IFPA pushes for addition of wholesale and general advice to CSLR

Bringing managed investment schemes (MIS) into the Compensation Scheme of Last Resort (CSLR) has been a measure for which a range of industry stakeholders have advocated; however, the Institute of Financial Professionals Australia (IFPA) said efforts to reduce the burden on financial advisers need to go further.

Natasha Panagis, head of technical services for the IFPA, said without immediate changes, the escalating costs risk driving small financial advice firms out of business and reducing access to quality financial advice for consumers.

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In its submission to the Treasury review of the CSLR, the IFPA re-emphasised the recommendations it made in its original submission to Treasury in February, which recommended that the government should fully fund the first 12 months of the CSLR as originally promised.

Additionally, it said the scheme should not apply retrospectively, and all legacy complaints predating its implementation should also be funded by the government.

Panagis said the IFPA would also like to see the reinstatement of the financial advice sector cap to $10 million to prevent disproportionate levies on advisers and a limit to compensation strictly to actual capital losses to ensure the scheme is a true last-resort mechanism.

“The financial advice sector has been shrinking in recent years, and the rising costs associated with the CSLR may further accelerate this decline,” Panagis said.

“This has far-reaching consequences: rising costs for consumers, pushing financial advice further out of reach for everyday Australians; an increased financial burden on existing advisers, penalising those who have done nothing wrong for the failures of others; and a deterrent for new entrants to the profession, making financial advice a less attractive career path.”

Crucially, the IFPA also argued that general and wholesale advice failures also need to be covered through the scheme.

“Financial advisers should not fund compensation claims tied to general or wholesale advice failures,” the submission said.

“AFCA’s ability to reclassify these types of advice as personal advice creates a risk that financial advisers will be unfairly burdened with claims from sectors that do not contribute to the CSLR.

“To address this imbalance, general and wholesale advice providers should also contribute to the scheme.”

Alexandra Sidoti, senior ombudsman – investments and advice at the Australian Financial Complaints Authority (AFCA), said the reclassification of complaints from general or wholesale to personal advice happens because, as highlighted in a number of United Global Capital (UGC) cases, a firm is trying to avoid responsibility despite providing tailored recommendations.

“There’s this attempt to make it general advice,” Sidoti said during the AFCA members forum last week.

“They might say it’s general advice at times but then there’s still a statement of advice provided, which tries to say, ‘Oh, we didn’t really recommend this, we’re just talking about this aspect of it.’ But it really is a furphy.

“From the outset, the contact with the client has been about comparing their existing APRA-regulated superannuation fund to an SMSF vehicle and investment in this particular product. They’re talking about their long-term goals and objectives, when they want to retire, how much they want to retire on, it’s very clearly tailored personal advice, which purports to take in client circumstances. Unfortunately, what we’re seeing is it fundamentally doesn’t.”

AFCA lead ombudsman for investments and advice Shail Singh added that while there has been “criticism” of the complaints authority reclassifying advice, it is complying with its legal requirements.

“It’s really important to point out that the tests at law … It doesn’t matter what the person says they’re providing,” Singh said.

“What really matters is they had reasonable awareness, or a reasonable person would think they had awareness, of the circumstances or the situation of the person and provided a recommendation taking that into account.

“Really important to remember what the law says, remember the case law with BT and Westpac, which made that extremely clear. I think it’s a really good point to make.”

MISs still on the agenda

While the IFPA highlighted its issues with general and wholesale providers escaping the consequences of their failures, it maintained that MISs still need to be covered through the CSLR.

“Financial product issuers and manufacturers, particularly managed investment schemes, must contribute to the scheme,” the IFPA submission said.

“This will ensure they are held accountable for the failure of their own financial products. Their exclusion leaves consumers without recourse when these firms collapse.

“There is also concern that product failures may be misclassified as financial advice failures simply to enable compensation, unfairly shifting costs onto advisers. Financial advisers should not be responsible for product failures when the issue lies with the product itself.”

While this position has enjoyed broad support from industry stakeholders, the Financial Services Council (FSC) has been something of a lone voice among professional associations in arguing against the inclusion of MISs within the scope of the CSLR, saying it could “potentially increase the cost burden on financial advisers” and that there are “more appropriate mechanisms that could reduce the cost burden”.

“If complaints against MISs were to be brought within the scope of the CSLR, it is not immediately clear that basis for it not also being expanded to capture other subsectors such as banking, superannuation or insurance,” the FSC said in its submission to the Dixon inquiry.

Speaking at an FAAA roadshow event in Sydney last week, chief executive Sarah Abood noted that this is a particularly salient example of where the interests of different professional bodies diverge, despite often providing joint submission with the FSC as part of the Joint Associations Working Group (JAWG).

“We have a very strong view that part of the fix for the CSLR is that it must cover MISs – so managed investment schemes. Those are collapsing, they are at the heart of every case that has gone to the CSLR so far,” Abood said.

“And yet, product failure is being redefined as advice value, because if it’s an advice failure, the client will get compensation. If it’s a product failure and the product provider has fallen over, the client gets nothing.”

According to the CEO, there are a lot of different groups working “behind the scenes” to redefine what they do as advice failures.

“We’re really concerned about that. We think it’s really important that MISs should come into the scheme,” Abood added.

“The FSC opposes that, as you would expect, given their membership base, so we don’t advocate together on that. But we are advocating together with the FSC in another number of other areas where we are aligned, and one of those is access to the ATO portal.

“Members’ interests will always come first, irrespective of those alliances.”