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FAAA calls for retrospective impact of the CSLR on financial advisers to be urgently resolved

The Compensation Scheme of Last Resort (CSLR) has now publicly released estimates of what advisers will be expected to pay for the first full year of the operation of the scheme – which starts on 1 July 2024.  Financial advisers will be required to pay $18.5 million in total, with payment expected to be made in September 2024. There were 15,624 advisers registered as at the beginning of March and if split on this basis, the cost per adviser will be just under $1,200.

FAAA CEO Sarah Abood has expressed deep concern and disappointment about the adviser cost.

“The CSLR is intended to promote trust and confidence in the financial services sector and in particular, financial advice. However, if advisers are driven out of business by rising costs, through being made to pay for the poor behaviour of those who left the sector years ago, there won’t be a financial advice sector left to have confidence in. Coming as it does on top of an historically high ASIC levy, this flies in the face of making advice more accessible and affordable for consumers, which is the stated aim of our government.

“We have been supportive of the scheme in principle, while calling out that the scope is too narrow (through not including MISs) and that the scheme must not apply to financial adviser small businesses in a retrospective manner. This expectation is consistent with both the Ramsay and Hayne recommendations for the establishment of a CSLR.

“However, unfortunately the emergence of the Dixon Advisory “black swan” event, and the shortening of the initial period which is funded by the Government, appear to have had a highly retrospective and negative effect. It is extremely concerning that because of these issues, the high quality and compliant financial advisers of today are being asked to fund compensation for the clients of Dixons, a firm which has been in administration now since January 2022 – over two years ago and long predating the establishment of the scheme.

“Those issues are many, and include:

  • Dixons complaints are numerous, and still growing.

As at 15 February 2024, there were 1,948 Dixons complaints before AFCA, and that number continues to grow. This is because Dixons remains a member of AFCA despite entering voluntary administration over two years ago, and having its licence cancelled a year ago. Numerous public warnings have been issued to Dixons clients that the window will soon close, including by ASIC in August 2022. All these complaints should be classified as legacy complaints, and funded by government.

  • It will take AFCA some time as well as cost to process all these legacy complaints.

As a result, many claims will fall into the period for which financial advisers will be charged: that is, into the 2024/25 and later financial years. The actuarial report estimates the total cost to advisers will be $18.6 million in 2024/25 – of which the vast majority relates to Dixons. This is almost four times the amount the government will pay in the first year of the scheme (April – June 2024), which is $4.8 million in total (only $2.4 million of which is estimated to be for financial advice, with only one Dixons claim included in this estimate). This flies in the face of the intent when setting up the scheme, as it will now become almost wholly retrospective in the way it applies to financial advice, well into the second and later years of operation.

“We are urgently calling on the government to remove retrospectivity by covering historical claims based on the date the claim is made, not the date the claim is finalised,” Ms Abood says.

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