While the Compensation Scheme of Last Resort (CSLR) was – as the name suggests – designed as a safety net, it has become a “first-resort tax on financial advisers,” according to Institute of Financial Professionals Australia (IFPA) president Scott Heathwood.
In a statement, Heathwood said the current state of the CSLR has less to do with any “principle of justice” and is more a consequence of flawed legislative architecture. The current framework, he said, is “unsustainable and, frankly, unjust”.
Describing Treasury’s three CSLR and super system consultations as a “genuine opportunity” to fix this problem, Heathwood said the IFPA has a straightforward set of recommendations.
“The CSLR should reflect all participants in the delivery chain through which client investment funds travel,” he said.
“The current architecture does not. It loads the liability onto the adviser and largely exempts the managed investment scheme ecosystem that, in most cases of large-scale loss, sat much closer to the actual failure.”
Citing the principles of common law and equity in the Australian legal system, Heathwood said that in circumstances where multiple parties contribute to a loss, liability should be apportioned with respect to their “[failure] to mitigate.”
“Asset consultants, research houses, responsible entities and superannuation fund trustees all play material roles in accepting, directing, and managing client money,” he said.
“When a scheme collapses, the question should not simply be, ‘Which adviser recommended it?’ [It should be], ‘Which participants in this chain failed to discharge their duties and to what degree did that failure contribute to the loss?’”
Heathwood added that, over the past 25 years, the “greatest share of wealth generated by managed investments” has been distributed among manufacturers and promoters of investment products. Advisers’ share, by contrast, has been “comparatively modest”.
And yet, he said, “advisers carry 100 per cent of the CSLR liability when things go wrong”.
Echoing recommendations made by the Financial Advice Association Australia (FAAA), SMSF Association (SMSFA) and Stockbrokers and Investment Advisers Association (SIAA), Heathwood said the IFPA supports establishing managed investment schemes as a “primary subsector” within the CSLR – rather than “merely subject to ad hoc special levies when a collapse is large enough to trigger them,” as per Treasury’s current proposal.
Ultimately, Heathwood said the IFPA’s position was simple: “If you want a compensation scheme that endures and commands broad industry support, it must apportion responsibility across all participants who shared in the upside.
“You cannot indefinitely ask one part of the chain to absorb losses generated by the whole.”
