Exploring the areas where AFSLs come unstuck

As the government announces a public inquiry into Dixon, risk adviser Richard Silberman has detailed the three areas that typically lead to business collapse.

Earlier this week, it was announced that the Senate Economics References Committee will scrutinise the collapse of Dixon Advisory, examining how this failure has influenced the development and ongoing viability of the Compensation Scheme of Last Resort (CSLR).

Scheduled to take place and report by the last sitting day in March 2025, the inquiry will address several issues including how management actions contributed to the collapse, the underlying collapse cause, ASIC’s role in investigating corporate collapses, and the implications of the collapse on the CSLR. 

A public inquiry had previously been called for by the Financial Advice Association Australia as it is leading to heavy CSLR levy costs for the advice profession. As much as $135 million could be needed in client compensation for its victims.

Analysing the issue, managing director and founder of Numerisk, Richard Silberman, said the three biggest issues that typically lead to business collapse are product failure, fraud, and life and risk insurance.

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Product failure

“A practice or AFSL that has either incorporated a product into a model portfolio or has been widely advised and deployed across many clients and subsequently fails is a critical consideration for insurers. 

“Many PII policies have inherent weaknesses in the way multiple claims originating from the same cause are managed, and for larger AFSLs, some care needs to be taken when reviewing coverage as getting these provisions wrong can often result in years of litigation with both claimants and the insurance company entrusted to provide coverage.”

Silberman recommended the use of separately managed account (SMA) solutions run by portfolio managers as a way to put an additional layer of due diligence across product and investment options. 

Fraud 

“The stories of the rogue adviser running a ‘side’ sham investment scheme or simply falsifying statements and records are not uncommon, and the outcome can be devastating for advisers and clients alike. Equally, it’s not a surprise for many to know that small amounts of money being stolen over an extended period of time from an employer is a common occurrence across many businesses. These losses are often either uninsured or have very low levels of cover.”

Advice firms or AFSLs should look out for warning signs among staff, such as being unwilling to take annual leave or sudden change in lifestyle, especially by long-term staff who are integral to the business.

Life and risk insurance

“Commonly overlooked and likely not considered, the risks associated with insurance are significant and are a common source of large claims and losses. The scenario most commonly plays out in an operational context; a policy is cancelled and not replaced or changed to an alternative provider, and the policyholder or beneficiary suffers a major event. During the claim, it’s identified that either the policy is not current or the cover isn’t adequate under an exclusion or other policy language that has imposed additional requirements not met.”

Firms should ensure a strong protocol, Silberman said, around insurance and insurance policies as well as review policies post-placement to catch any errors before they become larger issues.