Advice associations are continuing to push the government to include managed investment schemes as part of the compensation scheme of last resort, but product representatives have pushed back saying the advice industry owes a greater proportion in unpaid determinations.
Ahead of the committee, 15 advice associations and consumer representative groups banded together to unite for a broader CSLR.
However, the minister for financial services, superannuation and the digital economy, Jane Hume, pushed back at extending the CSLR to include MISs, saying the purpose of the scheme was not to protect investors from risky investments.
Speaking at a Parliamentary Committee, Association of Financial Advisers chief executive Phil Anderson was one of many to highlight there was never a suggestion that a CSLR should step in to cover consumer loss on investment performance.
“We need to be very aware when consumers are making investment decisions, they need to do that fully-informed and prepared to accept that sometimes investments do not perform as they had hoped, so this scheme is not to cover investment losses,” Anderson said.
Keddie Waller, CPA Australia policy adviser for financial planning, said there would be investors who invest in MISs that did not seek advice and it was important to consider the scope of the coverage to protect those individuals.
The exclusion of MISs was also of particular concern to the SMSF Association.
“Over the years, SMSF investors have suffered substantial financial losses because of the misconduct and subsequent insolvency of MISs,” Peter Burgess, SMSF Association deputy CEO, said.
He pointed to the example of Trio Capital which was the responsible entity of 28 MISs and exposed a “significant gap” in the compensation options available for advised and non-advised parties.
“This is particularly relevant to SMSF investors who unlike members of APRA-regulated funds are not eligible for compensation,” Burgess said.
Product pushes back
Product manufacturers, represented by the Financial Services Council, pushed back on what they should be responsible for.
FSC acting CEO Blake Briggs said that while it was good advisers who would be burdened with the levies, it was the advice sector that had the most unpaid determinations.
Briggs said the regime could be improved to make it true to label and make it a genuine last resort scheme.
“The proposed scheme would compensate consumers, particularly in the advice sector – which is the primary source of unpaid determinations – that have received poor, non-compliant advice and experienced loss as a result,” Briggs said.
The FSC recommended strengthening capital obligations so well-resourced and efficiently managed advice firms would not be the only ones left to underwrite the poor practices of non-compliant firms.
“The current regulatory framework, however, does not require a strong capital requirement for the financial advice sector and there has not been effective enforcement of the existing requirement to hold adequate capital,” Briggs said.
Briggs argued the corporate regulator had enough responsibility when it came to product intervention and noted that several member firms in the organisation had suffered consequences from ASIC, but that product manufacturers were also now required to adhere to other new regulatory regimes like the design and distribution obligations.
Briggs said it was unfair to target FSC members to fund smaller, often unregistered schemes, just because they were larger and better capitalised.
“It’s not true to say we are excluded from the regime, particularly as we do cover part of the advice industry as well,” Briggs said. “What we’re nervous about is… I’m not aware of any unpaid determinations against FSC member regardless of the sector we represent.”
Cost of advice
Without any funding from MIS providers and the advice industry left to foot a disproportionate amount of the bill, Anderson said it would ultimately flow on to what consumers paid for advice.
“It’s been an issue and one that has really worried because it’s one of many factors that are driving up the cost of providing financial advice,” Anderson said.
Brad Vermeer, Financial Planning Association senior manager of government relations and policy, said the industry associations all had concerns with what the cost of the levy would look like.
“I don’t think anyone is opposed to providing funding for the redress of unpaid determinations but there’s substantial concern of the substantial cost of the administration of the scheme,” Vermeer said.
Judith Fox, Stockbrokers and Financial Advisers Association CEO, said the full draft bill should be published before any support was received to know exactly how the funding mechanisms would function.
She noted that SAFAA members had no unpaid determinations from AFCA.
Legacy of the Ramsay Review and Royal Commission
Much of the pushback on this issue came down to recommendations from the Ramsay Report, which said the issue of including MISs could be a potential “moral hazard” although that would only be a minor issue.
The Ramsay Review, which reviewed the complaint dispute framework in 2017, initially recommended the CSLR, which the Hayne Royal Commission endorsed with no changes.
Alan Kirkland, Choice CEO and one of the of the authors of the Ramsay Review, noted the report found MISs were the next most significant category of unpaid determinations under the former Financial Ombudsman Scheme, after financial advice.
When it came to the notion of moral hazard not being a significant issue for MISs, Kirkland point to several recommendations made in the Ramsey Report which would reduce the risk.
“That has indeed happened with some of the legislation like the product intervention power, design and distribution obligations – so they have reduced that risk significantly,” Kirkland said.
The issue with discounting for moral hazard is that it required consumers to make a significantly educated leap when engaging with financial products or service providers which is beyond reasonable.
“Having spoken to many of the victims of the Stirling First and other collapses… these are typically not people who spend their free time reading the Corporations Act or other legislation,” Kirkland said.
However, Ramsay’s 2017 report relied on data from the 2016 External Dispute Resolution Review interim report. Since then there was been a Royal Commission, the introduction of education reforms, and the most recent data from AFCA points to advisers making up a low proportion of complaints.