The super funds’ collective willingness to pay inflated prices for bank shares is starting to make them look like outliers. With about 30 per cent collective ownership of the banks, APRA sees “stability risk” as a salient concern for all stakeholders that can’t be ignored.
The inertia that rules the retirement system means bigger ideas are needed if members are going to get the best outcome in retirement. And with millions set to retire in the next few years, time is of the essence.
‘But for’ compensation stoush brews between the FAAA and AFCA
The Australian Financial Complaints Authority has denied accusations from the FAAA that the “But for” methodology it uses to calculate loss in financial advice complaints forces advisers to pay out theoretical investment returns.
Financial Advice Association chief executive Sarah Abood called out the use of ‘But for’ methodology at the group’s recent congress in Brisbane, saying the advice profession was being asked to “underwrite a minimum return guarantee for the clients of every failed advice firm”.
AFCA’s ‘But for’ test for assessing compensation puts consumers in the financial position they would have been if the advisers had provided appropriate rather than inappropriate advice. Instead of actual loss, the AFCA determination process looks at what the client would typically be invested in as part of advice service provision.
The methodology has been used by AFCA and its predecessor scheme, specifically the Financial Ombudsman Service, for years. It has, more recently, been employed during the Compensation Scheme of Last Resort’s Dixon Advisory claim rollout, which Abood (pictured, left) highlighted said will “outrage” advisers.
“This is called the ‘but for’ methodology and we saw how that plays out in one recent AFCA determination on Dixon Advisory,” Abood said. “Client losses are defined not as money lost, as you would expect, but they’re defined as the amount they would have earned had they been invested in, says, the Vanguard Balanced Fund.”
‘It’s about direct loss’
On a subsequent panel at the FAAA Congress, AFCA lead ombudsman for investment and advice, Shail Singh denied that the ‘But for’ test was set up to provide clients with theoretical losses, but acknowledged it might be perceived to function that way.
“What a ‘But for’ test means is that but for the failing of the adviser, where would the consumer have been invested?” Singh said. “It’s not about theoretical losses, it’s not about opportunity costs. It’s about direct loss that arose from the failings of the adviser.”
Some might think ‘But for’ compensation looks like it covers opportunity cost, Singh (pictured, right) explained to The Inside Adviser, but that’s not a characterisation he agrees with. “As explained, we are applying the ‘But for’ approach as it applies under the law. Opportunity cost is about indirect loss; we are looking at direct loss.”
“If we’re not satisfied and we don’t know what the person would have been [invested] in we’re not going to award theoretical compensation, we’re not going to say, ‘well, that’s the best returning fund, therefore we’re going to put them into that,'” he said.
Comparable benchmarks
The ‘But for’ stoush has been brewing for some time. In late 2023 AFCA held a consultation into its approach to determining compensation in complaints against financial advice firms, which the FAAA criticised in its submission for a lack of clarity, particularly around calculation of loss.
AFCA responded by referring the FAAA to its existing guide, The AFCA Approach to calculating loss in financial advice complaints, which made clear that consumers would be compensated not just for funds that were lost because of inadequate advice, but for what they would have earned if the advice was good.
“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 guide stated. “To do this, we will compare the consumer’s financial position after suffering the adviser’s breach of duty with the financial position they could have expected to have been in if the adviser had not breached their duty. The difference between the two positions is the amount of the loss the consumer has suffered.”
In making this calculation, AFCA said, it will use appropriate benchmarks from either the financial firm or alternative providers.
“To work out the direct financial loss a consumer has suffered as a result of investing in unsuitable investments, we need to consider what would have been a suitable alternative,” the guide stated.
“We will look for an alternative portfolio of investments with the correct mix of defensive and growth assets. To do this, we may need to use either a suitable benchmark asset allocation used by the financial firm or a comparable benchmark asset allocation.”
