‘Precarious and potentially lethal cliff’: AIOFP says advice doomed without CSLR changes

As financial advisers await the results of the Treasury post-implementation review of the Compensation Scheme of Last Resort (CSLR), which was interrupted by the federal election, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston argued that the profession needs to “learn from our past mistakes”.

“The advice profession is on the precipice of a precarious and potentially lethal cliff, we need to act,” Johnston told members.

The potential fallout of the CSLR is well understood among advice professionals at this stage, with the cost from both Dixon Advisory and United Global Capital already costing the sector millions.

There are additional “dark clouds” on the horizon, including a potential exposure to Shield Master Trust and First Guardian Master Fund of $440 million through a single advice firm.

According to Johnston, the advice profession is “doomed in its current form if the minister does not address the CSLR circumstances”, and avoiding this requires better lobbying in Canberra.

“It is time to address the ‘elephant’ in the room of financial adviser politics, we are at a critical juncture of the advice profession’s survival. This paper will no doubt polarise opinions and ruffle some well-placed feathers, but it is designed to do just that,” he said.

“We must learn from our past mistakes or most advisers will perish at the hands of the Compensation Scheme of Last Resort manipulation.”

Much of the blame, he argued, falls at the feet of the Financial Services Council (FSC).

“It is not hard to be bizarrely in awe of the political achievements of the FSC over the years but unfortunately, it has been against the best interests of the advice profession,” Johnston said.

“They have overachieved for the institutional sector and inflicted immeasurable pain on the advice profession.”

He added that the FSC is “responsible” for the CSLR in its current form and banks exiting advice post-royal commission have led to the group looking to recruit advisers into their membership to “legitimise their adviser credentials in Canberra”.

“We cannot let this happen,” Johnston said.

“It is political and commercial reality that any association that is predominately funded by the institutions and has a majority of institutional executives on the board will be favouring policies that benefit their dominate membership faction.

“It can therefore be argued that advisers in the FSC membership are only giving their membership fees and political capital to the FSC to be ultimately used against themselves, recent history has clearly demonstrated this outcome. Adviser members will only give the FSC an implied mandate to represent the advice profession in Canberra with the politicians.”

However, with the exception of standing as something of a lone voice among professional associations in arguing against the inclusion of managed investment schemes (MISs) within the scope of the CSLR, the FSC has been a prominent part of the chorus pushing back against the cost imposition of the CSLR on financial advisers.

Notably, it was among the earliest to argue that the so-called “but for” element of determinations be excluded from the scheme.

“It does not align with community expectations that 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, not the actual losses a consumer has incurred,” FSC chief executive Blake Briggs said in February.

It’s not the first time Johnston has pushed back on the FSC’s role in the profession, telling advisers earlier this year they should be “continually vigilant of any involvement the FSC has with advice issues”.

He hasn’t backed off this sentiment, with Johnston’s latest missive encouraging the advice profession to “distance itself from the FSC” and “counter any attempt by the FSC to convince the minister that the advice profession supports the CSLR in its current form”.

Appearing on The ifa Show earlier this month, focusing on regulatory reform, Briggs argued the case for a stable advice framework that would provide confidence for advice businesses.

“Wouldn’t it be lovely to get an advice framework that has stability for the next decade, so that advice businesses can have confidence that, when they’re bringing on an adviser, putting them through the professional year, they will get the commercial return for that,” Briggs said.

“But also allows superannuation funds to have conversations with the vast bulk of their middle membership that is never going to go off and get third-party professional advice but they can get that information assistance from their fund and have a better standard of living in retirement.

“That’s the sweet spot where we can marry up those two objectives.”

However, while Briggs said there is “a lot of goodwill to try to land in that place”, he made it clear the lobbying approach to ensure this kind of outcome is not easy.

“It does require some of the more, I don’t want to be too harsh, but the fringe elements of the debate to not try to overreach in this process and for [Minister Daniel] Mulino to adjudicate between those groups,” he said.

Briggs added: “If the industry gets ahead of itself and is saying, ‘Why haven’t you given us certainty yet? Or why haven’t you agreed that my priorities are also your priorities?’ We’ll actually end up getting them offside.

“The reality is we need to work through them, methodically, help them do their job well. And that’s where we can provide a lot of support but also be constructive. If you’re too loud and shrill in some of these debates, you very quickly lose a potential ally. So, let’s take the mature approach, let’s take the high road approach and I think we can get some important stuff done during the term of Parliament.”