AFCA limitations on super complaints damaging advisers: Anderson

Macquarie’s agreement to purchase its members’ holdings in the collapsed Shield Master Fund and provide “goodwill payment” that would combine to cover 100 per cent of their investment in the fund, to the tune of around $321 million, was broadly lauded.

Financial Advice Association Australia (FAAA) general manager policy, advocacy and standards Phil Anderson called it “great news” for Shield investors.

X

Continue to Website

“This is a very good outcome for these clients who have been so badly impacted by the collapse of this managed investment scheme. Hopefully, this will provide relief for them in what has been a very difficult and challenging experience,” he said.

On Macquarie’s end, it said the decision to “devote resources to achieve this outcome” was in recognition of the “unique circumstances” and scale of losses, as well as its “material impact on many investors and their limited access to recourse from the many different entities which played a role”.

“The approach of providing immediate certainty and an improved outcome for investors benefits all parties,” Macquarie said in a statement last week.

However, there is little indication that any of the other super fund trustees involved – Equity Trustees, Diversa, and Netwealth – are likely to follow suit.

None have the backing of an entity the size of Macquarie and its $83.75 billion market cap to take the substantial hit to their bottom line.

According to Anderson, the situation for both clients and the vast majority of financial advisers that had no role in the scandal is made more difficult thanks to the Australian Complaints Authority’s (AFCA) rules around superannuation complaints.

“Macquarie have taken the lead, in agreeing to compensate their clients who invested in Shield. This is a great step forward; however this response may not be replicated by others who may be implicated,” he wrote in a piece on the FAAA website.

“Other than already announced settlements, the resolution of these matters is uncertain and that is where we run into trouble and where it is clear that the financial services complaints regime has some deep flaws.

“These flaws result in impacted clients being encouraged to direct their complaints against financial advisers only. This option should always be available to clients when adviser wrongdoing is evident, however the system must provide clients with the right to complain with respect to other providers in the value chain that were involved in this failure.

“In fact, the complaints regime should treat the Compensation Scheme of Last Resort (CSLR) as the last resort and prioritise resolution through other means.”

AFCA’s limitations

While he noted that the complaints authority is indeed a “good system for clients”, Anderson argued there are a range of flaws or limitations that can negatively impact access to compensation.

These include:

• AFCA can only accept complaints against firms who are members of AFCA. While financial advice licensees, responsible entities and super funds are members of AFCA, research houses and auditors are not.
• AFCA cannot accept complaints against the actions or conduct of professional indemnity (PI) insurers who are insuring financial firms that are members of AFCA or join them to a claim.
• AFCA is only an option for retail clients. Clients who legitimately meet the criteria to be classified as wholesale do not have access to AFCA.
• Where there is a level of joint responsibility for loss between multiple financial services providers, AFCA cannot join a super fund to a complaint against a financial adviser. This forces clients to make two separate complaints, significantly increasing the effort and complexity for consumers.

However, the main issue as it relates to the Shield and First Guardian failures is AFCA Rule C.1.5, which excludes complaints that are “solely about the investment performance of a financial investment, other than a complaint concerning non-disclosure or misrepresentation”, as well as complaints relating to the management of a fund or scheme as a whole.

“We are aware of complaints to AFCA against the super funds who included Shield and First Guardian on their investment menus that have been rejected on the basis of AFCA Rule C.1.5,” Anderson said.

“AFCA have determined that these complaints do not fall within their jurisdiction as the investment performance of Shield and First Guardian are excluded; and super funds’ decision to list these investments on their platforms relate to the management of the fund as a whole.

“Such decisions are clearly very concerning for these clients. We have also seen decisions that have highlighted that complaints could not be considered as the amount of loss cannot be calculated due to uncertainty about the level of recovery through the liquidation of these schemes.

“This limitation has not been applied when it comes to advice-related complaints, which have already received an AFCA determination and progressed to the CSLR.”

He also noted that the complaints authority’s webpage on the Shield and First Guardian issues lays out that it has “limited jurisdiction” relating to super funds.

“We believe this is not the intent of the consumer compensation system or the principles of external dispute resolution,” Anderson added.

“These aspects of the AFCA rules should be amended as a matter of urgency to assist the clients impacted by these failures.”

Looking at how this rule should be changed, he said it requires “significant moderation”.

“Complaints about the operation of the fund, including with respect to the decision to include an unsuitable investment fund on an investment menu and failure to take sufficient action in the context of warning signs related to investment products and business practices, must be permitted,” Anderson said.

Beyond this, particularly in the case of such complex matters, there needs to be a “mechanism to negotiate a settlement across all of the contributing parties” rather than leaning so heavily on the CSLR.

“Changes to the law to allow complaints involving financial advice to attribute loss to other parties, even where there are breaches of the core advice obligations, such as the best interests duty and the appropriate advice obligation,” Anderson said.

He added: “It is clear that many parties across the financial services value chain played a role in this matter. If it takes a public inquiry to flush out everything that has happened and what needs to be done to fix these problems for clients, then the financial services industry must support this.

“Consumer protections and compensation regimes are critical for consumer confidence in the superannuation system, and the financial system more generally – the current regime is not fit for purpose and must be fixed.”