Despite perceptions to the contrary, the Compensation Scheme of Last Resort will only ever cover losses from licensed advice providers.
Speaking at the Professional Planner Licensee Summit in the NSW Blue Mountains in one of his first industry outings, CSLR chief executive David Berry noted concerns over the four case studies released by the scheme earlier this month.
“We only cover claims that have gone through AFCA and as part of that they need to be licensed,” Berry said. “[Claims against] unlicensed individuals are not claims that will be coming through to us.”
Berry has spent 30 years in the finance sector, working with ANZ and NAB; as chair of the Consumer Action Law Centre; and as CEO of Way Forward Debt Solutions, a charity set up by the big four banks and Financial Counselling Australia that helps people in long-term financial difficulty.
“The conversations we’ve had across the broader industry is that there is a need for a safety net where people have experienced financial misconduct – and that’s a strong term – but we’re seeing the worst of the worst scenarios,” Berry said.
Of the 130 claims that have been lodged so far only 10 have related to Dixon, but Berry notes this ratio will change over time.
“What we see is really ugly,” Berry said.
“A profession is judged not by its best performers, it’s judged by the worst performers. How do we strengthen the financial services system by highlighting these situations in the right context?”
Berry said he has two obligations – to pay compensation to people who have experienced financial misconduct and have reached a last resort, but also to build trust in the industry.
“Financial services is an industry that I love, I’ve been a part of it for a long time and I want it grow and there are too many people that don’t have access to financial advice,” Berry said.
Dixon troubles
Dixon Advisory went into voluntary administration in January 2022 due to the expectation that mounting liabilities would make it insolvent in the future, and it was required to maintain its AFCA membership until April this year.
The claims against Dixon were ruled an advice failure by AFCA, which opened the door to compensation claims even after it had gone into administration, and ASIC conceded it had no legal avenue to pursue parent company Evans and Partners.
AFCA lead ombudsman for investments and advice Shail Singh said the main allegation raised Dixon was a conflict of interest in the business but there was also issues with asset allocation.
“Ultimately, the lead decision was determined by a panel, which includes a consumer representative and financial planning representative, [and which] decided that the asset allocation was off,” Singh said.
Singh said Dixon didn’t follow its own asset association rules.
“It said this person is ‘balanced’ but then didn’t put them in a balanced asset allocation, it also had a high proportion of conflicted investments without justification,” Singh said.
“Because of the way the legislation is written, that’s a breach both of the Best Interests Duty but also the conflicts priority rule.”
Singh said Dixon breached the conflicts priority rule – which requires firms to give client the priority over the adviser if the adviser faces a conflict of interest – and a high proportion of property investments within the growth part of the portfolio.
“It was a combination of all those findings,” Singh said.
“Ultimately, we apply the ‘but for’ test – so ‘but for’ the failing, what would the consumer have been in? In this particular case we took a Vanguard passive indexed investment in accordance with their proper asset allocation as determinative of the ‘but for’ test.”
Because Dixon was ruled an advice failing, it meant it would continue to go through the AFCA process, which wouldn’t have happened if it had been rule only a product failure.
“If the adviser hasn’t breached their obligation and the managed fund, the adviser won’t be held liable for those losses,” Singh said.
“Because of the way the CSLR is structured, only the advice component of Dixon was something that was eligible for us to look at, so we were looking at the adviser’s conduct.”
Over-leveraged and poorly diversified
Berry said SMSFs and property seem to be “on almost every” determination on poor advice. He noted one example of someone being advised to take funds out of a defined benefit superannuation fund to invest in property via an SMSF.
“Who would advise to do that?” he said.
“There are certain structures like self-managed super funds and borrowing money for property and going into debt [and] doing those things when they’re older and they’re looking to retire soon. They just seem like no brainers, but we seem to see them on a regular basis coming through.”
Lack of diversification in SMSFs, particularly due to excessive property exposure, has long been an issue flagged by AFCA, as well as its predecessor, the Financial Ombudsman Service, and Singh noted this is what he speaks to the industry about all the time.
“The fact that David’s seeing it is just a reflection of what we’ve been talking about for years,” Singh said.
