CSLR built on moral hazard says SIAA

The Compensation Scheme of Last Resort (CSLR) “was built on the shaky foundations of moral hazard” and its shortcomings are obvious now the scheme is in operation, according to the Stockbrokers and Investment Advisers Association.

“The CSLR was never intended to underwrite investment risk or pay complainants hypothetical ‘but for’ gains they did not receive because of their investment decisions. Yet this is what is currently taking place with the CSLR essentially guaranteeing investment returns of complainants,” it said.

The SIAA has used its submission to the Treasury Review of the CSLR to make clear that the scheme needs fundamental changes and that the Government should not seek to use the Treasury Review to simply “kick the can down the road”.

“The way in which fault is attributed under the law results in financial advice firms bearing the full costs of failed or poorly performing managed investment schemes where advice has been provided,” it said.

“It is inequitable that a methodology used by AFCA in its determinations that results in a calculation of a large loss amount is not subject to independent review when it cannot be disputed by a counter party.”

“The payment of compensation to wholesale clients is not the intended objective of the CSLR. It was always intended for retail client who could not afford redress through the courts, not wholesale clients who have that financial capacity. The ability of AFCA to reclassify wholesale clients and accept their complaints has the potential to impact significantly on the sustainability of the CSLR and those financial firms subject to the CSLR levies when AFCA determinations brought by wholesale clients are unpaid and referred to the scheme,” the submission said.

“The impact of both the CSLR and the ASIC Industry Funding Levy could force small advice licensees to close their doors. For larger licensees, it is likely to result in an increased cost of advice as they pass on the costs of these levies to their clients. This is in direct conflict with the policy of both the Labor and Coalition parties that seeks to make access to advice more affordable.”

“The scheme does not allow either advisers or firms to manage risk or budgets. It is inequitable and unsustainable,” the submission said.

The SIAA submission has recommended that an independent expert be appointed to review the methodology used by AFCA to determine compensation amounts for the Dixon Advisory complaints.

As well, it wants all AFCA personnel determining damages have recognised qualifications and experience in and/or strong knowledge of capital markets.

The SIAA also wants the Government to cover the costs and claims of the first 12 months of the scheme, as originally promised and for the scheme to be redesigned to take into account the fact that “currently PI insurance does not respond in any meaningful way to complaints involving the failure of financial advice firms”.