‘Lack of understanding and poor decision making’: FAAA blasts ASIC’s Dixon investigation

Weeks after the submissions to the Senate economics references committee’s inquiry into wealth management companies first began to trickle out, the committee has finally released the Financial Advice Association Australia’s (FAAA) contribution.

Among the FAAA’s extensive submission to the inquiry is a range of criticisms related to the Australian Securities and Investments Commission’s (ASIC) investigation into Dixon Advisory, particularly that it was “slow to investigate” the reports made all the way back to 2005.

Responding to questions on notice from Liberal senator Andrew Bragg, in which he relayed that the sentiment among financial advisers was that the problems with Dixon Advisory “have been known for many years and had been reported to ASIC”, the regulator said in July that the majority of the misconduct reports it received came after it had commenced its “first investigation”.

“Between October 2008 and September 2022, ASIC received 60 reports of misconduct in relation to DASS,” it said.

“As set out in ASIC’s prior response in Set 73, most reports were received 2019 or later, being after ASIC had commenced its first investigation.

“The earlier reports resulted in ASIC conducting surveillances or were subject to no further action. One such surveillance subsequently led to the commencement of an investigation in July 2019 relating to suspected breaches of best interest duties and conflict of interest.”

In ASIC’s submission to the inquiry, the regulator further detailed that it received 28 reports of misconduct in relation to Dixon between May 2005 and its commencement of an investigation in July 2019.

Providing context to the numbers, ASIC said: “At that time, we received an average of over 11,500 reports of misconduct each financial year.”

However, the FAAA said ASIC “did not do enough to investigate the actions of Dixon Advisory and related entities, or respond quickly enough; and when they did take action, it was flawed and inadequate”.

“There has been a long history of complaints about Dixon Advisory. We have been advised that ASIC undertook a significant surveillance review of Dixon Advisory in 2015,” the submission said.

“As part of that exercise, Dixon Advisory appointed a major consulting firm to review client files and to provide advice to ASIC on its findings. They also appointed a legal firm to engage with ASIC. We understand that ASIC obtained copies of many client files at that time.

“What we don’t understand is why the extent of the problems were not obvious to ASIC at that time, and why they did not take enforcement action to correct the poor practices that were seemingly present. It seems that things only got worse from that point. What we did see in 2015, is a change of Responsible Entity for the URF, and some changes in directorships.”

For its part, the corporate regulator noted that it commenced a surveillance of Dixon on 27 January 2015.

“Using our compulsory information gathering powers we obtained information from Dixon, including a sample of client files, and we engaged with Dixon in response to some of the concerns raised with us,” ASIC said in its submission.

“For example, in response to concerns that Dixon’s website included potentially misleading statements about the costs and performance of SMSFs, we issued two infringement notices on Dixon in 2015.”

However, there is little in the way of detail on exactly why this was the extent of ASIC’s action at the time.

FAAA general manager Phil Anderson raised this topic at the association’s congress in Brisbane late last month, noting that it needs to be explored when the committee undertakes hearings.

“It will be interesting to get to the bottom of why ASIC didn't take action in 2015,” Anderson said.

Additionally, the FAAA said that while ASIC eventually investigated further in 2019, leading to the action it took in 2020, “unfortunately, by then it was far too late and the losses within the URF had been crystalised”.

Looking directly at ASIC’s investigation decisions, the FAAA submission included a list of questions it wants answered during the hearing:

• What were the findings of ASIC’s 2015 surveillance review of Dixon Advisory?

• Did ASIC request Dixon Advisory make changes to its practices in relation to URF, its Investment Committee governance, or to address any conflicts of interest within the business, as a result of its 2015 review of the business?

• Were the change of the URF Responsible Entity in 2015, and changes in Dixon Advisory directors, a result of actions related to the 2015 surveillance undertaken by ASIC?

• Did ASIC continue to monitor the operations at Dixon Advisory as a result of the findings of its 2015 review of the business?

Based on its analysis of ASIC’s investigation with the information available, the FAAA said the problem ultimately comes down to the regulator’s decision-making, not a lack of powers or funding.

“We do not believe that ASIC lacks the powers to deal with financial advice matters like those related to the Dixon Advisory matter. We do not believe that the solution here is more powers. We do not believe that the issue is more funding - as it is the financial advice profession who paid for ASIC’s action against Dixon Advisory,” the FAAA said.

“It would have been the MIS sector that would have paid for their investigation of the URF, if they had done this properly. We can only conclude that where this went wrong was a lack of understanding and poor decision making.

“Given that it has evidently not been tested, we are uncertain as to whether the law is clear enough and ASIC has the power to pursue matters involving misconduct on the part of a funds management business such as the URF, or where there are systemic conduct issues that are encouraged and condoned by directors and senior management.”

Recommendations related to ASIC

Among the FAAA’s 20 recommendations to the committee, it delivered four that concerned the corporate regulator.

Top of the list was that any fines and penalties resulting from ASIC action taken against financial firms for wrongdoing causing consumer detriment, should be allocated to cover the cost of the ASIC regulatory action, rather than the current situation in which the funds are allocated to the government’s consolidated revenue.

It has also sought great “visibility and accountability” around how ASIC responds to reports of misconduct, recommending that it be required to report annually on its investigations, findings and regulatory action taken in relation to reports of misconduct that ultimately ends up with insolvent businesses, where clients are being compensated by the Compensation Scheme of Last Resort (CSLR).

“ASIC reporting is more than likely to be after the investigation is complete or at least public. Such reporting should focus on what ASIC have done with respect to firms that are the subject of a CSLR payment,” the submission said.

“Such firms would most likely already be in administration or liquidation. Some reasonable exemptions from the reporting would be required for matters that are still subject to investigation, however only for a limited period.”

Additionally, the FAAA wants ASIC to be required to “look beyond the financial advice client files” and investigate the full financial advice value chain.

“There were significant and systematic conflicts of interest evident within the management of Dixon Advisory and related entities, particularly between the advice entity and its related in-house products. Based on publicly available information, these matters were seemingly not investigated by the regulator,” it said.

“The apparent focus of the ASIC investigation was on the output of the advice – via the client advice files – rather than the business model. This allowed these practices to continue despite ASIC’s 2015 surveillance of Dixon Advisory, to the detriment of consumers.”

It has also called for a dedicated reporting mechanism for financial advisers to report matters of concern, including about their own or another licensee, adding that there is a need for an ethical support line.