‘High-risk strategy’: Is boycotting the CSLR a viable option?

The drastically escalating costs of the Compensation Scheme of Last Resort (CSLR) have caused growing concern among financial advice professionals, particularly as it relates to the costs of the Dixon Advisory collapse.

Earlier this month, an update from the Australian Financial Complaints Authority (AFCA) noted a further 544 complaints about Dixon Advisory have been made since 15 February 2024, which means the financial advice profession will have to pay an estimated additional cost of approximately $65 million.

This equates to a direct cost to every financial adviser of $4,165 on top of what has already been disclosed by the CSLR, which the Financial Advice Association Australia (FAAA) said is a “huge impost for the financial advice profession that is already dealing with declining numbers and spiralling costs”.

These “spiralling costs” have caused advisers to contemplate drastic measures.

Dr Paul Moran, principal of Moran Partners Financial Planning, told ifa that in his eyes, advisers should boycott the CSLR levy until the Dixon issue has been resolved.

“That’s where I would start, with a boycott of the CSLR until that was resolved, which would put some pressure on the government to make that change,” Dr Moran said.

“However, I’m not convinced there’s not enough people amongst the profession who would do that, and therefore that’s why I don’t think it’ll actually work.

“You need to get 60–70 per cent and actually have rallies, that sort of stuff, and they would have to probably be driven by an organisation like the FAAA, and I can’t see them taking on that militant role.”

He added that ultimately, there would be enough people who would simply pay the fee to then make the ones who don’t pay compromised.

“People are unwilling to stick their heads up for fear of being identified by ASIC as troublemakers and potentially being targeted by ASIC,” Dr Moran said.

“Now I don’t know whether that would happen or not, but there’s definitely people who are gun shy of compliance and issues around sticking their head up.”

Gayle McKew, a financial adviser at Prosperity Planning, also believes that a boycott of the levies would be an effective but unlikely method to protest the unfair cost to advisers.

“When it comes down to it, there will be people that will have the guts to stand up and go, ‘I’m just not going to pay it’,” she told ifa.

“But the problem is that all of our assets are basically on the line, if we take an ethical and moral stance on the fact that we shouldn’t be paying for errors that were not our problem.”

Similar to Dr Moran, McKew also said that it would require a combined effort from advice associations to be able to work in practice.

“The FAAA indicated that they are representative of the best part of really 11,000 advisers, they and the AIOFP, which I understand looks after about 4,000 advisers, would need to get together and basically say, ‘go away, we’re not going to pay those levies’,” she said.

‘Very severe strategy’

FAAA general manager policy, advocacy and standards, Phil Anderson told ifa that advisers boycotting a mandatory levy would be a “very severe strategy” and “high-risk” too.

“The first key point to make is that the invoices for the CSLR will be issued to licensees, not to individual advisers and you’ve got more significant issues with respect to the consequences of non-payment,” Anderson said.

“It’s a strategy where you would be putting all your eggs in one basket and keeping your fingers crossed. It’s probably too risky. Because the regulator could just say, ‘Well, we’ve got remedies that we can take for people who don’t pay the levy and that’s exactly what we’re gonna do’.”

He added that the FAAA would be concerned about endorsing a course of action that could have a significant negative impact on advisers’ businesses.

“It’s a little bit like a civil disobedience program. I think there’s a range of other options that we would pursue first. You don’t want to, as a professional association, be calling on members to put themselves at risk in that respect,” Anderson said.

Alternative options

Dr Moran explained that it isn’t just the CSLR levy causing cost concerns for advisers, but also the increased ASIC supervisory levy.

“To pay an ASIC levy, when most advisers would say ASIC has failed to act quick enough to identify bad actors by focusing on minute details, and then the CSLR levy comes in and is retrospectively going to be funding the actions of a single, large bad actor before the thing was even in place and asking us to pay for that as well. It’s just one thing on top of another,” he said.

Looking beyond the possibility of a boycott, Dr Moran said that the best course of action to make some dent in the impact of both the CSLR levy and the ASIC supervisory levy is to pass the cost on to clients with a direct explanation.

“The next option to me was to make it explicit for each practice to work out what the relevant levies were on a per client basis and explicitly add that to the annual fee agreements or fee disclosure statements,” he said.

“Charge an explicit additional fee for all our clients with an explanation as to why that fee is there.

“The 15,000 or 16,000 advisers left, we might have 100 or 120 clients – you’re talking about 1.6 million Australians who are going to get an annual statement with an explanation of why we’re charging this explicit additional fee. I don’t know whether this government will care about that. But it makes the point.”

McKew added that advisers need to be “actively communicating” the challenges with their clients.

“It gives them the opportunity to go and speak with their local members, their MPs, all of those people that can make a difference at a decision level in Parliament, because effectively, we have to do the same thing,” she said.

“We have to be speaking to our federal members, our local members or anyone who has an influence within the political arena that can make a difference. I wrote to all my clients a couple of weeks ago.”

Both advisers agreed that something like the CSLR is important to provide restitution to clients that are unable to find it elsewhere, but the way it is set up currently is not fit for purpose.

“I know consumers need protection. But the things that they’re trying to protect them from have effectively been fund failures, scams, abject stupidity on behalf of some clients. I support it, I just don’t support the funding mechanism,” McKew explained.

Dr Moran added: “I don’t think there’s any issue around a compensation scheme to last resort being in place, the issue is the retrospective nature of the funding model.”