Dixon collapse will influence CSLR for years

ANALYSIS

Financial advisers should not be surprised that the Compensation Scheme of Last Resort (CSLR) has flagged that the upcoming levy will exceed the $20 million sub-sector cap given the Government’s handling of the issue and past actions by the Australian Securities and Investments Commission (ASIC).

The CSLR chief executive, David Berry was being frank with financial sector representatives who attended this week’s industry forum particularly around just how long the collapse of Dixon Advisory will remain on the scheme’s books -multiple years.

He said while the amount relating to Dixon was unlikely to change, the amount will likely be spread over multiple levy periods depending on the time of complaints being resolved and people subsequently lodging a claim with the CSLR.

Berry and the board of the CSLR have no choice but to give this unvarnished outlook because they are working within a construct imposed by the Government and which has already been heavily criticised by the Financial Advice Association of Australia (FAAA) and other adviser groups.

Perhaps this is why Berry’s statement following the forum referenced the CSLR’s commitment “to working closely with Treasury, ASIC, AFCA and the Minister in providing early insights into the operation of its legislative framework”.

Indeed, the FAAA’s Phil Anderson has published the following eight reasons why the CSLR is a flawed model and therefore costly.

8 reasons why the CSLR is a flawed model

1. The scheme is being applied retrospectively. Despite the Ramsay Inquiry, the Banking Royal Commission and the Government’s initial response all suggesting that the scheme would be forward-looking, it is weighed down by substantial legacy complaints, particularly those related to Dixons, which went into administration more than two years before the scheme commenced.
2. It is not clear that everything has been done to recover funds from the Dixon Advisory business. Dixons was a subsidiary of the large, listed E&P Financial Group (which reported revenues of $173m in the 2023 financial year). When Dixons was put into administration, a number of advisers (and presumably clients) were transferred to another entity in the group. ASIC is currently taking legal action against a Dixons’ Director alleging failures in directors’ duties. No other director, senior manager or financial adviser has been prosecuted or banned by ASIC in relation to the product or advice related issues with this matter. The URF continues to operate and earn fees for its parent group.
3. The per-sector cap has been doubled. The former Government set a per-sector cap for the CSLR of $10m in the initial legislation – which was the maximum amount that any one sector could be levied by the scheme without the direction of the Minister. However, this was doubled to $20m by the current Government in September 2022. We question whether this was done in light of information coming to hand about the cost of the Dixons matter.
4. The Government is paying less than it committed to. The Government promised to pay for the first 12 months of claims and operating costs of the CSLR. However, in fact they are only paying for three months of operations from 2 April to 30 June 2024.The financial advice profession will be paying for all financial advice compensation payments issued after 30 June 2024. In practice this will include all of the Dixons’ complaints received by AFCA after 7 September 2022, other than the single claim the government will pay.
5. Managed investment schemes are excluded from the scope of the CSLR. Not all sectors covered by AFCA are part of the CSLR; the scheme only covers financial advice, credit provision, credit intermediation, and securities dealing. Managed investment schemes are a notable and problematic exclusion from the scope of the CSLR, as failures of these products are responsible for substantial consumer harm that currently has no recourse if the firm fails. Our sector is also concerned that product failures will be re-defined as advice failures in cases where product failure has contributed to consumer harm, because otherwise consumers will not receive compensation.
6. Small business financial advisers are being asked to pay compensation to the clients of a large listed entity, one which continues to profitably operate after simply putting one subsidiary into administration and moving advice operations to another subsidiary. There appears to be nothing stopping other firms using this strategy in the future.
7. New advisers entering the profession now could be paying for the past misdeeds of Dixons for many years to come – some of whom had not finished high school when Dixons failed.
8. There is no party left to review, investigate and defend complaints against Dixon Advisory, resulting in a one-sided process. We recognise that there has been a serious failure in the Dixon’s business. However, every complaint should be robustly investigated and defended as a matter of process and natural justice to determine the most appropriate outcome is reached for each specific case.