Bragg presses ASIC on Dixon response

On the back of continued questioning across multiple avenues in the Senate – including estimates, the committee hearings on the first Delivering Better Financial Outcomes bill, and the inquiry that eventually led to a recommendation that the regulator be split in two – Bragg has put a number of tough questions to the Australian Securities and Investments Commission (ASIC) focused on its part in the Dixon Advisory debacle.

The written questions, which the senator has directed to ASIC as part of budget estimates, are largely focused on seeking greater transparency about the regulator’s actions relating to the collapse and its investigations.

“The 19 April 2022 ASIC media release on suspending the AFS license of Dixon Advisory included a statement that ‘ASIC is also undertaking inquiries in relation to the transition of former clients of Dixon Advisory to Evans & Partners Pty Ltd, a related entity’. What did your investigations reveal?” Bragg asked.

“How many of these Dixon Advisory clients moved to other subsidiaries within E&P Financial Group and how many of these clients who moved have submitted complaints to AFCA, which will need to be paid for by the CSLR? Additionally, how many financial advisers transferred from Dixon Advisory to Evans & Partners?”

Speaking with ifa in May, FAAA chief executive Sarah Abood raised a similar issue, highlighting the role of Dixon parent company Evans and Partners (E&P).

“When this compensation is paid, much of it will go to E&P as they still have many of these clients on the books,” Abood said.

“It’s certainly what makes me the angriest, that advisers are on the hook for the failings of a listed entity. It’s unbelievable.”

Bragg also queried what action ASIC took given the sentiment among financial advisers is that the problems with Dixon Advisory “have been known for many years and had been reported to ASIC”.

“Can you please advise what reports ASIC had received, when and what action ASIC took in response to those reports? What was the trigger for ASIC to ultimately take action against Dixon Advisory?” he asked.

Along with questioning why the requirement for Dixon’s membership of the Australian Financial Complaints Authority (AFCA) client obligation scheme was extended a year, Bragg also asked why ASIC decided not to take any action against the financial advisers involved with Dixon.

“At the Senate estimates hearing on 4 June 2024, ASIC confirmed that you were investigating Dixon Advisory between 2015 and 2019, however, ultimately decided not to take any action against the financial advisers. With respect to this investigation:

1. Why did it take so long, if the client loss was so great?
2. What did you discover with respect to the sales practices and the related party URF fund, where the client losses were so great?
3. What processes did the licensee take to research the URF fund before it was recommended to clients and how did they monitor its performance?
4. Did you interview financial advisers to understand why they recommended such high allocations to related party products?
5. To what extent were senior managers involved in both the advice and product manufacturing side of the business and how were conflicts of interest managed?
6. Presumably, if you decided not to take action against individual advisers, then you must have decided that the core of the problem was the underlying business model. If this was the case, then why wasn't action taken against management and directors who designed and operated that business model?”

Bragg also raised an issue around the concentration of client funds in related party products, echoing concerns that FAAA general manager policy, advocacy and standards, Phil Anderson, had expressed to ifa around the level of exposure clients had to the US Masters Residential Property Fund (URF).

“Our main objection here is, one, just being able to walk away, but it’s what they have walked away from,” Anderson told ifa.

“This is predominantly related to this URF fund which is a related party of Dixon Advisory. There’s a preliminary AFCA case that [has] been released on a Dixon Advisory client, which suggests that this client had between 54 per cent and 75 per cent of their investments in related party products. They also had a significant overexposure to property, and that’s all tied up in this URF.

“This is not about advice that relates to unrelated party products. If it was advice that was related to external products, and something went horribly wrong, then you might question why was the parent company allowed to walk away from it?”

In his questions on notice, Bragg asked ASIC if this was a “surprisingly high allocation in ASIC's view”.

“Would such a high percentage of related party products normally be an alarm bell for ASIC? What monitoring does ASIC do to oversight this issue of high related party investment allocation for vertically integrated groups in the financial services sector?” he asked.

“Would ASIC normally investigate such situations to understand what incentives are being paid or pressure is being applied to the advisers to facilitate such a high allocation to related party investment products?”

Finally, Bragg turned towards the URF and the level of investment in the fund that came from Dixon.

“As part of ASIC's investigation of the Dixon Advisory scandal, did you manage to work out what percentage of the total investment in the US Masters Residential Property Fund came from clients of Dixon Advisory? Evidently it was a very high percentage. To what extent was this a concern for ASIC? Did this suggest a strong level of pressure had been applied from elsewhere in the company to support this product?”

In a letter to Financial Services Minister Stephen Jones earlier this week, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston said the AIOFP has referred its concerns around the role “Treasury bureaucrats” have played in the construction of the Compensation Scheme of Last Resort (CSLR) to the National Anti-Corruption Commission (NACC) for investigation.

“Further to our correspondence with your office on June 30th we have some additional information that raises further questions and confusion about the relationship between the CSLR, the Dixon Advisory failure and the Treasury bureaucrats who we assume structured the legislation and its outcomes,” Johnston said in the letter.

“This issue has enraged and galvanised the advice community like no other in living memory, it will substantially increase the cost of advice for consumers when the government’s objective should be to lower costs.”