes trust and confidence in the financial advice sector,” the paper said.
“The [Compensation Scheme of Last Resort] CSLR has revealed gaps in the ability of some AFS licensees to meet their compensation obligations, forcing other industry participants to shoulder the financial burden of these failures through levies, further straining the already high costs of providing advice.”
According to Sean Graham, the managing director of Assured Support, the FSC’s assertion that undercapitalisation and underinsurance can exacerbate the risk of licensee failure is “partially true”.
“Entities without adequate resources are more vulnerable to shocks, and insolvency heightens the harm to consumers who cannot recover compensation. However, this diagnosis is incomplete,” Graham said in response to the FSC’s green paper on advice licensing.
“The licensees that failed did not collapse solely because of weak balance sheets; they failed because of deliberate, reckless or negligent noncompliance.”
In light of this, he argued that a larger factor that could have “prevented or at least mitigated” the massive claims flowing through to the CSLR is “effective compliance arrangements and a culture of accountability”.
“These concerns align with long-standing observations in ASIC’s oversight activities. However, the paper again extrapolates systemic conclusions from adviser self-reporting, which is anecdotal and vulnerable to cognitive bias,” Graham said.
“REP 813 does not provide data supporting widespread PI coverage failures. The proposal for mandatory post-licensing PI insurance reporting could enhance ASIC’s oversight, but the argument should rest on firmer evidence.”
According to the consultancy head, this is a “misdiagnosis” that unfairly shifts the burden away from compliance failures.
“Responsible licensees that maintain sound systems and meet their obligations now carry the cost of failures by those that did not. Through the CSLR levy, compliant businesses are effectively underwriting the misconduct of their competitors,” he added.
“The problem here is real, but it is not a problem of undercapitalisation. It is a problem of regulatory failure and cultural weakness in parts of the sector, where compliance was treated as optional until collapse made the consequences unavoidable.”
Graham also argued that making the accountability for compensation more closely aligned with responsibility would be a “more principled response”.
“Some form of mutual indemnity fund may provide a sustainable model, but only if all relevant stakeholders contribute. As the Shield and Guardian failures illustrate, financial loss rarely results from the conduct of advisers alone,” he said.
“ASIC has acknowledged that trustees, responsible entities and research houses all played roles in enabling or failing to prevent these advice collapses.
“Unless such participants are included in the pool, the CSLR risks entrenching the very inequity it was designed to resolve, making responsible licensees pay for the deliberate or negligent failures of others.”
Appearing on the ifa podcast earlier this month, CSLR chief executive David Berry explained that when the scheme first modelled what it expected to see in terms of complaints, its actuaries expected the “massive” category to be exceedingly rare.
A failure approaching the scale of Dixon Advisory – clearing the bar of either 400 complaints or more than $50 million in compensation to be paid – should be a one in 20-year event.
“[United Global Capital] has just come. We’re now dealing with Brite, which we don’t know the full extent of how that’s going to impact, you’ve got all the fallout from Shield and First Guardian,” Berry said.
“Initially, they were called black swan events. Well, I think we’re dealing with white swans now because there’s … quite a few of these now.”
Let’s get real. We can pretend all we like that “if people just did the right thing…”. People respond to incentives. Crooks will always target the finance industry – because thats’ where the money is! Whether they start out that way or slide into it through gambling, drugs or “poor culture” – it doesn’t matter.
The only way to protect is to have multiple reputations AND balance sheets at risk. If you don’t have the capital behind you, you can’t play unitl you convince someone who does to back you with theirs. Then at least clients don’t HAVE to trust you to be safe.
The idea that small self licensees are the answer flies in the face of the data. Sure you may well be sweaky clean and do a great job, but your very existence is what makes this possible. For all the “harm” of big licensees, they at least foot the bill.
Sure it seem preferable not to have to face an auditor every 6 months, especially knowings that our compliance team have real-time access to everything we do, with all records permanently accessable. There is just nowhere to hide. But then there’s the advantage of being able to address issues systematically, so they don’t occur, but also knowing that everyone in my business – and our licensee network – has the same radical transparency. It doesn’t guarantee, but the incentives must certainly weed the right ones out.
We pay more than some, but price is not the only cost.
The FSC’s continual bleating about smaller licensees being more likely to fail smacks of desparation. The dinosaur dealer groups they represent are on the nose and have no place in the future of our profession. They know this!!
All of the best advisers I know, have ditched the big licensees and are now self-licensed (or will be soon).
Having your own licence = less cost, more efficiency, less headaches, more flexability around software/systems, less risk and more client friendly processes.
We did it a few years ago, and it was the best thing we have done since starting our buisness 20 years ago. Yes there was an upfront cost and some disruption for a couple of months, but our compliance consultant made it a smooth transition. My only regret is that we didn’t do it several years earlier.
Yeh good to hear
It took a long time though to see the light : – )
It could also be argued that if ASIC had of done their job and acted on tip-offs it would have massively reduced the impact on the CSLR, moreso than any compliance measure.
ASIC had over 10 years and some 60 Adviser complaints and did Nothing to stop Dodgy Dixons MIS Fiasco.
ASIC had multiple years and tip off for other MIS blow ups too.
&
ASIC will be held responsible for = NOTHING of course.