The Financial Advice Association Australia (FAAA) has identified several flaws in the Compensation Scheme of Last Resort (CSLR) and made several recommendations to rectify them in its submission relating to the post-implementation review of the measure.
The industry body has made eight suggestions, beginning with a request for an amendment to the law so the advice sector will not have to bear the full responsibility for product failures where financial planning services were involved. As an additional point, it was also stipulated personal financial advice should not be forced to pay for general advice or wholesale client advice failures.
The FAAA also called for the operation of the regime not to allow for the possibility of exposing small sectors, such as the financial advice space, to a special levy that will exceed the sector cap, which it said should be reduced to the original proposal of $10 million.
It was also recommended the government pay for all compensation claims received prior to the operation of the CSLR and for Canberra to honour its original commitment to fund the first year of the scheme’s operation.
The advice organisation also proposed the measure represent a true scheme of last resort, meaning it is only invoked after all potential loss recovery action has been exhausted, and for a body akin to the Fair Entitlements Guarantee Recovery Program to be given the responsibility to oversee all recovery actions possible. Further, it was suggested insolvency laws be changed to improve the prospect of recoveries and make it easier to prosecute parties responsible for product failures.
Finally, it was suggested the Australian Securities and Investments Commission undertake a thorough review of firms involved with CSLR payments to ensure misconduct, inappropriate business practices or breaches of insolvency laws were not present.
The FAAA also took the opportunity to stress the current situation of the financial advice sector and the adverse impact the CSLR, as it stands, will have on it.
“Financial advice is a profession that is under pressure, having declined significantly in numbers over recent years. It has also become highly fragmented: there are over 6100 financial advice businesses in Australia and 92 per cent of advisers work in a business with 10 or fewer advisers,” it noted.
“Further pressure, such as the significant contingent liability posed by the potential cost of the CSLR, will only make this situation worse. It will also serve to further increase the cost of financial advice, putting it out of reach of more Australians.”
