We recently discussed the Morrison Government's draft legislation outlining plans to establish the Compensation Scheme of Last Resort (CSLR), which will allow consumers to receive compensation in situations where a determination by AFCA remains unpaid.
As explained in the piece linked above, the advice industry will be on the hook for substantial CSLR establishment costs: an estimated $12.3 million in the first year and $7.5 million for the next two years, which breaks down to a levy of $544 per adviser in year one and $341 per adviser in years two and three. After that, the advice sector will pay around $6.2 million in annual levies ($291 per adviser) on an ongoing basis.
Add these costs to the recently-upped ASIC levy and you're faced with an industry that's under increasing financial pressure with very little relief in sight. It's perhaps unsurprising, then, that eight advice associations have joined forces to condemn not just the rising costs associated with the CSLR but also the structural vulnerabilities in its proposed design.
In a statement, Chartered Accountants Australia and New Zealand (Chartered Accountants ANZ), CPA Australia, the FPA, the Institute of Public Accountants (IPA), SMSF Association (SMSFA), the AFA, the Stockbrokers and Financial Advisers Association (SAFAA) and the Boutique Financial Planning Principals Association described the CSLR draft legislation as potentially the "last straw for the financial advice industry."
The statement explained that while the eight associations supported a last-resort compensation scheme in principle, "[we] do not support the way the scheme is structured to include [AFCA's] outstanding expenses in addition to failing to address the causes of unpaid consumer compensation. The associations are concerned the scheme may not be used purely as a last resort. This is a major and unwarranted departure from the Royal Commission’s intent."
Making the CSLR a subsidiary of AFCA, the statement continued, "adds unnecessary red tape by requiring ASIC to administer invoices and payments and significantly increases the Governments administration costs of the financial advice sector with little benefit to consumers."
The associations also noted the discrepancy between the Government's stated agenda to "[reduce] red tape [and] cut the cost of of doing business" and the added complexity this draft legislation represents. Furthermore, the statement questioned why the scheme doesn't apply to other industry participants such as product manufacturers.
As discussed in our last piece on the topic, the projected CSLR costs for the advice sector are substantially higher than the amounts leviable for other products and services included in the scheme. Part of the reason for this may be that the CSLR's funding model has been designed to essentially mirror the one used by ASIC, down to using the same sub-sector definitions and data.
The Government said this was done to streamline the CSLR's establishment process, but the result of this streamlining is the duplication of a funding model that many advisers have said doesn't adequately consider which parts of the industry are actually costing ASIC money in surveillance and enforcement activities.
And as referenced in the eight associations' joint letter, because products like managed investment schemes are excluded from the scope of the CSLR, advisers are effectively culpable under the scheme both for their own conduct and for the integrity of the products they recommend.
Nearly one year ago, Senator Jane Hume told an FSC conference that the Morrison Government has a "vested interest" in "ensuring [advisers] can provide financial advice to as many Australians as possible without being tied up in red tape." It's difficult to see how this draft legislation serves that interest.
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