The Financial Planning Association of Australia (FPA) has indicated that it continues to hold reservations about the Compensation Scheme of Last Resort (CSLR) and Financial Accountability Regime (FAR) legislation which were recently introduced into parliament.
FPA chief executive officer Sarah Abood said that the legislation has not changed substantially from earlier drafts and noted that many of the concerns the association has flagged previously still remain.
“Firstly, we believe the scope of the scheme needs to be broader, to ensure that consumers are covered for the full range of matters considered by the Australian Financial Complaints Authority (AFCA), including managed investment schemes (MIS),” she said in a statement on Thursday.
As part of her response, Ms Abood acknowledged the review of the MIS regulatory framework announced by the government on Wednesday, which she described as a “positive step”.
“We are particularly pleased that this review will include a look at the thresholds that determine whether an investor can be treated as ‘wholesale’ or ‘sophisticated’,” she stated.
“However this could take some time, while consumers remain unprotected from a major source of harm in the sector.”
Another ongoing area of concern highlighted by Ms Abood is the “moral hazard” of businesses that are complying and efficiently run being forced to effectively underwrite bad actors.
“We need to ensure there are strong disincentives for companies and their directors to resort to the scheme — otherwise, we risk groups allowing their advice entities to go bankrupt (and the profession wearing the costs of consumer compensation), while the group and its directors continue their other profitable activities unscathed,” she said.
“The proposed remedy of cancelling the AFSL of a defaulting entity is little disincentive if it has already been made bankrupt. We would like to see enduring penalties for the related parties, directors, and responsible managers of the entities resorting to the scheme.”
Ms Abood noted that the FPA is awaiting an “overdue” review of professional indemnity (PI) insurance and suggested that a properly functioning PI sector would significantly reduce the calls on a CSLR.
Meanwhile, concerns were also raised about the costs that the scheme will impose on members of the FPA.
“We’re very pleased to see that advisers will not be asked to fund compensation for past misdeeds at the outset — however, the proposed sector cap of $20 million could see levies in the future of over $1,250 per adviser at our current numbers,” said Ms Abood.
“This is a significant impost on advisers who already face increased costs from the unfrozen ASIC levy, PI premiums, and the general increased costs all businesses are facing in the current high-inflation environment.”
Ms Abood pledged to continue working constructively with the government, advisers, consumers, and other stakeholders to help ensure the scheme can operate effectively and that consumers can have trust in financial advice.
