Assign liability to product manufacturers

The Australian financial services system places the liability for product failures on advisers and consumers rather than manufacturers, leading to further collapses, the Institute of Financial Professionals Australia (IFPA) has claimed.

IFPA president and chair Scott Heathwood said if manufacturers knew they could be held liable for product failures, they would “think very hard before releasing something that might fail”.

However, Heathwood claimed liability has been placed on other parties via a range of prescriptions and regulations that allow failures to continue to occur.

“Every product has a disclosure document and a target-market determination. Every responsible entity holds a licence,” he stated.

“Research houses rate, platforms list, trustees select, licensees approve and a conduct regulator, a prudential regulator, an ombudsman and a Compensation Scheme of Last Resort (CSLR) sit over the top of all of it.

“No other sector or profession in the country is regulated this closely and the product manufacturer is still not liable. The failures keep coming,” he added, pointing to Westpoint, Timbercorp, Great Southern, Trio, Sterling, Dixon, Shield and First Guardian.

In each of these, he noted the product manufacturers were not held to account and liabilities were sheeted home to the advice sector.

“Watch where the liability lands each time. The manufacturer goes broke or into administration and the people who ran it walk away with the fees already banked,” he said.

“If the regulator gets there, it is a penalty years later against an entity with nothing left or a banning order for people who have moved on.

“So the search begins for whoever was standing nearest. The adviser or, even more curiously now, the lead generator. When they cannot pay or have disappeared, the CSLR pays, funded by levies on advisers who had nothing to do with it.”

He said legitimate investment products may fail because of market conditions and no one should be liable for that, but that was not the case where they were badly designed, poorly run, conflicted or fraudulent from the start.

“For that, the liability should sit with the people who built it and it should hurt. If you manufacture a dodgy product, you are liable,” he said.

“A manufacturer bringing a product to retail investors should carry a product liability tower, reinsured, and sized to what it is building.

“It is how every other serious risk in the economy is underwritten. If the product fails, the investors are compensated from that cover, not from a levy on advisers who never touched the design.

“The premium is also a price signal. A product that is expensive to insure is telling you something.

“None of this requires another layer of rules. It requires putting the liability where the decisions are made.”