The Australian Financial Complaints Authority has defended the usage of its “but for” methodology, saying it can only apply if the adviser has breached the best interest duty.
AFCA’s “but for” process considers whether a claimant would have been in a better financial position had they received appropriate advice.
But the external dispute resolution service has come under industry criticism for the usage of the methodology with Financial Advice Association chief executive Sarah Abood addressing what the association believes is a flaw in the system.
Abood told an audience at FAAA National Congress last month this flaw meant claimants may receive compensation simply because they would have been in a better financial position if they had received better financial advice, not because they had suffered a tangible loss.
However, AFCA lead ombudsman of investments and advice Shail Singh says this does not affect AFCA’s determination, regardless of the amount of money claimed. If the adviser knowingly provided inappropriate advice the claimant is eligible to receive financial compensation.
After a breach of the best interests duty is established the next step to work out whether it caused consumer loss and then how much that loss is.
“If someone makes a million and they could have made 1.2 [million] is that fair if they get the 200 [thousand] back,” Singh tells Professional Planner.
Singh says there are two elements to this argument, one involving the Compensation Scheme of Last Resort and the other without.
“Outside the context of the CSLR, if there’s a breach and they should have been in something else and that makes a difference of [200,000], the law would say that’s what should be compensated,” Singh says.
Singh says ultimately this is about what the consumer would have been invested in, had the correct advice been provided.
“The terminology ‘but for’ can be used, but that’s shorthand,” Singh says. “What that says is, ‘but for’ the failing, where would the consumer have invested?”
Clear breach required
Whether or not there was a breach in adviser conduct that caused direct loss to the consumer decides if a dispute is eligible for compensation.
Singh says there must be a clear breach demonstrated by the claimant’s adviser, such as a breach of the duty of best interest or the issue of conflict of interest.
A clear example of a breach of the duty is the conduct of the disgraced Dixon Advisory. In February, AFCA determined in its lead case on Dixon Advisory that it failed to provide appropriate advice and instead prioritised its own interests ahead of its clients.
“If you look at Dixon, the breach was they paid no regard to what these people’s objectives were or their risk tolerance,” Singh says.
“There [were] a lot of commissions that were derived, and the overall portfolios were in the interest of the financial firm, not the consumer.”
Dixon is the reason behind the overwhelming majority of complaints submitted to AFCA with the number of claims sitting at around 2773, as of 30 June 2024.
AFCA only steps in when there has been a clear breach of adviser duties – for example, the actions of Dixon – but does not accept claims about bad investment returns.
“We’re not allowed to consider disputes about investment performance,” Singh says.
“Just because an adviser advises someone, and the investment performed badly that is excluded from our jurisdiction.”
Rage against the scheme
Much of the criticism of the methodology – which was used by AFCA’s predecessor, the Financial Ombudsman Service, as well – has arisen due to the launch of the CSLR.
The CSLR, which commenced operations in April this year, has left professional advisers to foot the bill via the CSLR levy to cover peer firms that have gone insolvent.
The thousands of complaints related to Dixon have flooded the system in its infancy, pushing the CSLR levy to near the collective $20 million annual cap.
Professional advisers will collectively pay $18.5 million – or $1286 per adviser – to cover the first full year of operation with the scheme expected to blow past the cap in FY26.
“I think [Abood is] getting at the fact not that the AFCA test is wrong, but that, in her view, it’s wrong that these advisers pay compensation by the CSLR to these people,” Singh says reflecting on where the angst is coming from.
