Why is UGC the main contributor to FY25–26 CSLR levy?

The problems surrounding insolvent firm United Global Capital (UGC) and its Global Capital Property Fund (GCPF) have been well known for months, with the Federal Court detailing the extent of the complications afflicting the firm and its “UGC Advice Model” in October.

In a judgment ordering the GCPF be wound up, Justice Neskovcin said the directors of the fund were “hopelessly conflicted”.

X

Continue to Website

Speaking with ifa, Phil Anderson, Financial Advice Association Australia (FAAA) general manager policy, advocacy and standards, noted that the scale of the losses was not previously understood.

“We were obviously aware of the UGC matter and the circumstances behind that, we knew there was a problem with the Global Capital Property Fund, but we just didn’t know what sort of dollar losses might be possible. This has obviously made that a front and centre issue,” Anderson said.

In announcing the levy for FY2025-26, Compensation Scheme of Last Resort (CSLR) chief executive David Berry said the “key contributors driving the expected number of claims” are UGC and Dixon Advisory.

Indeed, while 92 per cent of expected claims paid for FY25–26 relate to the two failed firms, the impact of UGC on the FY25–26 estimate is far greater at $44.57 million compared with $12.25 million for Dixon.

The question that many advisers would be asking is how exactly UGC has exploded to the point that Dixon is taking a back seat for the upcoming levy period?

AFCA prioritising pre-CSLR complaints

The Australian Financial Complaints Authority (AFCA) is not simply ignoring complaints lodged against Dixon Advisory; however the determinations it makes over the FY25–26 period are largely going to be covering the backlog attributed to the pre-CSLR period that Australia’s 10 largest financial institutions have already paid.

Specifically, the complaints authority, which has a separate team working on Dixon Advisory, will aim to get through the 1,638 complaints that were submitted by 7 September 2022.

“AFCA’s focus will be, in regard to Dixon, all the pre-CSLR complaints, so we won’t see much of the post-September 2022 complaints,” Berry told ifa.

“If they manage to really ramp up and get through the pre-CSLR faster, it means they then start engaging on the post-September 2022 work. Those claims could then come through and that then brings forward claims that we were expecting in FY27 into FY26. We probably won’t have a good view of that come May or June this year, but that’s something that could impact it.”

The more likely scenario, Berry said, is that AFCA falls short of the number of determinations it has projected it can complete, leaving some pre-CSLR complaints yet to be completed by the end of FY25–26.

“That won’t really impact the FY26 levy, but it does mean there’s a chance that the FY27 levy won’t see the end of Dixon,” he added.

UGC assumptions

The estimate for the levy is heavily reliant on a range of actuarial assumptions around the ultimate number of UGC complaints that AFCA receives – UGC must remain a member until at least 31 May 2025 – the speed with which AFCA processes complaints and the average claim size of the complaints.

Speaking with ifa, Berry broke down how independent actuarial firm Finity factored in these assumptions.

The first of these is whether UGC’s membership of AFCA will actually end on 31 May or if it will be extended, and how many complaints are eventually lodged.

At the time of the report being compiled, there had been 101 complaints lodged with AFCA against UGC, however, that number had grown to 141 by the time the report and estimated levy was announced.

“It all depends on when AFCA will cease their membership so people can’t lodge any complaints,” Berry said.

The CSLR has estimated that the total number of complaints will be 346, with 307 of those being paid in FY25–26.

“Now we don’t know what that actual number will be. It’s what the actuaries, using their experience with other modelling they’ve done, with other circumstances and with Dixon, that’s the number they’ve come up with. I think it’s unlikely we’re going to see a huge increase,” he said.

Berry added that while the CSLR doesn’t know what AFCA is planning to do in terms of how long it will keep UGC’s membership open, he thinks “they learned a lot from the Dixon [situation] and they’ll move a lot faster this time around”.

Anderson told ifa that the FAAA hopes there will not be a “repeat of the Dixon Advisory experience”, which saw the Australian Securities and Investments Commission (ASIC) require Dixon remain a member of AFCA until 8 April 2024, but ultimately not be expelled from the scheme until 30 June 2024.

“That was nearly three months extended on, and it was the FAAA that had to pursue AFCA to ask them to take action to terminate the membership of Dixon Advisory. We would not like to see that complication repeated again with UGC,” he said.

The second assumption is around both the average size of the determinations and the amount that are in favour of the complainant.

While there are just four AFCA determinations published as of 12 February, and none were completed when the actuarial report’s data was compiled, three of the four complaints have been successful.

However, the actuaries have estimated that 98 per cent of all complaints against UGC will be awarded a “non-zero determination in their favour”.

