It was on stage to open the Financial Advice Association National Congress in Brisbane that CEO Sarah Abood called out the issue of the “but for” methodology favoured by the Australian Financial Complaints Authority.
Abood told incredulous delegates that disputes that have been determined by AFCA that, in a nutshell, end up compensating clients even when they haven’t lost money, but simply haven’t made as much as they might have.
As Professional Planner reported in late November, Abood cited an AFCA determination in case 12-00-1008199, which found the value of a client’s investment increased from $1.03 million in January 2013 to $1.06 million 10 years later, after they invested products offered by the new-defunct Dixon Advisory.
Under AFCA’s “but for” methodology, it was ruled the client’s financial position would have improved to $1.34 million if they’d invested elsewhere. This understandably caused – and continues to cause – significant angst among financial advisers.
At the FAAA congress, AFCA lead ombudsman for investments and advice Shail Singh was keen to address some of the misconceptions around how a “but for” determination works.
“Essentially, what a ‘but for’ test means is ‘but for the failing adviser, where would the consumer have been invested?’,” Singh said.
“It’s not about theoretical losses. It’s not about opportunity costs. It’s about direct loss that arose from the failings of the adviser.”
But it looks like clients are being compensated for the cost of missing out on an alternative opportunity – especially when they’re being compensated even when they didn’t lose money.
“And I’ve heard this discussion,” Singh said. “But take an example. Historically, Commonwealth Bank, years ago, used to take people out of term deposits, send them to the planner, put them in a high growth portfolio. They would lose their money. Now, I don’t think there’s too many people who wouldn’t say that that person would have been in a term deposit had that conduct not occurred.
Singh cited the case of Paterson Securities Ltd vs Financial Ombudsman Service Ltd (2015), which established the principle to which he was referring.
“It’s often one of the trickiest parts of what we do, but it’s ultimately been endorsed by the courts,” Singh said who also noted to Professional Planner it had been used by AFCA’s predecessor, the Financial Ombudsman Service.
Abood raised the suggestion that in its determinations, AFCA is assuming that had a client had received advice from a different adviser, they would have been advised to invest in the best-performing product over the relevant period of time. Clearly that’s unrealistic – which was Abood’s point, of course – but Singh’s explanation hints that this is not how AFCA approaches the issue.
In his example, he suggested that before the client followed the advice received, they’d been invested in term deposits.
Surely this should be the reference point? AFCA can’t – and taking Singh’s words at face value, it appears it is not – saying it assumes the client would have invested in the best-performing product but for the faulty advice they received.
Rather, it’s saying: where would they have been, had they not taken the advice? In the example cited, the client was in term deposits. Had they not acted on the advice, they’d have stayed there and would have earned term deposit rates for the period in question.
What’s really fuelled attention in “but for” determinations is that these decisions can drop into the Compensation Scheme of Last Resort.
It’s not the principle that underlies “but for” determinations so much as the fact that it is just one more injustice piled on a financial advice community already overburdened by the cost of funding the scheme, exacerbated by the disgraceful behaviour of the parent company of Dixon Advisory, Evans & Partners, in cancelling the Dixon AFSL and leaving the advice community to pick up the tab; and the government’s reneging on a promise to fund the scheme.
A mechanism for compensating clients for inappropriate advice is necessary for building trust and confidence in financial advice. Consumers need to know that should they suffer the misfortune of receiving inappropriate advice they’re not going to be left hanging out to dry. It’s appropriate, also, that professionals fund some of that compensation.
It’s not clear that anyone is seriously arguing against the existence of the CSLR. But there are plenty arguing that it needs to work differently.
