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Pretty hate machine

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alex.burke
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9 days ago

Confession time: back when I was a trade journalist during the Royal Commission, I never found the “few bad apples” defence very persuasive. 

Not because of any strongly-held convictions, mind you; it’s just that the pedant in me couldn’t tolerate an idiom being so woefully misused. If someone mentioned bad apples without the spoiled bunch – without acknowledging that rot begets rot – I found it very hard to give them the benefit of the doubt. 

It’s a personal failing, I know. I’m not working on it and I won’t get any better. 

I’m reminded of this period due to recent press coverage of financial advice, particularly regarding the Shield Master Fund and the First Guardian Master Fund. While I’ve yet to see any bad apples mentioned, I noticed something equally maddening: an almost Pavlovian recitation of the exact same talking points we all heard seven years ago. 

Time truly is a big fat circle. 

Take this example, which apparently operates under the assumption that the past decade-or-so of advice policy reform never actually happened. About halfway through, I’m told that “licensed financial planners” sold units in the Shield Master Fund for “lucrative commissions” between 2022 and 2024 – a period that, I’m sure we can all agree, took place after the Future of Financial Advice reforms came into effect on 1 July 2013. 

From this piece, I learn that Assistant Treasurer Daniel Mulino has “ordered a review of the [CSLR] to examine how it can be made fairer” to people who have been “misled by financial advisers.” For some reason, complaints related to advice make up “most of the claims” being referred to the scheme. 

Then there’s the matter of SQM Research. If you’re unaware, SQM managing director Louis Christopher recently defended his company’s ratings system following reports that investment platforms were planning to drop SQM as an approved research partner

Christopher argued that the 3.75 stars given to both Shield and First Guardian were at the “lower end” of the “investment grade” scale. And, sure enough, a quick visit to SQM’s ratings methodology reveals a big scary asterisk next to the 75% “favourable” rating – below that, you’ll find a warning that strongly recommends advisers conduct “additional due diligence over and above base requirements” when considering funds in this range. 

The fact that both asterisk and warning were absent from the methodology page back in June last year is neither here nor there, probably. 

In the aggregate, these stories paint a pretty clear picture: wherever there’s fraud, you’ll find an adviser nearby. And if you can’t see one, it’s because they’re busy – to quote the first article linked here – “looking the other way.”

Still: why bring all this up now? Why curate a list like this, especially one referencing news items that were already seeping out of the discursive membrane? 

Well, obviously to get your clicks, sucka. 

But I also want to explore why advisers tend to draw all the lightning whenever another Storm’s afoot. Advisers were involved in both recent disasters, sure, and their recommendations contributed to catastrophic losses for potentially thousands of clients, but contamination from Shield and First Guardian appears to be limited to a relatively small number of licensees

Moreover, the peak body for the profession warned ASIC about Shield and First Guardian’s cold-calling operations all the way back in 2021.   

None of this is exculpatory, of course; there may be other advisers who have some form of exposure to Shield, First Guardian or other schemes like it. And, frankly, I have neither the ability nor the inclination to absolve (or condemn) an entire profession for the crimes its members may have committed. 

However, it’s worth considering the chain of accountabilities required for something like Shield or First Guardian to happen. There’s the adviser who recommended the product, yes, but there’s also the platforms that hosted it, the research houses that rated it, the auditors that signed off on it and the telemarketing firms that referred the adviser in the first place. 

Obviously, there’s also the manager and responsible entity for the product itself.

Given the range of interested parties here, why is the “dodgy adviser” so commonly used as a convenient shorthand? Well, I’d argue it’s kind of baked into the legislative framework – and the CSLR is the perfect example of why that is. 

Somewhat damaged

Two weeks ago, Treasury announced a consultation on the costs required to fund the CSLR for the 2025-26 financial year. Because the estimated $67.3 million in advice-related claims is well above the $20 million subsector cap, the Minister has the option to raise a special levy to cover the shortfall. 

The purpose of this consultation is to determine how, exactly, that levy should be meted out. 

