How can advice firms avoid an AFSL failure?

AFSL compliance failures CSLR Wealth Data

10 April 2024
| By Laura Dew |
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With the Compensation Scheme of Last Resort (CSLR) forecasting 4.2 financial advice firms to fail per year, industry commentators have shared the types of problems that can occur, especially for small firms. 

This includes compliance problems, a high proportion of professional indemnity (PI) claims or the pressure of the increased costs from running a business practice.

A particular concern is for smaller or micro-AFSLs that may be either be running a business with less oversight or have less experience in business management. Several AFSLs in the last six months have fallen into liquidation or voluntary administration, including NextGen and Crown Wealth, while small adviser David Valvo of Your Financial Freedom was charged with alleged dishonest conduct. 

Licensee owners who commenced with between zero to less than 20 advisers rose by more than 208 in 2023, according to Wealth Data.

Smaller firms also face high costs when they look to start an advice business; the ASIC levy alone is $2,818 per adviser a total cost for the sector of $47.6 million, while the CSLR levy is $18.5 million.

Richard Hopkin, senior associate at Cowell Clarke, said: “Any small business in any industry or profession is under pressure from increasing costs regardless of how well it is run and given the increasing costs financial advice firms face for PI, ASIC levy and now the CSLR levy on top of increasing operating costs generally. 

“It is hardly surprising that some financial advisers are finding it impossible to continue.”

However, he added that the CSLR’s estimate of 11 complaints for a single financial advice firm “would be an unusually high number for a small to medium sized firm and should be cause for alarm”. 

Wealth Data founder, Colin Williams, added he is concerned whether there is enough independent oversight at small firms compared to when they are part of a large licensee.

“I am concerned with some of the small ‘micro AFSLs’ and whether all of them have the right systems in place to avoid issues when they arise most of them look pretty solid, but when the firm’s owner is also the financial planner, head of compliance, head of complaints, there’s not much independent oversight which should be concerning.”

Rhett Das, managing director at Integrity Compliance, said problems often occur due to poor management or advice processes which can cause problems later on if a breach is missed.

“The sort of thing that could put a firm to the wall is multiple professional indemnity claims where they lack enough cash flow to pay the excess on their claims. We have seen that on a few occasions over the years, and it can usually be attributed to poor advice. 

“For example, if an adviser goes rogue and it is not picked up until the complaints start rolling in and then it might be deemed a systemic issue which can set off a chain of events.”

The Australian Financial Complaints Authority saw more than 100,000 complaints in 2023, and chief executive, David Locke, said this high volume of complaints is the “new normal” for the organisation after consecutive years of high complaints.

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Costs imposed by ASIC and the government together with massive compliance overheads will be the primary cause of these failures.
The government is obviously unable to grasp the situation as to why financial advice is expensive!
The answer is very simple, it is the massive duplication of paperwork for example we must disclose our fees in our SOA, then again in our fee agreement and yet again in a document to be forwarded to the platform that pays these fees.
Now let’s take the SOA, it should only contain the advice written in plain English and based on the scope of the advice. Everything else should be removed.
There should be one fee agreement and that should be accepted by the platform as sufficient authority to pay any fees applicable.
Advice must be fit for purpose and should not be extended to include every scenario for example if we are providing retirement advice to a 50-year person, we should not be considering their aged care needs at that time. The scope of advice could exclude areas of advice that are not taken into consideration in preparing the advice.
As accountants we can provide affordable advice as we are not subject to the same level of compliance as our financial planning services. Accounting advice is far more targeted and is generally limited to a 2-page document including a scope of advice and the advice itself. The average cost is about $700 to $800, whereas the average cost of financial advice is about $2,500.
To get financial advice lower, the government wants to create the role of “Qualified Adviser”, whereas they should be simplifying the whole process to either “simple advice” or “complex advice”.
This would create a pathway to bring new advisers into existing firms which could meet the demand for “simple advice”.
William Mills Price Financial Intelligence

Submitted by Ross Smith on Wed, 2024-04-10 12:06

There are false assumptions by Treasury in its 23 June 2023 IFM Final Report which likely misled The Treasurer to reintroducing the anti-competitive ASIC Supervisory Cost Recovery Levy ACT (2017) which levies AFSL licensees who have done no wrong, after ASIC has already paid Treasury the penalties and fines paid by wrong doers, so Treasury is doubling up, ie, Hon Stuart Robert said in early 2023 that Treasury is making 1.6 times ASIC's enforcement costs, because penalties and fines are not accounted back to the $44.6 million levy gross. It is crook Treasury accounting. AFA found this 3 years ago and reported to financial advisers. SIAA also reported this to the Senate Economics References Committee in online Hearing dated Wednesday 3 October 2023. The Treasurer should be ashamed at punishing the financial adviser workers of Australia, because we work with high professional skill due diligence against a plague of problems in the products of financial institutions for no fee or compensation! Two wrongs do not make it right in these Domestic Governance failings, when there should be 200,000 financial advisers in Australia, not 16,000.

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