Advice firm warns CSLR hands AFCA an ‘open cheque book’

The proposed funding structure for the Compensation Scheme of Last Resort (CSLR) will deliver the Australian Financial Complaints Authority an ‘open cheque book’ capable of wreaking hardship on struggling financial planning firms, according to Infocus Wealth Management. 

In a blunt submission to Treasury responding to the draft CSLR legislation, Infocus has warned that the costs associated with the CSLR will ultimately drive up the cost of providing advice to clients – something which runs counter to the objectives of the Quality of Advice Review (QAR). 

The Infocus submission states that the proposed structure of the CSLR “does nothing to address the root causes of financial failures or the regulator’s complicity in adding to the problem by granting licenses to under-capitalised, inadequately resourced participants for whom it is much easier to go into voluntary administration rather than meet their legal, regulatory and professional and honourable obligations. 

What is more, the submission expresses “incredible disappointment” that Treasury has not published a Regulation Impact Statement (RIS) “that adequately models the true cost of this scheme to both industry and consumers, noting that ultimately, the only funding mechanism for the industry is the payment of fees by clients/customers”. 

The Infocus submission also points to the industry funding arrangements underpinning the Australian Securities and Investments Commission (ASIC) and the fact that the ASIC levy increased over 340% over a four-year period. 

The submission also expressed concern that existing AFCA infrastructure was not being utilised to establish the CSLR and the fact that the annual administration costs of running the scheme was $3.7 million on top of an establishment cost of $6.3 million and the creation of a capital reserve fund of $5 million. 

“This, in our view, is complete overkill when the total unpaid AFCA determinations relating to financial advice due to insolvency is only $3.7 million and the anticipated annual unpaid awards of compensation are significantly less than this figure,” it said. “By comparison, failed Managed Investment Scheme (MIS) operators have $6.4 million in outstanding awards of compensation.” 

“It is disappointing that a small subset of the financial services industry, namely the financial advice subset, will be required to fund $15 million (and likely more) to establish the CSLR when the wider range of participants that contribute to a substantially higher level of unpaid determinations have not been included in the scheme,” the Infocus submission said.