Not just Dixon: ‘Underlying issues’ with CSLR design hurting advisers

The Financial Advice Association Australia (FAAA) has taken the opportunity of the Treasury post-implementation review of the Compensation Scheme of Last Resort (CSLR) to stress the issues with the scheme and how disastrous it has been for financial advisers.

However, as FAAA general manager policy, advocacy and standards Phil Anderson told ifa last month, a lot of the problems with the scheme’s operation are already “well known”, with a range of stakeholders detailing the issues in their submissions to the Senate inquiry into the Dixon Advisory collapse.

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“We want action,” Anderson told ifa after the Financial Services Minister announced the review.

“We don’t want sitting around for months waiting for action to be taken when there is no certainty of when that will occur.

“The problems are already known, the need for the government to take action has been fundamentally clear for a very long time.”

Despite this apparent duplication of efforts, the FAAA has delivered an extensive submission to the review, making a “large number of recommendations that we believe will go a long way to addressing the numerous flaws in the design of the CSLR”.

The FAAA’s key issues and recommendations include:

• The law needs to change so that financial advice is not taking full responsibility for product failures, when financial advice has been provided and a product fails. Neither should personal financial advice be forced to pay for general advice or wholesale client advice failures.
• The exposure of small business sectors, like financial advice, to a special levy, needs to be modified to ensure that it will never exceed the sector cap. The sector cap should be reduced to the original proposal of $10 million.
• To remove the retrospective element of the scheme, which is contrary to the Ramsay review and Hayne royal commission recommendations, the government must pay for all claims received before the commencement of the CSLR scheme.
• Consistent with the government’s original commitment, they must pay for the first 12 months of the scheme.
• The CSLR should operate as a genuine scheme of last resort, with payments on the basis of capital loss, without interest and only after all potential recovery action has been concluded.
• An entity should be appointed to perform a role similar to the Fair Entitlements Guarantee Recovery Program that undertakes every possible effort to recover funds from responsible parties.
• Changes to insolvency laws should be made to enhance the prospect of recoveries and to better enable responsible parties to be prosecuted.
• ASIC should thoroughly review financial firms where CSLR payments are made to investigate misconduct and to consider broader issues such as product failure and inappropriate business models. ASIC should also consider any potential breaches of insolvency laws.

While many of these concerns, as Anderson had previously signalled, have been well known for months, the submission provided the review with a distillation of the major problems the advice sector has grappled with since the CSLR was legislated.

“At the core of what has gone wrong, are issues directly related to the development and promotion of in-house investment products that were poorly managed, with unacceptable levels of conflicts of interest,” the FAAA submission said.

“This is compounded by insolvency laws that favour corporations over consumers, resulting in the CSLR creating a moral hazard for the profession, in that the consequences of poor behaviour are not borne by those who have perpetrated it, but by those who are innocent of wrongdoing.”

Among the FAAA’s new recommendations is for the establishment of an entity that can attempt to recover funds from responsible parties and reduce the cost to advisers.

The association has taken inspiration from the Fair Entitlements Guarantee (FEG), which is also a scheme of last resort, designed to protect the interests of employees when their employer goes into liquidation.

Unlike the CSLR, the government funds the FEG – to the tune of $2 billion since it was established in 2012.

“There is also a FEG recovery program, which pursues companies that have failed to pay employee entitlements, where they believe that there are grounds for taking action,” the FAAA said.

“The FEG recovery program includes the funding of liquidators to take action of this nature. Since the commencement of the recovery program in 2015, $470.8 million of FEG advances have been recovered by the Australian government.”

Given there is “no evidence of any recovery action” relating to firms responsible for unpaid AFCA claims and subsequent CSLR payments, the FAAA argued a similar program is “essential” for the CSLR.

“A body should be responsible for the pursuit of these insolvent firms, their directors and related entities and have the capacity to fund recovery action,” the submission said, adding that any funds recovered must be used to reduce levies on the advice profession, not put into consolidated revenue for the government.

“Our members are extremely proud of the financial advice they provide, the businesses they work for and the role of the financial advice profession,” the FAAA said.

“Our members were some of the first to raise awareness of the problems at Dixon Advisory with ASIC, as well as concerns about other historic collapses, and will continue to call out misconduct and the risk of detriment for clients.”