Capital requirements on the cards for licensees

The scheme, flagged by Assistant Minister for Superannuation, Financial Services and Fintech Jane Hume last month, is due to be introduced mid next year and would ensure customers are compensated for ombudsman determinations in their favour if an advice firm falls into administration and is unable to pay the determination.

Countplus chief executive Matthew Rowe told ifa the government may look at removing any incentives for troubled licensees to take advantage of the scheme by placing a capital requirement on licensees.

“If there’s a last resort scheme the government could look to introduce a capital requirement for AFSLs, because there’s a moral hazard if somebody sets up an AFSL and it blows up and they put themselves in administration so that everybody else will have to pay their bill,” Mr Rowe said. 

“PI insurance is hard to get and it's becoming more and more expensive, so the government would need to look at having a capital adequacy requirement [for licensees] to continue to operate.”

Mr Rowe said potential capital requirements as a result of the scheme were one of a number of “extinction events” that would see the advice sector shrink considerably in the next three to five years, as private mid-tier and boutique licensees increasingly shut their doors due to rising regulatory costs and the removal of product subsidies.

“There is still some pain and dislocation to come – there’s some, what I call extinction events, and that’s around the education standards and the exam, and also a big shift in terms of the economic drivers of advice, with the banning of grandfathered commission and rebates coming off,” he said.

“There will be less of us, less advisers and less licensees, and we are going to go through a consolidation stage. I think that financial viability, the strength of your balance sheet and cash position, the quality of your technology systems will be far more important.”

Mr Rowe said industry consolidation was unlikely to occur through the large M&A transactions of the past, with large dealer groups now regarded as more of a risk than an investment for financial institutions.

“I’m not sure that licensees are really worth a lot anymore and if you were to buy one, how do you manage any tail risk? Because these are long tail liabilities, potential risk can go back six or seven years,” he said.

“We bought Count Financial because Commonwealth Bank gave us a $300 million indemnity, that's pretty helpful when you come to manage risk. I’m not sure there are any players running boutique AFSLs who have the same sort of balance sheet, so I think there will be a natural consolidation not through M&A but just through shutdown.”