CSLR the ‘Grim Reaper’ for advice profession: AIOFP

As the latest large fund failures potentially wipe out hundreds of millions of dollars in superannuation savings for Australians, the future cost of compensating the Shield and First Guardian victims is set to fall on financial advisers.

While it has been broadly acknowledged that poor advice deserves a portion of the blame, the escalating cost of remediating clients of a small handful of firms that allegedly did the wrong thing could signal a death knell for the advice profession, according to Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston.

Speaking at the association’s conference on the Gold Coast on Wednesday morning, Johnston said the Compensation Scheme of Last Resort’s (CSLR) initial concept and genesis was “supported by all industry stakeholders”, which he called a “pleasing outcome for the advice profession and consumers at the time”.

“Unfortunately, however, the CSLR guidelines were professionally tampered with at the point of legislation in June 2023, an event that has greatly disadvantaged consumers and the advice profession,” he said.

“Although we welcome former minister [Stephen] Jones’ pre-retirement/election initiative of instructing Treasury to review certain aspects of CSLR, it will only ever be a Band-Aid solution. CSLR legislation is fundamentally and critically flawed, it has become potentially the Grim Reaper of the advice profession.”

Categorising the prior Labor term in government as one of “severe vacillation”, Johnston expressed hope that things would change with a new minister.

“This pause will hopefully give Minister Mulino time to reassess the circumstances/unintended consequences of this event and recommend structural legislative change,” he said.

As part of the AIOFP’s push to highlight how drastically different the current version of the CSLR is to what was originally envisioned through 2017’s Ramsay review and the subsequent royal commission, the association head has sought responses from those involved in recommending the scheme on how it has been implemented.

Namely, royal commissioner Kenneth Hayne and the Ramsay review panellists – Professor Ian Ramsay, current ASIC commissioner Alan Kirkland, and current Productivity commissioner Julie Abramson.

“We are seeking their cooperation to publicly state that the CSLR structure they initially recommended is not reflected in the current CSLR legislation,” Johnston said.

“We have been disappointed with the response from three, whereas Mr Kirkland is the only one not to respond. The responses varied from ’not wanting to be involved’, ’no longer interested’ and too conflicted to comment’.

“Considering the many millions spent by consumers/taxpayers on these matters and the influence these individuals have wielded, they should be compelled to comment post release when it’s in the best interests of consumers in our view. We contend that if any of these highly esteemed and respected individuals co-operated, it will shine a different light on the CSLR issue.”

Once again putting the blame for the “tampered” outcome on the Financial Services Council (FSC), he is seeking cooperation from the FSC with “informing Minister Mulino that their lobbying success with the CSLR legislation needs to be rescinded due to the seriousness of the unintended consequences”.

“Considering CSLR and the Life Insurance Framework (LIF) legislation are arguably the two most draconian legislative outcomes in financial services history, and the FSC successfully lobbied both outcomes, we will be requesting they also include the modification of LIF in their report to the minister,” Johnston said.

He added: “The manipulated CSLR legislation is an attempt to perpetuate the flawed and outdated narrative that financial advisers are responsible for the failure of financial products. This no doubt suits the agenda of ASIC and the other stakeholders, but it must end.”

Johnston also took aim at the regulator, which he claimed had been “avoiding responsibility for decades” and shifting the blame to financial advisers.

“In doing so [ASIC] have allowed the other stakeholders to be less than efficient with their conduct, particularly the ’big end of town’,” he said.

“ASIC takes no responsibility for allowing flawed products onto the market and no responsibility for the ongoing monitoring of these products, so what does ASIC actually do to protect consumers from products failing?

“Judging from its numerous press releases, it spends the vast majority of its time being reactive to relatively minor market offences by attacking low-hanging ’adviser fruit’ and not being proactive by holding other stakeholders to account for their conduct including themselves.”

Ultimately, he added, the cost of the CSLR will inevitably be passed on to clients in the form of higher fees.

“Furthermore, it is extremely difficult to attract new entrants into the advice profession with the grossly unfair CSLR liabilities casting a massive black cloud over the industry,” Johnston said.

“The CSLR solution is quite straightforward, manufacturers pay for product failure, financial advisers for poor advice outcomes and risk advisers for poor risk advice failure. Banning financial advisers from creating a vertically integrated business model will eliminate future ambiguity around the responsibility if a product fails.”