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Boiling point

Alex-Burke's avatar
Alex-Burke
Icon for Advisely Team rankAdvisely Team
19 days ago

Do you remember the “Royal Commission pipeline”? 

If not, a brief recap: in a Senate committee hearing back in 2021, then-ASIC deputy chair Karen Chester used the term to describe the financial services enforcement activities the regulator undertook following the Royal Commission. She cited these activities, and the costs incurred from them, as the primary reason adviser levies had ballooned by 160% over the preceding two years. 

In the same hearing, former ASIC commissioner Danielle Press said these Royal Commission costs were the “numerator” in the levy equation; the denominator was the “declining number of advisers”. 

“Those two things have hit together,” she explained, adding that the industry funding legislation provided ASIC “very little flexibility” in how these numbers were calculated. 

The ASIC representatives suggested advisers could expect a cost reduction at some point (once that numerator had been sanded down a bit) and they were right, in a way. A few months later, Treasury announced a two-year freeze on ASIC levies, bringing them back to pre-COVID levels. 

That freeze, of course, came to an end in June last year. And in November, ASIC announced a per-adviser levy of $2,818 – a welcome downgrade from its original estimate of $3,217, sure, but still higher than the figure in question when Press was explaining the basic arithmetic of industry funding. 

With that history lesson out of the way, I’ll make three observations: first, it’s no secret that the “denominator” in ASIC’s calculations is just over half the size it was back in 2021. Second, ASIC’s initial levy estimates are imminent – they’ll most likely arrive within hours of publishing this piece. And third, an entirely separate funding mechanism kicks in next week, compounding advisers’ ongoing levy obligations.

That new mechanism, of course, is for funding the CSLR. And while the “Royal Commission pipeline” likely won’t play much of a role in future CSLR levies, there’s a new, equally nebulous numerator in the form of Dixon Advisory. 

Somehow, we’ve gone from a freeze to a boil. 

Burning down the house

These costs, along with the potential ones that might arise from the Government’s proposed modifications to section 99FA of the SIS Act, were the central topic of a missive posted by Senator Andrew Bragg earlier this week. 

Acknowledging the "huge pressure" advisers were under, Bragg said the industry “should be worried” about the upcoming CSLR levy given the rapid increase in Dixon Advisory-related complaints being referred to AFCA. The tally now stands at around 2,500, he explained, which is an increase of 500 complaints since February.

“It’s been reported that the cost to the advice profession through CSLR levies as a result of Dixon Advisory could be above $100 million,” he added. “I’ve been asking the question of why proper law enforcement hasn’t happened here, and why small businesses are carrying the can.”

Bragg said the Government’s “callous and cold” responses to questions about the CSLR levy demonstrated its lack of interest in the potential impact on “small and medium financial adviser practices,” and that these “pain points” would be addressed in next week's report on the Senate Economics Committee's inquiry into ASIC investigation and enforcement. 

Hang on, though – if the levy formula Danielle Press laid out in 2021 is correct, what lever could ASIC pull here? Outside of reducing its enforcement and investigation activity overall – which, I imagine, would run counter to Bragg’s aspirations for “proper law enforcement” – how could the regulator actually make a dent in the annual adviser bill? 

That’s to say nothing of the looming costs associated with Dixon and the CSLR, of course. Theoretically, ASIC has some control here; per the Financial Services Compensation Scheme of Last Resort Levy Act 2023 and associated legislation, the regulator is responsible for calculating the levy burden for each firm within the CLSR’s remit. ASIC also determines the extent to which its administrative costs are included in the CSLR levy for a given financial year.

Ultimately, however, the CSLR’s funding model inherits its industry sub-sector definitions and entity metrics from the same legislation that determines the annual ASIC levy: the regulations made under the ASIC Supervisory Cost Recovery Levy Act 2017. 

The magic number

Those regulations prescribe both minimum levies for relevant industry sub-sectors and the formula used for calculating the graduated levy component. In the case of retail financial advice, this basically shakes out to ASIC’s regulatory costs for the sub-sector net the minimum levy ($1,500) multiplied by the sub-sector population (number of AFSLs). This figure is then divided by the number of relevant providers on ASIC’s register, which gives you the annual per-adviser levy.

