CSLR unsustainable and another Dixon collapse will break it
The collapse of Dixon Advisory has demonstrated that the Compensation Scheme of Last Resort (CSLR) is not fit for purpose and may not be sustainable, according to major accounting group, Chartered Accountants ANZ.
The accounting group is urging consideration be given to imposing capital adequacy requirements on financial services licensees and arrangements which would hold parent companies responsible for the actions of licensees.
In one of the first submissions to the Senate Economics Committee inquiry into Wealth Management companies, CA-ANZ has pointed out that approximately 87% of Australian Financial Services licensees (AFSLs) licensees have 10 or less financial advisers or hold a limited license.
“This represents approximately 29% of all financial advisers,” it said.
“A significant proportion of the CSLR levy will fall upon small practitioners. The retrospective nature of the scheme means financial advisers will be faced with the burden of covering over 40% of Dixon Advisory claims with an approximate cost of $135 million,” it said.
“Combine the CSR levy with the ASIC and AFCA levies along with professional indemnity insurance levies and small practitioners face a significant financial burden.”
“The financial advice sector does not have the capacity to pay for large losses. Another big failure like Dixon Advisory would push annual CSLR levies even higher for longer, which would force more financial advisers out of the sector jeopardising the long-term sustainability of the CSLR,” CA-ANZ said.
“It is inappropriate that small financial advice practices should bear the brunt of the compensation payments for the failure of a large financial services firm. Nor is it appropriate that new entrants to the financial advice sector should be forced to pay for the failures of their predecessors for many years to come.
“We strongly urge the government to indemnify financial advisers against claims for losses that were incurred before the formal commencement of the CSLR,” the submission said.
It said that the financial advice sector does not have the capacity to pay for large losses.
“Another big failure like Dixon Advisory would push annual CSLR levies even higher for longer, which would force more financial advisers out of the sector jeopardising the long-term sustainability of the CSLR,” the submission said.
Appreciate CANZ’s views but it is nothing but common sense. Oh that’s right this was dreamed up by idiotic bureaucrats in Canberra who have lifetime tenure, 9 day fortnight and would struggle to work in iron lung. Noting Canberra has the highest average salary in Australia. Why might that be???🤔
They are not worth spitting on.
Not only is CSLR unsustainable, it is also morally hazardous.
It encourages investors to gamble with high risk vertically integrated products, knowing they will be bailed out by innocent third party advisers if those gambles don’t pay off.
And it encourages vertically integrated advice firms to offer high risk high fee inhouse products, knowing they can simply transfer assets to another entity and avoid all accountability if those products fail.
There’s an even bigger sustainabilty risk to CSLR than dodgy vertically integrated firms like Dixons.
CSLR has just paid $64K to a couple who lost money on a residential property investment in an SMSF. It was an unpaid AFCA determination in which AFCA said the adviser was responsible for their loss, because the recommended strategy was inappropriate for them.
How many other adviser recommended SMSF residential property investment land mines are out there? And if some people are losing money on property in a buoyant market, what will happen if the market has a big decline? Will refundable SMSF losses just be restricted to property? Will AFCA take the view that any investment loss in an SMSF is the adviser’s fault, if an SMSF was deemed not appropriate for the client in the first place?
Why isn’t the accountant fined they setup the SMSF? why isn’t the bank fined to giving out the loan to a customers they could not afford? why isn’t the lawyer who setup the baretrust fined?
Just the financial planner
And what happens when the SMSF property eventually appreciates in value. Surely AFCA need to apply a reasonable time frame for riskier assets, to smooth out the volatility.
CSLR is wrong in every aspect. Essentially it is a system for rogue operators like Dixon’s to fleece clients knowing they can walk away from any responsibility and push the financial burden on vast majority of financial planners doing the right thing. Governments will do nothing about it as neither party cares about small businesses and are happy they don’t have to fund any compensation payments. Clients can take on high risk for high reward and then have a safety net knowing a system is in place to compensate them when they put a complaint into AFCA, who always sides with the client. Product providers can cause harm and don’t even have to pay towards the CSLR tax.
CSLR is essentially the Target Toaster refund approach to Financial Services – basically the client says to AFCA ‘Hey my investment broke, I wanna refund!’ and AFCA says ‘Sure bro! Hey you go! You know anyone else we can bomb on?’
Investor’s are no longer responsible if an investment they agree to action fails. 100% Failure now lies with their adviser and is made worse by FSP’s that offer vertically integrated financial products.
The big end of town along with ASIC and tacit support of the Fed Govt have managed to shift the $$$ required to fund this scam..err…scheme by having the smaller AFSL’s fund the majority of it.
The current financial advisory sector in Australia is broken. It’s riddled with insane regs, unsustainable costs and the entry of new young advisers who have no fk’ing idea what a real mkt correction looks like.
No wonder the growth of general advice has exploded. What sort of idiot gives Personal advice in this environment?