The number of discontinued advice licences rose sharply as the 2020 financial year came to a close, with the COVID-19 crisis and rising regulatory costs placing extreme pressure on many small practices and forcing them to abandon self-licensing plans, new data has found.
Adviser Ratings’ Musical Chairs Report for Q2 2020 found that 83 financial services licences had been discontinued in the three months to June, a significant rise on the 61 licences that had ceased in the first quarter of the year.
The report noted that “as more businesses struggle with the current economic conditions”, the ratio of licences ceasing versus forming had accelerated over the past 12 months, and was now almost 3:1 versus 1.5:1 in the second quarter of 2019.
Further, there was now a trend towards more recently established businesses with between two and five advisers cancelling their licence, demonstrating that some practices that may have attempted self-licensing were deciding against continuing down this road.
Around 74 per cent of licences that ceased in the second quarter were five years old or younger, up from 65 per cent in the previous 12 months.
Deregistrations were also more evenly split among one-man band practices and multi-adviser groups, with 47 per cent of ceased licensees having one adviser and 87 per cent having five advisers or less, compared with 65 per cent and 90 per cent over the previous 12 months.
“These latest results show a worrying trend: that the sustainability pressure on younger businesses continues, however it is now spreading to the larger, two to five adviser self-licensed boutiques,” the report said.
The group noted that many of the advisers working in the ceased licensees - around 24 per cent - had opted to go on working in the industry but switch to working under a bigger AFSL.
In addition, five licences were cancelled by ASIC over the quarter and two suspended, which Adviser Ratings suggested could be a sign of the distressed business environment.
“Interestingly, two of the [ASIC] actions were due to a perceived lack of financial sustainability,” the report said.
“Given the ongoing pressures from enforced business shutdowns or isolation, we may see more licences being shut down this way, particularly with the financial year-end now behind us.”
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