With the financial advice industry recoiling at the growing costs of the new Compensation Scheme of Last Resort levies, should brokers be looking to join the fight, too?
It may only have come into operation less than two months ago, but the Compensation Scheme of Last Resort (CSLR) is already drawing ire from the financial services industry.
Annie Kane
The Adviser
The CSLR offers recompense to consumers who have received a favourable determination from the Australian Financial Complaints Authority (AFCA) but haven’t been paid by the financial firm in question because it has gone insolvent.
The scheme enables compensation payments of up to $150,000 if a consumer is found to have suffered financial loss relating to arranging and providing credit; personal financial advice; and dealing in securities for retail clients.
But, while the first levy period was funded by the Australian government, the second levy period – expected to meet eligible compensation claims and costs from 1 July 2024 to 30 June 2025 – will be covered by the sub-sectors of the financial services industry that are covered by the CSLR, including credit intermediation.
The estimate for each sub-sector is:
- Financial advice, $18.5 million.
- Credit provision, $1.5 million.
- Credit intermediation, $1.8 million.
- Securities dealing, $2.3 million.
It is estimated that the 4,214 credit intermediaries will have to pay a minimum levy of $100 plus $33.85 per credit representative for the CSLR, on top of other levies already placed on the industry (such as the ASIC levy and AFCA costs).
A total of $360,000 has already been paid to four claimants – the first payments made under the new system – with one being for $54,050 to a couple from Queensland who were advised by a mortgage broker to take out a loan that was “inappropriate for their circumstances” (see page 6 for more).
But is it fair for an industry to wear the cost of another company’s misdemeanours?
The financial services industry certainly doesn’t think so. As reported on our sister brand ifa, financial advisers are collectively writing to politicians and regulators outlining their frustration that they are having to pay high penalties for something they have not done.
The anger largely stems from the fact that the financial advice industry will have to pay $5,709 per adviser to bear the financial burden for the transgressions of a major, defunct entity, such as Dixon Advisory.
Added to the gripes is the fact that the parent company of Dixon Advisory, Evans and Partners, earned over $174 million in revenue last financial year, yet advisers are being asked to foot the bill for its subsidiary’s failures. Plus, according to ifa, E&P’s licensee, Evans and Partners (where many of the Dixon clients and advisers migrated), continues to operate the US Masters Residential Property Fund (URF) — the very product that played a huge role in this scandal.
According to the deputy chair of the financial services regulator ASIC, Sarah Court, part of the issue lies in the fact that “the way that our laws work is that [ASIC has] to deal with the company or entity that is actually engaged in the conduct. And there was no evidence that [ASIC] could ascertain that Evans and Partners was involved in the conduct that was done by Dixon and its advisers.”
In the letter circulating to MPs by members of the financial planning industry, wealth advisers argue that financial advisers are generally small-business owners who prioritise their clients’ interests and that “holding them accountable for the failures of large corporations like Dixon Advisory is unjust and unsustainable”.
The planners say the added costs mounted on the industry make it hard for them to maintain “affordable access to financial advice”. As such, the Financial Advice Association Australia has mounted a campaign fighting the “unjust” CSLR cost imposed on advisers.
Given that brokers are also having to wear the costs of an insolvent company’s failure to pay compensation, it may not be long before this industry joins the fight.
The CEO of the Mortgage & Finance Association of Australia (MFAA), Anja Pannek, said: “We maintain that the levies our members pay must remain reasonable and proportionate, and will continue to monitor complaint volumes and payments made through the scheme and industry levies to ensure our members are not subsidising payments for misconduct by other segments of the financial services sector.”
