The government’s proposed compensation scheme of last resort should be clearly split into product and advice responsibilities, ensuring advisers are not left holding the can for major product failures, according to the Association of Independently Owned Financial Professionals.
In a submission to the government’s consultation around the proposed scheme, the AIOFP suggested funding for the scheme should be split between product providers and advisers, with advice firms to be levied only for failures of strategic advice such as incorrect risk profiling or estate planning recommendations.
“It would be totally disingenuous to levy a fee upon the advice community for losses that they essentially have nothing to do with – surely the product manufacturers must now finally stand by what they build, manage and reap profits on,” the association said.
“Over the past 40 years they have successfully ‘spun’ the blame for their sector’s woes onto the advice community, so much so that the PI underwriters are seriously considering leaving the current Australian market.”
While the association agreed that both advisers and product providers should be liable for annual contributions as well as other one-off payments for “specific unforeseen circumstances”, there needed to be a fairer split between the two parties when it came to systemic product failures.
“For any hybrid failure that involves both product and advice intertwined, a separate committee with members from [both parties] should decide the split of responsibility. An independent chair [should be] sought to oversee the process,” the AIOFP recommended.
“If this is done the losses associated with actual poor financial advice will pale into insignificance against the $40 billion of failed managed funds since 1980.”
The association pointed out that a number of the major product failures in the financial services industry had occurred with products that had been given full approval from research houses and regulators, meaning it was unreasonable to blame advisers for not knowing the products would fail.
“The failed Astarra Absolute Return Fund has three positive research ratings, a major bank as its custodian, an impressive return track record over many years and the fund’s PDS was registered by ASIC and allowed onto the market – it looked great on paper but failed dismally due to alleged offshore fraudulent behaviour,” the submission said.
“If ASIC, a bank custodian, trustees and three research houses cannot detect fraud, how are advisers sitting in their offices meant to?”
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