The actual formula is a little more complicated than that, but I think parsing out the law’s multiple exceptions and recursive definitions within the confines of this article would violate at least one article of the Geneva Convention. The point, though, is that ASIC only appears to have control over a single variable in this calculation: its regulatory costs and the extent to which those costs apply to a particular industry sub-sector. 

Admittedly, that is a pretty large variable. And the methods ASIC uses to calculate sub-sector costs aren’t exactly indisputable – not long ago, in a response to a question on notice from Senator Slade Brockman, the regulator said nearly $4.5 million of last year’s advice levy arose from “a not insignificant enforcement effort required in respect of unlicensed operators involved in providing financial advice.”

Now, I’m not exactly au fait with the complex mechanics of financial services regulation, but I would argue that charging licensed advisers for the policing of unlicensed activity rather defeats the purpose of treating them a distinct, leviable industry sub-sector. 

Sins of the father

Whether it’s unlicensed operators, Dixon Advisory or the Royal Commission, though, the central problem is the same: a significantly-reduced adviser cohort, vulnerable to further reduction due to cost pressures, is consistently burdened with the costs associated with policing an even-smaller minority. That those minorities share very few recognisable characteristics with the average retail advice business doesn’t (or can’t) even factor into the equation. 

It’s worth noting that ASIC acknowledged this issue in a letter to Treasury back in May 2021. Commenting on industry feedback to its affordable advice consultation paper, CP 332, ASIC said that “many advisers cited the industry funding levy as a key driver of cost.”

Those advisers, ASIC continued, suggested restructuring the levy so that it better-targeted the licensees actually “responsible for the historical misconduct which ASIC is taking action against” – most of whom had already exited the industry at that point, effectively exempting them from ASIC’s levy calculations. 

We’ll never know how those suggestions might have been incorporated into further consultation, though, because the bulk of ASIC’s advice affordability research was subsequently folded into the Quality of Review – and consideration of the ASIC levy was excluded from the review’s terms of reference. 

Which brings us back to Danielle Press’s “numerator and denominator” comments from 2021. If it’s the formula that brought us to this point, perhaps the real issue is the formula itself. 

Treating all advice as uniform – whether it’s from a bank, a small, self-licensed business or an unlicensed TikTok personality – is only ever going to result in a disproportionate levy burden for the remaining number of registered financial advisers in Australia. It’s just maths. 

Updated 19 days ago
Version 3.0

1 Comment

  • Phil-Anderson's avatar
    Phil-Anderson
    Icon for Advisely Partner rankAdvisely Partner

    Hi Alex, an excellent coverage of the ASIC Funding Levy and CSLR issues. You have raised a number of really good points.  On the ASIC Funding Levy the big issue is advisers paying for unrelated activity. Non licensed operators is one big example. For Treasury (and ASIC), seemingly the argument is that the advice profession benefits from these unlicensed operators being confronted. I, for one, can't see how that is the case. Advisers already have as many clients as they need, with lots of Australians looking for advice. In terms of reputational damage from unlicensed operators being caught, then surely it is the responsibility of ASIC to make it clear when they take action against them, that they are not licensed operators, should not be confused with licensed operators, and by the way, you should make sure your adviser in licensed before you appoint them by checking the FAR.

    ASIC does have some influence in the way the ASIC Funding model works. One classic case is the action that ASIC took against Westpac for what their call centre operators were doing in their super funds. Westpac argued they were providing general advice. ASIC argued it was personal advice and the High Court sided with ASIC. As a result, ASIC decided to charge 60% of the costs of this case to the personal financial advice to retail client sector. Despite this conduct being undertaken by a super fund business owned by a big bank, that said it was general advice, they chose to charge the majority of it to small business financial advisers. This does not stand up to the pub test in any way whatsoever. Their argument was that it was somehow beneficial to the advice profession to protect the boundary between general advice and personal advice. This only came out due to questions at Senate Estimates. Otherwise we would never know as there is no visibility of the money spent on these enforcement cases. Enforcement costs make up two thirds of all ASIC costs charged to financial advice, so it is really important. We need a model that works that is subject to transparency and challenge. We don't have that. And by the way, those who do the wrong thing, should be charged where-ever possible, rather than the innocent. There is no doubt that the super funds could have paid for the Westpac case.

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