ASIC levy leaves advice stranded in muddy waters

Alex Burke,  Senior Writer,  No More Practice Education

It's just maths. 

That's been more or less the sentiment espoused by ASIC representatives over the past year when asked about the steadily-increasing industry funding levy for the advice sector. Former chair James Shipton described the levy calculations as "mechanical," while commissioner Danielle Press explained that rising costs can be attributed to a simple "numerator and denominator" effect: the numerator being the "big [litigation] pipeline from the Royal Commission" and the denominator being the dwindling number of advisers left to shoulder the cost burden. 

The end of the pipeline

If there was a silver lining in those comments, it was that ASIC would soon be reaching the end of said pipeline and that the advice industry would (indirectly) reap the benefits of the regulator finally recovering its Royal Commission-related litigation costs.

Based on ASIC's response to a question on notice from Senator Slade Brockman during the 2021-22 Budget estimates, though, the reality is a little more complex. 

Brockman asked the regulator two important questions: first, what proportion of costs charged to financial advisers as a result of court/enforcement action are typically recovered via a court award of expenses? And if ASIC is successful, and penalties are awarded, do those penalties reduce the adviser levy or are they diverted to consolidated revenue? 

These questions are critical because they address the key funding problem ASIC faces, at least based on Danielle Press' comments earlier this year when she told a parliamentary committee that costs are "incurred today but not recovered until the litigation is successful, which can be in two-to-three years’ time," leading to the situation where advisers (and other industry participants) bear the brunt of the levy in the short term. 

Where does the money go? 

Intuitively, of course, we know that not all litigation results in costs being awarded to the plaintiff. And indeed, that's exactly what ASIC acknowledges in its response to Brockman's first question, adding that "where costs are awarded and able to be collected by ASIC, the costs recovered from industry are reduced." These costs are described in ASIC's Cost Recovery Implementation Statement (CRIS) as "costs funded by own-source revenue" - and for the 2019-20 financial year, they amounted to $4.6 million offset against $86.3 million in enforcement costs. 

But what about the penalties awarded when ASIC litigation is successful? "As a matter of law," ASIC's response reads, "penalties go directly to the Commonwealth Consolidated Revenue Fund. Penalties are imposed as a deterrent and bear no relationship to ASIC’s regulatory costs." 

How, then, do advisers stand to benefit from the end of the "Royal Commission pipeline"? What are the primary cost levers that will see some form of adjustment? If the public disagreements between ASIC and Government about how much "flexibility and discretion" the former has when imposing levies muddied the waters, this response only compounds the issue. 

Time for a change

In fact, according to an AFA submission to ASIC's 2020-21 CRIS, the situation has become "untenable and will have a hugely negative effect on the advice profession and the clients it serves." 

The AFA is calling for ASIC's funding model to be adjusted such that advisers will reap the benefits of any cost recovery and penalties relating to litigation costs incurred in 2018-19 and 2019-20, and that advisers should not be required to "fund this litigation in future years." 

"If the Government chooses to continue with this approach in the face of industry and adviser concerns," the submission continues, "and financial advisers are expected to fund litigation against large institutions, then any penalties should flow back into the financial adviser ASIC Funding Levy pool, including those penalties that have already been applied. 

"Further, if financial advisers are expected to fund Government litigation against large institutions, then they should receive adequate disclosure and reporting on the outcome for the contribution that they are being forced to undertake." 

The submission also addresses one of the more confusing aspects of the ASIC levy - the fact that advisers are being charged for surveillance and enforcement activity relating to the provision of unlicensed advice. As we've discussed previously, it's difficult to imagine how licensed providers have much influence over (or responsibility for) people giving financial advice without the proper authorisations. 

"Where people operate outside the law," the submission argues, "in many cases to avoid the additional costs of operating in a compliant manner, it is not reasonable for those who are doing the right thing to pay for those who are not." 

The window for feedback on ASIC's latest CRIS has closed, but one hopes advisers are given greater clarity in the not-too-distant future regarding what they're actually paying for. 


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Sue Allen

25/08/21

Well I for one am not holding my breath waiting for the Government to begin doing a major backflip on these very vexed funding questions. Nor am I waiting for any so-called clarifications on these matters. What advisers are faced with is extinction. What Australian financial consumers are faced with is increasing lack of understanding of ever changing rules and regulations. What the Government wants to do is skim off as much of the forthcoming intergenerational wealth transfer as it possibly can, and it doesn't want clients to be getting any proper advice at all. The rich WILL get richer because they can afford to pay for advice. The poor WILL get poorer and who will care? Not a nice scenario.

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