How could ASIC mitigate wealth management collapses?

The Financial Services Council has made multiple recommendations to ASIC regarding exercising its powers around AFSLs and the application process to mitigate the risk of failing companies.

In its submission to the Senate economic references committee inquiry regarding wealth management companies, the organisation discussed ASIC’s powers against AFSLs and guidance during the AFSL application process. 

The public inquiry is assessing matters such as the underlying cause of the collapse of wealth management companies like Dixon Advisory, the role of the financial services regulatory regime in the collapse of an investment product and ASIC enforcement companies in the event of a wealth management collapse.

Chaneg Torres, executive director for policy at the FSC, highlighted three changes that ASIC could make to its treatment of AFSLs to prevent future collapses.

Firstly, the FSC recommended that ASIC review its AFSL registration process to capture data about managed investment schemes, such as the capital adequacy position, liquidity position, proposed risk management frameworks, and previous involvement in failed entities. 

VIEW ALL

View all

Depending on the risk level of the managed investment scheme, more or less resourcing could be devoted to those high-risk applications. 

This would help the corporate regulator to adopt a risk-based approach for AFSL applications and use that information to inform forward-looking surveillance processes.

“The FSC recommends ASIC review its AFSL and scheme registration processes, including the information it captures as part of an AFSL application and scheme registration forms/processes to capture enhanced data points that will lead to either a fast-track or slow-track registration processes depending on the particular MIS. These enhanced data points will inform risk-based surveillance processes at the outset, to be implemented following registration of an MIS.”

Following this, the FSC recommended greater oversight of professional indemnity (PI) insurance requirements and imposing appropriate capital requirements for advice licensees to ensure they are better positioned to meet compensation obligations. 

Currently, advice licensees are only required to hold enough cash to cover 12 weeks of liabilities, which the FSC said is “inadequate” if there is a compensation payment needed. 

“By introducing minimum capital or liquid asset requirements, advice licensees would have the financial stability necessary to meet claims against them, reducing the likelihood of unpaid determinations.

“Importantly, introducing appropriate capital requirements does not need to result in prudential supervision. Rather, it can simply require minimum cash or liquid capital requirements as part of licence conditions. These assets are then available to meet any consumer claims. This can be built up over time to streamline the introduction of such requirements. The appropriate amount of capital and PI insurance should be the subject of consultation with industry. 

“Furthermore, stronger regulatory oversight by ASIC would ensure that licensees are operating within a framework that aligns PI insurance excesses with minimum cash requirements, ensuring firms can effectively meet their financial obligations. By enforcing these measures, the overall risk of unpaid determinations would decrease, directly alleviating the pressure and improving the sustainability of the CSLR.”

Finally, once an AFSL is active, the FSC said ASIC should be enacting powers around banning or suspending those AFSLs that fail to meet compensation rulings by the Australian Financial Complaints Authority (AFCA) at least twice. 

So far, only two AFSLs have been cancelled following the payment of funds by the Compensation Scheme of Last Resort (CSLR). The first was Libertas Financial Planning in August 2024 and the second was DOD Bookkeeping in November. 

“The FSC recommends ASIC should be exercising powers under s920A(1)(j) of the Corporations Act to ban a person linked to an AFSLs refusal or failure to pay AFCA determinations.

“By more consistently and publicly exercising such powers, ASIC could significantly deter non-compliance, ensuring that licensees either meet their compensation obligations or are removed from the market. This would enhance the integrity of the financial advice sector and reinforce the idea that regulatory bodies will not tolerate firms that attempt to evade financial responsibility, ultimately protecting consumers and encouraging higher standards across the industry.”