What is the purpose of the CSLR?

Advisely Team

3 months ago

Advisely expert and FAAA general manager policy, advocacy & standards Phil Anderson recently jumped onto Advisely to answer all your burning questions on Compensation Scheme of Last Resort (CSLR).

Here are five of the most interesting conversations that came out of his AMA:

Q: What is the purpose of CSLR really? I don't see this in any other profession. Financial planners seem to be taken to be wrong at face value unless they can prove otherwise and in hindsight.

The CSLR is designed to ensure that clients who have been awarded a determination by AFCA, are actually paid, even when the firm becomes insolvent or refuses to pay. This is an objective that we can support, provided it is applied in a reasonable manner.

We are not aware of a similar scheme, however neither are other professions subject to an ombudsman arrangement with the powers that AFCA has. There are other forms of protection for clients in other fields including stockbroking, however what we have is quite unusual and very protective of clients. Some would argue that this is understandable given the critically important role that advisers play in the management of their client’s financial affairs.

We are certainly concerned that financial advice often takes the blame for what is basically a product issue, and we would argue that was at the core of what went wrong with Dixon Advisory. We also argue that the exclusion of MISs from the CSLR scheme places an unfair priority on seeking fault in the advice that was provided. We can only continue to argue against the way this works and seek more comprehensive action by the regulators against product providers when things go wrong.

Q: What is the Coalition's view on CSLR? What is the logic pollies use to backdate the start date? Why did Dixon's PI insurer not pay the claim? Why were the directors not affected? Can other advisers do the wrong thing and keep expecting honest advisers to foot the bill?

The Coalition is aware of our objections and is sympathetic to our concerns. I believe that they are supportive of our views on the retrospective application of the legislation and the Government being forced to meet its earlier commitment to pay for the first 12 months of the scheme. I expect that we will hear more from them on the CSLR over time.

The PI Insurer for the Dixon Advisory and broader E&P Financial Group has made a contribution towards the claims, which we understand is $12m. This is a tiny fraction of what the total cost will end out being. The problem with PI is that there is normally a cap and that it does not apply in a range of circumstances, including non-approved products and after a business goes into administration. It will never provide the level of protection that we might want in the case of a black swan event like Dixon Advisory.

We would love to know the full reason why action was not taken against the Directors for what went on in the Dixon Advisory business. The answers that ASIC have provided so far in response to that question do not give us an explanation that we can accept.

The Dixon Advisory case sets an example of why there are important flaws in the design of the CSLR. It should not enable people to just walk away from an advice subsidiary and keep operating in another form. This is wrong. There needs to be consequences for this type of activity and the scheme needs to be fixed to ensure that this cannot be repeated.

Q: I wanted to get your thoughts on a more equitable – or perhaps proportionate – distribution of industry funding obligations for both ASIC and the CSLR. While the actual formula for determining sub-sector levies in the 2017 legislation is quite elaborate (and dependent on a bunch of seemingly circular definitions), the adviser levy appears to basically work out to something like –

[ASIC's costs - ($1500 x number of AFSLS)] ÷ number of current advisers on the FAR.

Obviously, this has resulted in substantial levy increases over the years, both due to post-Royal Commission enforcement activity and declining FAR numbers. What do you think needs to change in the underlying calculations to ensure a more sustainable industry funding model? Or is it just a matter of reining in annual expenditure for both ASIC and the CSLR?

Let's deal with these two matters separately. With the ASIC funding levy, the number of advisers is critical. An increase in adviser numbers will have an automatic impact of reducing the levy per adviser.

On the other hand, what has really driven the cost has been what ASIC spends on enforcement. In the recently released set of numbers, this is $19m, versus $6.5m for supervision and surveillance.

On top of this, there is a significant allocation of overheads. In total Enforcement will be costing us at least $30m out of $48m. We only get one number and no additional details. We know that we are paying a lot of money for unlicensed operators, which we strongly disagree with. In the past, we have paid for matters where the connection to financial advice was weak.

The lack of transparency on this is a problem. Also, when it comes to the fines and penalties generated by the enforcement cases that we fund, we would like the money to come back into the pool to offset the Levy

In terms of the CSLR, it is very early days, however the biggest issue at present is Dixon Advisory. That is a retrospective cost that we should not be paying for. Once the Dixon Advisory debacle is behind us, it will be up to the CSLR to get the operating costs down. Otherwise, we need to do everything that we can to avoid future black swan events. This means reporting concerns about licensees to ASIC and ASIC taking appropriate and timely action to minimise the risk of consumer harm.

Q: Is there any chance we can have a statute of limitations on how far back one can go to make a claim? Claims that can pop up after 20 years are a bit much, in my opinion. We should be able to purge after 7 years, similar to the accounting profession.

Most of the complaints related to financial advice go through the Internal Dispute Resolution (IDR) process and the External Dispute Resolution (EDR) process that is managed by AFCA. The AFCA rules do have time limitations, including that the complaint must be submitted “within six years of the date when the Complainant first became aware (or should reasonably have become aware) that they suffered the loss”.

There is also a further time limit that is applied – “where prior to submitting the complaint to AFCA, the Complainant was given an IDR Response in relation to the complaint from the Financial Firm - within two years of the date of that IDR Response”. These limitations are sensible and do protect advisers from facing very old complaints.

It is, however, important to note that it relates to when the client became aware that the loss occurred. It is possible that deficiencies in advice could result in losses arising some years later, so this is not the same as saying that there is a limitation of liability of six years from when the advice is provided.

Q: With the industry struggling to draw in new advisers, do you think the CSLR will deter new entrants further? What can we do to appeal to new advisers again?

I do think that the CSLR is another factor that could present an obstacle for new advisers coming into the advice profession. Who would want to be held financially responsible for poor advice that was provided by another adviser, even before you entered the advice profession?

The CSLR levy, however, is just one of a number of costs impacting financial advisers, and it is likely to be less than the ASIC funding levy. There is a sector cap of $20m, above which the Minister must approve any special levy and where they have the power to allocate the additional levy to a broader range of sectors.

We would hope that in any year where the financial advice profession hit that $20m threshold, the Minister would make exactly this decision. In that case, based upon a total cost of $20m for the profession, the cost of the CSLR could be capped at around $1,300 per year per adviser in the worst case.

This is why we have to work so hard to encourage new entrants into this critically important profession. We all have a role to play in rebuilding the advice profession.