In its submission to the Australian Financial Complaints Authority’s (AFCA) consultation on its approach to determining compensation in complaints involving financial advisers and managed investment schemes, the Financial Advice Association Australia (FAAA) said that AFCA has a negative perception among advisers.
“The practical reality is that a very small percentage of advisers have experienced a complaint that proceeds to AFCA. Based on AFCA matters that proceeded to a decision in the 2022–23 year, it is likely that less than 1 per cent of financial advisers were impacted by this experience,” the FAAA submission said.
“Despite the very limited exposure to the AFCA complaints process, many advisers have a perception that the process is very much biased in favour of the consumer, and that when a product fails, advisers are often the last party standing and thus bear a disproportionate share of the cost of complaints.”
The association added that as many financial advice firms are small businesses, the result of losing a case at AFCA can have a “huge financial impact”.
“Having a matter go to AFCA can also cause a great deal of stress and reputational damage, regardless of the outcome,” it said.
This, the FAAA said, is part of the reason that AFCA’s operations should be clearly articulated.
“As it stands, how AFCA operates is not well understood by the advice profession, so a high level of understanding should not be assumed,” the submission said.
“It is certainly better for all stakeholders that advisers have a much better understanding of the AFCA complaints process and confidence in how AFCA operates.”
Among the feedback the FAAA offered in response to the consultation, top of the list related to proportionate liability within section 2.3 of the draft approach, which specifically noted that failure to act in the client’s best interests, inappropriate advice, and failure to prioritise the client’s interests are not apportionable in relation to advice complaints.
“As these matters make up the bulk of advice complaints, there would be very few advice complaints where the loss would be apportionable under the law,” the FAAA said.
“This feeds the perception that all compensation payable in an AFCA complaint will be borne by the adviser, regardless of fault by another party. It is vital that the application and scope are clear in AFCA’s approach to complaints involving financial advice and MISs.”
The association also called for greater clarity around how AFCA determines complaints and calculation of loss, which “have not been adequately explained or referenced in the draft approach, leaving a lack of clarity about the impact this AFCA approach will have on financial advisers”.
Additionally, the FAAA took issue with the tone of some of the messaging, saying that the wording of some sections suggest that “financial advice firms will be responsible for the full loss, despite a lack of clarity on how loss is determined and calculated and in the context of other parties contributing to the loss”.
“In some cases, the wording is talking about the client’s loss and does not adequately address the issue of what caused the loss and how the loss for AFCA’s purposes should be calculated,” the submission stated.
“It also suggests that the financial advice firm will pick up the entire cost, even in circumstances where other parties have contributed to the loss.
“We ask that you consider how this wording will be perceived by the advice population in the absence of greater clarity on some of the key concepts that exist in the AFCA regime.”
Bring back FOS, they actually knew what they were doing.