CSLR changes to add ‘significant cost and complexity’, says IPA

The IPA stated that the CSLR should be considered in light of the outcomes from various reviews, which will all have a bearing on the design, operation and cost of the CSLR. 

This includes the current review of the Australian Financial Complaints Authority (AFCA), ongoing consultation and an upcoming review of the ASIC industry funding model, review of ASIC (and APRA) by the Financial Regulator Assessment Authority (FRAA), and the quality of advice review in 2022.

“Given how long it has been since a compensation scheme was first discussed and the negative impact of a flawed design, we see no compelling reason why the CSLR legislation should be rushed and why it can’t wait for all of these other reviews to be completed. Changing the scheme once it has commenced would be sub-optimal,” IPA group executive, advocacy and policy, Vicki Stylianou said in the submission.

The Financial Services Royal Commission had recommended the establishment of a compensation scheme of last resort to compensate consumers once all other avenues had been exhausted. Ms Stylianou noted the IPA’s view is that all avenues for payment must be exhausted, including engaging debt recovery services.

“Otherwise, there appears to be no incentive for the claimant to pursue payment if they can easily access the CSLR,” Ms Stylianou said.

“We contend that this is not a genuine scheme of last resort. The proposal states that ‘AFCA can conduct reasonable steps to secure payment’. The concept or idea of ‘reasonable steps’ does not equate to all other avenues being exhausted.

“A claimant could become an unsecured creditor in an insolvency, and we believe this is preferable to abrogating the claimant’s rights to the CSLR operator. This would avoid having the industry (or the taxpayer to some extent) funding the CSLR operator having to recover funds from a chapter 5 body corporate.

“Otherwise, the scheme operates more like a ‘reimbursement scheme’ than a genuine scheme of ‘last resort’. If cost for consumers is an issue, then we point to the numerous debt recovery businesses which can be used by consumers on the basis of ‘no recovery – no fee’.

To operate effectively, Ms Stylianou noted a CSLR should be viewed holistically to ensure that everything is being done to reduce the reliance on such a scheme.

“This is simply part of the broader landscape of having efficient and well-functioning financial markets, with a regulator that can be relied upon for effective and efficient monitoring, supervision and enforcement activity,” she added.

“For this reason, the overall operation of ASIC needs to be considered, which we anticipate will be examined during the upcoming FRAA review. Part of this landscape of well-functioning markets is the role of professional indemnity (PI) insurance. We believe that the government, Treasury and ASIC should consider the market for PI insurance and ensure that all licensees hold appropriate PI insurance as part of their obligations.

“Whilst the professional accounting bodies, including IPA, have this as a mandatory requirement which is monitored and enforced, we believe that it should be included in ASIC’s supervision model. It may not solve all situations, and it is only one element, however, it is a critical one, also in the CSLR context.”

Further, given that advisers cannot add insurers to a case by a claimant going through AFCA, then there is even more reason for the issues around PI insurance to be considered within the CSLR context, according to Ms Stylianou. 

“No regard seems to be given to the additional and significant costs incurred by advisers who may have to pursue indemnification from insurers through a costly court process,” she said.

“This includes instances where cases are decided in favour of advisers. The IPA proposes that this could be addressed by allowing advisers (not claimants) to join their insurer to a claim. To be clear, we do not support claimants being able to join insurers as PI insurance is not intended to provide compensation.”

Addressing cost issues 

Overall, the IPA said it does not support the proposed structure of the scheme, which would enable AFCA to recover outstanding expenses in addition to failing to address the causes of unpaid consumer compensation.

Ms Stylianou contended this is a major and unwarranted departure from the royal commission’s intent.

“The federal government made a commitment to reducing red tape to cut the cost of doing business and we point to the work of the Prime Minister’s Deregulation Taskforce. Contrary to this work, the proposed scheme will add significant cost and complexity, which is at odds with this commitment,” she explained.

“The draft legislation establishes a CSLR operator as a subsidiary of AFCA. This adds unnecessary red tape by requiring ASIC to administer invoices and payments and significantly increases the government’s administration costs of the financial advice sector with little benefit to consumers. 

“The costs to set up and administer the scheme (refer to this week’s MYEFO) seem overly generous at a time when the sector is experiencing significant cost increases, which will have to be borne either by clients or absorbed by the business.

“Either way, the cost of advice will increase, and the accessibility of advice will decrease. The proposal that ASIC can collect ‘special levies’ associated with the scheme leaves the door open for ASIC to increase the levy without proper consultation; and given the issues with the ASIC industry funding levy, we are concerned about the lack of appropriate accountability and transparency.

Further, the proposal that the funding of CSLR as the scheme operator is funded by industry seems like another open door, according to Ms Stylianou. The proposal that CSLR will estimate levies and then request ASIC to levy a set amount is another open door for potentially increasing costs.

“The proposal that funds can be levied for unpaid AFCA fees, operational costs, and ASIC’s administration costs under the CSLR is a major concern. Again, we point to the issues with the ASIC industry funding levy to describe the lack of accountability and transparency,” she explained.

“Where are the incentives to keep costs contained and to consider the cumulative and increasing cost pressures on industry. The proposal states that the CSLR is not ‘fee for service’ and is not ‘cost recovery’. The inclusion of a possible secondary funding mechanism is a major red flag. The proposal states that the levy framework will align with the ASIC industry funding model but not form part of the framework.

“All of this presents an ambiguous model which can be used to increase the levy rather than having a model with built-in incentives to decrease the levy and ease the pressure on industry. We believe this proposal will create a situation of moral hazard which will have implications for PI insurance, ASIC levies and licensee fees. Another implication is that the consumer bias indicated previously by AFCA decisions may return.”

As COVID impacts and Australia’s ageing population mean the nation’s advice needs are growing along with escalating regulatory costs have already caused a mass exodus of advisers from the industry, Ms Stylianou stressed the total number of financial advisers would not be enough to meet this increasing demand.

“We anticipate the proposed scheme will further reduce adviser numbers. The IPA is of the view that excess funds should be ‘pooled’ and quarantined so that over time a pool of funds becomes available which may have the benefit of reducing costs for participants,” Ms Stylianou continued. 

“The pool can be invested in the same way that a superannuation fund may operate. Otherwise, there appears to be no mechanism or incentive to contain or reduce costs over time, especially costs for industry participants who are being asked to fund the misdeeds of some. We reiterate that government should fund some of the operational costs from consolidated revenue since AFCA and the CSLR are public goods.”