CSLR underestimating future financial advice firm failures

CSLR complaints AFCA Wealth Data Colin Williams financial advice

4 April 2024
| By Laura Dew |
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Wealth Data’s founder Colin Williams believes the idea of four financial advice firms failing per year, as put forward in CSLR estimates, is too low an estimate.

Last month, the Compensation Scheme of Last Resort shared its estimate of the levy that will be paid by financial advisers and a factor in this is how many firms it expects to fail in the sector in the future.

Its actuaries report stated: “Financial advice has the highest number of complaints per firm that are unpaid or unreported at the failure date. For this subsector, we have assumed 4.2 firms will fail on average every year, with an average of 11.6 complaints per firm, consistent with the historical experience. This means we expect 48.7 in-scope complaints to arise from financial advice firms that will fail each year.”

Over the five years of operation of the Australian Financial Complaints Authority (AFCA), it said there have been 21 insolvencies in the space (excluding Dixon Advisory and Superannuation Services).

The number of expected financial advice firm failures compares to just one per year for the other three levy sectors, with around four complaints per failed firm.

The industry has already expressed concern that another “black swan” failure such as DASS could have a devastating impact on the levy for advisers. 

However, Williams said this was a lower figure for financial advice firms than he would have expected. In the past six months alone, NextGen has failed as well as licensee Crown Wealth.

NextGen went into liquidation in November 2023 after the plaintiff applied for it to be wound up in a court case regarding an unpaid $270,000 AFCA determination. Meanwhile, Crown Wealth lost its Australian financial services licence (AFSL) in March after going into voluntary administration. Troubled investment firm Endeavour also lost its AFSL last month as it is in liquidation, but this liquidation took place in 2019.

Williams said: “My initial reaction was that four looks like a small number. We’ve had two recently fail, NextGen and just last week Crown Wealth. Both would have been mid-tier firms in their day. We know NextGen failed due to not having the cash to solve a complaint. Crown Wealth have gone into voluntary administration.

“If you go over the years, there have always been a few major issues. Some of the more recent ones have been massive but bailed out by their owners, and therefore I presume not a direct issue for CSLR. If the licensees owned by the banks were standalone, and were forced to compensate the ‘fees for no service’ which was the major issue, I suspect most would have gone broke and the number of clients involved would have dwarfed the Dixon matter.”

However, he acknowledged changes to regulation and compliance since the Hayne royal commission meant problems which may have occurred in the past should, theoretically, no longer present concerns.

“Major licensees and advisers are far better placed now, they take more care in product selection and have stopped chasing commissions and also have better compliance awareness and processes. I don’t think the problems we had before will happen again, but that could be famous last words!”

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