CPD: Consumer protection essentials – AFCA and advice complaints

AFCA plays a vital role in consumer protection across the financial services sector by providing an accessible, independent, and binding dispute resolution process.

As essential component of a robust framework for protecting financial consumers is the presence of mechanisms that hold individuals and organisations to account for causing consumer harm and allow consumers financial redress in the event they suffer such harm.

In financial advice, there is a triumvirate of bodies who fulfil these functions, the Australian Financial Complaints Authority (AFCA), the Compensation Scheme of Last Resort (CSLR), and the Financial Services & Credit Panel (FSCP).

For the vast majority of compliant, financially health advice practices, AFCA is the body most likely to be interacted with, and this article will look under the hood, in order to provide advisers a practical working knowledge of AFCA, including its remit, processes, costs, and criticisms.

AFCA – the single dispute resolution body

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’s primary purpose is to ensure fair and efficient resolution of financial disputes without the need for court proceedings. It fulfils this purpose by:

• investigating complaints about financial advice, banking, insurance, and credit
• assessing complaints based on relevant laws, regulations, industry codes, and fairness principles
• requiring firms to compensate consumers if a complaint is upheld.

AFCA also works to identify and report systemic issues, and works closely with stakeholders including regulators, product providers, and licensees to enhance compliance and professional standards.

AFCA plays an important role in identifying unpaid compensation and referring cases to the CSLR.

AFCA’s remit

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
• 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 consider complaints relating to wholesale/sophisticated advice clients.

Financial limits can limit AFCA’s involvement

AFCA’s jurisdiction may also be limited by the size of the loss being claimed by a complainant. As of January 1^st, 2024, the maximum claim value AFCA will consider is $1,263,000, for insurance and advice cases^[2]. There is no limit for superannuation cases.

The maximum compensation AFCA can award per claims is $631,500.

AFCA processes

For complaints falling within its jurisdiction, 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^[3] include:

• when urgent finalisation is needed, for example if a complainant is experiencing severe financial hardship
• when complainants are impacted by a natural disaster, such as a bushfire or flood
• high value claims where prolonged proceedings could result in claim amounts exceeding AFCA’s financial limits
• low value claims involving serious personal circumstances, for example if the complainant is a victim of domestic abuse, or is suffering a serious medical condition.

Determinations are binding

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

Furthermore, a federal court case finalised in January 2023 reaffirmed the legal obligation financial firms have which is that they must co-operate with AFCA throughout the entire complaints process^[4].

The costs of AFCA to practices and licensees

AFCA’s services are funded by financial firms through membership fees and user charges, ensuring accessibility for consumers without direct costs.

Financial firms bear the costs associated with complaints lodged against them. In addition to a modest registration fee (currently $388.69)^[5], AFCA charges on a per complaint basis, giving firms an incentive to resolve complaints through internal dispute resolution processes before they reach AFCA.

As of March 2025, the current fee schedule applies:

To support smaller firms and encourage early dispute resolution, AFCA provides the first five complaints closed within a financial year free of charge^[7]. This approach is also celebrated for giving advisers more confidence to defend, rather than blindly settle, complaints.

Complaints trends

During the 2024 Financial Year, AFCA received 3,559 complaints in the investments and advice sector, a drop of 26 per cent compared to the previous year.

Excluding complaints related to Dixon Advisory, advice complaints reached an all-time low of 2,709 complaints, according to AFCA (the previous low being 3,207 during the 21/22 financial year.

As the table 2 shows, inappropriate advice remains the dominant type of investments and advice complaint received.

From a product perspective, the highest number of complaints related to equities.

Of all complaints resolved before the determination stage, 72% were resolved in favour of the complainant. Of all complaints that went to determination stage, 30% were found in favour of the complainant^[10].

How does AFCA calculate loss in financial advice complaints?

When AFCA upholds a complaint against an advice firm who has breached one or more duties to the consumer, they may rule that financial compensation is payable. The purpose of compensation is to place the consumer in the position they would have been in had there been no breach of duty.

The approach to calculating this compensation is informally referred to as the ‘but for’ approach. That is, AFCA will determine the financial position the complainant would have been in, ‘but for’ the breach of duty by the adviser.

