Only a handful of players are behind the major failures heading to the Compensation Scheme of Last Resort, led by conflicted advice through an SMSF.
Australian Financial Complaints Authority lead ombudsman Shail Singh told the Professional Planner Licensee Summit on Tuesday morning for many of the models, “there’s maybe two or three people behind each of them”.
“They’re essentially using SMSFs, using the system to get access to a pot of money, which they then siphon off to either their own pockets or to various companies, so you lose track of where it’s gone,” Singh said.
ASIC had warned the industry about telemarketers using high pressure sales tactics to refer potential clients to advisers who will then be put in inappropriate or conflicted advice models.
Taking the big culprits like Dixon Advisory and United Global Capital out of the equation reveals most of the offenders are much smaller with a lower number of complaints.
“We have a number of batches where even there can be less than 50 disputes in it, but it’s certainly not the big institutions or the big AFSLs,” Singh said.
Compensation Scheme of Last Resort chief executive David Berry said the inappropriate use of SMSFs was a common theme of the claims lodged with the scheme.
“Self-managed super funds are good, but they can easily be used for an inappropriate or a poor reason,” Berry said.
Singh agreed with Berry the misuse of SMSFs can be very detrimental to clients and therefore result in numerous complaints.
“SMSFs can be a legitimate tool for many Australians, but too often we see them recommended not for their appropriateness, but because they enable a channel to in-house or high-risk products,” Singh said.
“The suitability assessment becomes a box ticking exercise, rather than a genuine inquiry into what’s best for the client.”
CSLR’s watchlist
Berry reveals the scheme has a “watchlist” of organisations they are keeping an eye on, including firms involved with the failed Shield and First Guardian funds.
Earlier this month, the corporate regulator also cancelled licensee Financial Services Group Australia’s license, partly because it failed to ensure two of its representatives provided financial product advice in the best interest of the client who invested in Shield and First Guardian.
FSGA’s responsible manager Graham Holmes also received a permanent ban and ASIC encouraged clients to pursue a complaint with AFCA.
Back in March, ASIC applied to liquidate Falcon Capital Limited, the responsible entity for First Guardian, to liquidate the master fund.
The regulator alleged First Guardian had been investing in activities in the financial interest of Falcon director David Anderson, which the responsible entity failed to recognise and prevent.
Despite First Guardian and Shield failures being driven by just a few individuals, 6000 and 5800 clients respectively, are expected to have been caught up in it.
Classify complaints
During a table discussion on how the scheme can reformed to be sustainable, conducted under Chatham House rules which meant the participants wouldn’t be attributed, one participant told the room the scheme needed to classify the complaints to prevent such high levies on the industry.
“Are we classifying some of these issues that are ultimately leading to large compensation bills the right way for some of them are, in fact, scams,” one participant said.
“They are deliberately designed operating models with the intent to monetise an outcome which is never about financial advice.
“These things find their way into a compensation scheme attached to an adviser who is complicit.”
Another participant said the scheme should look at other professional models and see how they are structured, such as accounting as it has limited liability.
They also suggested a $1 levy on every retail super and insurance policy holder would have covered the scheme.
Other suggestions included reducing the $150,000 cap on client compensation to $100,000, as well as excluding ‘but for’ determinations that didn’t result in a capital loss to the client.
Future of ‘but for’ determinations
Former Minister for Financial Services Stephen Jones had suggested at the Professional Planner Advice Policy Summit claims that didn’t result in a capital loss could be excluded from the CSLR and a potential outcome for Treasury’s review into the scheme.
Berry had informed the government and opposition approximately 80 per cent of CSLR claims are based on ‘but for’ determinations.
AFCA’s ‘but for’ methodology has been widely criticised, but Singh remained steadfast that it is accepted throughout courts.
“You need to look at what would the consumer have been in had the proper advice been given,” Singh said.
“You need to factor in market exposure when you’re assessing loss. Granted, when the market’s going well that can work in favour of the consumer, but when it’s going badly, it works in favour of the adviser.”
AFCA defended the methodology last year with Singh arguing it was a legal requirement to compensate claimants if the adviser has breached the best interest duty.
