Regulatory reform must address consumer harm, industry bodies say

In a series of coordinated submissions to Treasury consultations on financial system integrity, CA ANZ, CPA Australia and the IPA are campaigning for more effective, upstream conduct and responses that target the root cause of governance failures.

Current pressures on the CSLR, it was argued, are the result of poor lead generation practice, conflicting remuneration arrangements, and weak product governance. A certain inequity was identified regarding the levy that burdens compliant advisers while those that incurred the cost either do not contribute, or no longer exist.

Rather than expanding subrogation rights or taking from compensation stores which, the collective suggested, would increase complexity and ignore the underlying cause of consumer harm, it was suggested that matching compensation to actual loss would reinforce the core goal of the CSLR.

Similarly, the government was urged not to introduce a “waterfall” levy model as it risks normalising funding shortfalls or burdening financial businesses from numerous sectors.

As such, the industry bodies recommended aiming for stronger product governance, addressing misconduct within distribution channels, and ensuring Managed Investment Schemes (MISs) contribute to funding in proportion to the losses caused.

While supporting the goal of stronger member protections within the superannuation system, the proposed government reforms risk increasing regulatory complexity and simultaneously don’t prevent future failures, the accounting bodies furthered. Their submission argued that the Shield and First Guardian scheme point to failures in MIS structures and distribution practices, rather than within existing trustee obligations.

As such, the introduction of platform-specific governance, mandatory holding limits or increased penalties was not supported, especially considering that trustees are already party to strict and comprehensive standards.

A renewed focus should be placed, therefore, on the effective enforcement of current frameworks and continued monitoring regarding conflicts of interest.

In the same vein, it was argued that suggested waiting periods when changing super funds and restrictions on the deduction of advice fees would only increase financial burdens, distort competition and reduce financial advice accessibility.

CA ANZ, CPA Australia and the IPA also noted the importance that MISs be fit for purpose, outlining a stronger approval process and adequate reserves as conditions for operation to ensure investors can be compensated in the event of product failure.

The industry bodies also identified lead generation activity as a continued risk to consumers, especially where it operates outside regulation or accountability for financial decisions. Current proposals to tackle this issue, they continued, focus on downstream controls and are therefore ill-equipped to address the issue properly.

To ensure suitable supervision and educational standards alignment, it was argued that any influential party should be subject to current AFSL licensing frameworks. In addition, it was suggested that unlicensed and targeted communication that involves capturing consumer data or directing to products be banned, and the disclosure of remuneration and referrals be made more transparent.

It was noted that unintentionally capturing compliant general financial education or legitimate, professional referrals be avoided.

Finally, changes such as requiring licence display, strengthening ASIC’s enforcement powers, extending anti-hawking protection, and applying conflicted remuneration rules to lead generators were similarly identified as crucial steps towards greater consumer protection and overall transparency.