The Federal Government has been warned it risks making financial advice unaffordable when the cost of funding the new Australian Financial Complaints Authority (AFCA) is placed on top of the cost of funding the financial services regulators.
As well, the Government has been warned it could be forcing the exit of smaller advice firms due to the increased costs and the difficulty in obtaining professional indemnity (PI) insurance.
The Association of Financial Advisers (AFA) has used a submission to the Senate Economics References Committee review of the AFCA to warn that “the costs of providing advice in future will increase because of this new scheme”
Further, it said this came at a time of other increased costs for the profession, including the introduction of Australian Securities and Investments Commission (ASIC) funding, and the establishment of the Financial Adviser Standards and Ethics Authority (FASEA) and when business revenue is also under pressure from changes such as the Life Insurance Framework (LIF).
“In aggregate, these expected cost increases have the potential to reduce some consumers’ access to quality financial advice and could lead to some smaller licensees exiting the market due to increased professional indemnity costs,” the submission said.
“The AFA believes that great advice for more Australians leads to significant community benefits however the increasing costs of running an advice licensee and advice practices could lead to consumers having less choice when selecting an advice professional, and also making financial advice less affordable,” it said.
The AFA submission said it was essential that the overall regulatory reform program did not lead to a reduction in the availability or affordability of financial advice because “if it becomes too costly to service advice clients in future – in part due to the cost of dispute resolution and the contingent cost of professional indemnity insurance – then smaller businesses are more likely to exit the industry or merge with larger businesses”.
“This is likely to result in a reduction in the diversity in the market and an increased in the level of concentration and domination by the larger institutions. This will result in a reduction of choice for consumers,” the AFA submission said.
It said the impact of increased costs on financial service providers and the resultant increase in the cost of financial advice and reduced access to financial advice would have broad consequences, including a lack of competition and advice that is so unaffordable, average Australians who may need it most will miss out.