Due to the size of the investments, the majority of which exceeded the CSLR’s compensation cap of $150,000, the report put the estimated average outcome amount at $145,000.

This figure, it said, allows “for potential investment returns that this money may have otherwise earned”, as well as the potential for UGC’s liquidation to offset some of the cost to the CSLR.

According to Berry, the actuaries had to rely on information received through an affidavit with ASIC and with regard to the administrator to work out the average size of investments and the type of investment.

“UGC does have assets, but the expectation from when the actuaries had a look at it was that the recovery there was going to be minimal,” he said.

“There might be some, but they didn’t see that it was going to be enough to offset anything, because the size of the investments that people had made were quite large.”

Understanding this assumption, Berry explained, is important to put the eventual final levy amount in context, as it could move either higher or lower.

“We put the $145,000 and that’s based on lots of debate with the actuaries,” he added.

“But those two assumptions are the big ones, because if they come in lower we can be looking at a levy total of about $50 million, but if they come in higher it’s up to about $85 million.”

The AFCA determinations that are publicly available at this stage have much greater variance in amount than these estimates would suggest, with the most recently published awarding just $2,500 plus interest. However, this was for a statement of advice that was paid for but never delivered as the firm’s assets were frozen two months after the client meeting.

Another determination was for $386,961.33, with $324,816.05 representing an actual capital loss. When the CSLR pays this to the client, they will only receive the capped amount of $150,000.

The other successful complaint found the client was $73,845.20 worse off, of which $40,481.78 was a capital loss.

Retrospectivity and ‘but for’

Much of the ire stemming from the advice profession in regard to the cost burden of the CSLR has been on the subject of the scheme being applied retrospectively to Dixon Advisory and the use of the “but for” test in delivering compensation.

Indeed, Dixon collapsed before the scheme was legislated and a large number of Dixon Advisory complaints include hypothetical capital gains.

Speaking on an ifa webinar in November, Berry revealed that about 80 per cent of claims that have ended up at the CSLR land in the “but for” category – leaving just 20 per cent as involving an actual capital loss.

UGC, however, only failed in the middle of 2024 and would not be carved out if stakeholder pressure forced the government’s hand in dealing with pre-CSLR failures in another manner.

ifa also understands that far fewer UGC determinations are likely to be comprised solely of these hypothetical capital gains.

While the limited number of published determinations means it is too early for any solid conclusions on the total make-up of the claims, the large investment amounts and shorter time frame of investment compared with Dixon clients are critical factors in how effective excluding the “but for” component would be in reducing the levy on advisers.

AFCA senior ombudsman, investments and advice, Alexandra Sidoti, told ifa that while the complaints authority “can’t comment in any detail” as it looks at the individual UGC cases, “it is fair to say that some broad themes are emerging in relation to conduct issues”.

“This first UGC determination includes some issues and principles that will be common to other, but not all, UGC complaints,” Sidoti said.

“Ultimately, every case must be determined on its individual merits, given the individual nature of financial advice. Depending on the facts of each case, outcomes will differ.”

The push to exclude the “but for” portion from the CSLR has been ongoing for months and featured prominently in many submissions to the Senate’s Dixon inquiry.

AFCA has previously defended the use of the “but for” approach, highlighting that the standard actually predates AFCA’s existence.

Namely, the Supreme Court of Western Australia ruled in favour of the approach back in 2015, when Patersons Securities launched action against the Financial Ombudsman Service.

However, FAAA CEO Sarah Abood late last year said that while AFCA’s methodology is not new, how it interacts with the CSLR is.

“I think, certainly from our perspective, it seems completely unfair, but also obviously unsustainable,” she said.

“That a compensation scheme of last resort should be paying, basically an income guarantee to those clients. So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.”

The outcry has made inroads, with Financial Services Minister Stephen Jones addressing the concerns earlier this week, acknowledging that the CSLR is “not about guaranteeing investment returns”.

The scheme, he said, is “about ensuring genuine victims have access to some redress”.

“This is an important part of the financial system for advisers. Because it gives Australians confidence that there is a backstop in situations of genuine last resort,” Jones said.

“It’s in all our interests to ensure that is what it is doing.”

In comments made to ifa on Tuesday, shadow financial services minister Luke Howarth agreed that the “but for” issue is of key concern, with the shadow minister calling on the government to “intervene to limit or filter out these claims”.

“I think everyone supports a sustainable scheme with a reasonable cost – that’s not what we have now. It is not a scheme of ‘last resort’,” Howarth said.

“It is out of control and the solution can’t be just to issue more levies.”

It is unlikely that there is any government intervention before the election, or even before the recently announced CSLR review is completed.

What is clear, as Minister Jones noted this week, is that Dixon and UGC “have very different characteristics that make a quick fix very difficult”.