Amid increasing criticism of AFCA’s role in the ever-increasing cost of the Compensation Scheme of Last Resort (CSLR), Shail Singh, lead ombudsman, investments and advice, has emphasised that “ultimately, the main driver of the cost of the scheme is flawed business models leading to consumer complaints”.
During AFCA’s member forum last month, Alexandra Sidoti, senior ombudsman – investments and advice, said that too often, advice firms were recommending SMSFs to get clients into a conflicted product.
“Complaint volume is the main thing that flows through to costs of the CSLR and the big things that we’re seeing both for CSLR complaints, actually, and our business-as-usual complaints, are conflicted advice models and SMSFs,” Sidoti said.
Echoing these findings, Singh said these issues were “the most prevalent issues behind complaints that then lead to CSLR claims”.
“In 2024, one in five of the complaints we received in investments and advice alleged failure by the adviser to act in their client’s best interest or to provide appropriate advice,” he added.
Despite the financial services royal commission putting a spotlight on conflicted advice, Singh said it remains a “prominent” cause of financial advice complaints.
“We have observed troubling behaviour where some advisers recommend products based on incentives rather than what is in the best interests of the client.”
“To put it simply, instead of finding a product for the client, some advisers are finding clients for a product.”
The complaints authority once again highlighted SMSFs as an area of concern, with some advisers recommending them “primarily as a way to direct client funds into in-house investment products”.
“Instead of a thorough assessment of whether an SMSF is suitable for the client, the goal is to facilitate a particular investment,” Singh said.
“Let’s be clear: SMSFs are not inherently problematic. For many investors, they can be an appropriate vehicle for managing retirement savings. However, an issue arises when SMSFs are recommended not for their benefits but as a mechanism to move client funds into high-risk or conflicted products.”
He also pointed to a worrying trend of cold-calling tactics being employed to drive unsuspecting consumers into these conflicted environments.
“AFCA has seen cases where individuals have been contacted by call centres, often after submitting their details online to secure a superannuation ‘comparison’,” Singh said.
“These calls are typically from unlicensed representatives who persuade consumers to switch to an SMSF and invest in a specific product. While AFCA can’t consider the actions of unlicensed entities, consumers are then referred to a financial adviser who formalises the transaction.
“Again, the aim is to lead consumers into an investment that benefits the firm rather than the client.”
A recurring theme in criticisms of AFCA as it relates to the CSLR surround advisers being on the hook for product failures, rather than advice failures – a claim the complaints authority has consistently refuted.
“A product failure is never a good thing. It’s not good for the financial firm. It’s not good for the consumer,” Sidoti said at the member forum.
“When there’s a product failure, though, and that’s maybe 5 per cent of a person’s portfolio, that’s not going to have a catastrophic impact on someone’s superannuation funds. The issue that we’re really seeing here is a complete lack of diversification, and that’s an advice issue.”
Product failures, Singh said, “only result in adviser liability” in instances where the advice itself was flawed.
“We have seen in numerous complaints 50, 60, 70 or even 100 per cent of a client’s funds being directed to a single investment. At that level of exposure, the failure of a single product can be catastrophic for consumers.”
“We don’t expect advisers to have a crystal ball, but we do expect them to follow sound financial planning principles.
“In the past, we saw this with SMSFs investing in a single property, often with a kickback to the adviser. This lack of diversification is playing out again today with high concentrations in unlisted or high-risk investment schemes.”
The ombudsman stressed that the financial advice sector played a “crucial role” in protecting consumers, adding that it was “important that consumers have access to competent advice”.
“While most advisers act in their clients’ best interests, problematic business models – particularly those involving conflicted advice, misuse of SMSFs and aggressive sales tactics – continue to drive complaints to AFCA, potentially feeding through to CSLR claims,” Singh said.
“Advisers are concerned about the cost to them of the CSLR, while consumers are concerned about access to fair compensation when they have been the victims of misconduct. From our perspective as dispute resolution specialists, we can see that the ‘win-win’ is to prevent complaints in the first place.”
Take the Dixon Model. We have a lot of clients with money to invest, so lets do whatever we can to line our pocket at the expense of the clients that place their trust in us. Outright thieves who seem to have got away with it.
Two separate issues. Even if individuals were getting sold a product, (which I would say they were but that’s not the fault of the Adviser) the CSLR is falling unfairly and dis proportionally at Advisers.
In the case of United Global Capital, Advisers were sales rep temporarily employed for less than 12 months, until they escaped the spiders trap. Whilst the real criminals the CEO, managers and Compliance Manager working for 9 years get off scott free.
If these flawed business models are causing all the issues then how come the Government doesn’t ban them?
Product Failure? Flawed Business Model? The correct transfer form was generated after this financial planner left. Initial transfer form provided was incorrect & manipulated (dates removed & it was for a different product). The below was reported to ASIC a year and a few months after this financial planner started his own practice. This could’ve been avoided if ASIC initially / thoroughly investigated the matter similar to CSLR blowout. Seriously!
