Not including managed investment schemes in CSLR a ‘significant flaw’: SMSFA

In its submission to Treasury on the post-implementation review of the Compensation Scheme of Last Resort (CSLR), the SMSF Association said although it supports the objective of the scheme, the current model will ultimately end up impacting the access to advice for many Australians.

“Consumers should have access to financial compensation where they suffer a financial loss from poor or negligent financial advice,” the submission stated.

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“However, the current design of the CSLR is inequitable and unsustainable and poses a serious risk to the retail financial planning sector.”

The association highlighted in its submission that more than 80 per cent of all financial advice firms are small businesses with less than 10 financial advisers and the current CSLR model threatens both the viability of the scheme and the retail financial planning sector itself.

“This is due to several factors, including that the CSLR funding model is adjusted annually for the number of financial advisers during the relevant levy period,” it stated.

“Importantly, when the legislation was first introduced into Parliament in 2021, there were approximately 16,500 financial advisers, in 2022 just over 15,800 and in 2023 when the legislation passed, just over 15,600. Today, there are 15,512 financial advisers servicing an Australian population of nearly 27 million.”

The submission continued that a special levy was also built into the design of the CSLR “to fund the payment of a large body of eligible claims made against the scheme following a large failure or ‘black swan’ event”.

“Of serious concern is that since the CSLR commenced operation on 2 April 2024, we have now seen not one but two ‘black swan’ events, and a third potentially waiting in the wings,” it stated.

“More than 92 per cent of the expected claims of $70.1 million for the third levy period are from just two failed financial advice firms, being Dixon Advisory Superannuation Services Limited (Dixon Advisory) and United Global Capital Pty Ltd (UGC).”

According to the submission, the estimate of $70.1 million for the third levy period significantly exceeds the subsector cap of $20 million, meaning the special levy will have to be implemented to fund the estimated magnitude of consumer losses.

“Holding a sector accountable for the failures of firms who intentionally prioritise profit to the detriment of their clients, is not only unsustainable, but unjust,” it stated.

“It also demonstrates that the current design is resulting in moral hazard contributing to the increasing scale of potential CSLR liabilities being burdened on the personal financial advice sector.”

Furthermore, the association said the unpredictable contingent liability of the CSLR, coupled with the similar unpredictable annual costs of the ASIC industry funding model, which adds a further $1,500 for each financial advice firm and $2,691 for every financial adviser in 2023–24, is placing substantial pressure on many financial advice firms.

“This is forcing many financial advice firms offering financial advice on a part-time basis, such as those with a limited Australian Financial Services Licence (AFSL) or restricted scope to provide financial advice, to question if they can viably continue to offer financial planning advice to their clients,” it stated.

“This is despite client demand and the value their financial planning advice is providing to their clients. It is also a significant deterrent to new entrants into the personal financial advice, noting AFS licensees who only provide wholesale advice are not required to participate in the CSLR and only paid a flat ASIC funding levy of $812 in 2023–24.”

It added that this appears to be at odds with government reforms to “ensure Australians have access to quality and affordable advice”.

The SMSFA recommended that the current CSLR model be amended to ensure both it and the financial planning sector are viable into the future. It also urged ASIC to build stronger engagement channels with the sectors it regulates.

“This could include establishing dedicated working groups to provide industry insights and share information more readily, including alerting the regulator to potential red flags,” the submission stated.

“Importantly, this must be genuine two-way communication for this measure to be effective. Another important factor to support the viability of the CSLR is to ensure that all AFS licensees continue to hold appropriate professional indemnity insurance cover. It is our understanding that ASIC currently only assesses if PII cover is appropriate for an AFS licensee at time of application or as part of a surveillance activity.”

To address this, the SMSFA recommended AFS licensees be required to submit a copy of their PII certificate of currency when lodging their annual FS 70 and FS 71 forms and said ASIC could analyse samples from each relevant sector to confirm compliance or identify any emerging risks that may need early intervention.

“Finally, the responsibility for funding unpaid consumer losses should be shared evenly across the sector. The CSLR does not reflect this shared responsibility as it excludes product manufacturers, including managed investment schemes (MIS),” it added.

“We believe this is a significant flaw in the scheme, given that manufacturers whose products are poorly designed and improperly fail do not contribute to the CSLR, yet they have caused significant consumer detriment in the past.”