CPA draws attention to plight of small advice firms footing bill for ASIC enforcement

In its submission to the Treasury review of the ASIC industry funding model (IFM), CPA Australia said current participants are paying for past regulatory and enforcement activities taken against companies that were unlicensed, unregulated, or may no longer be part of the sector.

“This is particularly acute in the financial advice sector,” CPA’s executive general manager of policy and advocacy, Dr Gary Pflugrath said.

Namely, under the current model, the large institutional Australian Financial Services (AFS) Licensees that have ceased to provide retail financial advice are still subject to historical enforcement activities, the costs of which are borne by the remaining AFS licensees who are predominantly small to medium-sized businesses.

“The cost of enforcement activity against unlicensed operators appears to be borne by those who are appropriately licenced, which is arguably inconsistent with Section 10(4) of the ASIC Supervisory Cost Recovery Levy Act 2017,” Dr Pflugrath said.

He also highlighted the “significant increase” in regulatory and enforcement costs across the financial advice sector amid a considerable reduction in the number of participants paying the ASIC levy.

“This means that fewer numbers of participants are each paying higher levies to cover the overall increasing total cost of enforcement, regulation and oversight,” Dr Pflugrath said.

Moreover, Dr Pflugrath shone a light on the apparent lack of transparency with respect to indirect costs which average up to 40 per cent each year and noted that industry participants may be covering “some general and administrative costs” that are unrelated to ASIC’s regulatory and oversight functions.

“This is particularly evident with the financial advice sector’s indirect costs increasing significantly at the same time that enforcement costs have also risen significantly”.

Raising previously aired budgeting issues, Dr Pflugrath said: “The significant delays between ASIC levy estimate being provided and the final levies being announced each year, coupled with the significant variations between the estimated levies and the final levies charged, makes it extremely difficult for participants to accurately budget for their ASIC levies and to set adequate fees for their clients to recoup these costs”.

To address the concerns raised by Dr Pflugrath, CPA Australia made a number of recommendations including the separation of enforcement costs from ASIC’s day-to-day or “business as usual” regulatory costs. Instead, it said, these costs should be attributed to and, where possible, recovered from entities to which the enforcement activity directly relates.

Moreover, the group wants to see the cost of regulating unlicensed or unregulated activities, or activities relating to entities that are no longer regulated entities, recovered from them and not from regulated sub-sectors.

Additionally, to ease budgeting issues, CPA sees merit in the transition to a forward-looking forecast annual levy, based on the expected budget, with any adjustments made in the following year based on actuals.