Seems extreme? Let’s take a closer look.
AFCA is risk-free, inexpensive and almost effortless… for complainants
For licensees, it’s the opposite. AFCA favours the complainant in a number of ways – some more subtle than others. Let’s start with the most obvious.
A determination made by AFCA is only binding on the licensee. If a complainant does not like AFCA’s finding, they can ignore it and commence proceedings through the court system. The adviser does not have that option.
To add insult to injury, all of AFCA’s costs are borne by the licensee – and those costs rise at every stage leading up to resolution. In a normal case, this will mean that the licensee will pay between $8,535 and $12,815 for a decision that the complainant can simply ignore if they aren’t happy with it – and those figures are before legal fees.
And there are likely to be legal fees – but mainly for the adviser. AFCA will generally assist the complainant in making their case, often going to significant lengths to draw arguments out of either irrelevant or insufficient information.
If AFCA were limited to smaller claims made by unsophisticated individuals, these imbalances might be understandable. Unfortunately, it’s not.
AFCA is designed for consumers, but is open to highly sophisticated clients
Even though the obligation to be a member of AFCA is triggered by providing services to retail clients, AFCA does not limit its service to these clients. Sophisticated and wholesale clients are perfectly eligible to claim under the scheme (including companies with up to 100 employees) and, while AFCA can consider this in exercising its discretion not to hear complaints, it very rarely (never) does so.
When combined with very significant claims limits – $1 million per complainant, $500,000 per claim – this opens the door to claims that are simply not appropriate for the forum. AFCA can be (and is) used by highly sophisticated parties such as family offices, despite the fact that these entities comfortably have the resources to use the court system and in fact often have deeper pockets than the adviser. In a recent matter, a group of sophisticated investors claimed against a licensee over a private investment – each claiming the $500,000 limit – and provided AFCA with complete statements of claim drafted by lawyers together with hundreds of pages of supporting documentation. An application was made to AFCA to reject the claim based on the sophistication of the clients – and this was refused. These documents could have been lodged with a court, but when you have access to a risk-free forum that’s skewed heavily in your favour, why wouldn’t you use it?
Problematic for small claims as well as large
The problems continue at the other end of the claims spectrum. While bodies like Fair Trading are set up to manage small claims in a cost-effective manner, AFCA is not. The AFCA cost structure means that there is very little benefit for licensees in actively defending claims for less than $10,000. Even a preliminary decision will cost a licensee over $5,000 in just AFCA fees, and at least the same will generally be expended in legal resources (whether internal or external). This can result in a consistent stream of small settlements, which can add up to a very significant cost for licensees.
When combined with the obvious issues around larger claims, the result is a significant financial strain for financial advice firms. Whether it’s one large claim, or a stream of smaller ones, for smaller advice businesses, AFCA represents a significant financial risk. This is also increasingly reflected in PI insurance premiums, with only very few insurers in the Australian market still offering cover for retail advice – and then only with large deductibles.
Unreliable outcomes on subjective issues – exacerbated by FASEA
Unlike a court, AFCA is not particularly rigid when it comes to evidence or technical points of law, and it also doesn’t have an established system of legal precedent, which means that there are no established positions on recurring issues that can be relied on.
This issue is keenly felt in financial advice cases, where the same issues dealt with twice will often yield different outcomes. Many cases will turn on whether a portfolio or investment was appropriate for the client – and it is not uncommon to have extensive debate on what constitutes a ‘speculative’ investment, or whether certain stocks should be considered ‘growth’ or ‘high growth’. Similarly, AFCA will often allow clients to challenge established legal protections, for example claims that wholesale clients should have been treated as retail despite the existence of sophisticated investor certificates.
This results in a situation where complaints that initially seem frivolous or lacking in merit can quickly gain momentum in the face of even the smallest uncertainties.
The FASEA Code of Ethics has the potential to seriously exacerbate this problem, as it will give AFCA licence to apply an extended range of subjective standards to disputes. AFCA has indicated that it will apply the code to disputes dated from 1 January 2020, stating that it will change the way it approaches disputes, and emphasising its ability to prioritise a ‘fariness lens’ over black letter law. While that may seem like a noble sentiment, it introduces even greater uncertainty and further erodes advisers ability to rely on existing laws and regulation.
AFCA and COVID – A perfect storm?
While financial markets are impossible to predict, some things are certain. Bubbles burst. Bull markets turn into bear markets. Black swan events will happen. Whenever any of these events occur, they spawn a stream of complaints claims and litigation that can often last for years.
COVID will be no different – when the markets drop by a third and then rise by a third, all within the space of four months, one thing is for certain: many clients will have lost money. As a highly favourable, risk-free forum, which, thanks to FASEA, has more scope than ever to consider highly subjective criteria, AFCA will represent a tempting option for impacted clients.
The combination of a once-in-a-decade market event with a legal and regulatory environment that is as unfavourable as it has ever been, may well represent a perfect storm that will drive more advisers out of the industry – or at the very least away from providing advice to retail investors. At some point governments, regulators and communities should consider if that is really a good thing.
