The Financial Advice Association has highlighted disappearing assets from the now defunct Libertas, which could have led to $1 million potentially being used to cover disputes directed towards the Compensation Scheme of Last Resort.
In its submission to the inquiry into wealth management companies, colloquially known as the Dixon inquiry, the Financial Advice Association accused Sequoia, the parent company of Libertas, for disregarding liability when it put the failed licensee into voluntary administration in September 2023.
Furthermore, the cancellation of an intercompany loan meant there could have been assets allocated to fund any AFCA determinations instead of leaving them to pass to the CSLR.
The submission pointed to a creditors report from 2 February 2024 that showed the “disappearance” of an intercompany loan of $793,008 owed by Sequoia to Libertas.
The FAAA noted that while there has been no further report from the liquidator, there is reason to have doubts about the statement in relation to the cancellation of the debt since value of net assets declined by $884,160, from $1.01 million in FY22 to $129,235 in FY23.
“This would suggest that $1,023,841, which should have been available within Libertas to pay outstanding client complaints, has disappeared,” the submission said.
“Whilst the above analysis does indicate the possibility of conduct that would be detrimental to the interests of creditors, we do not have any further evidence of this and recommend that an investigation be undertaken by the inquiry.”
The FAAA argued Libertas is following a similar playbook toDixon by transferring assets and clients out of the business, leaving behind liabilities that will ultimately be covered by other advisers.
“We are very concerned by what we have seen in the cases of Dixon Advisory and Libertas in respect to the transfer of operations and assets for no consideration by the acquiring party and the extinguishment of debts,” the submission said.
Sequoia CEO Garry Crole declined to comment on the conjecture from the FAAA, instead referring back to previous commentary.
The submission added it was also concerned about the lack of action from administrators and regulators.
“To have confidence in the CSLR, financial advisers need to know that any firm which seeks to avoid its obligation to compensate clients by being placed into administration, will be subject to very careful oversight and action where there is any misconduct that is evident,” the submission said.
“Based upon what we have seen so far with Dixon Advisory and Libertas, we certainly do not believe that adequate action has yet been taken.”
While the FAAA chose to highlight issues with Libertas and how it will have further potential implications for the advice profession, the key target – and catalyst – of the inquiry into “wealth management companies” has always been the failure of vertically integrated financial advice company Dixon Advisory.
Dixon Advisory went into voluntary administration in January 2022 with the Australian Financial Complaints Authority in the process of assessing over 2700 complaints with the FAAA expecting the CSLR to remediate $135 million to victims via the CSLR levy.
Among the 20 recommendations the FAAA suggested to the inquiry, the association recommended “all action possible” should be taken to recover funds from Dixon Advisory and its parent company Evans and Partners which reported $173 million in revenue in FY23 and is still an AFCA member.
E&P had been a listed company on the ASX, but shareholders have since voted to delist from Australia’s largest exchange.
“When Dixon Advisory was put into administration, a number of advisers and clients were transferred to another entity in the group,” the submission said, noting 78 per cent clients were transferred according to an FY22 results briefing.
The association also suggested legislating to expand the CSLR to levy integrated financial groups that make a subsidiary entity bankrupt to avoid paying compensation to consumers.
“It is deeply unjust that advisers are being asked to fund compensation for the clients of a large listed entity, like E&P Financial Group, that continues to operate and in fact has retained many of the clients under advice and their associated fees,” the submission said.
“This equates to allowing phoenixing activity to occur to the detriment of consumers. While insolvency law might be hard to change, the government has almost unlimited power to expropriate and has used that power already for the CSLR, against the 10 largest financial institutions.”
The association also suggested that if the profession has reported a financial firm or adviser and ASIC has chosen not to take any action or delayed action, then it should be indemnified against having pay future CSLR claims.
