Govt needs to destress licensee balance sheets

Countplus chief executive, Matthew Rowe, did not particularly endear himself to his fellow licensee heads when he earlier this month published an analysis of the profitability of the major dealer groups and provided it to financial advisers working under the CountPlus and Count Financial mastheads.

Given the level of competition between licensees to attract both individual advisers and advice practices, it is hardly surprising that Rowe’s efforts were less than welcomed by some of his competitors, and understandably so.

The top line analysis provided by Rowe was that, looking at Australia’s Top 50 licensees, “almost all lose money or at best report low profitability” and that “not one is achieving an adequate risk-weighted return on capital”.

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“It is obvious that without product subsidies most would not exist,” Rowe’s message to advisers said. “Three are many fragile balance sheets that may not stand up to the challenges inherent in adapting to a required shift in the economic model demanded by the new world of financial advice.”

While these words from Rowe gained plenty of attention, what should have also warranted attention was his analysis that obtaining professional indemnity (PI) insurance is becoming increasingly difficult and that stretched balance sheets might make it difficult for them to meet any claims resulting from complaints to the Australian Financial Complaints Authority (AFCA).

As the Government more closely considers the implementation of a compensation scheme of last resort as recommended by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it should also reflect upon Rowe’s analysis and consider both the relevance and sustainability of the PI insurance regime.

As every adviser and as advice firm well knows, licensees are required by regulation to hold professional indemnity insurance and as every licensee wells knows the cost of obtaining that PI cover has risen year after year as fewer and fewer insurers have opted to operate in the market.

What licensees also know is that even when PI cover is obtained it will not necessarily serve to meet their needs – something which is sometimes reflected in the “unpaid determinations” column of the Australian Financial Complaints Authority (AFCA) and its predecessor, the Financial Ombudsman Service (FOS).

While AFCA does not regularly detail the size of the firms responsible for unpaid determinations, the FOS has previously disclosed that, for the most part, they are smaller operators and that many determinations remained unpaid because the responsible entity simply ceased trading.

The ability of the big banks and major institutions to compensate clients was never at issue. It was always a cohort of the smaller firms which proved problematic.

The bottom line in 2021 is that the PI insurance regime is not working as originally intended and that it is inevitable that the financial advice industry will be asked to pay its share of the cost of a compensation scheme of last resort. It is arguable that the advice industry should not be asked to do both.

If the Government is going to pursue an industry-funded compensation scheme of last resort then it should undertake a thorough review of the PI Insurance regime to determine whether it remains fit for purpose.

Rowe is right. The balance sheets of many financial planning licensees are stretched. A starting point for removing some of that balance sheet stress will be scaling back the regulatory expense before imposing something as inherently costly as a compensation scheme of last resort.

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