Boiling point

Do you remember the “Royal Commission pipeline”? 

If not, a brief recap: in a Senate committee hearing back in 2021, then-ASIC deputy chair Karen Chester used the term to describe the financial services enforcement activities the regulator undertook following the Royal Commission. She cited these activities, and the costs incurred from them, as the primary reason adviser levies had ballooned by 160% over the preceding two years. 

In the same hearing, former ASIC commissioner Danielle Press said these Royal Commission costs were the “numerator” in the levy equation; the denominator was the “declining number of advisers”. 

“Those two things have hit together,” she explained, adding that the industry funding legislation provided ASIC “very little flexibility” in how these numbers were calculated. 

The ASIC representatives suggested advisers could expect a cost reduction at some point (once that numerator had been sanded down a bit) and they were right, in a way. A few months later, Treasury announced a two-year freeze on ASIC levies, bringing them back to pre-COVID levels. 

That freeze, of course, came to an end in June last year. And in November, ASIC announced a per-adviser levy of $2,818 – a welcome downgrade from its original estimate of $3,217, sure, but still higher than the figure in question when Press was explaining the basic arithmetic of industry funding. 

With that history lesson out of the way, I’ll make three observations: first, it’s no secret that the “denominator” in ASIC’s calculations is just over half the size it was back in 2021. Second, ASIC’s initial levy estimates are imminent – they’ll most likely arrive within hours of publishing this piece. And third, an entirely separate funding mechanism kicks in next week, compounding advisers’ ongoing levy obligations.

That new mechanism, of course, is for funding the CSLR. And while the “Royal Commission pipeline” likely won’t play much of a role in future CSLR levies, there’s a new, equally nebulous numerator in the form of Dixon Advisory. 

Somehow, we’ve gone from a freeze to a boil. 

Burning down the house

These costs, along with the potential ones that might arise from the Government’s proposed modifications to section 99FA of the SIS Act, were the central topic of a missive posted by Senator Andrew Bragg earlier this week. 

Acknowledging the "huge pressure" advisers were under, Bragg said the industry “should be worried” about the upcoming CSLR levy given the rapid increase in Dixon Advisory-related complaints being referred to AFCA. The tally now stands at around 2,500, he explained, which is an increase of 500 complaints since February.

“It’s been reported that the cost to the advice profession through CSLR levies as a result of Dixon Advisory could be above $100 million,” he added. “I’ve been asking the question of why proper law enforcement hasn’t happened here, and why small businesses are carrying the can.”

Bragg said the Government’s “callous and cold” responses to questions about the CSLR levy demonstrated its lack of interest in the potential impact on “small and medium financial adviser practices,” and that these “pain points” would be addressed in next week's report on the Senate Economics Committee's inquiry into ASIC investigation and enforcement. 

Hang on, though – if the levy formula Danielle Press laid out in 2021 is correct, what lever could ASIC pull here? Outside of reducing its enforcement and investigation activity overall – which, I imagine, would run counter to Bragg’s aspirations for “proper law enforcement” – how could the regulator actually make a dent in the annual adviser bill? 

That’s to say nothing of the looming costs associated with Dixon and the CSLR, of course. Theoretically, ASIC has some control here; per the Financial Services Compensation Scheme of Last Resort Levy Act 2023 and associated legislation, the regulator is responsible for calculating the levy burden for each firm within the CLSR’s remit. ASIC also determines the extent to which its administrative costs are included in the CSLR levy for a given financial year.

Ultimately, however, the CSLR’s funding model inherits its industry sub-sector definitions and entity metrics from the same legislation that determines the annual ASIC levy: the regulations made under the ASIC Supervisory Cost Recovery Levy Act 2017. 

The magic number

Those regulations prescribe both minimum levies for relevant industry sub-sectors and the formula used for calculating the graduated levy component. In the case of retail financial advice, this basically shakes out to ASIC’s regulatory costs for the sub-sector net the minimum levy ($1,500) multiplied by the sub-sector population (number of AFSLs). This figure is then divided by the number of relevant providers on ASIC’s register, which gives you the annual per-adviser levy.

The actual formula is a little more complicated than that, but I think parsing out the law’s multiple exceptions and recursive definitions within the confines of this article would violate at least one article of the Geneva Convention. The point, though, is that ASIC only appears to have control over a single variable in this calculation: its regulatory costs and the extent to which those costs apply to a particular industry sub-sector. 

Admittedly, that is a pretty large variable. And the methods ASIC uses to calculate sub-sector costs aren’t exactly indisputable – not long ago, in a response to a question on notice from Senator Slade Brockman, the regulator said nearly $4.5 million of last year’s advice levy arose from “a not insignificant enforcement effort required in respect of unlicensed operators involved in providing financial advice.”

Now, I’m not exactly au fait with the complex mechanics of financial services regulation, but I would argue that charging licensed advisers for the policing of unlicensed activity rather defeats the purpose of treating them a distinct, leviable industry sub-sector. 

Sins of the father

Whether it’s unlicensed operators, Dixon Advisory or the Royal Commission, though, the central problem is the same: a significantly-reduced adviser cohort, vulnerable to further reduction due to cost pressures, is consistently burdened with the costs associated with policing an even-smaller minority. That those minorities share very few recognisable characteristics with the average retail advice business doesn’t (or can’t) even factor into the equation. 

It’s worth noting that ASIC acknowledged this issue in a letter to Treasury back in May 2021. Commenting on industry feedback to its affordable advice consultation paper, CP 332, ASIC said that “many advisers cited the industry funding levy as a key driver of cost.”

Those advisers, ASIC continued, suggested restructuring the levy so that it better-targeted the licensees actually “responsible for the historical misconduct which ASIC is taking action against” – most of whom had already exited the industry at that point, effectively exempting them from ASIC’s levy calculations. 

We’ll never know how those suggestions might have been incorporated into further consultation, though, because the bulk of ASIC’s advice affordability research was subsequently folded into the Quality of Review – and consideration of the ASIC levy was excluded from the review’s terms of reference. 

Which brings us back to Danielle Press’s “numerator and denominator” comments from 2021. If it’s the formula that brought us to this point, perhaps the real issue is the formula itself. 

Treating all advice as uniform – whether it’s from a bank, a small, self-licensed business or an unlicensed TikTok personality – is only ever going to result in a disproportionate levy burden for the remaining number of registered financial advisers in Australia. It’s just maths.