Fundamental to any consumer protection framework for advice clients are the consumer protection functions served by ACFA and the FSCP.

Protecting consumers through accountability mechanisms

Fundamental to any consumer protection framework for advice clients are mechanisms that (a) allow consumer redress for poor outcomes stemming from advice failures, and (b) hold advisers to account.

While Australia has had these elements in place for some time, the landscape was historically characterised by duplication and complexity, with multiple specialised bodies existing, many with overlapping jurisdictions. This led to confusion for clients and advisers alike. In recent years however, this landscape was dramatically simplified, with the creation of a single complaints body, (the Australian Financial Complaints Authority), and a single disciplinary body for advisers (the Financial Services Credit Panel).

In this article, we will get the under the bonnet of these bodies, to give readers a practical understanding of the roles of these bodies, their processes, and the circumstances in which they are likely to interact with them.

AFCA – when three become one

AFCA was established in November 2018, replacing three existing External Dispute Resolution (EDR) bodies – the Superannuation Complaints Tribunal, the Financial Ombudsman Service (FOS), and the Credit and Investments Ombudsman (CIO)^[1]. It operates as an independent not for profit body, funded by the financial service providers who comprise its membership. ASIC has oversight of AFCA.

Membership of AFCA is compulsory for Australian banks, insurers, credit providers, financial, debt collection agencies, superannuation members and many other businesses that provide financial products and services. Membership is also compulsory for financial advisers, at the licensee, rather than individual level.

The role of AFCA

AFCA describes its purpose as providing “fair, independent and effective solutions for individuals and small businesses who have a complaint about a financial product or service.”^[2]

The type of complaints considered by AFCA are broadly in line with the services provided by its membership, including:

• inappropriate financial advice​, including that relating to investments, superannuation, and life insurance
• denied insurance claims (both general and life)
• trustee decisions about distribution of superannuation benefits
• issues relating to loans, credit cards and short-term finance, and
• errors in banking transactions and credit listings.

Matters not considered include those relating to private health insurance and those relating to organisations who are not AFCA members.

Importantly – and sometimes controversially ­– AFCA may use its discretion to exclude complaints relating to wholesale/sophisticated advice clients. We will delve into this more, later in the article.

AFCA’s jurisdiction may also be limited by the size of the loss being claimed by a complainant, with them unable to consider cases where the amount claimed exceeds $1,085,000 for insurance, advice, and superannuation cases (higher limits apply to certain credit related claims)^[3].

To ensure AFCA doesn’t implode under the weight of the millions of complaints made each year across the sector, AFCA makes it clear that the first line of defence is a provider’s own Internal Dispute Resolution (IDR) process. Generally speaking, therefore, AFCA is only considering those complaints where internal processes have failed to deliver a satisfactory outcome.

AFCA processes

AFCA will first aim to resolve any complaint it receives by informal methods, seeking to reach a settlement between the complainant and the financial firm through negotiation or conciliation.

If this doesn’t work, they may use more formal methods, involving a preliminary assessment about the merits of the complaint. Ultimately, AFCA may make a decision (called a determination). A determination will set out the circumstances of the complaint, AFCA’s assessment of the facts, and the steps the provider must take to resolve the complaint. This may include financial compensation.

In some circumstances, AFCA will skip the ‘arbitration’ stage and go straight to a determination. Examples of these circumstances include:

• complaints that need to be finalised urgently. For example, because the complainant is experiencing financial hardship
• where the complainant has suffered a natural disaster such as flood or bushfire
• a low-value claim where the complainant suffers from a serious medical condition or is a victim of family violence, and
• a high-value claim, where a prolonged period may see the claim amount exceed our monetary limits.

Financial firms must comply with AFCA determinations against them, and there is no grounds for appeal with AFCA itself, only through the courts. This applies to complainants also.

In one recent case, a dealer group who refused to abide by an AFCA determination against them, relation to inappropriate SMSF advice, was ordered by a court to pay around $270,000 to their client^[4].