In simple terms, the compensation amount – the amount of loss the consumer has suffered – is difference between the client’s actual financial position, and their ‘but for’ position.

As shown in table 3 above, the most common type of investment and advice complaint during FY 24 related to equities and equity-based products. In this type of scenario, AFCA will often be required to rule on the appropriateness of a portfolio for a particular client – in terms of its risk profile.

For example, where a consumer has received inappropriate advice which caused them to invest in an unsuitable portfolio of investments, it would be assumed that the consumer would instead have invested in a suitable portfolio of investments if they had been advised properly.

To work out the direct financial loss a consumer has suffered as a result of investing in unsuitable investments, AFCA will consider what would have been a suitable alternative, looking for an alternative portfolio of investments with the correct mix of defensive and growth assets. To do this, AFCA may need to use either a suitable benchmark asset allocation used by the financial firm or a comparable benchmark asset allocation.

In cases where it is harder to determine what the consumer’s position would have been if the breach of duty had not occurred. AFCA will consider a range of factors, including:

• how the consumer’s money was invested immediately before it was invested in the disputed investments
• whether the consumer was satisfied with their investments immediately before they made the disputed investments
• whether the consumer actively sought the financial adviser’s advice or had responded to an invitation to obtain advice
• if the consumer had actively sought the advice, the reason why they had done so
• whether the consumer had told the adviser that they had any investment preferences.

Full details of the AFCA approach to advice complaints can be found in their guide: ‘The AFCA Approach to calculating loss in financial advice complaints’.^[11]This guide includes the following case study from AFCA’s predecessor, FOS.

Case Study – compensation for inappropriate asset mix

Mr & Mrs Smith, both in their early 60s, inherited $1,000,000 and sought financial advice in 2006. Acting on the advice of the firm, they each invested $500,000 in allocated pensions, seemingly unaware of the fact that the asset allocation was 90% growth and 10% defensive (they believed the mix to be 40% growth and 60% defensive).

When the GFC occurred, the clients panicked and withdrew their funds, incurring capital losses of $160,000 and $185,000. They complained to the Financial Ombudsman Service (FOS), on the basis that the asset mix they were actually invested in (90/10) was dramatically different to what they believed they were invested in (40/60).

After considering all the facts, FOS determined that, had the clients received appropriate advice, and been invested in a portfolio with a 40/60 mix, Mr Smith would have been $35,500 better off, and Mrs Smith $45,000 better off. As a result, FOS ordered the advice firm to pay these amounts to Mr and Mrs Smith as compensation.

Criticism of the ‘but for’ approach

The ‘but for’ methodology used by AFCA has drawn significant criticism from industry bodies and financial advisers. This approach determines compensation by assessing what financial position a client would have been in ‘but for’ the advice they received. Critics argue that it is too theoretical, inconsistent, and unfairly punitive to advisers.

One major concern is that AFCA’s application of the methodology lacks clear guidelines and overestimates financial losses by considering alternative scenarios that may not have realistically occurred. Advisers argue that clients should be responsible for some level of investment risk, rather than being compensated for hypothetical lost opportunities.

The Financial Advice Association of Australia (FAAA) has been particularly vocal, arguing that AFCA’s assessments often ignore market realities and economic fluctuations, leading to inflated compensation claims.

Their harshest criticism was reserved for the way the ‘but for’ test was interacting with the CSLR – a system under which advisers are forced to fund unpaid determinations.

“So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.” Sarah Abood, FAAA CEO^[12].

The SIAA similarly drew issue with application of the ‘but for’ method in the well-publicised Dixon advisory case, arguing that AFCA had erred by applying the methodology to the entire portfolios of affected clients, rather than just to the specific failed product at the centre of the controversy (a real estate trust, URF).

“We would expect a ‘but for’ calculation on the URF only would result in a significantly lower loss calculation compared to a whole of portfolio approach,” their submission to Treasury said^[13].

“AFCA has not provided an explanation as to why each investment in the portfolio should not have been held by the complainant and was not in line with their objectives based on the information readily available at the time, except to say they were related party products.

