Advisers treated like ASIC litigation funders without a winning bonus

Mike Taylor

Managing Editor and Publisher

9 November 2022

The Federal Treasury has been directly challenged to declare whether financial advisers are funding regulatory activity around unlicensed adviser Melissa Caddick and the Australian Securities and Investments Commission’s (ASIC’s) appeal following its court loss to Colonial First State and the Commonwealth Bank.

In both instances, Treasury has been told that financial advisers were not at fault yet were likely to be levied under the current ASIC industry funding model (IFM).

The Stockbrokers and Investments Advisers Association (SIAA) has used its submission to the Treasury review of the ASIC IFM that the current regime does not work and that it is apparent that firms in the financial advice sub-sector are subsidising the costs of firms which are no longer in the sub-sector.

“It is apparent that those firms in the financial advice sub sector are subsidising the costs of firms who are no longer in the sub sector or who have reduced their exposure to the sub sector and are the subject of ASIC enforcement and supervision action in relation to personal advice issues arising from the Hayne Royal Commission,” it said.

“This is compounded by the fact that the number of financial advisers which form the denominator when determining the levy for the sub sector has fallen significantly since the model was introduced. Clearly this cross-subsidisation is not appropriate,” the SIAA submission said.

It said the personal advice sector was funding large scale litigation against the large financial services firms but that, unlike litigation funders, they received no credit for litigation wins.

“We note that recovered legal costs are applied back to relevant sub sectors. However, ASIC only successfully recovers a fraction of its total enforcement costs,” it said.

“A big issue for the sub sector is when ASIC loses cases and becomes liable to pay not only its own legal costs but the legal costs of the successful party —the advice sub sector bears those costs.”

“One could argue that because a loss in court means that the entity in question was not in breach of the law, charging personal advice licensees for the costs of this action runs counter to the principle that sub sector members pay for the wrongdoing of their fellow members.”

The submission said that one issue that demonstrates the SIAA’s point is that of unlicensed advisers.

“Enforcement costs for unlicensed advisers are currently charged to the personal advice sub sector. For example, we understand that ASIC is charging the costs of the Melissa Caddick enforcement action to the personal advice sub sector, despite the fact that:

• Melissa Caddick was holding herself out as a financial adviser but may also have been operating an unlicensed investment scheme,
• Melissa Caddick may have been providing unlicensed advice to wholesale clients as well as retail clients.

“We consider that advisers on the FAR are doing the right thing and shouldn’t be responsible for paying the enforcement costs of someone who isn’t. We also consider that enforcement of the licensing provisions benefits the entire financial services industry.

“Another allocation issue that stakeholders have difficulty understanding is why 60% of the costs of the Westpac case (that involved the provision of general advice about superannuation by call centre employees of a large bank) were charged to the personal advice sub sector.

“We note that licensees that provide personal advice to retail clients account for 14 per cent of enforcement costs since the commencement of the IFM (average over 4 years from 2017-18 to 2020-21). However, there is little transparency or understanding about what enforcement matters are being charged to the sector.”