ASIC should review the case and properly investigate the financial planner they crucified (lost their houses, savings and nearly lost his family and suffered significant distress through this experience until now) for alleged churning of insurance products. Through some bogus complaint (severely manipulated & incomplete misleading information) regarding this financial planner, they alleged the financial planner churned insurance products and put his clients into an inferior product and claimed commissions from it (His superiors received ALL the commissions as per evidence, not him, he was an employee). Turns out, this financial planner had no choice to represent himself at the AAT (no funds to hire a lawyer or barrister, spent $400k legal fees). EVIDENCE shows new life insurance products clearly had more features and benefits and monthly premiums was significantly lower and had a reference number before assessment for every single file (Reviewed by 2 different departments). Materials were severely manipulated to make it look like this financial planner was a crook. This financial planner had no compliance breaches in the 4 years he was employed, 100 plus good character references from the community and industry & had all the awards, 3 independent experts was hired to investigate the matter and turns out there was no formal / verbal warning of any breaches and other financial planners were doing it and still practising.
Miscarriage of Justice.
For 99% of advisers, this is not relevant – aka rubbish.
This is a diversion tactic which aims to muddy the waters on the whole issue.
We aren’t that dumb – we see you.
The issue with CSLR are a small number of flawed vertically integrated models with poor investment products. These and the advisers involved are “overseen” by ASIC yet there are numerous examples of complaints from other planners being ignored by ASIC. All three of the examples I know of were subject to a complaint to ASIC by me over 9 months (one well over 12 months) prior to anything being done. Control the products and you won’t have a problem but ASIC won’t do that because someone else is paying for their incompetence.
Where in the hell is ASIC?
Can AFCA tell us who the licensees are? Why aren’t they being called out?
Why do I have to keep paying for this crap?
Does AFCA still close at 2pm on Wednesday’s as per what I read in the AFR about 12 months ago?
Is it true that staff can have the afternoon off, but not lose salary?
https://www.afr.com/work-and-careers/workplace/how-this-organisation-prevented-burnout-for-staff-20240416-p5fk90
Maybe we should notify ASIC if we hear of a dodgy SMSF or MIS scheme…oh wait, they aren’t interested as they’ve allocated full resources to investigate the case of a financial planner handing out an FSG in 2005 where the printer ink had smudged the final full stop in the document.
“Again, the aim is to lead consumers into an investment that benefits the firm rather than the client.”
If Singh is adamant about this being a problem then he is going to have a field day with intra-fund and industry fund advisers. Aren’t you Mr Singh????
I’ll bet it never happens though.
Something smells off about these comments.
If AFCA stand by the assertion that qualified financial advisers are recommending 50% to 100% allocations to single, high risk investments (other than ETF’s, APRA regulated managed funds or diversified managed accounts), then I want to see numbers. ‘Numerous complaints’ tells us nothing at all. Are we talking about 3 complaints, relating to a single adviser, or is this widespread. Exactly how many advisers are we talking about here? Have they been banned by ASIC? If not, why not?
Until we see facts, evidence and/or clarification, I’m going to assume AFCA are deliberately white anting the financial advice profession to divert attention away from their own poor behaviour which is contributing to the CSLR debacle.
Probably “white anting” to divert attention.
If in fact the AFCA is correct – sound like ASIC is providing very very poor oversight of the ASFL system – for which ASIC charges a yearly fee?
Either way, the system appears to be not working. Perhaps all this money spent on all these regulator and government agencies all to protect the consumer is not cost effect for the consumer? I’m sure it is providing a great living to all the salaries being paid etc?
Need a DOGE?
It’s always the financial planners fault isn’t. In ASIC/APRA/ASIC eyes they are saving all clients from “dodgy” advisers when the reality is all these bodies have caused massive harm to consumers by driving up the cost of advice and making it extremely difficult for consumers to access quality advice. Punishing the majority of advisers for the sins of a very small minority does nothing to help consumers. CSLR is flawed and needs to be fixed, until this happens consumers will simply have another layer of regulation cost added to their bill, for absolutely no benefit.
“In 2024, one in five of the complaints we received in investments and advice alleged failure by the adviser to act in their client’s best interest or to provide appropriate advice,” he added.
Despite the financial services royal commission putting a spotlight on conflicted advice, Singh said it remains a “prominent” cause of financial advice complaints.”
If find these comments rather interesting, because under the new DBFO rules, superfund advisers can recommend a member retains/invests more into their super even if there are other funds better suited, which is against their best interests. They can then recommend a member invests into one of their inhouse (conflicted) investment options that they run.
Yes, for all the talk, he has nothing to say about the conflicted legislation from Minister Jones.
CSLR & AFCA are FLAWED business models:
– ASIC allows dodgy MIS to be flogged via Vertically owned structures with no accountability to the MIS or business owners.
– ASIC allow Dixon’s and the like to Phoenix assets out of failed MIS and Co’s from paying compensation.
– Jones stitched up Advisers by cutting Govt’s agreed 12 mths CSLR funding to only 3 mths.
– Jones and the FSC stitched up Advisers by excluding MIS from paying Compo when they fail.
– Treasury has manipulated CSLR to pay their employees and buddies stung by Dixons with the only Retrospective claims allowed.
– AFCA apply But For compo rules for innocent good advisers to fund the failed MIS products.
The whole dam CSLR & AFCA are totally FLAWED !!!!!!!
And no mention or reference to Dixons?????????
Why is evan and partners still operating then ASIC should shut them down.
So in house products and SMSFs are the main reason for expensive CSLR fees. So if you are not authorised to provide SMSF advices should you pay a lower CSLR fee? As they are the main cause of problems for clients, why are in house products and SMSFs still allowed. Stupid question really, we know it is because of lobbying. If the government was really focused on client outcomes, it would consider banning both.