Furthermore, the Federal court recently reaffirmed the legal obligation financial firms have to co-operate with AFCA throughout the entire complaints process.

In a case brought by ASIC on behalf of AFCA, Justice Downes ruled against the defendants (a credit provider), on the basis that failure to co-operate with AFCA constituted a breach of the relevant consumer protection legislation (in this case the National Consumer Protection Credit Act). The two individual defendants in the case were fined^[5].

Where a financial firm – including a financial advice licensee – fails to comply with a determination, AFCA is required to report this non-compliance to ASIC.

Where a financial advice licensee fails to comply with at least two AFCA determinations, this can trigger the convening of a Financial Services & Credit Panel, which may impose a range of penalties on the licensee/adviser (more on this below).

A mountain of complaints against advisers? Not so much

For the 2021/22 financial year, AFCA resolved 71,152 complaints^[6], bringing the total number of complaints dealt with by AFCA to more than 270,000 since opening their doors in late 2018.

For perspective, only around 4,900 of 70,000 plus complaints required a determination, with the vast majority being settled before this was necessary^[7].

And despite perceptions to the contrary, the proportion of complaints relating to financial advice remained relatively small.

Under AFCA’s current classification system, financial advice is included in a broad ‘investments and advice category’. Under this umbrella, actual advice related claims only total around 45 – 50 per month, or just under 600 per year^[8].

Five free complaints per year

Under its user pays model, AFCA levies a cost on its members. This user charge, levied at the end of each financial year, is proportionately allocated based on the number, closure point and complexity of the complaints each member closed in the relevant financial year, compared with same data for all members in the same period.

Fees for the 2023/24 financial year range from around $950 per fast-track complaint (without needing a decision) through to $8,090 for non-fast-track cases resulting in a decision^[9].

Crucially for smaller licensees, the model was amended shortly after its launch, so that members receiving 5 complaints or less per year would not need to pay.

The announcement of this ‘first five free’ policy in 2022 was warmly welcomed by many advice stakeholders, with then AFA CEO Phil Anderson noting that it would give licensees more confidence to defend complaints which, under the previous model, they may have chosen to settle because it was cheaper^[10].

Timeliness of AFCA processes under review

AFCA data on complaints closed shows just under 90% of investment and advice complaints are resolved prior to AFCA needing to make a determination. The average time AFCA takes to review complaints varies from around 78 days for General Insurance, to 106 days for advice related complaints and over 120 days for life insurance and superannuation complaints^[11].

Following an independent review by Treasury, AFCA commenced a consultation process in early 2023, as it seeks to improve the efficiency and timeliness of complaints handling.

AFCA themselves have previously expressed a desire to halve the time it takes to resolve complaints^[12].

AFCA and wholesale advice

As previously mentioned, one particular area where AFCA has attracted criticism relates to its use of discretion in deciding to consider or exclude certain complaints, including those relating to wholesale/sophisticated clients.

Commenting on the issue, AFCA Lead Ombudsman Shail Singh stressed that if someone is properly classified as wholesale, and are properly informed of the consequences it is highly unlikely they would pursue those complaints^[13].

However, where a client has been misclassified as a sophisticated client, AFCA is likely to consider their complaints, provided they fall within the jurisdictional dollar limits.

Advisers operating in this space must ensure there is sufficient evidence of client informed consent and an understanding of the protections forfeited when going down the wholesale path.

Viewing the latest AFCA determinations

The details of AFCA determinations can make for interesting reading, and can be instructive for advisers seeking to sense check their own processes and avoid the mistakes of others. AFCA publishes the details of determinations regularly on its website, where they also provide a detailed search function.

Holding advisers accountable – single disciplinary body

As previously mentioned, a consistent refusal to abide by an AFCA ruling is just one of several triggers for a convening of the FSCP, the relatively new single disciplinary body covering financial advisers.

