The scheme, flagged by Assistant Minister for Superannuation, Financial Services and Fintech Jane Hume last month, is due to be introduced mid next year and would ensure customers are compensated for ombudsman determinations in their favour if an advice firm falls into administration and is unable to pay the determination.
Countplus chief executive Matthew Rowe told ifa the government may look at removing any incentives for troubled licensees to take advantage of the scheme by placing a capital requirement on licensees.
“If there’s a last resort scheme the government could look to introduce a capital requirement for AFSLs, because there’s a moral hazard if somebody sets up an AFSL and it blows up and they put themselves in administration so that everybody else will have to pay their bill,” Mr Rowe said.
“PI insurance is hard to get and it’s becoming more and more expensive, so the government would need to look at having a capital adequacy requirement [for licensees] to continue to operate.”
Mr Rowe said potential capital requirements as a result of the scheme were one of a number of “extinction events” that would see the advice sector shrink considerably in the next three to five years, as private mid-tier and boutique licensees increasingly shut their doors due to rising regulatory costs and the removal of product subsidies.
“There is still some pain and dislocation to come – there’s some, what I call extinction events, and that’s around the education standards and the exam, and also a big shift in terms of the economic drivers of advice, with the banning of grandfathered commission and rebates coming off,” he said.
“There will be less of us, less advisers and less licensees, and we are going to go through a consolidation stage. I think that financial viability, the strength of your balance sheet and cash position, the quality of your technology systems will be far more important.”
Mr Rowe said industry consolidation was unlikely to occur through the large M&A transactions of the past, with large dealer groups now regarded as more of a risk than an investment for financial institutions.
“I’m not sure that licensees are really worth a lot anymore and if you were to buy one, how do you manage any tail risk? Because these are long tail liabilities, potential risk can go back six or seven years,” he said.
“We bought Count Financial because Commonwealth Bank gave us a $300 million indemnity, that’s pretty helpful when you come to manage risk. I’m not sure there are any players running boutique AFSLs who have the same sort of balance sheet, so I think there will be a natural consolidation not through M&A but just through shutdown.”
Shouldn’t the headline read “Head of Countplus would like capital requirements for all licensees to help get rid of the smaller licensees”.
well on that basis, advisers would not want to joing Countplus, with net assets only 78M counting is a microcap stock, and accumulated losses and no reserves. So this thesis should have us all rushing for IOOF, the best capitalised. Is that a good outcome? Perhaps rather than running an article that is good for your own book, run an article that argues the last resort scheme is a burden to advice cost delivery and should be funded elsewhere.
Let’s not single out the AFSL model, lets go the whole way, retail, medical, building, construction, accounting, legal. Rather than improve competition and services, let’s restrict it to death with some extra compliance, checklists.
Maybe we just all work for the state
This is not a reason to further entrench the large AFSL model, which is just an excuse for vertically integrated product flogging. It is a reason to get rid of AFSLs altogether and have all advisers individually registered like doctors, accountants & lawyers.
I see no reason why advisers cannot be individually registered, I know the main reason i stayed with a group was because of the admin and technical backup, plug the mate ship of course which you kind of lose with your own AFSL
Awesome, and guess who will pay for that too! Advisers.
Why doesn’t the government self insure the industry
Hold all insurance premiums like they do for road accidents etc
TAC (and the equivalent in other states) operate at a loss buddy…but other than having no idea, particularly in relation to State and Commonwealth arrangements, quite a brilliant suggestion / analogy really.
well aren’t you a knob
I agree