FPA responds to introduction of CSLR and FAR into Parliament

Sarah Abood

The FPA continues to hold reservations about the proposed Compensation Scheme of Last Resort (CSLR) and the Financial Accountability Regime (FAR) Legislation, introduced into Parliament yesterday.

“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,” says FPA CEO Sarah Abood. “However the legislation has not changed substantially from previous drafts, and many of the concerns we expressed previously remain.

“Firstly we believe the scope of the scheme needs to be broader, to ensure that consumers are covered for the full range of matters considered by the Australian Financial Complaints Authority (AFCA), including managed investment schemes (MIS). We acknowledge 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 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. 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. 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.

“We are also keen for the overdue review of professional indemnity insurance to be commenced. A properly functioning PI sector would substantially reduce the calls on a CSLR.

“Finally we are concerned about the costs this scheme will impose on our 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. 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.

“We will continue to work constructively with the Government, advisers, consumers and other stakeholders to help ensure the scheme can operate effectively and that consumers can have trust in financial advice,” Abood says.