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Impose capital adequacy requirements on advice licensees says FSC

By Mike Taylor12 January 2022

The Financial Services Council (FSC) wants financial advice licensees to be the subject of capital adequacy requirements in the context of the new compensation scheme of last resort (CSLR).

In a submission agreeing with Treasury’s analysis that the bulk of unpaid Australian Financial Complaints Authority (AFCA) determinations are owed by financial planning practices, the FSC not only wants an improved professional indemnity (PI) insurance regime but also capital adequacy requirements.

In doing so, the FSC has leant its weight to calls by both the Financial Planning Association (FPA) and the SMSF Association for the Australian Securities and Investments Commission (ASIC) to more closely oversight financial planning licensees to ensure their level of PI insurance is actually adequate.

It has suggested ASIC could achieve such an outcome via regular risk-based reviews of a sample of financial advice licensees.

“We support the recently commenced Government review into professional indemnity insurance (PI) for the financial advice sector. In addition to the availability of appropriate PI, there must be proactive ASIC oversight to ensure that; advice licensees obtain suitable PI cover, covering all the products and services that a provider is licensed to give financial advice on and that the licensee has sufficient capital to meet excess payments should there be a claim against the PI policy.”

“Without sufficient capital to pay the excess, the insurance cover will not respond,” the FSC submission said. “This can readily be undertaken by ASIC through regular risk based reviews of a representative sample of advice licensees, to encourage good practices regarding financial and PI requirements.”

“Without greater ASIC oversight over existing laws, the CSLR itself will do little to reduce the consumer risk of unpaid AFCA determinations and simply shifts the cost, via levies, to financial services companies that have done nothing wrong.”

“A well designed regulatory financial system, is one which reduces the risk that lead to unpaid determinations in the first place and not just one which places a safety net beneath it, in the form of a compensation scheme of last resort.”

The FSC submission specifically recommends that ASIC introduce minimum capital requirements for Advice Licensees which could be phased in over a suitable transition period.

Mike Taylor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

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PAUL HARDING-DAVIS
4 months ago

We need to stop seeing the Licensee as part of the solution. They don’t exist in any other profession. Accountant’s, Actuaries, Engineers do not require capital in this manner to deal with PI claims. We must start looking for the solutions through the lens of a fully fledged profession, and this does not include Licensees. It will include firms that provide some of the service Licensees provide, which are valuable and that compete solely on the value of those services, as is the case for example with accountants. These FSC recommendations are supportive of maintaining more of the status quo which has been a failure, and was predictably so from the FSR reforms. What is more it continues to support the centrality of a financial product in Advice – the worst mistake of the FSR reforms that has delivered us Chapter 7 and a product distribution culture. The product recommendation is the least valuable part of financial advice.
Whilst it may be correct that the largest amounts of unpaid determinations are from small firms, the comparison of the volume of claims and remediation both nominally and proportionately would indicate that large licensees were the bigger problem, despite the enormous legal and compliance resources. ASIC reached this conclusion when they acknowledged that they had incorrectly used those models as their view of best practice.
I may offend a number of industry friends and colleagues, but it is also an interesting question about leadership of professional practices. I can’t think of one of the other professions where the head of the business – i.e. the Managing Partner – is not a qualified professional themselves. It would not be contemplated. How many of the larger licensees are led by someone who at least at some stage has been a practicing financial adviser? I expect fewer (and I include myself here) can practice today.