It’s too complicated to make advisers alone pay

ANALYSIS

If the current workings of the Compensation Scheme of Last Resort (CSLR) regime are allowed to play out, then financial advisers can expect to be hit with ongoing special levies to meet successive blow-outs in the sub-sector cap resulting from the Shield and First Guardian collapses.

Whether this actually occurs, depends entirely upon the attitude of the Federal Government and consequent approach decided by the Assistant Treasurer, Daniel Mulino, with announcements likely to be made in coming weeks.

However, what is certain is that parallel legal and quasi-legal events will be taking place at the same time – the Court actions initiated as part of the Australian Securities and Investments Commission’s (ASIC’s) ongoing investigation into the collapses, and the actions of the Australian Financial Complaints Authority (AFCA) in processing complaints.

Financial advice was certainly a part of the equation with both Shield and First Guardian so, under the existing rules AFCA will be quite properly operating within its jurisdiction as will the Compensation Scheme of Last Resort (CSLR) with respect to any consequent unpaid AFCA determinations.

Thus, financial advisers may be obliged to foot the bill for ongoing CSLR activity while ASIC’s court actions remain on foot and the culprits remain unconvicted.

Another factor, introduced by the managing director of Sequoia Financial, Garry Crole, is the possibility of the platform-based superannuation funds activating the Operational Risk Financial Requirement (ORFR) compensation mechanisms.

The ORFR mechanism was put in place to cover Australian Prudential Regulation Authority (APRA) superannuation fund members losses relating to the collapse of Trio Capital. Crole believes it is equally applicable to the Shield and First Guardian collapses.

While Sequoia filed submissions supporting the need for an ORFR event with the platforms and APRA on August 29, the platforms have yet to formally indicate their response and APRA has been silent on the issue.

As well, there exists no clarity about the degree to which compensation paid as a result of an ORFR event would reduce the burden on the CSLR and, if indeed, it would result in AFCA needing to abort hearing the cases of people already compensated via such arrangements.

The possibility of activating an ORFR event has never been tested in the context of the AFCA and CSLR regime with the collapse of Dixon Advisory not involving platform-based superannuation.

And while all this is going on, advisers need to remain focused on the extent of a special CSLR levy and who will pay.

Yes, it’s complicated.