The Financial Advice Association has homed in on a flaw in the AFCA determination process whereby claimants may receive compensation because they would have been in a better financial position if they’d received better advice, not because they’ve suffered an actual loss.
AFCA’s “but for” test assesses what the financial position of the client would be if they had received “appropriate” financial advice.
Opening the FAAA Congress in Brisbane on Wednesday morning, chief executive Sarah Abood said this flaw in the process had come under scrutiny due to complaints about Dixon Advisory reaching the Compensation Scheme of Last Resort, meaning advisers are funding compensation because clients would have been in a better financial position, not because they suffered financial loss.
“Client losses are defined not as money lost, as you would expect, but they’re defined as the amount they would have earned had they been invested in, let’s say, the Vanguard balanced fund,” Abood said.
“This is called the ‘but for’ methodology and we saw how that plays out in one recent AFCA determination on Dixon Advisory.”
AFCA determination in case 12-00-1008199, which Abood was referring to, found the value of the client’s investment increased from $1.03 million in January 2013 to $1.06 million 10 years later after they invested in Dixon products. However, under AFCA’s “but for” methodology it was ruled their financial position would have improved to $1.34 million if they’d invested somewhere else.
AFCA determined the compensation owed to the client was $272,669.50, but under the CSLR compensation cap the client would only receive $150,000 in compensation.
“If that doesn’t outrage you, I don’t know what will,” Abood said.
“In effect, our profession is being forced to underwrite a minimum return guarantee for the clients of every failed advice firm. So much of the land of the fair go.”
Despite AFCA ruling Dixon Advisory an advice failure, Abood said the root cause was clearly product failure given it was a “poorly designed, high fee, highly leveraged, and highly conflicted product” that lost most of its value.
“No financial adviser has been sanctioned for this mess, yet financial advice is being blamed,” Abood said.
“There’s no one to defend the advice during AFCA’s deliberations when the licensee is insolvent.”
Although this case was an example of a client who hadn’t suffered a material loss, AFCA had recently noted that one Dixon claimant did not get compensation awarded because the client wasn’t in a worse financial position because of the advice. This was despite AFCA still ruling it in breach due to a conflict of interest and inappropriate asset allocation.
Abood reiterated the association supports the establishment of the scheme but the collapse of Dixon Advisory, which has since led to a Parliamentary inquiry, highlighted the fundamental flaws in the design process.
Professional Planner reported earlier this week that CSLR chief executive David Berry had even raised concerns to Minister for Financial Services Stephen Jones about the financial sustainability and fairness of funding model of the scheme.
“We have supported the scheme’s establishment because it’s fair that consumers should have access to compensation if they’ve lost money due to poor advice and the scheme’s existence increases consumer confidence in engaging a financial adviser,” Abood said.
“What we are adamantly opposed to is the funding model of this scheme which relies on funding from compliant small business financial advisers who are not in any way responsible for the misconduct that caused the client’s losses.”
Abood said the way the scheme has been handled has given advisers no right of recourse despite funding it nor do they have the ability to pursue “wrongdoers” to hold them to account.
She further argued that action ASIC takes against wrongdoers has no benefit for consumers because any collected penalties go back to consolidated revenue for the government rather than to the victims.
“Yet we pay the costs for ASIC enforcement win or lose, and we pay the consumer compensation too – you can probably tell I’m pretty annoyed about this,” Abood said.
