CSLR moral hazards and recurring themes

The Compensation Scheme of Last Resort (CSLR) has declined to comment on the causes leading wealth management companies to collapse but has pointed to the moral hazards inherent in financial misconduct.

However, the CSLR has pointed to the fact that it has already detected recurring themes in the misconduct around which it has been required to assess compensation.

Those recurring themes are:

• Inappropriate advice to use an SMSF to borrow and/or invest in property (90% of all personal financial advice claims were linked to superannuation in some way)
• Misleading, deceptive advice or unauthorised transactions
• Advice that was not aligned to risk profile, personal circumstances or best interests of client(s)
• Failure to:

o conduct proper analysis or oversee investment strategy

o implement a statement of advice

o regularly review investment strategies

The CSLR told the Senate Economics Reference Committee inquiry into Wealth Management Companies that given its limited operational scope and its emerging stage, it did not have sufficient information or experience to comment on the cause of the collapse of wealth management companies.

“As a compensation scheme of last resort, the CSLR is aware of the potential for moral hazards inherent in financial misconduct by financial firms, particularly in instances of phoenixing,” it said. “This troubling practice not only erodes the integrity of the financial system but also leaves victims without adequate recourse for their losses.”

“The CSLR acknowledges the significant challenges in detecting such conduct in realtime. Where it observes the need for greater accountability, CSLR will refer the relevant conduct and/or financial firm to regulatory bodies for consideration and action. These mechanisms are essential to ensure that those responsible for the financial harm inflicted upon victims are held accountable, thereby safeguarding the interests of consumers, and reinforcing trust in the financial system.”