AFCA’s discretion over whether it will pursue a complaint for a wholesale investor comes down to whether the label has been applied properly.
Speaking at the Stockbrokers and Investment Advisers Conference earlier this week, AFCA advice lead ombudsman Shail Singh responded to queries regarding the authority’s use of discretion when assessing cases brought by wholesale clients.
Singh said the authority has discretion to exclude complaints from wholesale investors, but it’s not mandatory.
“Sometimes there’s a bit of misinformation on this issue, it’s good to be able to clarify,” Singh said, adding AFCA will hear ‘wholesale’ complaints because a retail investor has been misclassified to circumvent appropriate consumer protections.
“We’re not saying that’s the case for every sort of wholesale investor, but there’s certainly instances where it’s happened in the past.”
In the current system, AFCA has the discretion to exclude wholesale complaints although SIAA has been among the associations that have questioned the authority’s oversight.
Singh pointed to Chapter 7 of the Corporations Act which says high net worth, sophisticated or professional investors are exempt from retail protections like best interests duty or seeing a FASEA qualified advisers.
“What Treasury said was for Chapter 7 purposes – for sophisticated and professional investors – they should be outside jurisdiction unless there is an issue with the classification,” Singh said.
“We’re amending our operational guidelines essentially to reflect Treasury’s recommendations and that’s what Treasury’s recommendation was.”
Singh said the bottom line is if someone is properly classified as wholesale and are properly informed of the consequences it is highly unlikely they would pursue those complaints.
Red flags
Asked what red flags the authority looks out for when it comes down to identifying misclassification, Singh said it largely comes down to whether there is evidence of informed consent and the client understands the risks of falling understand wholesale jurisdiction.
“The FASEA Code of Ethics uses this as part of Standard 1 – if a widower, for example, of a husband who had been classified as wholesale automatically inherits that classification then that’s probably problematic,” Singh said.
“You would need to understand if that person properly understood [the consequences of the classification]”.
These consequences including losing access to external dispute resolution as well as the advice not being subject to the adviser’s Best Interests Duty, Singh said.
“To me it’s a question of informing the particular client, ensuring they provide informed consent to sit outside the retail system,” Singh said.
“The other tricky area with this is some AFSLs treat people as wholesale, then will do an SOA [statement of advice] as well and provide advice in their best interest which is very confusing. Consumers can certainly get confused by that as well in terms of whether [they are] being treated as wholesale or retail.”
Singh also noted there is a compensation cap when pursuing a claim through AFCA.
According to AFCA’s website, complaints from a non-super trustee AFSL can award consumers up to $542,500 per claim for direct financial loss which includes a $5,400 cap for non-financial loss.
Super trustee AFSL complaints have no monetary limit if it falls within AFCA’s definition of a superannuation complaint.
“The other thing you have to remember is we have caps,” Singh said. “We’ve got an approximately million dollar jurisdictional cap but also approximately $500,000 per claim, so some wholesale will be outside jurisdiction anyway.”
