Productivity Commission must target phoenixing: FAAA

If the Productivity Commission is mulling over possible changes to Australia’s corporate insolvency framework, the Financial Advice Association Australia (FAAA) thinks phoenixing would be a good place to start.   

In a submission to the Commission’s consultation on business dynamism in Australia, the FAAA said that “any changes to the Australian insolvency framework will need to make this much more difficult to undertake, not easier.” 

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“Insolvency should not be an easy solution for those who have caused detriment to others,” the association added.  

To illustrate the issue, the FAAA pointed to Dixon Advisory: “Dixon Advisory was a subsidiary of E&P Financial Group. Clients of Dixon Advisory were recommended to invest a substantial amount of money into a [managed investment scheme] called the US Masters Residential Property Fund.  

“The URF invested in residences in New York and New Jersey. Companies associated with Dixon Advisory made hundreds of millions of dollars from the work involved in the renovation and management of these properties.”  

After that, the FAAA said, the URF declined substantially and clients started complaining about the quality of advice at Dixon. Then, in January 2022, Dixon collapsed.   

“The clients and advisers were transferred to another financial advice business within the same group for no payment,” the FAAA said.  

“Despite claims amounting to hundreds of millions of dollars, E&P Financial Group were able to settle with the administrators and walk away after making a contribution of $4 million. Thousands of complaints have been submitted to the [Compensation Scheme of Last Resort] and in fact compensation paid by the CSLR has been invested by these same clients with the E&P Financial Group.” 

The submission then moved to another example: an advice business that went into administration in 2023.  

“In [that year], the advisers were transferred to another business in the same group for no payment. The subsidiary business going into liquidation paid a dividend to the parent in the year of going into administration that was used to cancel an intercompany loan owed by the parent entity,” the FAAA said. 

In both cases, the FAAA said, clients lodged complaints with AFCA. As the companies in question were no longer solvent – even if their parent entities were – these complaints were subsequently transferred to the CSLR. 

“Clients of financial advice licensees who go into liquidation are able to access protection from the CSLR, whereas the clients of [managed investment schemes] are not covered under the scheme, and the only way that these investors can seek compensation is to argue that they received inappropriate financial advice from a financial adviser,” the FAAA said. 

Therefore, the association continued, “advised clients of these schemes will always seek to make a complaint against their financial adviser in order to access the CSLR, no matter how negligent or criminal the conduct of the MIS was.” 

This is one of the primary reasons that the CSLR levy has blown past the roughly $10-million-per-annum projections made by Treasury back in 2021, recently hitting $191.8 million for the FY2027 financial year.  

“This is 19 times what Treasury projected only five years ago. These losses have largely been driven by the collapse of managed investment schemes such as those related to Dixon Advisory, Shield and First Guardian. Financial advisers are therefore very circumspect in terms of people rapidly entering the profession or leaving the profession quickly. This is one sector where business dynamism comes with complications,” the FAAA said.  

Because of this, the association concluded, any changes to the current insolvency regime “need to more carefully restrict phoenixing activity.”  

“It is also important that liquidators are empowered to pursue phoenixing activity and that those who are responsible are held to account,” the submission said.