ASIC oversight needed to reduce unpaid determination risk

If the corporate regulator does not have greater oversight with existing laws, the compensation scheme of last resort (CSLR) will do little to reduce the consumer risk of unpaid Australian Financial Complaints Authority (AFCA) determinations, according to an association.

In its submission to the CSLR bill, the Financial Services Council (FSC) said a lack of oversight would shift the costs, via levies, to financial services companies that did nothing wrong. A well designed regulatory financial system, it said, reduced the risk that led to unpaid determinations not just one that placed a safety net beneath it in the form of a CSLR.

The FSC recommended the Australian Securities and Investments Commission (ASIC) introduce a minimum capital requirement for advice licensees that could be phased in over a transition period to streamline any financial impact.

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“The law already requires advice licensees to have adequate financial requirements and arrangements in place for compensating clients,” it said.

“There are however no minimum capital requirements for advice licensees. ASIC should also have regard to the professional indemnity [PI] claims experience to inform its view of adequate arrangements as exclusions and declinations mean the CSLR will be forced to prop up a PI framework that is not meeting requirements.”

The FSC noted that while ASIC would consider how a licensee would cover insurance excess and keep records of this assessment when determining if it had appropriate financial arrangements in place, it was unaware of ASIC providing proactive or regulator industry oversight over these obligations. It also said there needed to be a relationship between the capital a business held and the level of PI excess chosen.

“To ensure existing legal obligations are being met, ASIC needs to undertake regular risk based reviews of licensees (ensuring that they include a representative sample of advice licensees) focusing on licensees having adequate financial and compensation arrangements in place, which will serve two important purposes;

  • It will identify those who have inadequate arrangements in place so that ASIC can take appropriate regulatory action and reduce the risk of consumer harm and unpaid determinations; and
  • It will encourage licensees right across the industry to ensure they have the right arrangements in place.”

ASIC, it said, also needed to have oversight over whether advice licensees had obtained the right PI, had sufficient financial arrangements to pay PI excesses to ensure that PI could respond to claims.

“In this regard it is recommended that Advice Licensee arrangements are strengthened, together with greater ASIC oversight of financial and compensation arrangements, to reduce the risk of unpaid determinations and ensure the CSLR operates as a genuine last resort compensation scheme,” it said.

Recommendations the submission had included:

  • The FSC supports a targeted CSLR which is funded by the sectors responsible for unpaid determinations via sector specific funding. The scheme will cover personal financial advice, which historically has been the largest source of unpaid determinations, as well as covering credit activities and dealing in securities (other than issuing securities) for retail clients;
  • Should additional levies be needed for the CSLR, it is recommended that they should be funded by the relevant sector as the starting position, and to the greatest extent possible overall;
  • ASIC should introduce minimum capital requirements for advice licensees – this can be phased in over a suitable transition period to help streamline any financial impact;
  • ASIC commences proactive oversight of Professional Indemnity Insurance (PI) and adequate financial arrangements held by advice licensees;
  • Supports provisions in the CSLR to prevent phoenixing – those responsible under the licence should also be prohibited from obtaining another AFSL where unpaid determinations have been paid by the CSLR;
  • The FSC supports the $150,000 cap on claims as proposed in the bill which is key to supporting a sustainable CSLR;
  • There needs to be a further focus to reduce the administrative costs of the CSLR, which have been estimated to cost 46% of levies raised whilst only 54% of levies are estimated to pay out consumers for unpaid determinations; and
  • To align the CSLR cost recovery process with the annual ASIC levy in order to reduce the operational and administrative costs for providers required to fund the CSLR.


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