The Australian Financial Complaints Authority has made clear the disputes it has made determinations on are purely advice issues as advisers are meant to be the gatekeepers of portfolio decisions, despite industry calls for product makers to take more accountability.
In an AFCA member forum held online on Thursday, senior ombudsman Alex Sidoti said the main causes for complaints that reached the Compensation Scheme of Last Resort were conflicted advice models often through Self-Managed Super Funds.
Sidoti said they had observed “a primary focus on trying to find clients for a product, a conflicted product, rather than the other way around” when the expectation would be to find a suitable product based on the client’s needs.
While SMSFs themselves are not inherently problematic, the panel heard the problem is the intersection between the use of SMSFs to access people’s superannuation funds to then invest in a conflicted product.
Sidoti attributed SMSF-related complaints to advice models that recommend people establish an SMSF, so their superannuation becomes available to invest in conflicted products.
“What AFCA is fundamentally observing are advice failures,” she said.
AFCA’s reinforcement of the role advice is meant to play as the gatekeeper continues to put it at odds with the advice sector.
Financial Advice Association of Australia general manager for policy Phil Anderson told members during the association’s roadshow this month that product manufacturers should have more liability in CSLR claims.
Anderson questioned why the CSLR had to pay for product failures, such as the failures of Dixon Advisory due to the US Residential Masters Fund, and the UGC Global Capital Property Fund.
“These are product failures to a larger step, not advice,” Anderson said. “Why is advice forced to pay for everything?”
However, Sidoti made it clear during the forum the reason these were considered advice failures was due to lack of portfolio diversification which would’ve mitigated the impact of a failed product.
“We’re seeing at times 100 per cent of someone’s investment funds going into a single product,” Sidoti said.
“If that product fails, that’s 100 per cent gone. It’s that fundamental lack of diversification, which is just one of the fundamentals of financial planning.”
‘Terrifying’ issue
The root cause of some of these cases, particularly in the case of United Global Capital which accounts for 70 per cent of the claims in the FY26 CSLR levy, is because of the marketing firms that are generate lead lists for advisers who then convince consumers to switch to an SMSF to invest in conflicted products, often relying on high-pressure sales tactics.
It’s previously been flagged by the corporate regulator as one of its biggest enforcement priorities.
Sidoti said this was “a really terrifying issue” they’re seeing that is also appearing in new batches of complaints.
“There are clearly call centres set up, and it may be [that] someone’s entered their details online to compare their super or something like that,” Sidoti said.
“The next thing they know, they’re getting a call from this call centre who aren’t licensed advisers, but will start to talk to people about the benefits that they might get in having an SMSF and investing in a particular product.”
Additionally, some of the UGC batch of complaints showed extra perks – such as a free iPad.
“There are definitely free iPads that we’re seeing in the UGC batch which sort of underscores just how much there’s this attempt to lure people into these investments,” Sidoti said.
AFCA lead ombudsman for investments and advice Shail Singh said because call centres don’t have an AFSL, they are unregulated and therefore are difficult to track down.
“We certainly don’t have jurisdiction over them, because we only have jurisdiction over the AFSL,” Singh said.
“It’s incumbent actually on associations and advisers under Standard 12 to if they find out about this sort of conduct, that they report it.”
Singh is referring to Standard 12 of the adviser Code of Ethics which dictates advisers “must uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest”.
‘Counterfactual’ compensation
Sidoti referenced AFCA’s controversial ‘but for’ approach to determinations and said she preferred the term “counterfactual”.
“A counterfactual is to really look at what situation would that client be in if they’d received appropriate advice rather than inappropriate advice,” Sidoti said.
“[The methodology is] a means of establishing what the direct loss is that flows through to the client as a result of the advice being inappropriate.”
She provided UGC as an example that would fall into the counterfactual no transaction category as there were many cases of inappropriate divestment advice.
In the case of Dixon Advisory, there was advice failure over several years and therefore the correct compensation has to be estimated.
“[It] can usually be fairly estimated based on their risk profile and we can look at a market benchmark to fairly estimate what [the victim’s] market exposure would have looked like for that period,” Sidoti said.
“The reason we find that to be a really fair approach is because it measures both the market at risk and reward. If the market would have gone down anyway, well, the clients bear that that risk, that’s part of what it’s about.”
Senior ombudsman for investments and advice Patrick Hartney said the counterfactual or ‘but for’ compensation is usually less than the actual capital loss.
“I think part of the confusion that’s happening at the moment [is] they see the actual loss representing a profit or a gain,” Hartney said.
