Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
Up to $1,250 per adviser: FAAA flags ‘onerous’ scheme of last resort costs
The Financial Advice Association Australia (FAAA) has raised concerns about the cost to advisers for the government’s controversial Financial Services Compensation Scheme of Last Resort (CSLR) bill, which passed through both houses of parliament last week and looks set to take effect without amendment.
The CSLR, which provides a compensation mechanism for retail consumers who have lost money due to poor advice, will be funded by the advice industry with the eventual fee per adviser to be determined by running costs.
According to the FAAA, there is a danger that these costs could blow out and leave advisers who have done nothing wrong paying an outsized bill for he misdeeds of others.
“It’s important to acknowledge that advisers will not be bearing the setup costs and those in the first year of operation,” FAAA chief executive Sarah Abood stated in a release.
“That said we do have concerns that the running costs of the scheme after the first year may be onerous for advisers,” she continued. “There are estimates as high as $1,250 per adviser if the sector cap of $20 million were to be reached, with an expected amount closer to $375 per adviser (if running costs are closer to the estimate of around $6 million a year).”
The FAAA has long held that the CSLR scheme has the potential to impose an unfair tariff on advisers, making the point in its submission to the proposal and directly to successive financial services ministers during the life of the bill, which was originally pushed back during the pandemic.
Aside from the potential costs to advisers, the FAAA has also expressed concern that the scheme doesn’t cover harm caused to consumers by managed investment schemes (MISs), otherwise known as ‘pooled investments’.
High profile scheme failures such as Sterling Income Trust, Trio Capital and Timbercorp have costs investors millions, yet the government is adamant that these should be treated separately from the CSLR program. It did, however, announce a review into the regulatory framework for MISs – which operate under a 20-year old regulatory model – on March 8, which will as part of its mandate consider whether MISs should be brought into the CSLR.
The MIS review isn’t scheduled to hand its findings to the government until mid-2024, though. If MISs were to be subsequently included in the CSLR, it’s likely this wouldn’t occur until at least early 2025.
“A major source of consumer harm in our sector is MIS failure, and this isn’t covered in this legislation” Abood stated. “We acknowledge that a review into the regulatory structure of MISs has been announced, and this is a positive step. However this could take some time, while consumers remain unprotected from failures in this area.”