A direct response to the 2018 Hayne Royal Commission, the ‘new’ FSCP took effect following the introduction of the Better Advice Act at the start of 2022. Under the Act, financial advisers ceased to be regulated by the Tax Practitioners Board (TPB), and the Financial Adviser Standards and Ethics Authority (FASEA) closed, with responsibility for the FASEA Code of Ethics moved to Treasury.

Although already in existence (the relevant ASIC regulatory guide – RG 263 – dating back to 2017), the FSCP saw its powers and size greatly increased at the start of 2022, most visibly through the size of its member pool which increased from 16 to 31. These members include a range of experts across relevant disciplines, with initial appointees including former adviser and AFA CEO, Brad Fox, and high-profile advisers Julie Berry and Will Hamilton^[14].

What circumstances trigger FSCP involvement?

Broadly, there are six circumstances that would be considered matters for the FSCP^[15].

1. Where the adviser is in a position that compromises their ability to practice as a financial adviser. For example, they could be insolvent, under administration, convicted of fraud, or not be a fit and proper person.
2. Where the adviser may have contravened financial services law, such as those relating to conflicted remuneration or annual consent requirements or any FASEA standards.
3. Where an adviser has been involved with someone else’s breach of financial services law.
4. Where an adviser provides advice while unregistered.
5. Where an adviser fails to follow a previous sanction from the FSCP.
6. Where an adviser has at least twice been linked to a failure or refusal to give effect to an AFCA determination.

Additionally, ASIC has publicly stated it may also convene a sitting panel at their discretion at any time, even if the convening circumstances are not present¹⁶. This may be because ASIC themselves are unsure if the requirement for convening circumstances has been met and so will ask its panel of experts to consider the matter.

Procedures for ‘less serious matters’

In the event that misconduct falls short of triggering a sitting of the panel, ASIC has a range of mechanisms it can call on to discipline advisers.

These mechanisms, published by ASIC, include a warning, designed to let the adviser know they should stop continuing the conduct cited, and a reprimand, which admonishes the adviser in relation to that conduct.

ASIC will send a letter electronically to the financial adviser outlining the decision, while a copy will be given to the current AFSL of the adviser whether or not the incident in question happened during the period they were licensed with that AFSL.

Warnings and reprimands will not be recorded on the ASIC’s Financial Advisers Register and the name of the financial advisers will not be published.

What penalties can the FSCP hand down?

The FSCP has a range of ways it can penalise adviser misconduct.

It can take administrative action against an adviser by issuing warnings or reprimands, it can direct an adviser to take specific training, it can order the suspension or cancellation of an adviser’s registration, issue infringement notices, and recommend to ASIC that it seek to apply to the court for a civil penalty.

FSCP Processes

Before taking action against an adviser, the FSCP will be required to give that adviser a notice detailing the relevant circumstances, action it proposes, and the adviser’s right to request a hearing or make a submission to the FSCP.

According to RG 263, and consistent with its underlying consumer protection intent, decisions of a sitting panel are likely to be publicised by ASIC and, in certain specified circumstances, are required to be displayed on ASIC’s Financial Advisers Register (FAR).

These circumstances include where the adviser has had their registration suspended or cancelled, where the adviser accepts an enforceable undertaking, and – in some cases – where an adviser has been directed to undertake training or receive counselling or supervision.

When ASIC publishes a matter – on its publicly accessible Outcomes Register – which it is not required to enter onto the FAR, it will do using a randomly assigned pseudonym, so the adviser cannot be identified. This includes cases where no adverse findings are made against an adviser.

The first two cases, published on the Outcomes Register in June 2023, demonstrate this approach perfectly:

Case Study 1

In the FSCPs inaugural finding, ‘Mr S’ impersonated a client during two phone conversations with a bank, to facilitate a transaction for the client’s benefit. The panel found that, while the adviser had breached the Code of Ethics, and engaged in misleading and deceptive conduct, they did not themselves obtain any benefit as a result of the behaviour.

The FSCP ordered the adviser’s licensee to perform three successive compliance audits in relation to retail personal advice clients, with a minimum of 12 months between each audit.

