FSC cites risks in extending CSLR to MISs
The Financial Services Council (FSC) is arguing strongly that the Compensation Scheme of Last Resort (CSLR) should not be expanded to Managed Investment Schemes (MISs).
At the same time as questioning the ‘but for’ methodology being used by the Australian Financial Complaints Authority (AFCA) to assess claims, and arguing for the Commonwealth to fund more of the CSLR’s costs, the FSC claims there are risks in seeking to expand the CSLR.
It said those risks include diluting the focus of the CSLR, increasing “the financial burden on the entire financial services industry, including compliant advises and licensees” and giving rise to moral hazard “where clients, licensees or others captured by the scheme become less cautious, knowing that any financial shortfall will be covered by the CSLR, or regulators become less motivated to undertake enforcement activities against bad actors to recover lost funds”.
Discussing “risks associated with the incorporation of AFCA complaints concerning MISs into the CSLR”, the FSC submission to the Senate Economics References Committee acknowledged that some industry participants had argued that the Dixon Advisory collapse involved a MIS.
“The incorporation of AFCA complaints concerning MISs would significantly expand the CSLR and potentially increase the cost burden on financial advisers,” it said and suggested there were other mechanisms available for reducing costs.
“If complaints against MISs were to be brought within the scope of the CSLR, it is not immediately clear that basis for it not also being expanded to capture other subsectors such as banking, superannuation or insurance,” the FSC said.
It said that it was important to note that the Federal Court had accepted Dixon engaged in breaches of the best interests duty and appropriate advice duty but made no adverse findings against Dixon associated with the design of the URF as an MIS.
“The Court simply accepted that the URF products were ‘highly risky’, which is why the Court considered Dixon advisers’ financial advice to so clearly breach sections 961B and 961G of the Corporations Act,” it said.
Outlining some of the reasons why it would be inappropriate to incorporate MISs into the CSLR, the FSC suggested that the Government might be then underwriting investment risk.
“Unlike financial advice failures, losses in MISs may not stem from misconduct or negligence. Including them in a CSLR might create an inappropriate expectation for compensation where the loss is market-driven rather than a failure of regulatory obligations or advice standards,” it said.
The FSC also suggested that the higher regulatory costs associated with expanding the CSLR would then be passed on to consumers stating: “If the CSLR levy is applied to MISs in addition to financial advisers, there is a risk of double-charging consumers. This would happen if a client invests in an MIS and simultaneously receives advice from a financial adviser, as both the MIS and the advice service could pass on their respective CSLR-related costs to the consumer”.
Dodgy Dixon’s MIS Fiasco was a Management led, force feed compulsory product their vertically owned Advisers had to flog the vertically owned MiS.
Dodgy Dixon’s were taking 9.5% pa in various fees out of the URF MIS.
Yet ASIC has done nothing against most of Dixon’s directors and management. And butchered it’s one attempt at a director.
ASIC has also not gone the individual advisers as they stated it was a systemic Dixon’s business sales flog.
So yes the MIS and management of Dixon’s need to be held liable.
And ASIC for doing nothing.
Way more client damage has been done by MIS than dodgy advice. Gum trees anyone, equilink, estate mortgage, Sterling, Westpoint, city pacific. We are talking billions upon billions upon billions.
It should be FSC members NOT financial advisers bearing the costs of CLSR, the culpability sits squarely here. That and the other elephant that never left the room, vertical integration, industry funds, banks, Dixon, storm financial.
This is where the damage has been done.
FSC has a job to do and they are doing it using lies and superfluous arguments to talk a conflicted game. They should be ignored when debating this issue. It’s like asking a criminal to determine his sentence in court.
Accountants and lawyers play a pivotal role in the financial ecosystem, particularly in areas such as setting up SMSFs, establishing bare trusts, and advising on Managed Investment Schemes (MIS), including property schemes. These services are often foundational to financial arrangements that later fail, yet these professions lack an equivalent Compensation Scheme of Last Resort (CSLR). This absence unfairly shifts the burden of compensating affected clients onto financial advisers and planners, despite the broader professional involvement in these cases.
MIS, especially property schemes, have been a significant contributor to financial collapses, leaving countless clients out of pocket. Accountants are often instrumental in structuring SMSFs to invest in these schemes, while lawyers provide the legal frameworks for the trusts and companies underpinning them. In many instances, inadequate due diligence or advice from these professionals exacerbates the risks clients face. When MIS and property schemes fail, the financial advisers involved in the downstream processes are left to shoulder the blame and the cost of redress under the CSLR, even though accountants and lawyers played a critical role in enabling these investments.
Adding to this inequity, directors and executives of failed financial companies frequently rely on advice from accountants and lawyers. Yet, when these companies collapse, there is no recourse mechanism holding these professionals accountable in the same way financial planners are held under the CSLR. This creates an imbalanced system, where financial planners bear the disproportionate cost of client compensation, while accountants and lawyers face no equivalent responsibility, despite their involvement being integral to the failed arrangements.
A CSLR-equivalent for accountants and lawyers would address this imbalance, ensuring that all professionals contributing to financial arrangements share the responsibility for client compensation. It would also encourage higher standards of due diligence and accountability across the professions, creating a more equitable and robust system for addressing client losses. Without such measures, the current system unfairly penalizes financial advisers while allowing accountants and lawyers to operate without equivalent oversight or contribution to client redress.
Great comment. I lean more towards removing CSLR entirely, but having a CSLR type arrangement for those other industries is fairer than the current system no doubt.
Set up 2 and keep them separate. We pay for ours and MIS pay for theirs. I know which one I’d rather be in
Wow. How many flaws are there in the FSC arguments on this point? Some important points of clarification:
Amazing stuff, its as if Mr Industry Super stooge, Des Nutmeg has recently become a massive supporter of Advisers.
Can there be any clearer alert that Industry Super are on a massive we provide Advice campaign, come see ISA funds for all your Financial Advice needs.
Pity the whole thing will be the most hypocritical approach of Advice ever as Industry Super will be:
= massive redistribution of wealth from unsold, unadvised younger accumulators to wealthier retirees getting free sales advice.