In its submission to the Senate inquiry into the Dixon Advisory collapse and its impact on the Compensation Scheme of Last Resort (CSLR), the CSLR operator has detailed some of the “recurring themes of misconduct” that it has identified since the scheme kicked off.
According to the CSLR’s submission, as of 31 October, it has received a total of 202 claims related to Australian Financial Complaints Authority (AFCA) determinations concerning personal financial advice, which it said represented 80 per cent of all claims received.
So far, 90 of these claims have been processed, resulting in compensation payments of about $8.95 million.
However, the value of the AFCA awards associated with the determinations for these processed claims is about $18.9 million, which the submission said highlighted the “significant impact of these decisions on affected individuals”.
According to the CSLR, inappropriate advice to use a self-managed super fund (SMSF) to borrow and/or invest in property was the top theme for the misconduct, with 90 per cent of all personal financial advice claims linked to superannuation in some way.
Misleading, deceptive advice or unauthorised transactions were also common, as was advice that was not aligned to risk profile, personal circumstances or best interests of clients, and failure to conduct proper analysis or oversee investment strategy, implement a statement of advice, and regularly review investment strategies.
A total of 24 financial firms were involved in the 202 AFCA determinations, with just five firms accounting for 10 or more claims each.
While the most prolific firm in terms of claim numbers at 69 is referred to simply as “Firm One”, it likely relates to Dixon Advisory claims.
The submission said claims for this firm “primarily involve misclassification of consumer risk profiles and incorrect categorisation of property as ‘defensive and growth’, resulting in overly aggressive risk profiles and lack of diversification”.
“Additionally, there were recommendations for related entity products,” the CSLR said.
The other high-volume firms, with between 11 and 18 claims each, saw determinations largely related to inappropriate advice to set up SMSFs, particularly when balances were too low to be cost-effective.
One of the firm’s claims concerned overexposure to property within SMSFs, “focusing on a single asset class without considering the consumer’s situation or associated risks”, while another included failure to provide ongoing advice or implement recommendations as well as instances of dishonest conduct.
Limited ‘information or experience’ to comment
In terms of the broader goals of the inquiry, the CSLR operator said that due to its “limited operational scope” and how early it is in the scheme’s existence, it “does not have sufficient information or experience to comment on the cause of the collapse of wealth management companies”.
“It is important to recognise that more detailed evaluations of these issues would be more appropriately handled by specialised bodies that can provide a deeper analysis,” the submission said.
However, it did touch on concerns around the potential for moral hazards related to misconduct by financial firms, particularly as it relates to phoenixing activity.
“This troubling practice not only erodes the integrity of the financial system but also leaves victims without adequate recourse for their losses. The CSLR acknowledges the significant challenges in detecting such conduct in real-time,” the submission said.
“Where it observes the need for greater accountability, CSLR will refer the relevant conduct and/or financial firm to regulatory bodies for consideration and action. These mechanisms are essential to ensure that those responsible for the financial harm inflicted upon victims are held accountable, thereby safeguarding the interests of consumers, and reinforcing trust in the financial system.”
Speaking with ifa in May, Financial Advice Association Australia (FAAA) chief executive Sarah Abood raised concerns around the role of Dixon parent company Evans and Partners (E&P), including that it would indeed be a beneficiary of CSLR payments.
“When this compensation is paid, much of it will go to E&P as they still have many of these clients on the books,” Abood told ifa.
“It’s certainly what makes me the angriest, that advisers are on the hook for the failings of a listed entity. It’s unbelievable.”
Responding to questions on notice from Liberal senator Andrew Bragg in July, the Australian Securities and Investments Commission (ASIC) said about 3,280 of the 4,100 Dixon Advisory & Superannuation Services (DASS) clients had, by May 2022, moved to E&P.
“Every DASS client was given a choice, with some choosing to leave and the majority deciding to stay withing (sic) the group,” ASIC said.
“Most DASS clients already had a standing relationship with other entities within the group. For instance, clients may have received investment advice from DASS, but the administration of their self-managed superannuation fund was conducted by other entities, or they received broking services from another of the AFSL holders within the group.”
In addition, the regulator explained that between 1 January 2021 and 10 May 2022, E&P appointed 39 advisers who were Dixon representatives.
Accountants and lawyers should be required to contribute to the Compensation Scheme of Last Resort (CSLR), given that a significant proportion of complaints under the CSLR pertain to SMSFs. Accountants are often responsible for setting up SMSFs, while lawyers establish bare trusts and assist in structuring the companies tied to financial firms that later collapse. These professions play a critical role in the processes that lead to such complaints, and it is only fair that they share the responsibility of funding the CSLR.
Herein is the issue that has concerned the majority of professional financial advisers for many years.
The advice to establish an SMSF, for the purpose of purchasing a property, has been hawked by numerous unqualified property spruikers without any form of regulation. They give no consideration to the appropriateness of this strategy as their sole motivation is the commission (of up to $40k) from the sale of a property.
And yet, there is no recourse with regards to their unsolicited advice or contribution to CSLR. Pathetic!
Some people think phoenixing scams like Dixons are the biggest threat to CSLR. But an even bigger threat is SMSF advice.
If an SMSF member makes an investment loss, they have an easy money back guarantee by claiming they never should have been recommended an SMSF in the first place. They “didn’t know what they were getting into, never understood the risks, and just followed advice”. AFCA will uphold their complaint in a majority of cases.
After the next big property or equity market downturn expect a huge volume of complaints to AFCA from SMSF members. Then expect a huge CSLR bill to pay for the compensation AFCA awards them.
Dixon’s was smsf advice and has skewed these results
So, unsurprisingly, the majority of claims are against salespeople masquerading as financial advisers while the real professional advisers foot the bill for the policing activity. This needs to be fixed and FAST!