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The cost and availability of advice has been a hot topic in the financial planning industry, particularly over the past couple of years. In the past week, two key articles in the media were of important relevance to the sector.

  1. The Financial Services Council (FSC) released a media statement outlining a push to the government to adapt changes to the Compensation Scheme of Last Resort (CSLR) whereby Advice Licensees be required to hold additional capital buffers and for more proactive oversight of Professional Indemnity insurance (amongst other recommendations)
  2. Details of recently appointed ASIC Chairman Joe Longo agenda to make financial advice more affordable, dismantle red tape to assist in fulfilling “unmet advice needs”

The CSLR is designed to provide some reimbursement to consumers when a determination issued by the Australian Financial Complaints Authority (AFCA) remains unpaid.  The scheme was implemented to support confidence in the financial systems dispute resolution framework.  The FSC have argued that the above measures need to be implemented for Advice Licensees to prevent the risk of costs from unpaid AFCA determinations from advice failures being shifted to financial service companies that have done nothing wrong.

In an article published in the AFR (20/9/2021) ‘SME financial advisers reject capital buffer call’, the Association of Independently Owned Financial Professionals highlight a statistic that only 1% of the “70,000 annual consumer complaints to AFCA are against advisers”.  Based on this statistic, the new measures being recommended by the FSC are unreasonable.

ASIC’s position is one that endeavours to simplify and facilitate better advice.  It is also aimed at putting some responsibility back on the consumer to also take responsibility to better understand the risk of their financial decisions.  This means the legal obligation does not solely rest with the advisor.  Some of the priorities raised by ASIC include

  1. Introducing new guidelines to deregulate the market leading to a less conservative approach to compliance – including removing the need for producing unnecessarily long-winded legal documents to clients
  2. Review Chapter 7 of the Corporations Act which deals with provision of Financial Product Advice, and potentially replace this with new legislation
  3. Building a dedicated hub page collating information relating to financial advice

It is fair to say that the revised stance from ASIC is a welcome one for independent licensees and we would hope to see swift action take place.  On the other hand, minimum capital buffers and more oversight on PI would be deemed a further step in the wrong direction especially in consideration of the AFCA complaints ratio.

The FSC recommendations do not really provide much insight into the specifics of what the capital reserve requirements should be, or what their expectations around adequate PI insurance would look like. Our view is that the minimum capital buffers simply prevent principals from being able to invest in their firm for greater efficiency and growth as cash sits idly by. Furthermore, if they are to increase the minimum PI limit required then it would likely lead to a further squeeze on the available capacity and result in further rate increases across the board. We also believe the current ASIC guideline for PI limits serves it purpose for the boutique advisory firms with turnovers of less than $10 million and increasing limit requirements would be overkill and cause further unnecessary compliance cost hikes for very little benefit for consumers.

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