The FPA continues to hold reservations about the proposed Compensation Scheme of Last Resort and the Financial Accountability Regime Legislation introduced into Parliament, saying the scope of the scheme needs to be broader.
FPA CEO Sarah Abood says that on the good side, an effective CSLR will promote trust in financial advice among consumers “…by ensuring that if retail consumers have lost money due to poor advice, there is a compensation mechanism available.” Also see: Finalisation of CSLR and FAR Regime Welcomed.
However, she says, the legislation has not changed substantially from previous drafts, and many of the concerns the association expressed previously, remain.
Abood says the FPA believes the scope of the scheme needs to be broader “…to ensure that consumers are covered for the full range of matters considered by the AFCA, including managed investment schemes.”
The FPA acknowledges that a review into the regulatory structure of MISs has been announced “…and this is a positive step. We are particularly pleased that this review will include a look at the thresholds that determine whether an investor can be treated as ‘wholesale’ or ‘sophisticated’.”
However, she says, this could take some time “…while consumers remain unprotected from a major source of harm in the sector.”
…another area of concern remains the ‘moral hazard’ in the complying, efficiently- run businesses in our sector effectively having to underwrite the bad actors…
Abood says another area of concern “…remains the ‘moral hazard’ in the complying, efficiently-run businesses in our sector effectively having to underwrite the bad actors.”
“We need to ensure there are strong disincentives for companies and their directors to resort to the scheme – otherwise we risk groups allowing their advice entities to go bankrupt (and the profession wearing the costs of consumer compensation), while the group and its directors continue their other profitable activities unscathed.”
She says the proposed remedy of cancelling the AFSL of a defaulting entity “…is little disincentive if it has already been made bankrupt. We would like to see enduring penalties for the related parties, directors and Responsible Managers of the entities resorting to the scheme.”
Abood says the association is also keen for the “overdue” review of professional indemnity insurance to be commenced, saying that a properly functioning PI sector would substantially reduce the calls on a CSLR.
The Costs to Advisers
She says that finally the association is concerned about the costs this scheme will impose on its members.
“We’re very pleased to see that advisers will not be asked to fund compensation for past misdeeds at the outset – however the proposed sector cap of $20m could see levies in the future of over $1,250 per adviser at our current numbers.”
Abood says this is “…a significant impost on advisers who already face increased costs from the unfrozen ASIC levy, PI premiums and the general increased costs all businesses are facing in the current high inflation environment.”
