Financial complaints. Mulino’s compo ploy to tap the goodies, even super, to cover the baddies

A storm is brewing that will blow up the Federal Government’s Last Resort Compensation Plan. Michael Pascoe An unknown factor in predicting the outcome is whether the minister in charge is playing a complex political game or is a fraud about to make a bad situation worse.

Is Deputy Treasurer Danny Mulino a shrewd politician and clever economist with a PhD from Yale, or Richard Marles’ junior faction friend in the Victorian Parliament?

This will be decided by how the government fixes or worsens the Compensation Scheme of Last Resort (CSLR) and the Australian Financial Complaints Authority (AFCA) that administers it.

By increasing the likelihood of using your retirement fund as compensation for people who make bad financial decisions, it either seeds the clouds for an urge to make major reforms or displays an ear and passion for being generous with other people’s money.

Looted Left and Right

Mulino’s proposal to add pension funds to the list of entities collecting compensation from punters was immediately met with scorn from left and right, most notably from unions and the super industry.

AFR’s John Kehoe featured ($) With CSLR taxes approaching $300 million this year, the moral hazard of riskier investments being undertaken by unsuspecting parties, the vast majority of which will be paid by honest financial advisors.

Crikey’s Glenn Dyer and Bernard Keane point out the injustice of those with significant assets being over-represented in the compensation queue, as they are more likely to seek higher and therefore riskier returns.

super dairy cow

“Mulino faces the problem that Chalmers sees the pensions sector as just another resource that the government can swoop in to solve problems elsewhere. There is no proposal to adjust the tax treatment of the pensions sector – the government is fed up with the situation after backtracking on changes a few months ago – just taking money from members through their own funds to compensate the victims of a different part of the financial sector.”

Association of Stockbrokers and Investment Consultants sees special taxes series If this becomes so steep, it will prevent new advisors from joining an industry where there is already a lack of responsible advice.

CSLR in its current form is unsustainable; it undermines good financial advisors, punishes the innocent, and ignores the dangerous ones.

AFCA sees itself as the Tooth Fairy.

he happily stuck some old coins with gold-encrusted dentures under the children’s pillows and in a glass next to the bed.

CLSR is a ‘money pit’

CSLR, set up in good faith to help people losing money by following bad financial advice, turned into a money pit after allegations reached the good-hearted AFCA. It’s a bit of a mini NDIS, except the funding comes from some good players in the financial system rather than taxpayers.

Notice that there is only “some”. Arguably the main source of losses are dodgy management investment schemes (MIS), which have been successful for decades but are lightly, belatedly and only occasionally regulated by our notorious financial watchdog, ASIC.

Whether as prank tree plantings or too-good-to-be-true retirement investments, MIS has been the tool of choice for rip-off traders. However, MIS issuers and so-called “responsible entities” do not contribute to the compensation fund.

MIS is the devil’s playground

Financial advisors, loan providers (banks), credit intermediaries (brokers) and securities dealers (stockbrokers) do this, but there is no one who wants to set up an MIS and take punters’ money.

The funny thing is. Logic, equity and history will ensure that MIS issuers and ASIC itself are also engaged.

I’ll come back to ASIC, but if you’re wondering why it’s the first one, ask the Financial Services Council because that’s the only mob that thinks otherwise. The FSC is known mainly for its relentless campaign against industry superfunds and for being Andrew Bragg’s old school. We can say that it has had a close relationship with the Liberal Party for a long time.

There is nothing new in MIS being the financial devil’s playground. Provide a gap or wide chasm and shocks will take advantage of it. A dozen years ago, the Companies and Markets Advisory Committee (CAMAC) conducted a lengthy inquiry into reforming the MIS framework, but the FSC didn’t like it, thinking that a bit more regulation and oversight would be, you know, “regulatory burden”.

bitter harvest

One of the minor items in the Abbott government’s first budget was to scrap CAMAC.

After a long and painful collapse of numerous crooked or incredibly inept agricultural plans, the Senate economics committee announced its decision in 2016. “Bitter Harvest” report With a lot of criticism towards the MIS system and the frequent failures of the ASIC.

And Mulino’s predecessor, Stephen Jones, launched a review of the MIS regulatory framework, which succeeded in producing a consultation paper two years ago, but no since.

A common feature of almost every financial scandal is that ASIC is asleep at the wheel. Whether it’s agricultural MIS marketed with the phrase “ASIC approved” on the cover, or Storm Financial, where ASIC has the all-clear, despite the extensive briefing on the disaster about to happen, the watchdog characteristically remains unmoved until it’s all over, restraining crying.

Initial Guardian and Shield failures

Same goes for the billion-dollar First Guardian and Shield failures. ASIC was reported to the fraud when it was in its infancy and did nothing. Incredibly, ASIC told Macquarie that Shield was dangerous but failed to pass on the same warning to another platform provider, Equity Trustees, allowing another $160 million to be invested in the scheme.

Now ASIC is trying to make itself stand out with its investigation, but it’s not fooling anyone.

And as these pages reported last week, it just keeps coming. The shadow minister involved, Pat Conaghan, said: Gave both barrels to ASIC I recommend on Wednesday

Instead of law reform, we need ASIC reform.

Joe Longo’s ASIC. Another day, another scam ignored

If someone is looking for someone to do a good deed, it makes more sense to charge the watchdog for the losses they suffer for not taking action, rather than punishing innocent players who try to do the right thing in the advice field. (And ASIC generates hundreds of millions of dollars in fees for the Federal Government every year.)

This is where the collateral damage from the current composition plan occurs. The size of the losses, initially from Dixon Advisory’s fiasco recommendations and now from First Guardian and Shield, means that:

Taxes on consultants are becoming punitive and threaten to shut down the consulting service.

So Mulino looks for someone else to pay, namely your super fund, or uses the backlash from this offer as an excuse to overhaul the comp system.

As it stands now, the maximum individual payout from CSLR is $150,000, but there are plenty of people raising their hands.

AFCA’s dreaded ‘But For’ clause

The system was made worse post-Dixon by the AFCA’s introduction of the incredible “but for” rule. In the official’s own words:

“Where the complaint relates to financial advice on an MIS that may subsequently fail (and is no longer an AFCA member), we will consider whether the adviser breached their legal obligations and, if they did, we will consider what the complainant might have invested in ‘in the absence of the breach’.”

So there is no compensation for the loss of capital that comes only from being led to make a bad decision,

AFCA wants to give you the profits you can make by doing something smart with your money.

It would be a bit of an exaggeration to say that this is like having $20 stolen from me for which I could have purchased a winning OzLotto ticket, and therefore I should receive a maximum compensation of $150,000 from CSLR.

Everything gets complicated because the Law of Unintended Consequences is operating as intensely as ever. Whether Mulino has what it takes to improve or worsen this mess remains to be seen.

Editor’s Note: maybe tapping the ASIC might help. They collect $2 billion in fees for the Federal Government, which gives them $430 million in funding annually. Financing losses from fraudsters and incompetents could be an incentive for better regulation.

Michael Pascoe is an independent journalist and commentator with five decades of experience in print, television and online journalism here and abroad. His book, Summertime of Our Dreams, was published by Ultimo Press.