Now, as we’ve discussed far more times than is medically advisable, the CSLR inherits its industry funding model from the same mechanism used to determine the annual ASIC levy. Crudely, that formula is ASIC’s regulatory costs for the sub-sector net the minimum levy ($1,500) multiplied by the sub-sector population – and for advisers, that sub-sector population is the number of AFSLs.

I saw the sign / and it burned out my eyes / I saw the sign

This figure is then divided by the number of ARs on ASIC’s register, which gives you the annual per-adviser levy. Absent from that calculation, you may have noticed, is any recognition of proportional regulatory impact or different advice businesses’ capacity to pay. 

This became a serious problem for the profession in the fallout of the Royal Commission; ASIC’s “regulatory pipeline” was swelling just as institutional interest in the sector began to evaporate.

The diminished presence of businesses actually investigated by the Commission – those bad apples of yore that were, coincidentally, best able to absorb the costs of regulatory action – left the lion’s share of ASIC funding to a much smaller and more fragmented cohort. 

Returning to the CSLR, advisers now face a similar challenge. Substantial costs incurred by a relatively small number of providers (some of whom are already in liquidation) are spread, more-or-less uniformly, across the entire industry. And that industry is even more heterogeneous than it was when the banks were bowing out – according to Wealth Data figures from earlier this month, just over half (50.28%) of licensees have fewer than 50 ARs.

Plus, the structure of the CSLR introduces a further wrinkle. It’s something I’ve covered so many times now that cerebrospinal fluid bursts from my ears whenever I type these words, but managed investment schemes are outside the CSLR’s remit. Which means that any complaints related to product failures are de jure advice complaints if a claim makes it to the scheme. 

Treasury acknowledges this problem in its consultation paper on the special levy, noting that there’s “an inherent difficulty in requiring the determination of responsibility for the conduct driving the [CSLR’s] costs.” 

“Some stakeholders,” the paper continues, “have suggested that ‘financial product failures’, in particular in relation to managed investment schemes, are a driver of the CSLR’s costs.”

That’s about the length of it, though. And fair enough: any substantial changes to the CSLR will probably have to wait until after the scheme’s post-implementation review, which Treasury (helpfully) says is “ongoing.” 

In the interim, the special levy consultation will consider a range of options, including:

  • Doing nothing (and letting the excess roll over into subsequent years)
  • Breaking the levy into instalments 
  • Spreading the costs across other subsectors
  • Levying the primary subsector

You can read the full paper here – and you should, because there’s a lot more granularity to potential outcomes than the above list implies – but it’s worth highlighting that one of Treasury’s most important considerations is the “repeatability of the decision.”

After all, this likely won’t be the last time a special levy is required; there’s a very long road ahead, if Dixon Advisory’s outsized presence in the FY26 claims estimates is any indication.

The big come down

Clearly, this is a tenuous and unstable position for any business to be in. And because the current system struggles to accommodate any nuance with respect to individual accountability or the relative culpability of other industry subsectors, every adviser is, in a sense, tainted by association. 

Right now, that’s the letter of the law – so why shouldn’t the prevailing narrative follow suit?

Even as I write all this, though, I have to concede that there’s another obvious argument as to why advisers can become the focal point of crises like Shield and First Guardian. It presents itself in the form of a question: were we instead discussing medical malpractice, would our instinct not direct us towards a patient’s primary care provider? 

If there is a difference here, it’s that – theoretically, at least – there would be a much clearer delineation between practicing professional and, say, pharmaceutical product manufacturer.

By contrast, advice exists in a sort of quantum state: it’s simultaneously a profession, with all the standards and obligations that entails, while also sutured to the financial product distribution framework defined in the Corporations Act. 

The Australian Law Reform Commission described this issue two years ago in its third interim report on financial services regulation. The report noted that a “piecemeal approach” to advice policy has seen new provisions “incorporated into the existing legislative structure as new parts or divisions” with little regard for “achieving a coherent and navigable structure.”

At the time, the ALRC suggested that the implementation of “substantive reforms” following the Quality of Advice Review would enable legislators to tackle this problem head on. Well, hopefully those reforms are coming any day now.

Until then, I guess one apple is as good as another. Blight doesn't discriminate. 

Updated 9 days ago
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