‘The amount and the principle’: Why back a CSLR at all?

Speaking on a Financial Advice Association Australia (FAAA) webinar on Thursday, chief executive Sarah Abood once again stressed that the association has been “consistent supporters” of the Compensation Scheme of Last Resort (CSLR) in principle, just not the “absolutely diabolical” funding model.

“We do support the fact that there should be a scheme that exists if a consumer has suffered a loss because of bad financial advice, it’s fair that there should be recompense for that, and that is good for confidence in our profession,” Abood said.

This sentiment is similar to one that CSLR CEO David Berry expressed last month, arguing that a “safety net” would increase trust in the financial system.

“We’re quite supportive, particularly of the financial advice sector,” Berry said.

“There are far more people that need advice than are getting it at the moment. What we’re trying to do is help them understand that when you’re making big decisions and you don’t know who to trust, there is a safety net that’s available to help so that they can take those steps to getting the advice that they need.”

The main issue with this safety net is that when it has been stretched too thin, which the Dixon fiasco ensured was the case right from the start, it becomes, as Abood told Financial Services Minister Stephen Jones two weeks ago, “unsustainable”.

“What we think is absolutely diabolical is the funding model that’s been put in place to support it, and that is, without a doubt, the biggest issue that members are concerned about,” she said on the webinar.

“They feel that while they can see the argument for a scheme, they don’t see the argument for why they should be funding recompense for clients, in particular, clients of large listed groups.

“And the anger is centred mostly around Dixon, which is an absolute huge scandal. It’s looking likely at the moment that advisers themselves will be on the hook for something north of $135 million from that scandal alone.”

While the Dixon figure is unlikely to blow out further given the defunct firm’s membership of the Australian Financial Complaints Authority (AFCA) was finally ended at the end of June, new problems have since emerged.

Both United Global Capital (UGC) and Libertas bear many similarities to the Dixon collapse, though so far looking to be at a much larger scale.

Speaking to ifa last week, Sequoia CEO Garry Crole said the firm’s decision to close Libertas had nothing to do with the CSLR.

“The Libertas AFSL was no longer viable to run, and we wrote to all advisers in February 2023, more than 18 months ago, giving them a reasonable notice period the AFSL would be closed in 2023 and if they wished to join another of our AFSL, they could do so but under new terms of engagement where the provision of a service was commercial,” Crole said.

“Once all advisers had transferred to a new AFSL and there were no complaints that we believed to be still open, we appointed a receiver and asked for the AFSL to be cancelled.”

Indeed, while Crole insists that Sequoia did nothing wrong, he agreed that the current system needs to change.

“Sequoia believes the CSLR recovery program is legislation that needs review and is driving up the cost to the consumer, adviser and AFSL and believes the minister Mr Jones needs to listen to the industry and make changes immediately as to its current status,” he said.

Speaking on the FAAA webinar, Abood said that while these fresh issues are likely to be on a “much smaller scale than Dixon’s”, the principle remains the same.

“That principle that a large listed integrated financial group could close a single licensee entity down, walk away from those client compensation requirements, move the clients and advisers to another entity in the group, and go on operating while leaving financial advisers themselves have had nothing to do with it to pay the compensation is really, really causing a lot of concern,” she said.

“I think even more so the concern that that compensation is being paid to clients who are still being advised by the group that originally did the wrong thing.”

E&P wiping their hands of Dixon

An argument could be made that Dixon parent company E&P Financial Group had already removed itself from any of the fallout from its subsidiary’s collapse some time ago. However, its 2023–24 financial year results announcement last week, in which it boasted that all “legacy issues” were resolved, was still galling for advisers left to pay E&P’s bills.

In April, the Federal Court of Australia approved the 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 for $16 million.

E&P managing director and chief executive Ben Keeble said this was an “important milestone”.

“Financial year 2024 was a transitional year, marked by several key developments as we resolved our outstanding legacy issues, reset our strategy for the future and solidified our core business. However, challenging market conditions impacted the level of activity in our transactional businesses as mentioned in our first half result,” Keeble said.

“The group reached a settlement of the Representative Proceeding against EP1, DASS and former directors, which was approved in the Federal Court, representing an important milestone in the resolution of legacy issues. Additionally, the transformation of the E&P funds division was completed during the period.”

FAAA general manager policy, advocacy and standards, Phil Anderson took issue with a quote from E&P non-executive director David Evans, in which he said: “We exist to help our clients prosper. Focused on their objectives, we harness the collective expertise of our business to deliver their full potential.”

“I wonder if the Dixon Advisory clients feel that this is an accurate description of their experience with the E&P Financial Group, because this is certainly not the way financial advisers feel about the sorry Dixon Advisory scandal,” Anderson said on LinkedIn.

The CSLR is not mentioned once in E&P’s annual report – or as Anderson put it, a search “brings up a big donut”. Indeed, the only mentions of “compensation” at all are related to director remuneration.

Finding the nuance

Given the situation and the inherent unfairness towards the advice profession that these problems with the CSLR as legislated have brought, why support for a compensation scheme at all?

Speaking on the FAAA webinar, association chair David Sharpe explained that the FAAA does not support members having to fund wrongdoing.

“We don’t support that. If we had to … as a profession, make a modest contribution, sure. But we’re not up for $135 million,” Sharpe said.

“It’s probably the nuance, which is, while we support us someone having to pay when they’ve done nothing wrong themselves. I think this is that nuance between, we support the scheme of consumers being recompensed, we just don’t support the funding model,” he said.

Abood added: “When the legislation was first introduced, I think the first cab off the rank was early in 2023, the estimates of what that would be likely to cost was something between $300 and $400 per adviser.

“That was a level at which, I don’t think anyone was deliriously happy about it, but there was a level of, ‘OK, I can live with it if it’s sitting at that level’. But at the $20 million cap, which is the amount that we are currently up for as a sector, the most that we can pay without a special levy, that’s sitting at more than $1,200 per adviser now.

“That is a level that members are absolutely not OK.”

However, it is not just the amount that advisers are being asked to cover causing concern, she said, but the principle as well.

“We’ve got to ensure that the people who did the wrong thing are the ones who are paying for clients up to the fullest extent of the resources that they have available to them,” Abood said.

“There’s no excuse for asking the adviser group more broadly to make those payments if no action has been taken, for example, against the group where the wrong deed derived.”

She added that the FAAA is hopeful that, on the back of meetings with the minister and upcoming work with Treasury, some of these issues can be fixed and the CSLR can operate in a sustainable way.

“It’s very clear to us that changes to the law will be needed in order to fix this, and that the great positive, I think, out of that meeting from the minister is that there’s now a willingness to engage with that and at least to see what changes could be made to fix that hole,” Abood said.

“Because there’s no one that I’ve talked to who thinks that’s fair.”

Sharpe added: “The first step to fixing a problem is acknowledging that there is one in the first place. We certainly got that acknowledgment [from the minister] that there’s a problem loud and clear.”