CA ANZ highlights vertical integration concerns in Dixon inquiry

In its submission to the Senate inquiry into the collapse of Dixon Advisory and its impact on the Compensation Scheme of Last Resort (CSLR), Chartered Accountants Australia and New Zealand (CA ANZ) has pushed for stronger responsibilities for the parent company of a collapsed AFSL.

“In the case of a vertically integrated business, where there is common ownership and/or directorship, the responsibility to ensure adequate capital resources to fund compensation to aggrieved clients should fall on the parent entity,” CA ANZ said in its submission.

This could be a model similar to the requirements for superannuation funds to maintain a level of financial resources necessary to meet their business needs, it said, adding that Dixon Advisory parent company E&P Financial Group should have taken on the burden of compensating clients.

“In the case of Dixon Advisory, ASIC found that its representatives breached the best interest duty to a number of clients and was penalised $7.2 million. Dixon Advisory had already been placed into administration, and its parent entity E&P Financial Group ultimately entering into a heads of agreement with ASIC to pay the penalty,” the submission said.

“Subsequent to this, E&P appointed 80 per cent of Dixon Advisory advisers to a subsidiary, Evans & Partners, and transitioned 78 per cent of clients to Evans & Partners.”

According to CA ANZ, an AFSL’s parent company should “assume responsibility of the licensee’s commitment to clients, similar to a licensee being responsible for their authorised representatives’ actions”.

“Similarly, where the operations of a licensee are transferred to a related party, as was the case with Dixon Advisory, the parent entity should assume responsibility for any complaints and compensation claims against the former subsidiary,” it said.

CSLR as implemented is not fit for purpose

While CA ANZ expressed its support for the CSLR and the importance of an external dispute resolution (EDR) framework, it said the scheme as currently constructed has flaws that were “highlighted by the collapse of Dixon Advisory”.

“Paying compensation must primarily be the responsibility of the party whose behaviour gave rise to the complaint. The EDR framework should have safeguards in place to ensure providers are in an adequate financial position to compensate their clients when necessary. These safeguards should include minimum capital adequacy requirements and ensuring adequate levels of appropriate professional indemnity insurance are held.

“If these safeguards exist and functioning adequately then the majority of complaints should be resolved, and any compensation paid at the EDR stage and a compensation scheme of last resort would be a genuine last resort.

“Unfortunately, the Dixon Advisory case has demonstrated that the CSLR as implemented is not fit for purpose and may not be sustainable.”

The submission argued that, given the vast majority of AFSLs have 10 or fewer financial advisers or hold a limited licence, a significant proportion of the CSLR levy will “fall upon small practitioners”.

“The retrospective nature of the scheme means financial advisers will be faced with the burden of covering over 40 per cent of Dixon Advisory claims with an approximate cost of $135 million,” CA ANZ said.

“Combine the CSR levy with the ASIC and AFCA levies along with professional indemnity insurance levies and small practitioners face a significant financial burden.”

The financial advice sector simply does not have the capacity to pay for these large losses, it added, and another failure on the scale of Dixon Advisory would “push annual CSLR levies even higher for longer, which would force more financial advisers out of the sector jeopardising the long-term sustainability of the CSLR”.

“It is inappropriate that small financial advice practices should bear the brunt of the compensation payments for the failure of a large financial services firm. Nor is it appropriate that new entrants to the financial advice sector should be forced to pay for the failures of their predecessors for many years to come,” the submission said.

“We strongly urge the government to indemnify financial advisers against claims for losses that were incurred before the formal commencement of the CSLR.”