FSC canvasses capital requirements for advice licensees

14 February 2020

Other sectors of the financial services industry should not be made to fund client losses generated by financial advisers under a compensation scheme of last resort (CSLR), according to the Financial Services Council (FSC).

In a submission to the Treasury on the proposed scheme, the FSC said it supported a targeted ‘mid-coverage’ scheme which included the sectors which historically had unpaid determination – “namely financial advice, investments and credit”.

“The targeted CSLR should be funded solely by the sector responsible for the unpaid determinations via Sector Specific Funding. Sector Specific Funding should take into account the historical experience of unpaid determinations (that is, whether or not and if so the extent of, historical unpaid determinations in that sector) to identify appropriate funding requirements for each sector, until a fulsome risk-based funding approach can be implemented in the CSLR,” the FSC submission said.

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It argued that sector specific funding should be deep enough to meet estimated costs including expected variability across different periods, but not require cross-subsidisation from other financial services sector.

The submission said that to facilitate sector specific funding and to ensure that the CSLR was sustainable it was essential that outstanding regulatory gaps in the advice licensing regime were addressed, particularly relating to professional indemnity (PI) insurance and capital requirements.

The submission said the FSC believed there needed to be greater oversight of PI insurance requirements by ASIC and the introduction of appropriate capital requirements for advice licensees, noting that the current cash needs requirements set out by ASIC only required sufficient cash to meet 12 weeks of liabilities.

“This latter measure of introducing appropriate capital requirements need not result in prudential supervision. Rather it can simply require minimum cash or liquid capital requirements as part of licence conditions. These assets are then available to meet any consumer claims. This can be built up over time to streamline the introduction of such requirements,” it said.

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Why stop at sector differentiation? Based on the premise put forward by the FSC, why should advisory firms with a record of good practice subsidise parts of the industry that have caused issues?

Good point. But even more broadly, why should licensed firms subsidise the much larger unlicensed advisory sector where the worst advice is given and the least law is enforced.

First the FSC ran insurance advisers out of town with the changes to commission to " reduce premiums".
Now the are taking aim at Licencees who aren't members of FSC.
And remind me again who is the FSC...the banks and insurers.
Sounds like setting the stage for banks to get back into financial planning at everyone's expense as usual.

Based on this principle, then why should licensees with a clean record be subsidizing those with not such a clean record?

The FSC clearly doesn't understand how insurance works. Car insurance premiums increase in line with the mass experience of all claims, and individuals move to different rating if they have a claim. It's not the whole industry paying for the misdeeds of the individual. No wonder financial planning is in trouble!

Woah !!! The 'dogs breakfast' continues. It's a return of serve to the banks … oh …. forgot, they've already bailed from the Wealth Management space. More cost to the remaining players because of the minority who do the wrong thing. The cost of advice continues to escalate and become prohibitive for the average Australian. Very sad state of affairs.

The members of the FSC are listed here - https://www.fsc.org.au/about/fsc-members . I don't believe these companies will benefit from fewer financial advisers, so the FSC is not representing their interests very well.

I'll just close my business (no complaints, net promoter score of all those firms combined & small client base with annual fee arrangements in place, FASEA compliant, 0.05% commission client) and move to AMP shall I?

I think the FSC should be paying for their misdeeds. They corruptly conned the government and ASIC over the LIF for profit which promised "a better outcome for customers". Since then they have been increasing existing customers rates at unprecedented levels.
The FSC are solely responsible for a surge in lapses, a plummet in new business and for increasing under-insurance.
This is a lobby for profit group and nothing else. The best outcome for customers and the industry is to have the FSC disbanded.

The FSC as usual is trying to shift blame for their members behaviour and this is another distraction. A quick review of the AFCA 18_19 summary of complaints.
60% of complaints were about banking and finance, 23% were general insurance (Companies not brokers), 9% were about superannuation companies. Only 5% were about Investments and advice and you can bet 'investments' includes product failure and property spruiking. 2% were about insurance.
As far as funding it is very simple. 92% of all AFCA costs and ASIC should be borne by members of the FSC. They are the ones causing the costs. If it was only advice, AFCA would be twiddling their thumbs.
The FSC and its members have done tremendous damage to the advice profession and now want us to pay for their corruption of a valued service.

What a great idea. Perhaps we should get rid of our progressive tax system as well. It’s manifestly unfair that helicopter owners pay towards the cost of roads...
Isn’t the biggest concern here that a financial planning practice goes broke and the principals basically lose their career and livelyhood so often that we need to discuss the idea of claims insurance?
It’s almost as if we constantly forget that the overwhelming majority of advisers and licensees are small businesses with small business budgets.

Of course it’s easy to crucify people who do something wrong but there are often serious consequences for basic errors and these cascade in to business collapse pretty quickly.

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