Because the circumstances were not deemed sufficient to include on the FAR, the adviser wasn’t named^[17].

Case Study 2

Mr M cold called a client and recommend they move to a new superannuation fund. The FSCP found that Mr M had failed to consider the client’s life insurance cover under their existing fund, had provided retirement projections with no basis in fact, and had recommended a high growth portfolio, at odds with the client’s growth risk profile. Also problematic was the fact that the SOA was presented to the client only a day after the fact find was completed, and on the SAME DAY the client completed the risk profiling process.

Mr M was deemed to have failed to act in the client’s best interests and provided advice that was not appropriate. He was also found to have made false and misleading statements and breached the Code of Ethics, including the duties of trustworthiness, competence, honesty, fairness, and diligence.

The panel required Mr. M have their next 10 SOAs for retail clients be pre-vetted by an independent person with expertise in financial services laws compliance, along with an audit of their last 10 retail SOAs^[18].

Appealing an FSCP decision

An adviser can apply to ASIC for a variation or revocation of a direction or order from the FSCP.

In these circumstances, ASIC can either decide to convene the FSCP to consider the matter, or refuse the application.

In the event ASIC decides not to convene the panel, or a sitting panel decides not to vary or revoke its original decision, the adviser can apply to the Administrative Appeals Tribunal to review the decision.

When an adviser makes an application to the AAT, they can request stay orders on the publication by ASIC of the original FSCP decision, a situation described by some advisers as an unacceptable loophole^[19].

Summary

Financial advice clients enjoy the protection of a robust framework of financial consumer protections, under which they know they are able to seek remedies for any financial harm they have suffered as a result of their adviser breaching financial services law and/or ethical standards, and which incentivises professional and compliant adviser behaviours by holding them to account when those behaviours fall short.

From an adviser perspective, they should feel confident that this framework prioritises procedural fairness for all parties, while playing an important role in lifting the reputation of the financial advice profession.

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References:
[1] https://www.allens.com.au/insights-news/insights/2018/07/unravelled-australian-financial-complaints-authority-a/
[2] https://www.afca.org.au/about-afca/engagement-charter/purpose#:~:text=AFCA’s%20role,a%20financial%20product%20or%20service.
[3] https://www.afca.org.au/news/latest-news/afca-complaint-monetary-limits-updated
[4] https://www.moneymanagement.com.au/news/financial-planning/nextgen-ordered-court-pay-270k-inappropriate-advice
[5] https://www.afca.org.au/news/media-releases/federal-court-reaffirms-financial-firms-must-co-operate-with-afca
[6] https://www.afca.org.au/media/1469/download
[7] Ibid.
[8] https://www.moneymanagement.com.au/news/financial-planning/advice-complaints-decline-getting-more-complex-afca
[9] https://www.afca.org.au/members/funding-model/fee-structure
[10] https://riskinfo.com.au/news/2022/06/07/new-afca-fee-model-licensees-more-inclined-to-defend-complaints/
[11]https://www.afca.org.au/media/1469/download
[12] https://www.professionalplanner.com.au/2022/03/afca-eyes-halving-the-time-of-complaint-disputes/
[13] https://www.professionalplanner.com.au/2023/06/afca-defends-use-of-discretion-to-hear-complaints-from-wholesale-investors/
[14] https://www.professionalplanner.com.au/2022/02/beefed-up-fscp-doubles-in-size-as-disciplinary-body-takes-shape/
[15] https://download.asic.gov.au/media/bhvde4zi/rg263-published-3-august-2022.pdf
[16] https://www.professionalplanner.com.au/2022/02/asic-lays-out-draft-adviser-discipline-plan/
[17] https://www.financialstandard.com.au/news/large-afsls-lead-advice-complaints-afca-179800123
[18] https://www.financialstandard.com.au/news/fscp-hands-down-second-order-audits-adviser-179800207
[19]https://www.professionalplanner.com.au/2023/05/anomaly-enabling-banned-advisers-to-avoid-public-shaming/

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