In a submission to Treasury, the Financial Planning Association (FPA) argued that the funding model proposed for the Compensation Scheme of Last Resort (CSLR) risks making financial advice less affordable and accessible.
Noting “significant structural changes” in the financial planning sector since the banking royal commission, the FPA explained that while 70 per cent of financial planners were licensed by the top 10 financial advice licensees prior to the commission, today 60 per cent of financial planners run their own licensees and small businesses.
“These sole traders and small businesses cannot afford the continuing rising costs associated with increased complex regulation,” the group said.
As such, it argued that the proposed scheme “risks making financial advice less affordable and accessible in an environment where increasing complexity in markets and Australia’s ageing population mean that the need for advice continues to grow”.
The proposed funding model for the CSLR is based on the ASIC funding levy, and one of its biggest flaws, according to the industry, is that levies imposed on the financial advice sub-sector are calculated according to the number of financial advisers on the financial adviser register (FAR).
The FPA explained that the exodus of the six large licensees from the advice market has had a “marked impact” on the advice market and the levies paid by other licensees.
“Given the significant withdrawal from the personal advice to retail clients by these six large licensees, they have not incurred a levy for this ASIC investigation and enforcement activity,” the FPA said.
Ultimately, the FPA noted that it opposes the CSLR funding mechanism relying on the ASIC industry funding model, which is “fundamentally flawed” and currently subject to Treasury review.
“The FPA therefore suggests it is inappropriate to use the ASIC IFM which is not ‘fit for purpose’ in its current form for the CSLR and pre-empt the outcome of industry funding model review.
It noted that while it supports a mechanism by which all licensees contribute to the cost of the CSLR — in a similar way to AFCA membership — to ensure all participants have a role in improving the conduct and consumer outcomes for the profession more broadly, “the graduated levy should be based on a risk-based approach where the larger the risk of consumers going uncompensated, the larger the levy”.
“On this basis, the FPA recommends that the graduated levy be charged to licensees who have AFCA cases which progress past the merits assessment and have a finding in favour of the complainant.”
Last week, in its pre-budget submission, the FPA among other things argued that the current CSLR Bill is “too narrow” in scope, “provides inadequate coverage to consumers”, and fails to address some of the “underlying cause of unpaid determinations” such as professional indemnity insurance.
“We believe the government should amend the proposed legislation to establish the scheme so that its design reflects a broader base that includes all participants in the financial services industry,” the FPA said.
This, it opined, could be achieved by “broadening the scope of the scheme to include the entirety of the jurisdiction of the Australian Financial Complaints Authority”.
