The CSLR is ‘needed’, how it’s funded is the issue

Speaking on an ifa webcast breaking down the Compensation Scheme of Last Resort (CSLR), the scheme’s CEO, David Berry, argued that the existence of the CSLR is a necessary step to ensure there is trust in the financial system and complaining that it has been established is counterproductive.

“I think you can have lots of discussion as to well, ‘woe is me, this is unfair’. It's here, it's been passed by Parliament, by both sides of government. The question is, now, is it needed? And I would say yes, it is needed,” Berry said.

“From what I'm seeing, I'm seeing a lot of people who are the victims of financial misconduct. Now, the unfortunate thing is, this is the 5 per cent of financial advisers that you would collectively be happy to see out of the business. But unfortunately, they're there, and we've got to look after these people because we need more people getting financial advice, not less.”

Part of the “big puzzle” of increasing the number of people accessing advice, he said, is creating a safety net that gives confidence that clients can trust and reach out to an adviser with whom they don’t have a prior relationship.

“When I look at the claims which have come through, there's a few things that have really stood out, and they've been consistent across the board,” Berry said.

“One is, we're dealing with a lot of very smart people, but when it comes to financial matters, the products are very complex, and they just don't understand it. The financial literacy of the individuals is also not at the same level as a financial adviser, so they're looking for somebody that they can trust.”

He noted that this is particularly necessary when entering retirement and the pension phase of superannuation, adding that “anything that can help that is a good thing”.

“The question is, how is it funded? And I think there is, from everything that I see, there is a need for the scheme. The challenge is, how is it funded? Who pays for it?” Berry said.

Phil Anderson, general manager of policy, advocacy and standards at the Financial Advice Association Australia, added that now that the CSLR is in place, it’s “unlikely that any government is going to remove” it.

“The question that they need to solve for is sustainable and equitable funding. At the moment it is, as David said, 85 per cent of this is being attributed to financial advice. I think that that's a great unfair treatment of the way things go wrong and the contribution of product failure is not being adequately picked up,” Anderson argued.

“We need to get that fixed. And then you look at from the perspective of who gets the benefit of the scheme. It's broader than just financial advice and clients of financial advice, it gives confidence to all the stakeholders. So, there should be a more equitable sharing of the cost of this scheme.”

Berry explained that as the administrator, the CSLR has no discretion as to how it operates because it’s “all outlined in legislation”, however he said what he can do is “be transparent”.

“That's my commitment to financial advisers, and to the industry associations, that we will be as transparent as we can be. If you feel that we're not, ask the question,” he said.

“You know, I in with everything that we put together, there's a way that I describe Phil [Anderson]. He's frustratingly smart. I've got to think through what are the [questions] that Phil's going to ask, because I need to make sure that I've got an answer that is accurate and right. I'm not interested in giving you an answer that he wants to hear.”

He added that “keeping the channels of communication open” is key to the operation of the scheme and that the CSLR aims to keep financial advisers aware of what’s coming down the pipeline.

“Where I see things that someone is not going to like I’m not hiding them away, I'm reaching out to the industry associations and saying, ‘this is coming, we can't change it, you're not going to like it. How do we move forward with it?’” Berry explained.

“And we'll work as hard as we can to support this industry, because I've been involved with financial services for over 30 years. It's something I love. I'm very passionate about, and I want to see it continue to go because it's something that's really needed.”

To hear more from ifa’s CSLR webcast, tune in here.