FAAA urges insolvency crackdown to curb soaring CSLR costs

The Financial Advice Association Australia (FAAA) has called for tougher insolvency rules to prevent "phoenixing" activity.

The FAAA said loopholes which shift costs of failed financial advice businesses onto the broader profession through the Compensation Scheme of Last Resort (CSLR) must be closed.

In a submission to the Productivity Commission's inquiry into reducing barriers to business dynamism, the FAAA said while it supported efforts to encourage business creation and growth, the financial advice sector required stronger safeguards because advisers face long-tail liabilities with some consumer complaints emerging years after advice is provided.

The association said the issue had become more pressing following the CSLR's announcement that costs are now expected to total $190.3 million, almost 19 times higher than Treasury's original estimate of less than $10 million a year.

FAAA general manager policy, advocacy and standards Phill Anderson said much of the increase had been driven by the collapse of managed investment schemes linked to Dixon Advisory, Shield and First Guardian.

"Insolvency should not be an easy solution for those who have caused detriment to others," Anderson said.

Anderson argued some businesses have been able to transfer advisers and client books to related entities before entering liquidation, leaving outstanding complaints to be funded by the CSLR.

"It is now a well understood pathway to transfer advisers and clients to another business and continuing to operate under a different licensee, whilst leaving the cost of outstanding complaints to be picked up by other innocent operators in the profession through the CSLR," he said.

He notes reforms to Australia's insolvency regime should make phoenix activity more difficult and give liquidators stronger powers to pursue those responsible.

"It is important that any changes to the insolvency regime need to more carefully restrict phoenixing activity. It is also important that liquidators are empowered to pursue phoenixing activity and that those who are responsible are held to account," Anderson said.

The FAAA acknowledged the financial advice licensing process can be lengthy, noting ASIC aims to determine 70% of complete AFSL applications within 150 days of 90% within 240 days.

However, Anderson argued these checks remain necessary given advisers' ongoing obligations and the potentially significant financial consequence of poor advice for consumers.

The submission forms part of the Productivity Commission's consultation on reducing barriers to business dynamism, with the FAAA urging policymakers to balance regulatory efficiency with appropriate consumer protection.