Requiem for a scheme

You've likely come across the idea of regulations being written in blood. 

It's typically used in reference to aviation safety standards, but it can be adapted to pretty much any regulatory reform – at the appropriate viewing distance, anyway.

You'd imagine, for example, that the shattered windshield preceded the mandatory seatbelt. And perhaps hydrogen might still be a popular dirigible lift gas were it not for the inferno that rained down on a New Jersey township one evening in 1937. 

Similarly, you could argue that establishing the Compensation Scheme of Last Resort (CSLR) was an important corrective measure; a means of redress for people who'd had their lives and savings ruined by financial services entities unable (or unwilling) to foot the bill. When the legislation was introduced to parliament in late 2021, former LNP MP Alan Tudge (speaking on behalf of then-Treasurer Josh Frydenberg) said the scheme represented a "committment to take action" in response to the "many instances of misconduct" examined by the Royal Commission.

While the design of the scheme quickly attracted criticism from advice industry representatives – who suggested that excluding product providers from the CSLR would place an unfair burden on advisers and compromise effective remediation – then-Minister for Superannuation, Financial Services and the Digital Economy Jane Hume dismissed these concerns. 

She argued that the CSLR shouldn't become an "insurance" to bail out investors who "punt their savings on emu farms or tulips." And besides, she added, 92% of unpaid determinations (by value) came from the financial advice sector – at least based on 2017 data from the Ramsay Review.

Just a few months after Hume's comments, Dixon Advisory went into voluntary administration. 

Blood makes noise

You probably know how the rest of the story goes. I've covered Dixon several times on Advisely (most recently here), and FAAA general manager for policy, advocacy and standards Phil Anderson has laid out the history of Dixon's collapse more eloquently and exhaustively than I could ever manage.

So: instead of getting into the weeds, I want to go back to the topic of blood. 

If we accept the premise that the CSLR legislation was written in blood – specifically, the blood of customers identified during the Royal Commission – the Dixon affair presents an interesting dilemma. On its face, it's exactly the kind of problem the CSLR was designed to solve: an advice firm rolls huge proportions of client savings into a risky investment product, regulatory controls fail, the fund tanks, the firm goes belly up and clients are left holding the bag.

But that's not the whole picture, is it? For one, the fund in question was managed by Dixon's parent company, E&P Financial Group. Then there's those regulatory controls I deliberately glossed over: does ASIC have the investigation and enforcement powers necessary to intervene before a catastrophe like this occurs? If so, why weren't they exercised?

Finally, and most relevant to this discussion, the CSLR is industry funded. The plan was for the government to fund its first year of operations, but this period was reduced to three months for reasons that have yet to be fully explained. Ahead of the launch, actuarial firm Finity Consulting reported that 80% of "in-scope, post-CSLR complaints" related to Dixon. And per the design of the scheme, Dixon complaints are de jure advice complaints. 

This means that advisers will pay the lion's share of the CSLR's operating expenses because of a disaster at least partially caused by the fund manager that owned Dixon – and a disaster that the regulator, whose costs are recovered primarily from advisers, failed to prevent.

For the time being, anyway. Following last week's motion by Senator Pauline Hanson – not to mention months of campaigning by the FAAA – Dixon, the CSLR and related matters have been referred to the Senate Economics References Committee for an inquiry. The committee will consider, among other things, the "underlying cause" of the Dixon collapse, the attribution of blame, the design of the CSLR and ASIC's role in "[reducing] scale of loss for consumers."

Commenting on the Senate motion, Shadow Minister for Financial Services Luke Howarth said the need for an inquiry “highlights the Albanese Government’s poor implementation and maladministration of their Compensation Scheme of Last Resort,” adding that advisers are “hurting at a time when they should be focused on rebuilding their industry and helping Australians who are currently under-advised and under-insured.” 

While the pedant in me wants to note the disparity between Howarth’s statement and those of his Coalition predecessor, it’s hard to disagree with the overall sentiment. The advice profession has been haemorrhaging members since its 2019 peak – and over 5,000 have left the industry since 2021, the year the CSLR legislation was introduced.

A grim lesson for future policymakers, then: when writing regulations in blood, take care not to nick an artery in the process. 

Deep impact

Of course, it would be disingenuous to blame the CSLR for the current state of the advice industry. The scheme only launched this year, after all, and there are so many other post-Royal Commission heavy-hitters to consider: you’ve got the professional standards regime and the Code of Ethics, ongoing fee arrangements, disclosure rules, breach reporting requirements and mounting ASIC levies to enforce all of the above. 

Tell you what, though: I think there might be a consistent theme here, and I’m not just saying that because this is obviously the point in the article where the writer starts funnelling the reader towards a conclusion that cleverly (or clumsily) references the opening statement. If we look back at all these changes, what do they have in common? 

Virtually all coincided with (or were launched in response to) a crisis and were developed with minimal industry consultation. To varying degrees, each has played a role in driving up the cost of providing advice. And in the intervening years, most have been frozen, amended, wound back or heavily scrutinised as advice affordability has gone from being an intra-industry conversation to a matter of national concern. 

We don’t yet know how the Senate inquiry will shake out, but I’d be surprised if the CSLR legislation doesn’t follow a similar trajectory. At the very least, advisers might finally get the kind of regulatory impact statement the government failed to include the first time around. 

Useless machine

Now, before I leave you today, I’m going to get a little inside baseball. Consider this fair warning, although if you stuck with me through all the blood stuff, I think we’ll be alright.

We’re coming up on one year since Advisely was launched, which means we’re rapidly approaching the threshold at which it becomes socially acceptable to reminisce. If you disagree, imagine Advisely was a baby: they’d be pretty close to walking, if not already up on two feet! Doesn’t sound so silly now, does it? 

Back when we were still in the ideation phase – which is what you call thinking about something while in an office – we knew that advice efficiency would be the central pillar of the Advisely proposition. Over the ensuing 12 months, I think we’ve all pondered what that really means more often than many of us would like to admit (sorry, team). 

Efficiency, after all, is meaningless without the input and output. And when I consider the idea of efficiency as it relates to the post-Royal Commission regulatory landscape, I have to wonder: how much energy expenditure in advice is dedicated to expediting the navigation of bad policy? 

Clearly, this problem has wider ramifications than Advisely’s editorial agenda. I’m reminded of Marvin Minsky's useless machine: a device invented as a philosophical exercise, whose only purpose is to turn itself off. How many useless machines did the Royal Commission create?   

None of this is to say, of course, that advisers shouldn’t aim for efficiency. Even if some of that effort invariably goes towards compliance with regulations whose client benefit is dubious at best, that’s still extra time on the clock. And for that reason, efficiency is and will remain an essential part of the Advisely project.

It is, as they say, in our blood.