‘Deep concern and disappointment’: Advice associations slam new levy

On Monday, the Compensation Scheme of Last Resort (CSLR) board publicly released estimates of what advisers will be expected to pay for the first full year of the operation of the scheme – which starts on 1 July 2024.

The CSLR estimate for the first levy period is $4.8 million, which falls within the scheme’s annual levy cap of $250 million and will be funded by the Australian government. This estimate is expected to meet eligible compensation claims and costs from the CSLR’s commencement on 2 April 2024 to 30 June 2024.

In addition, CSLR has provided a second levy period estimate of $24.1 million, which also falls within the scheme’s annual levy cap of $250 million and within the $20 million sub-sector cap.

This estimate is expected to meet eligible compensation claims and costs from 1 July 2024 to 30 June 2025.

The estimate for each sub-sector is:

• Financial advice $18.5 million
• Credit provision $1.5 million
• Credit intermediation $1.8 million
• Securities dealing $2.3 million

Financial advisers will be required to pay $18.5 million in total, with the payment expected to be made in September 2024. The Australian Securities and Investments Commission (ASIC) uses the estimate determined by the CSLR to calculate the leviable amount per entity, which the regulator said would equate to a minimum levy of $100 plus $1,186 per adviser.

Financial Advice Association Australia (FAAA) chief executive Sarah Abood expressed “deep concern and disappointment” about the adviser cost.

“The CSLR is intended to promote trust and confidence in the financial services sector and in particular, financial advice. However, if advisers are driven out of business by rising costs, through being made to pay for the poor behaviour of those who left the sector years ago, there won’t be a financial advice sector left to have confidence in,” Abood said.

“Coming as it does on top of an historically high ASIC levy, this flies in the face of making advice more accessible and affordable for consumers, which is the stated aim of our government.

“We have been supportive of the scheme in principle, while calling out that the scope is too narrow (through not including MISs) and that the scheme must not apply to financial adviser small businesses in a retrospective manner. This expectation is consistent with both the Ramsay and Hayne recommendations for the establishment of a CSLR.”

She added that the combination of the Dixon Advisory “black swan” event and a shortened government-funded initial period has had a “highly retrospective and negative effect”.

“It is extremely concerning that because of these issues, the high quality and compliant financial advisers of today are being asked to fund compensation for the clients of Dixon’s, a firm which has been in administration now since January 2022 – over two years ago and long predating the establishment of the scheme,” Abood said.

Despite Dixon entering voluntary administration over two years ago, it is still a member of the Australian Financial Complaints Authority (AFCA) and there are almost 2,000 complaints before the complaints authority. The FAAA said that all these complaints should be classified as “legacy complaints” and funded by government.

It also explained that, as a result of the time it will take AFCA to process all these legacy complaints, many claims will fall into the period for which financial advisers will be charged.

“The actuarial report estimates the total cost to advisers will be $18.6 million in 2024–25 – of which the vast majority relates to Dixon’s,” Abood said.

In comparison, the FAAA said, the amount the government will pay in the first year of the scheme is $4.8 million in total, while only $2.4 million of this is estimated to be for financial advice and only one Dixon’s claim included in this estimate.

“This flies in the face of the intent when setting up the scheme, as it will now become almost wholly retrospective in the way it applies to financial advice, well into the second and later years of operation,” Abood said.

“We are urgently calling on the government to remove retrospectivity by covering historical claims based on the date the claim is made, not the date the claim is finalised.”

Blurring the lines of advice and product

In response to the CSLR estimates, Association of Independently Owned Financial Professionals (AIOFP) executive director Pete Johnston said it is further evidence of the important distinction between advice and product.

“Canberra bureaucrats have now inflicted another cost onto advisers who have no choice but to pass it onto to their clients,” Johnston said.

“We are pleased the initial CSLR set-up costs are met by the 10 largest institutions, and so it should be. Considering institutions are responsible for over $40 billion of failed funds since 2007 and today represent over 97 per cent of all AFCA complaints, they are by far the greatest failure for consumers in the financial services industry over the past 40 years.”

He said advisers are blamed for these product failures, adding that the Quality of Advice (QAR) reforms will only exacerbate the issue.

“Our understanding is most past consumer AFCA debts are a result of product failure where an advisory firm is somehow blamed for a failure, ‘hung, drawn and quartered’ by ASIC with no capacity to pay whilst those responsible for the product failing or allowing it onto the market in the first place, run for legal and political cover,” Johnston said.

“This is precisely why we do not want QAR allowing institutions back into the advice arena, they are simply not very good at it.”

AFCA’s usage of the term “financial firm” also raised concern from Johnston, who said it is a “concise and convenient way of grouping advisers and product manufacturers together under one category to protect the institutions from market scrutiny and damage”.

“When are Canberra bureaucrats going to understand that advice and product are two diametrically opposed functions and should be separated?” he said.

“We will now put this issue on our lobby list with adviser clients and both sides of politics.”