AFCA Guide – Not a Level Playing Field
The complaint resolution scheme administered by the Australian Financial Complaints Authority was already one of the key factors that made providing financial services to retail clients a very risky business. When combined with the recent introduction of FASEA, and COVID (a once-in-a-decade market event that we are still experiencing), AFCA may well be the centre of a perfect storm for financial services providers.
Even on a stand-alone basis, AFCA is a deeply problematic forum for financial services licensees, and being a member will dramatically increase the financial risk attached to a financial services business. Membership is mandated under the Corporations Act for any business that provides financial services to retail clients. While that will mean that participation in the scheme is unavoidable for many, it does raise a legitimate business question for some i.e. if retail clients form a small part of your business, AFCA membership is a strong incentive to give these clients up.
Seems a little extreme? Let us explain.
AFCA provides a free shot to complainants
Like many consumer-focused schemes, AFCA is looking to even up what it deems to be an uneven playing field. As a result, it heavily favours the complainant, and it does this in a large variety of ways - some more subtle than others. Let’s start with the most obvious.
A determination made by AFCA is only binding on the licensee. If a complainant does not like AFCA’s finding, they can just ignore it and go to court anyway.
To add insult to injury, all of AFCA’s costs are borne by the licensee – and those costs rise at every stage leading up to resolution. In a normal case, this will mean that the licensee will pay between $8,535 and $12,815 (up to $29,860 for a legacy complaint) for a decision that the complainant can just ignore if they choose. In effect, it gives complainants a free shot.
AFCA is designed for consumers, but can be abused by highly sophisticated clients
As touched on above, AFCA considers itself to be a body set up to level the playing field for consumers. If you think of bodies like NSW Fair Trading, the core idea is to provide access to dispute resolution to normal people (e.g. consumers, tenants) who may otherwise not have the resources or capability to challenge a larger company. Accordingly, it will limit access to certain types of clients and claims, and it genrally won’t manage disputes that are larger or between companies or commercial entities. The problem with AFCA is that it does not limit access to its service in the same way.
First, even though the obligation to be a member of AFCA is triggered by providing services to retail clients, AFCA does not limit its service to these clients. Sophisticated and wholesale clients are perfectly eligible to claim under the scheme and, while AFCA can consider this in exercising its discretion not to hear complaints, it very rarely does so. In addition, corporate structure also doesn’t exclude applicants – with eligibility extending to companies with up to 100 employees.
When combined with very significant claims limits - $1m per complainant, $500k per claim – this can lead to some very unfair (and legally inappropriate) outcomes.
For instance, AFCA can be used by highly sophisticated entities such as family offices or fund managers to claim large amounts through a deeply skewed system.
Entities like this comfortably have the resources to use the court system, in fact more so than many small licensees, yet they have been given access to a forum where they can take a free shot at the licensees expense. And why wouldn’t they?
Accordingly AFCA can be about much more than just retail advice, and any company with mid-range sophisticated clients - for example advisers with family office clients - should be thinking about this.
Unreliable outcomes on subjective issues – exacerbated by FASEA
Unlike a court, AFCA is not particularly rigid when it comes to evidence or more technical points of law. It also doesn’t have an established system of legal precedent (i.e. case law) which means that there are no established positions on particular issues that can be relied on.
This issue is keenly felt in financial advice cases, where the same issues dealt with twice will often yield different outcomes. For example, almost every client will claim they were given personal advice, regardless of whether there is an SoA or if they were classified as wholesale or sophisticated. If AFCA accepts this, which they often will, the case will now often turn on whether a portfolio was appropriate for the client – an area in which AFCA has limited expertise and each case officer views differently. It is not uncommon to have extensive debate on what constitutes a ‘speculative’ investment, or other issues for which you would often defer to expert evidence in court.
This results in a situation where complaints that seem frivolous or opportunistic can quickly gain momentum because established protections you were relying on (like sophisticated investor certificates) are suddenly called into question.