Nik Albrecht, director, Albrecht + Associates
What I find sad is that all the comments below are made by “Anonymous” people who are too scared to mention their name as they may be the next target of AFCA or ASIC as this is the way we all feel as licensees
Great article Nik. AFCA is seriously out of control and sides with the client 99% of the time regardless of circumstances. At least FOS considered the AFSL’s position, AFCA is fundamentally a body to extract compensation from complaining clients rather than being an independent arbitration body, which is what they should be and what FOS claimed to be. The rule set governing FOS’ bailiwick did not include arbitrary payments for client ‘distress’, and was limited to retail investors, AFCA makes up its own mind as to the claimant. If this joke of an external dispute resolution service (note “resolution service”) is not brought back under control, smaller AFSLs will most certainly go out of business whether they have complaints or not because the insurance premiums will kill them.
AFCA decision making is a lottery, very one sided to the Complainant to the fact the Financial Firms are deemed now guilty and need to prove innocence. Hardly acting in accordance with the principles “on the balance of probabilities “. Coaching Complainants is even more concerning. No accountability.
I can’t help thinking how great it would be if the advice industry had a representative body that was representing them in all of this….oh hang on we do have one but unfortunately they are more concerned about their own relevance then actually representing the people who are paying them a fee each year.
What is concerning is that clients submitting complaints often receive advice from their new financial adviser criticising current or previous financial advice received from their existing or former adviser. We are turning back the time to the “survival of the fittest” will prosper so to speak. What we have created in the financial advice realm is far more sinister than it appears! Anyone can submit a complaint whether genuine or bogus and the licensee/adviser will start paying as soon as it lands in AFCA’s territory. Fair or not?
Thanks for the confirmation of the Adviser reality check Nik, it’s amazing how bad FOS / AFCA can be compared to the real Law.
I have had 1 case in 20 years of Advice and it was so frivolous, so extreme that the past FOS boss Personally called me after the final determination to apologise and say it was the worst Managed case she had ever scene, but sorry you still lose.
It was so badly managed and FOS agreed it was so badly managed by them and after the FOS boss called and apologised, I refused to pay the $10k FOS fee. The only win I had with FOS is that they agreed after multiple requests to not make me pay this $10k FOS fee. In reality a complete acceptance by FOS of how badly they stuffed up.
However, regardless of how bad FOS stuffed up, regardless of the case being thrown out by FOS 3 times, their process of zero cost to the complainant allowed a final complaint that FOS said they had to find in the complainants favour to get closure for them, regardless of how pathetic the case was.
FOS admitted their processes were an absolute shambles, FOS admitted they got many things in the case wrong, FOS admitted it was a terrible case.
Yet FOS still found a way to pay $100k out of $500k claimed. The $500k was so outrageous it could never be real, but so too was the $100k the PI insurers had to pay. Yet FOS said they had to find a way for the complainant to win.
Ultimately we as advisers had to pay the $100k FOS PI compo via increased PI costs anyhow. So the only loser was us the Advisers. Plus the 2 years of wasted time, costs, legal advise, etc the real Adviser cost Is well over $300k.
FOS is a complete BS Kangaroo Court, the only hope you can have is to not be in front of them. Because as a Financial Adviser, if you are ever in front of FOS, you will LOSE !!!!!!!
KANGAROO COURT !!!!!!!!
Had very similar experience. FOS found no wrongful advice twice before the third attempt by the prior client, and the final determination that allowed them to ‘win’ was riddled with errors – over 36 of the 71 numbered paragraphs were factually incorrect but we had no right of appeal. FOS/AFCA is pathetic and skewed, especially when you read that an accountant was let off in court for wrongful advice because a single brief filenote written by his junior associate miraculously appeared at the eleventh hour denying any advice was ever given. Chalk and cheese approaches to different ‘professional’ complaint processes!
And the politicians wonder why adviser are leaving in droves and very little new blood is entering this industry. Why would anyone want to risk losing their house due to this unjust system?
The greatest threat to the advice industry is bad advisers. Do the right thing, act in the best interest of your clients, deliver compliant advice and you’ll have no need to worry about whether AFCA is effective or not. [quote=Chris]The greatest threat to the advice industry is that the PI insurers simply abandon this deeply flawed process. It is entirely about AFCA assisting/coaching the client to put as much pressure on the insurer or defender of the action, to just settle it. It is a disgrace.[/quote][quote=Chris]The greatest threat to the advice industry is that the PI insurers simply abandon this deeply flawed process. It is entirely about AFCA assisting/coaching the client to put as much pressure on the insurer or defender of the action, to just settle it. It is a disgrace.[/quote]
Unfortunately that’s not how it works – clients are literally saying to their adviser “nothing personal, but I think i can get some money out of this, and your insurance will payout”… we can be 100% ethical and give great advice, and if the client wants some $$ – we’re screwed.
