The Australian Financial Complaints Authority has argued the controversial “but for” provision will be a necessity for Shield and First Guardian investors who missed out on investment gains after being rolled out of well-performing funds.
The Financial Advice Association Australia opened its National Congress last year with a firm criticism of “but for” AFCA determinations, criticising the complaints body for facilitating compensation when there hasn’t been a capital loss.
It’s a position that’s been heavily defended by AFCA, with lead ombudsman for advice and investments Shail Singh telling this year’s congress in Perth that it was a mischaracterisation to describe what investors were going through as underwriting “theoretical” investment returns.
“Shield and First Guardian investors were in APRA-regulated funds, we know they would’ve been in those funds if the poor advice hadn’t been provided,” Singh said.
ASIC has alleged that high-pressure sales tactics were used by lead generators to get clients to rollover into the funds through registered advisers.
Shail added that members in APRA-regulated funds had performed “quite well” in the time Shield and First Guardian investors had been moved away.
“I would suspect it would be more than the actual capital loss on the portfolio because market conditions have been going up since 2021, post-Covid,” Singh said.
Singh revealed that, as of 10 November, AFCA has received 1559 Shield and First Guardian complaints, but noted that number was relatively low when considering that around 12,000 investors were placed in Shield or First Guardian.
“Why is it that we haven’t got more [complaints]? Because I’m concerned that people don’t fully understand the extent of their losses… and the whole process is quite overwhelming for them,” Singh said.
CSLR chief executive David Berry noted the CSLR can only pay up to $150,000, which would mitigate some of the ‘but for’ claims on higher balance accounts. The scheme has also supported excluding “but for” losses from the CSLR.
“While a counterfactual loss will feature in some, the capital loss will cap out for a lot of these people,” Berry said.
The CSLR confirmed the FY27 levy will be over $120 million, but early Shield and First Guardian claims could double that figure.
The legislation governing the CSLR outlines the need for a special levy if the $20 million subsector cap is surpassed in a financial year. The minister is due to announce a decision for the FY26 levy which has also broken the subsector cap and super industry associations are already campaigning against being levied.
Asked about the FY28 levy, Berry said Dixon Advisory will continue to feature, but that United Global Capital could likely be resolved by FY27.
“I see the need for a special levy for the foreseeable future,” Berry said.
“The $20 million subsector cap is not enough and that would suggest that we would need to be in continuous special levy mode every year.”
ASIC senior executive leader Leah Sciacca detailed the regulator’s actions in the wake of the SHield and First Guardian collapse, which included its deal with Macquarie to remediate Shield investors, as well as court action against InterPrac, MWL Financial Services, SQM Research and Equity Trustees.
“Our priorities for both Shield and First Guardian matters have been to preserve assets so they can be recovered for investors while our broader investigations are continuing,” Sciacca said.
The ASIC executive’s comments came minutes before shadow Minister for Financial Services Pat Conaghan accused the regulator of failing investors.
PI dead end
The usage of professional indemnity (PI) insurance was also raised as an avenue to help mitigate claims that would otherwise go to the CSLR, particularly by liquidators and administrators, but Berry said this wasn’t simple.
“In our experience, there is no incentive for a liquidator to commence a PI claim,” Berry said, noting the issue was flagged in the scheme’s submission to the CSLR post-implementation review.
“It has to be really clear and it has to be highly likely they’re going to be able to recover from it. My personal experience with insurance companies is they will do everything they can to not pay and particularly in instances where there’s large amounts, there’s no incentive for them to pick that up and so they will draw it out.”
Berry said liquidators and administrators were handicapped because they have limited resources and time to proceed with a claim and insurers can instead wait them out.
“They’ve got to protect all the creditors, so there’s not a lot of incentive for them utilise them,” Berry said.
“PI covers the company, not the client. It doesn’t cover [the CSLR], it doesn’t cover AFCA, it covers the company that’s there. Not all policies are equal. Some of the claims we’d like to be covered may be specifically excluded from the policy itself. A lot of PI insurance has excesses so large, there’s a disincentive to also access it.”
Berry said he saw one instance of a claim where the advice firm had to fly to England to negotiate with Lloyds of London for them to cover a portion of the claim.
“And this large licensee had to pay half,” Berry said.
“The amount of effort that goes into utilising this insurance. It looks good on paper, but for the CSLR I don’t know what value it brings.”
ASIC conducted a PI market scan this year and expressed concerns over the lack of transparency around what is included in coverage, but Sciacca said the market has seen improvements.
“We found there was more supply and competition, there was a return to profitability, premiums were reduced and there was reduced claims,” Sciacca said.