Both the financial services minister, Stephen Jones, and the shadow minister Luke Howarth, also agree that the CSLR should not be about guaranteeing investment returns but instead should aim to give genuine victims a form of redress.

Citing data which suggests 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, the shadow minister called on the government to “intervene to limit or filter out these claims”^[14].

The ‘but for’ approach has also been criticised for essentially making advisers shoulder the burden for product failures, a criticism staunchly rebutted by AFCA, who argue that ultimately advisers are “gatekeepers” that need to ensure client portfolios are appropriately diversified.

As senior AFCA Ombudsman Alexandra Sidotti told an AFCA members forum in February 2025:

“When there’s a product failure, though, and that’s maybe 5 per cent of a person’s portfolio, that’s not going to have a catastrophic impact on someone’s superannuation funds. The issue that we’re really seeing here is a complete lack of diversification, and that’s an advice issue.”^[15]

Similarly, Lead Ombudsman Shail Singh said advisers wouldn’t bear the burden for the failure of products that were recommended in line with sound advice principles:

“If people put someone into a mortgage fund for 5 per cent, it was suitable to their portfolio, and there was no information to show that that fund was not going to perform – the adviser’s not responsible for that sort of conduct.”^[16]

While AFCA defends their approach as consumer-centric, critics argue it creates uncertainty, erodes adviser confidence, and could drive up professional indemnity insurance costs, ultimately increasing barriers to advice. Calls for greater transparency and reform in AFCA’s methodology continue to grow.

AFCA and wholesale advice

While wholesale advice is technically outside AFCA’s remit, they can use their discretion to consider wholesale complaints, if they believe the client has been misclassified as a sophisticated client, and provided the complaint falls within the jurisdictional dollar limits.

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^[17].

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

Conclusion

AFCA plays a vital role in consumer protection across the financial services sector – including financial advice – ensuring that disputes are resolved fairly and efficiently. By providing an accessible, independent, and binding dispute resolution process, AFCA enables consumers to seek redress without resorting to costly legal action. Its ability to investigate complaints, assess breaches of duty, and award compensation underscores its importance in maintaining trust in financial services.

Despite its strengths, AFCA’s ‘but for’ compensation approach has drawn criticism from financial advisers and industry bodies. Concerns include the theoretical nature of loss calculations, perceived inconsistencies in methodology, and potential financial strain on advisers due to obligations under the Compensation Scheme of Last Resort (CSLR). These debates highlight the ongoing tension between consumer protection and ensuring fairness to advice professionals.

As financial advice continues to evolve, AFCA’s role will remain critical in balancing consumer rights with industry sustainability. Calls for greater transparency and reform in AFCA’s methodology may lead to refinements in its approach. Ultimately, the effectiveness of AFCA will depend on its ability to maintain fairness, clarity, and confidence in its dispute resolution framework while addressing industry concerns.

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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/news/latest-news/afcas-compensation-caps-and-monetary-limits-adjusted
[3] https://www.afca.org.au/what-to-expect/the-process-we-follow
[4] https://www.afca.org.au/news/media-releases/federal-court-reaffirms-financial-firms-must-co-operate-with-afca
[5] https://www.afca.org.au/members/news/changes-to-afcas-fees-and-charges-in-fy25
[6] https://www.afca.org.au/members/funding-model/fee-structure
[7] https://www.afca.org.au/members/news/changes-to-afcas-fees-and-charges-in-fy25
[8] https://www.afca.org.au/annual-review-investments-and-advice-complaints
[9] Ibid.
[10] https://www.afca.org.au/annual-review-year-at-a-glance
[11] https://www.afca.org.au/media/402/download
[12] https://www.ifa.com.au/news/35424-siaa-puts-the-magnifying-glass-on-afca-methodology
[13] Ibid.
[14] https://www.ifa.com.au/news/35328-jones-and-howarth-agree-but-for-test-has-no-place-in-cslr-scheme
[15] https://www.ifa.com.au/news/35469-complete-lack-of-diversification-afca-says-advisers-not-being-blamed-for-product-failures
[16] Ibid.
[17] https://www.professionalplanner.com.au/2023/06/afca-defends-use-of-discretion-to-hear-complaints-from-wholesale-investors/