In an environment of M&A, CA ANZ has stated any company looking to acquire an advice firm should be prepared to bear responsibility for any compensation to aggrieved clients.
In its submission to the Senate standing committee on economics on wealth management companies, which is exploring the cause of the collapse of Dixon Advisory, the organisation discussed whose responsibility for compensation should fall upon.
Dixon Advisory collapsed in 2022 and was fined $7.2 million by ASIC, however, the regulator stated it will be unlikely to pay this penalty as the company is in liquidation.
This has left compensation to consumers, which the Australian Financial Complaints Authority (AFCA) estimated could be $458 million in losses, to be funded by the Compensation Scheme of Last Resort (CSLR). Some 2,773 complaints were submitted by the time Dixon was expelled from the AFCA scheme.
Commenting, CA ANZ said: “In the case of a vertically integrated business, where there is common ownership and/or directorship, the responsibility to ensure adequate capital resources to fund compensation to aggrieved clients should fall on the parent entity.
“In the case of Dixon Advisory, ASIC found that its representatives breached the best interest duty to a number of clients and was penalised $7.2 million. Dixon Advisory had already been placed into administration, and its parent entity E&P Financial Group ultimately entered into a heads of agreement with ASIC to pay the penalty.
“We believe the parent entity of an AFS licensee should assume responsibility for the licensee’s commitment to clients, similar to a licensee being responsible for their authorised representatives’ actions. Similarly, where the operations of a licensee are transferred to a related party, as was the case with Dixon Advisory, the parent entity should assume responsibility for any complaints and compensation claims against the former subsidiary.”
It also recommended that the external dispute framework should have safeguards in place to ensure providers are in an adequate financial position to compensate clients if necessary.
Michael Davison, financial advice and governments affairs leader at CA ANZ, said: “These safeguards should include minimum capital adequacy requirements and ensuring adequate levels of appropriate professional indemnity insurance are held.
“If these safeguards exist and function adequately, then the majority of complaints should be resolved and any compensation paid at the EDR stage and a Compensation Scheme of Last Resort would be a genuine last resort.”
Earlier this week, Money Management explored how potential acquirers are hesitant to enact M&A activity in the UK financial advice space as they are worried about potential remediation affected by the new Consumer Duty, similar to Australia’s best interest duty.
“The impact of consumer duty is starting to bite in the UK which is stopping acquirers. It ensures firms are acting in the best interest of their clients, are creating fair value from the advice you are giving, and that there’s ethical oversight at both an adviser and at a product manufacturer level. It’s quite widespread. Acquirers don’t want to find themselves liable for that,” said financial services executive Tony Beavan.
