Before an injured worker can receive a lump-sum payment via a workers compensation scheme there is a requirement in some states that they receive financial advice from a financial adviser.
On the one hand, this means opportunities for financial advisers who can align themselves with legal firms who act in this space. On the other, it does mean some additional pitfalls to be aware of.
This article explores what you, as a financial adviser, need to be aware of and the potential consequences when dealing with clients in this environment.
What does the legislation say?
It differs from place to place. South Australian legislation requires that “the worker has received competent financial advice about the investment or use of money to be received on redemption” (Workers Compensation Act 1986 s. 42(2) repealed 1 July 2015 and Return to Work Act 2014 s. 53(2)(b)).
In Queensland the legislation places an obligation on legal practitioners to provide advice in writing about, “the desirability of the worker obtaining independent financial advice about structured settlements and lump sum settlements”. (Workers’ Compensation and Rehabilitation Act 2003 s. 306T(b)). The Victorian and New South Wales Acts also contain similar wording.
The challenge for advisers
Apart from potentially having to deal with different legislative requirements, phrases such as “competent financial advice” and “independent financial advice” are not defined terms. As a result there has been confusion around what these phrases actually mean. Do they require the provision of personal or general advice?
Additionally, injured workers may be more vulnerable due to their emotional, physical and/or psychological conditions. This may impair their decision making and ability to comprehend financial advice, and as a result there are a number of challenges for advisers who deal in this space.
How have these matters been dealt with in the past?
A South Australian Workers Compensation Tribunal (the Tribunal) examined what “competent financial advice” and “competent professional advice about the consequences of redemption” means. (WorkCover Corporation/Employers Mutual Ltd (Pollard Brothers Pty Ltd) v Merica [2012] SAWCT 42 (10 October 2012) at para 63) The decision was an appeal of a previous Tribunal decision where it was found a worker was not given competent financial advice about the use of money received as part of a compensation payout.
In the original decision, it was determined financial advice was competent if it, among other things:
· was based on an adequate knowledge of and understanding of the relevant factual circumstances; and
· must have been sufficiently comprehensive (when considered as a totality) as to enable the worker to make an informed decision as to whether or not to agree to a proposed redemption.
The Tribunal was critical of the financial advice provided to the worker for a number of reasons. It found the advice failed to advise the worker of:
· the size of the return on investment of the lump sum
· taxation and social security consequences
· the risks as a result of accepting a lump-sum payment versus continuing to receive WorkCover payments.
The approach taken by the Tribunal meant that for financial advice to be competent, a worker would need to receive personal advice consistent with the requirements of the Corporations Act 2001 (Cwlth) s.944A before they accepted a lump-sum payment
On appeal
Unhappy with the decision, the South Australian WorkCover Corporation appealed the original decision of the Tribunal. As part of the appeal three judges handed down their decision.
A number of points from the original decision were discussed.
The examination of “competent financial advice” found:
· there may be a range of advice and might well be a number of different yet competent advice in respect to one set of circumstances;
· it is not viewed in light of an outcome, however it would require the adviser to have sought adequate knowledge of material facts of the case; and
· persons giving such advice would be a person generally regarded as being capable of giving such advice.
One of the simplest ways of expressing what “competent financial advice” is could be described as how to best invest or use the money on offer given a client’s circumstances. Information that may be useful to a worker contemplating a compensation offer in the form of a lump sum should be provided to the client including the risks and disadvantages of any proposal.
The worker should clearly understand that:
· the lump sum will end the right to, among other things, weekly payments, medical expenses and potential social security consequences
· the level of advice will vary according to the circumstances and the sum involved. “In many cases the advice will be about investment or the use of money will involve no more than to list the prudent options, detailing the variables of security and return on investments or use of the amount involved”. (WorkCover/Employers Mutual v Merica, as above, at para 94)
What does this decision mean for financial advisers?
Had this appeal not been upheld, the original decision had the potential to open the floodgates for every injured worker unhappy with their lump-sum payment figure on the basis that they did not receive “competent financial advice”.
This decision affirmed that in the South Australian environment the role of the financial adviser is to ensure that the client can evaluate the proposed compensation offer and make a fully informed decision as to whether or not they should accept or reject the offer.
Financial advisers who provide financial advice to clients in South Australia in relation to the redemption of WorkCover compensation payments are only required to provide advice that is general in nature. Financial advisers would not need to provide personal advice.
Given WorkCover legislation differs from state to state, it is recommended that advisers make their own enquiries and confirm whether they would need to provide a client with personal or general advice.