FASEA will exacerbate this problem, as it will give AFCA license to apply a whole range of subjective standards to what were considered legally settled issues – and AFCA have already indicated a willingness to do just that, recently stating:
“Ultimately, it (FASEA) is a fairness lens that we apply… If any black letter law finding results in an unfair consumer outcome we’re allowed to do what’s fair.”
This should be cause for concern for any licensee.
A poor forum for small claims as well as large
While bodies like Fair Trading are set up to manage small claims in a cost effective manner, AFCA is not.
The AFCA cost structure means that there is very little benefit for licensees in actively defending claims for less than $10,000.
Even a preliminary decision will cost a licensee over $5,000 in just AFCA fees, and at least the same will be expended in legal resources (whether internal or external). This can result in a consistent stream of small settlements which can represent a significant cost for licensees.
Scenarios to think about here are complaints about adviser fees or pricing – for example fees for no service – or complaints around small investment losses or individual trades.
As a result, managing small AFCA claims can be a challenge for a business, and an efficient, policy-based approach can make good sense. (A+B is well-placed to help where needed.)
Problematic for financial advisers in particular
While the issues raised so far could apply to any financial services business, they are felt most by financial advice businesses. As already touched on above, this is largely because financial advice is a much more complex and varied service. Fund Managers deal with (comparatively) very few AFCA cases as it is well established that complaints solely about performance of a product will not be heard by AFCA. In effect, this means that if the relevant Product Disclosure Statement was not defective, the client has no claim.
The same defence very rarely holds up for financial advisers, even when it relates to a single investment made by a sophisticated client.
It is simply too easy to frame those complaints around the adviser’s conduct, and even if AFCA agrees with you in the end, it won’t be before determination stage (at least $8,535 later).
Another reason why AFCA is disproportionately problematic for advisers is the size and nature of the average advice business. Like many ombudsman-style bodies, AFCA is founded on the idea that it is protecting consumers from large corporate businesses – but in reality the average advice business is not an AMP or an MLC – far from it. Whether it’s one large claim, or a stream of smaller ones, for a smaller advice business, the costs of AFCA are keenly felt and represent a significant risk to their viability. This is also increasingly reflected in insurance premiums, with only very few insurers in the Australian market still offering cover for retail advice – and then only with large excesses.
In the medium term, when combined with FASEA, stamping fees and other reforms coming out of the royal commission, this may well result in the average consumer losing access to personal financial advice – not a good thing in our view.
Enough problems – give me solutions!
The best possible solution to the AFCA problem is… not to be a member.
If there is a way that you can avoid providing advice to retail clients without significantly impacting your business, AFCA by itself may be sufficient reason to do just that.
For many firms that will not be an option. If you fall into that category then we recommend the following:
Your staff should be trained in how to assess and manage the risk around their clients. Often some intelligent conversations around expectations can prevent claims from ever being made - and documentation for higher risk clients should be flawless.
AFCA is a very specific forum that differentiates itself from other dispute resolution mechanisms in many ways. It requires a taliored, policy driven approach that can balance cost efficiency and outcomes.
From a business planning and strategy perspective, you should be accounting for the additional risk that AFCA brings to your retail business. For instance, the internal cost structure applied to a retail client should be significantly different from that applied to a wholesale one.
Stay tuned for part 2 in this series, where we will give our best tips on how to approach AFCA during the complaints process and how to manage your complaints program as a whole.
How can we help?
At A+B we can:
Help you set up an effective complaints management program to allow you to assess and manage claims as efficiently as possible
Train your staff to prevent claims from being made in the first place
Conduct an initial assessment of any claim in as little as two hours to allow you to manage your AFCA deadlines and costs
Provide cost-effective management of any claim on an ongoing basis from AFCA all the way through to litigation (if necessary)
Provide comprehensive management of your entire complaints and claims program.
Please get in touch!