THE CSLR HORNSWOGGLE

EXECUTIVE SUMMARY – The CSLR Legislation needs to be amended to reflect the intent of Commissioner Hayne’s Royal Commission Recommendations and the Ramsay Report to protect Consumers. There is no doubt CSLR has been nefariously manipulated to suit the objectives of the Banks, Fund Managers and Product Manufacturers resulting in Consumers and Financial Advisers being severely financially disadvantaged. 

The CSLR manipulation must be the most shameless and audacious legislative manoeuvre in financial services history. It really is a credit to the abilities of the Financial Services Council [FSC] for engineering the legislation to suit their Product Manufacturer/Banks/Institutional Member circumstances, unfortunately for the Advice community and Consumers however, it is disastrous and grossly unfair to most of Australian society.

We question whether the Politicians really understood what they were voting on to allow this to happen.  

This key glossary of terms needs to be understood from the outset to ensure the reader truly understands the different functional roles all stakeholders have in the financial services universe –

1. Financial Adviser [Adviser] is a person who offers strategic financial advice to consumers on a fee for service basis, they must be appropriately licensed and educated. 
2. Product Manufacturers [Manufacturers] are Financial Institutions/Life Companies/Fund Managers/Banks who own and manage Financial Products. 
3. The Australian Securities & Investments Commission [ASIC] is the Federal Government Regulator that supervises the registration of all Financial Products/PDS onto the market and behaviour of stakeholders, essentially the supreme ‘gate keeper’ of the industry.
4. The Consumer are the taxpayers who all stakeholders should be acting in the best interests of.
5. Associations will act in the best interests of the organisations or members who fund them.
6. Australian Financial Complaints Authority [AFCA] the highly effective complaints resolution service.
7. Compensation Scheme of Last Resort [CSLR] is the recently legislated organisation that must act within the law and direction from AFCA.  

Commissioner Hayne recommended in the Banking Royal Commission Final Report that Advisers should be held accountable to consumers for poor strategic financial advice and Manufacturers should be held accountable for the failure of their own products. This is also mirrored with the recommendations of the Ramsay Report in 2017. There is no ambiguity from either Comm Hayne or Professor Ramsay on these foundation tenets.  

Comm Hayne specifically recommended the following –

1. CSLR should commence from 1/1/2008.
2. All Managed Investment Schemes [MIS ie Financial Products] should be included.
3. Financial Advisers should be held to account for poor strategic advice
4. Product Manufacturers should be held to account for the performance of their own Financial Products.

The Financial advice community fully supports these Recommendations, in fact Financial Advisers are perpetually subjected to these conditions by the Australian Financial Complaints Authority [AFCA].

Please consider the following very likely opinions of the stakeholders – 

• The Manufacturers would not like this outcome, it literally means they will be held accountable for the mismanagement of their own products costing them billions in compensation.
• ASIC would also not like this outcome; it will shine a torch onto the systematic chronic failure of the MIS assessment of Financial Product procedures since 1991.
• Consumers would love this outcome to protect their savings and recoup past losses.
• Advisers are particularly disadvantaged by CSLR not adhering to the original HAYNE/RAMSAY recommendations. This professional Group and their clients will face the greatest adverse financial impact which will inevitably result in the cost of advice significantly increasing, Advice practices failing and a massive deterrent to new Advisers joining the industry. Dixon and UGC are a result of vertically integrated product sales camouflaged misleadingly as advice. AFCA has inappropriately chosen to apply the ‘best interests’ duty’ in awarding claims regardless of the empirical evidence.

The key question that needs to be addressed is how the CSLR legislation got to be manipulated to exclude all Manufacturers of any accountability of their own products failing then place this cost responsibility onto Advisers and consumers. Fundamentally, all but the 3^rd requirement above was removed from the intent of the legislation. Attached are the details published by then Treasurer Frydenberg on page 36/37 released in 2019 that received solid bipartisan support before the 2019 Election.

Also attached is a list of failed funds where consumers should have been compensated under Comm Haynes recommendations but have been excluded. The Ramsay Report estimates 80,000 consumers and more than $7 billion in consumer savings are affected, we think that is at the lower end of both estimations.

This legislative manipulation is a great outcome for the Manufacturers and their advocate FSC to avoid these liabilities but a poor outcome for Consumers and Advisers.  

SOME RELEVANT HISTORY – The history of the Financial Institutions officially avoiding accountability for the failure of their own products dates back to 1999 when the first complaints resolution scheme was legislated – the Financial Industry Complaints Service [FICS]. The Investment & Financial Services Association [IFSA] where instrumental in structuring the FICS shareholding/funding model where Advisers were allocated shares that demanded a lower annual fee but were held liable for poor advice including product failure. Financial Institutions paid more in annual fees but were not liable for the failure of their own products. In case you are wondering, IFSA was renamed FSC in 2010.

