CSLR, adviser levy the latest hit to advice industry

Another week, another gut punch for the financial advice industry. With the exodus of financial advisers from the industry showing no signs of slowing, the flagging of further increased in the cost of doing business were no doubt an unwelcome surprise. 

The fallout from the Royal Commission continues to hit the small and medium business sector the hardest, with the big corporates responsible for the issues having exited quickly. This week saw ASIC release their latest ‘estimate of costs’ that would be recoverable from the financial advice industry.

In 2020, despite the pandemic, the supervisory and cost recovery levy increase significant to $2,400 per adviser, with those running their own business also hit with licensee fees.

The cost equated to $56.2 million in 2020 to help fund ASIC’s operations and is set to increase another 30% in 2021 to $72.2 million if the estimates are correct. Interestingly, even the estimates for 2020 were lower than expected.

But it didn’t stop there, with Minister Jane Hume, table draft legislation for the ‘Compensation Scheme of Last Resort’ or CSLR. The scheme has been a long time coming, seeing several delays due to the pandemic and other priorities but has finally seen the light of day.

Put simply, the CSLR will be established to ensure that payments can be made to impacted clients and investors that are successful in complaints via the Australian Financial Complaints Authority, but where the Complainee is unable or unwilling to pay any settlement amount.

It seems this would include cases where bankruptcies occur, where licensees no longer exist when a failure occurs or where people simply refuse to pay. The CSLR will be funded ex ante, or before the fact with at least 75% of the cost to be funded by the financial advice industry once again.

Naturally, a number of associations have been up in arms on the issue, highlighting severe weaknesses and the increasing burden on small businesses and financial advisers. Their biggest concerns, however, relate to the risk of ‘product failure’. They risk, they suggest is that the financial advice industry is held responsible where a product fails, or goes to zero, for reasons outside of their control.

The Association of Financial Advisers highlighted a few key points regarding the draft legislation, which will be subject to comment until 13 August. The scheme will have a cap of $150,000 in individual payments but be able to scale up to as much as $250 million in any given year to cover the impact of a ‘black swan’ event; this would have to be raised from the industry.

They highlight that the range of included products and services if ‘very narrow’ excluding superannuation funds and managed investment schemes and that $12 million of the $16 million in costs in year one would be slugged to an already under pressure industry. Importantly, the minimum levy threshold of $1,000 is likely to mean the smallest advisery groups will not be impacted.

Concluding, the AFA said, “we are very concerned about the cost of this new scheme and the potential risk in the event of a black swan product failure” .

Staff Writer