CSLR model ‘disproportionately funded’ against advisers, Senate committee hears

In a hearing about the upcoming Compensation Scheme of Last Resort (CSLR) – which aims to provide limited compensation where a determination issued by the Australian Financial Complaints Authority (AFCA) that relates to a financial product or service remains unpaid – and the Financial Accountability Regime legislation, many of the speakers raised concerns about the funding of the model.

The Financial Planning Association of Australia's (FPA) senior manager, government relations and policy, Brad Vermeer slammed Treasury’s proposal of the bill in an opening address delivered on behalf of delivered on behalf of the FPA, AFA and CPA, which would see the sector pay over $12 million of the $16 million levy cost in its first year.

“We are also concerned about a model that is disproportionately funded by financial advisers, the majority of who are themselves small business owners,” Mr Vermeer said.

“We question the equity and sustainability of the proposed model.”

Mr Vermeer also noted the July 2021 proposal paper that suggested that annual administration costs of the scheme would amount to $3.7 million.

“Whilst it has not been stated, we have deduced from previous statements that there might only be 20 to 25 unpaid determinations every year. This suggests that the cost per unpaid determination could be in the vicinity of $150,000,” he said.

“Based upon a projection of $4.36m in unpaid determinations each year, administration costs of $3.7m, would make up 46 per cent of the total annual costs. This appears excessive, and there must be a better way to design this scheme.

“We also object to financial advice paying a disproportionate share of the establishment and capital reserve costs, which serve the benefit of all sectors and not just those who have previously been the highest contributors to unpaid determinations.”

Similarly, the Stockbrokers and Financial Advisers Association (SAFAA) CEO Judith Fox said she raised concerns with Treasury that those who had zero unpaid determinations were paying for the scheme, saying at the time it would result in a “moral hazard”.

The details of who will be levied and for what amounts are yet to be confirmed.

“We have assumed that the levy arrangements as detailed in the proposal paper are the ones that will apply and our feedback is based on that,” Ms Fox said.

“However, we strongly recommend that the bill not be passed until we have been able to provide feedback on the regulations as the ‘devil is very much in the detail’ when it comes to the way the levies are determined.”

Later in the hearing, the Financial Services Council CEO Blake Briggs fronted the committee and targeted the regulatory framework for not having “strong capital requirements” for the advice sector.

“…there has not been effective enforcement of the existing requirement to hold ‘adequate’ capital,” Mr Briggs said.

“The FSC recommends strengthening capital obligations so that the well-resourced and effectively managed advice businesses are not left underwriting the poor practices of their competitors.

“Similarly, we support strengthening the professional indemnity insurance requirements for the advice sector, to provide a first line of defence for consumers seeking compensation, and for evidence of insurance arrangements to be provided to ASIC to enable spot checks.”

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.