FAAA calls for changes to insolvency laws amid CSLR failures

Changes to insolvency laws are needed to ensure to enhance the prospect of recoveries and to better enable responsible parties to be prosecuted, according to the Financial Advice Association of Australia (FAAA).

In a submission to Treasury which echoes complaints that the Compensation Scheme of Last Resort is mired in significant moral hazard, the FAAA has made clear the need for a comprehensive redesign of the regime.

In a covering letter to the submission, FAAA chief executive, Sarah Abood said that “at the core of what has gone wrong, are issues directly related to the development and promotion of in- house investment products that were poorly managed, with unacceptable levels of conflicts of interest”.

“This is compounded by insolvency laws that favour corporations over consumers, resulting in the CSLR creating a moral hazard for the profession, in that the consequences of poor behaviour are not borne by those who have perpetrated it, but by those who are innocent of wrongdoing,” she said.

The FAAA summarised its view by stating:

• The law needs to change so that financial advice is not taking full responsibility for product failures, when financial advice has been provided and a product fails. Neither should personal financial advice be forced to pay for general advice or wholesale client advice failures.
• The exposure of small business sectors, like financial advice, to a special levy, needs to be modified to ensure that it will never exceed the sector cap. The sector cap should be reduced to the original proposal of $10m.
• To remove the retrospective element of the scheme, which is contrary to the Ramsay Review and Hayne Royal Commission recommendations, the Government must pay for all claims received before the commencement of the CSLR scheme.
• Consistent with the Government’s original commitment, they must pay for the first 12 months of the scheme.
• The CSLR should operate as a genuine scheme of last resort, with payments on the basis of capital loss, without interest and only after all potential recovery action has been concluded.
• An entity should be appointed to perform a role similar to the Fair Entitlements Guarantee Recovery Program that undertakes every possible effort to recover funds from responsible parties.
• Changes to insolvency laws should be made to enhance the prospect of recoveries and to better enable responsible parties to be prosecuted.
• ASIC should thoroughly review financial firms where CSLR payments are made to investigate misconduct and to consider broader issues such as product failure and inappropriate business models. ASIC should also consider any potential breaches of insolvency laws.