High-risk AFSLs should pay the highest price, not advisers

When the annual ASIC levy was introduced in 2017, the advice sector was a very different place.

For starters, it wasn’t recognised as a profession yet. The big four banks and AMP dominated the landscape and there were over 25,000 financial advisers to spread the cost of ASIC’s surveillance and enforcement activities.

While seismic structural and regulatory changes have occurred over the past nine years, including the institutional exit and rise of self-licensing, the design of the ASIC levy hasn’t changed, only the size for advisers which has more than tripled to $3,037.

Not only that, but the effectiveness of the levy has never been properly tested.

Strangely, the levy for AFSLs has remained stubbornly firm at $1,500 since 2017, despite the increasing risk that smaller AFSLs pose to the financial system and the need to actively police them given their disproportionate involvement in collapses like Shield, First Guardian and Dixon Advisory.

These failures, alongside constant increases to the adviser levy (and other levies) point to an ineffective, unsustainable system that is skewed towards reactive enforcement rather than prevention.

It points to a system that has misdirected and mispriced risk by enabling the existence of under-capitalised, under-resourced and under-supervised AFSLs.

Some smaller AFSLs that have robust systems and processes in place and are doing the right thing argue that they shouldn’t have to contribute more to the ASIC levy and compensation scheme of last resort (CSLR) because they’re not part of the problem, but either are professional advisers who belong to a well-resourced licensee.

Experienced licensees with adequate resources provide the services and infrastructure required for advisers to confidently deliver quality advice and grow their business, including comprehensive education and training programs, risk management and compliance monitoring. Their authorised representatives pay licensee fees for the privilege of guiding clients to manage their financial affairs and achieve their goals. They do not pose a risk to consumers.

The biggest risks in the system lie with boutique AFSLs and self-licensed firms that don’t fully understand their licensing obligations and don’t have adequate experience and resources to run an AFSL.

Ironically, it is this part of the market that needs the most monitoring and oversight but contributes the least to the ASIC levy.

Targeted, risk-based surveillance

The Financial Services Council (FSC) is calling for an overhaul of the industry funding model, including a “recalibration” of the ASIC levy to increase the contribution of AFSLs to $25,000 or $40,000, and redirect funds where they are most needed. The FSC is calling for a supervisory uplift including targeted, risk-based surveillance.

The Advisers Association (TAA), which represents advisers across Akumin, Charter and Hillross, shares the FSC’s sentiment and is highly supportive of any reforms designed to make the system fairer and improve consumer protections. TAA raised concerns about the asymmetry between AFSL obligations and the ASIC levy as early as February 2020 in our submission to the Financial Services Reform Taskforce.

The FSC’s proposed changes recognise that licensees are the entity responsible for managing supervisory risk and therefore they should carry the weight of responsibility. Advisers who are doing the right thing should not be subsidising AFSLs that are doing the wrong thing or just not doing enough to meet their obligations.

Questionable motives

According to Padua, there are currently 1,866 AFSL holders that have at least one registered financial adviser. A further 577 have no registered financial advisers.

Anecdotally, the main reasons people set up their own AFSL is for greater operational control and to save money. They want the autonomy to run their business their way, and they believe they can run an AFSL for less than the cost of being part of an established licensee.

Unfortunately, many don’t have the time, experience or financial resources to properly manage their obligations. Some also don’t have the right people and risk management frameworks to keep them in check.

Problematically, once an AFSL has been granted, ASIC has little to no contact with small AFSLs. While the regulator is in regular, ongoing communication with large licensees to ensure they act ‘Efficiently, Honestly, and Fairly’, and meet all their licence conditions and obligations, it does not have the same relationship or any relationship with most smaller AFSLs.

These entities are not required to prove that they are doing the things they said they would do in their application, such as providing high-quality services, and training and monitoring staff. If a key person or responsible manager moves on, it’s unlikely that ASIC will know.

Stronger action is required to ensure that all AFSLs maintain the highest professional standards. Over time, this will reduce the number and severity of failures, and the regulatory cost imposed on the industry and ultimately consumers.

For TAA members, being part of a large, established licensee is an essential operational cost and the price of doing business. We accept that advisers should contribute to the ongoing surveillance and policing of the industry but we do not agree that those who belong to a licensee and are subject to their strict compliance monitoring and surveillance should effectively pay twice and subsidise other participants.

Neil Macdonald is the chief executive officer of The Advisers Association. The Advisers Association represents the interests of advisers across Akumin, Charter and Hillross.