‘Really angry’: FAAA slams CSLR process

Speaking on a policy update webinar on Thursday, the FAAA laid out its extensive concerns with the Compensation Scheme of Last Resort (CSLR).

Chief executive Sarah Abood and general manager of policy advocacy and standards Phil Anderson took a very different tone when discussing the CSLR than the one adopted by Financial Services Minister Stephen Jones in recent weeks.

“The government stands with consumers to ensure there are robust protections in place for them,” Jones said in Melbourne this month.

Conversely, speaking to an audience of advisers on Thursday, Abood said the FAAA was “adamantly opposed” to the way the CSLR has been rolled out.

“I do want to clarify that we have not and do not oppose the scheme in principle,” she said.

“Consumers knowing that they have this access is likely to improve our confidence in the sector. And that is a good thing for all of us.

“What we are opposed to, and adamantly opposed to, is the way that this scheme is being funded and, in particular, the massive legacy overhang that this scheme has been launched with. That was not anticipated when the legislation was introduced.”

More issues than just Dixon

While the minister hailed the passage of the CSLR legislation as a “victory at last for victims of financial misconduct”, Anderson pointed out that advisers see it differently, as they stand to bear significant financial costs due to the CSLR’s outcomes.

While many of the concerns the FAAA raised in relation to the CSLR focused on the Dixon Advisory collapse, it is far from the only issue the association identified on Thursday.

“We’ve been doing our very best to get to the bottom of how this game will work. It is complex, and the disclosure has been, I must say quite poor,” Anderson said.

“In fact, I have to summarise that we are really angry about how this has all landed.”

He added that the disclosure around the scheme in general has been “very poor and disappointing”.

“Look at the explanatory memorandum, the March 2023 bill and the financial impact provides meaningless numbers in terms of what the cost is, whether that’s the cost to the government or its the cost more broadly, those numbers are meaningless,” Anderson said.

“The government also refused to do a regulation impact statement. They relied upon the fact that the financial services royal commission was a process akin to an impact statement, but the royal commission was more than four years beforehand and it was before the Dixon Advisory matter came to light.

“It was not an excuse to avoid the responsibility to do a regulation impact statement, and that left us with very little understanding of what this might mean.”

The FAAA also noted that when the scheme was initially introduced, before it progressed to legislation, the cap on the cost to any individual sector was half of what it is now.

“In October 2021, the maximum amount that the financial advice sector, or any other sector, could be charged was $10 million,” Abood said.

“That increased from September 2022. In fact, it doubled to $20 million and that, on our current numbers, that’s about $1,300 per current adviser.”

Even though the FAAA’s current estimate for the third period of the scheme stands at $29.5 million, surpassing the sector cap, Abood cautioned that this might not prevent advisers from bearing the entire amount of the charge.

“The other point I will make though, is that the minister has the power to essentially ignore that cap, and to charge more if the minister wishes to,” she said.

Advisers paying for Dixon ‘unfair’

Among the FAAA’s principal concerns is that advisers are left holding the bag for a company that collapsed before the scheme was legislated.

“The question that we are asking loudly and publicly is why should the compliant small business advisers of today be paying for the Dixons collapse?” Abood said.

Anderson noted that as originally envisioned following the Ramsay review, the scheme would be “industry-funded, forward looking” and only service unpaid decisions that arise after it is established.

He also explained that in the 10 years prior to the establishment of the Australian Financial Complaints Authority (AFCA), there were $30 million of unpaid determinations.

“That gave us some context that we weren’t talking or suspect that we were talking about very large numbers resulting from this,” Anderson said.

Abood added: “The quantum of Dixon will most likely be many multiples of that, in fact … one estimate is as large as half a billion dollars.”

“Dixon has been a huge impact on the scheme. We’ve described it in various places as a black swan event. The size of this is well in excess of anything that anybody envisaged,” she said.

Anderson explained that one factor contributing to the potential skyrocketing of this figure is the methodology used for calculating losses.

“The administrators, in their analysis of what had happened with Dixon Advisory, focused on losses for one of the investments of a related party of Dixon, the URF, the fund investing in US residential property,” he said.

“They worked out that 4,606 clients of Dixon Advisory had lost money on their investments in URF, and this amounted to nearly $368 million of client money.

“Now, the administrators were looking at this on a simple loss basis, so they were looking at it in terms of the money that they had put in versus what was left in there or what they got out, rather than the way AFCA does, which is assess that on the basis of what their earnings should have been if it hadn’t been invested in an appropriate manner.”

Burden on advisers will continue to rise

The FAAA also pointed to the recent extension of Dixon’s AFCA membership, due to end on 8 April, which only serves to increase the amount advisers will be forced to pay in later periods of the CSLR.

“The estimation is that the quantum of complaints related to Dixon will continue to climb for a number of years,” Abood said.

“The estimate is $18.5 million for the next levy period. That’s just under $1,200 per adviser on our current numbers, but we are estimating that will go up in the third period to $29.5 million.”

This figure was, however, calculated before Dixon’s membership was extended, meaning it could still grow.

Among the other main objections, Abood said, is that the parent company of Dixon Advisory, the listed E&P Financial Group (previously Evans & Partners), has walked away unscathed.

“It doesn’t seem fair, to put it mildly, that the sector has been levied to pay for the cost of an entity that was made bankrupt, that was part of a large listed group,” Abood added.

Her comments came just as E&P Financial Group announced on the ASX that the Federal Court of Australia had approved the $16 million settlement of the class action filed by Shine Lawyers in December 2021 against Dixon Advisory & Superannuation Services (DASS), E&P, Alan Dixon and Christopher Brown.