Unfortunately ‘being ethical’ is subjective, as is the term ‘great advice’. Deliver compliant advice, make sure your clients understand and agree to your recommendations and their possible risks (and evidence this understanding) and you have nothing to fear.
What BS. Years ago I would have thought exactly the same self righteous pompous rubbish but the reality is far different. Clearly you have never had a client go rogue on you, I hope for the purposes of your own professional education that you do.
This article highlights why AFCA is not fit for purpose as an EDR for financial advisers. AFCA has been structured to give consumers a power boost when taking on big banks and insurance companies. But when that same power boost is used against small financial advisers there is little chance of the adviser getting a fair hearing or outcome. The impact on small advisers can be devastating, and is far greater than on the large organisations AFCA was primarily designed to regulate.
This is why financial advisers need to be excluded from AFCA’s remit. The new financial advisers disciplinary body needs to take over all the regulatory functions of AFCA, ASIC, FASEA, & TPB in relation to financial advisers. It should do so in a way that is more fit for purpose, and improves access to affordable professional advice for consumers.
Great article Nik. This really highlights why FASEA Standard 3 is such a disaster. As it stands, Standard 3 could be interpreted in many varied ways, including to preclude fee for service advice. FASEA has issued a stream of vague guidance around this but at the end of the day FASEA isn’t responsible for the Code’s enforcement. Agencies like AFCA are free to interpret the ambiguous FASEA Code any way they like. This is why FASEA must immediately change the actual Code to something which is more practical and less ambiguous.
Kangaroo Court to rule on Kangaroo Ethics body FARSEA, sounds like a Kangaroo BBQ.
Not even God can help Advisers
So many stories I could tell about AFCA and their “fair” process, actively encouraging clients to continue with claims even though they have been resolved with the adviser and more. The industry [b]will not survive[/b][b][/b] if AFCA is not challenged, I have had PI insurers offering insurance but only with an AFCA exclusion. This is the most serious threat to our industry and not many advisers are aware of the danger.
I couldn’t agree more with what was written from the author. I have personally experienced AFCA (previously FOS) working with complainants to manufacture a complaint. To be told by your PI lawyer that ‘we know they (the complainant) are lying and we can prove they are lying, but because of the current environment, the regulator does not care and will just want to hang you out to dry’ and to then have to pay $30,000 out of my own pocket was one of the most gut wrenching and sickening feelings to have experienced.
Totally understand and agree, it cost us over $300k in legals, time wasted, PI increases, PI excess costs, an absolute FOS. Freaking Obscene Scam !!!
The concept of an ombudsman is a good idea however when they don’t follow procedural fairness and have a massive icentive to make money (at the expense of being fair and impartial) it doesn’t work.
This article is simply chilling…..not only in the level of precise detail , but in the fear it leaves behind once read.
What til you As an adviser Get to experience FOS / AFCA for the sad reality
I have recently Experienced in September – October 2020 – I won completely and not a cent was to be paid out. Client was caught lying and fabricating evidence… BUT !!!!!! I STILL LOST .. AFCA Fees to me $12,000, and i BLOODY WON ????? … how does that work?
The AFCA is fully funded by banks & insurance companies, so why are you all so silly as to expect the AFCA to do any more than just be a sounding board for the silly. I have written about this for years. This outfit is like the TIO [telecommunications industry ombudsman] who is funded by the likes of TELSTRA -OPTUS etc. That’s why you can never get a decision against them. I have canvassed the idea that all regulators must be funded by the tax payer.
This is one of the best most succinct articles I have read on IFA. Interesting for this topic to be addressed by a solicitor as well, as they are usually fishing for client to complain against advisers, rather than going into bat for them. Another important point is, now the Banks are out of the advice game, the licensees left are rarely profitable entities, therefore AFCA $5+ plus case management fees, plus compensation awarded, are borne by the Adviser up to the PI excess ($25-50k). Bottom line, this is a great cost to small business people (the back bone of an democratic economy). Nik, I could give you many examples of AFCA fishing for complaints (say complaint is against insurer first). I can give you more wear procedural fairness is given scant regard. AFCA, has a renewed righteousness that came out of the RC. Advisers are evil and must prove otherwise. I am all for consumer protection, but AFCA DO NOT take into account and client responsibility. Been years since I saw a ‘shared responsibility’ outcome from FOS/AFCA. Very very rare is advisers wrong or responsibility for 100% of the loss.
The greatest threat to the advice industry is that the PI insurers simply abandon this deeply flawed process. It is entirely about AFCA assisting/coaching the client to put as much pressure on the insurer or defender of the action, to just settle it. It is a disgrace.
Kangaroo court
AFCA forums showed a case study of overturning a client ‘wholesale’ status because they said the client, although they met income and assets test, werent experienced enough. talk about law upon themselves. Every Licensee and Adviser needs to write the Financial Service minister. There is no procedural fairness when it comes to advisers. unfair culture at AFCA needs readjusting.