Advisers go direct to Govt MPs over PI and CSLR cost impacts

Financial advisers have gone direct to key Government back-benchers telling them that if advisers are to be asked to fund a compensation scheme of last resort (CSLR) then they must be cut free from the current regulatory requirements around professional indemnity (PI) insurance.

While the major financial planning groups have voiced unanimous concern at the CSLR funding approach being proposed by the Federal Treasury, a number of advisers have taken direct action by raising their issues with influential back-benchers, not least the chairman of the Senate Economics References Committee, West Australian Senator, Slade Brockman.

The advisers have pointed to the hefty cost of their PI premiums which they point out would be on top of the increased levy contribution being canvassed by the Federal Treasury.

AdviceIQ general manager, Paul Harding-Davis said he agreed that there needed to be some form of trade-off involving the cost of PI and the cost of funding the compensation scheme of last resort.

What is more, he suggested that reviewing the role of PI in the equation would assist in moving financial planners towards professional status because it would remove what had become an unavoidable capital demand.

While the major planning groups have united to oppose the Treasury approach to the CSLR funding, submissions filed with the Treasury by planning groups have suggested that the cost should be carried by licensees via a capital requirement.

At least one submission has suggested that the minimum levy threshold for licensed entities would incentivise small licensees and therefore the likelihood of greater risk of claims under the CSLR.

“The risk of claim under a CSLR sits disproportionately at the small end of the licensee spectrum,” it said. “The proposed levy structure effectively subsidises the scheme participants most likely to force a CSLR claim by those least likely to force a CSLR claim.”

It said the introduction of a minimum levy threshold for licensed entities also failed to consider the “new world” economics of advice in which small, independently-owned or operated businesses authorised under a parent license would not receive the benefits of minimum levy threshold while “inherently higher risk, self-licensed small firms would”.

“In a market in which the dynamics are moving toward user-pays models, AFSL profitability has a linear relationship with adviser numbers. Profit margins are no longer a function of Authorised Representative numbers.”

“As a result, these levy costs are passed to the individual advisers or small businesses authorised under the licensee. This clearly, is antithetical to the intent of the proposed minimum levy threshold.”