The other significant event that has severely damaged consumer protection was when the Australian Securities Commission [ASC as it was known then] in 1991 received legal advice that they were responsible for the contents of a Prospectus. The MIS procedure was then promptly implemented to protect the legal position of ASC/ASIC but Consumers have been left exposed to poor products and less than scrupulous operators, the very stakeholder ASIC should be prioritising. This ‘all care but no responsibility’ position has been an incredibly damaging regime for Consumers over the past 33 years but it inexplicitly still remains in place.

PRODUCT FAILURE – this has caused the greatest loss of consumer savings over the past 33 years without question. The above-mentioned ASIC operated MIS regime is profoundly flawed where amazingly the Manufacturer business model is not scrutinised or Director backgrounds checked by ASIC. If the Product complies with a ‘tick the box’ procedure it gets registered and released onto the market with a ‘caveat emptor’ [aka buyer beware] warning. Advisers have little choice but to rely upon Research Houses, Trustees, Custodians, Manufacturer Management and ultimately ASIC to ensure the product is efficiently operating. Upon the failure of a Product the above stakeholders run for legal cover, ASIC then boldly attacks, publicly humiliates and then bans the Adviser for using a product which they allowed onto the market. This deeply flawed charade needs to end, but it will not if these stakeholders are not held to account for their actions within the CSLR guidelines.         

THE DIXON DECEIT – this insidious underhanded manipulation has gobsmacked many. The DIXON Product failure has many Canberra based Treasury and other Commonwealth Department Bureaucrat private investor victims who have lost substantial amounts of personal savings. Considering Comm Haynes retrospective recommendation was removed [point 1 above] and the new CSLR structure was meant to be ‘forward looking’ from the point of Royal Accent, we are intrigued to know how the DIXON failure was given preferential compensation treatment over the other impaired 190 funds. Could it be that Minister Jones’ office is managed by former Treasury Bureaucrats who consorted with their Bureaucratic friends around Canberra? We are still waiting for a response to our complaint to the National Anti – Corrupt Commission[NACC] submission 8 months ago. This certainly does not pass the ‘smell test’.

DON’T THREATEN THE GOVERNMENTS MONEY! – Attached is a response from the highly respected Bernard F Quinn KC from the Victorian Bar about our question of whether the ‘smell’ around the CSLR legislation was unconstitutional. Mr Quinn is considered the best legal brain in the Financial Services industry, frequently used by ASIC and recently proved the Ministers office and Treasury were flawed with the 99FA Legislation content. Unfortunately, Mr Quinn suggested that any attempt to amend legislation that attacks any Government tax or levy is destined to fail in the High Court, simply put, you cannot beat ‘City Hall’ when it comes to their money supply. It is a shame this same attitude does not apply to consumer protection. 

SUMMARY – The only way this repugnant legislation can be amended is in the Parliamentary process, the best time is over the next few months leading into the Election when all Politicians will listen.

Considering CSLR was designed by the Canberra Bureaucrats in conjunction with the FSC, the Minister allowing Treasury to evaluate their own handiwork is farcical. We also suggest this review is an effort to kick this very controversial and extremely ‘putrid can’ down the road until after the Election.   

The resolution is quite simple, implement the intention and recommendations of Comm Hayne and the Ramsey Report as all sides of politics committed to in 2019, the integrity of Politicians is on the line. Specifically, Advisers must pay for poor strategic advice outcomes and Manufacturers for the failure of their own products, its not rocket science and is painstakingly fair.

The fact that AFCA has cooperated with the flawed CSLR structure by using the ‘best interests duty’ to justify Advisers being held responsible for product failure emphasises why the legislation needs amending. Furthermore, AFCA are only answerable to their Board [not ASIC or the Minister] and their Board is stacked with Manufacturer Executives who will no doubt defend the current arrangements unless the law changes.   

No doubt the political haggling process will eliminate the retrospective aspect to please the Manufacturers but they must be held accountable for the performance of their own products. Furthermore, the DIXON foreboding smell needs to be either removed or moved over to the ‘Manufacturing’ category being a Financial Product failure once the legislation is amended.  

Some members have asked why we don’t use the FSC to rectify this matter. Considering CSLR must be the pinnacle outcome of their long list of achievements [even better than their LIF, FASEA, Grandfathering Ban victories] and they are funded by the Manufacturers to deliver results largely against the Advice profession and consumers, it could not work. It would be counter productive for the Advice profession to give their political capital to an organisation that will more than likely use it against them as recent history has clearly demonstrated.

It is time for all Advisers to educate their clients on the insidious and expensive characteristics of this legislation and give them some direction on who they should NOT vote for in the upcoming election. This will certainly get the attention of the Politicians, we need to act.

Peter Johnston | Executive Director