FAAA proposes ‘Friends of’ AFCA and CSLR roles

In its pre-budget submission, the Financial Advice Association Australia (FAAA) put forward a range of measures that it said would “improve the efficiency and reduce the costs of providing financial advice”, including $10,000 in government funding to incentivise advice practices to bring on professional year (PY) candidates.

It has also formalised a position that has been on the FAAA agenda for months – addressing the need for someone arguing in favour of an insolvent firm during the Australian Financial Complaints Authority (AFCA) determination process.

The form this would take under the FAAA’s submission is through a government-funded “Friend of AFCA” role.

“This role would represent the advice community in cases brought to AFCA where the advice firm has become insolvent,” the submission said.

“Acting as an impartial advocate, the ‘Friend of AFCA’ would ensure fair representation of the advice sector, in situations where there is otherwise no-one left to speak on behalf of the advice given.

“By bridging this gap, the initiative promotes accountability while reducing systemic risks associated with unrepresented claims, ultimately benefiting consumers and the broader financial ecosystem.”

At the heart of the proposal is for both sides to be “presented and fairly represented” through the external dispute resolution process.

According to the FAAA, in many instances a financial firm entering administration or liquidation means there can be issues with “accessing management to answer questions or provide copies of client files that help to demonstrate what transpired”.

“Equally, during the consideration of the case, it is essential that preliminary findings can be challenged and the loss calculation methodology can be questioned,” it said.

“We are also aware of CSLR cases where financial advice was provided by someone who was not authorised to provide personal advice, however AFCA assessed it to be personal advice, which would enable payment by the CSLR.

“Whilst this is an issue in the design and funding of the CSLR, this demonstrates that some oversight of these assessments is needed.”

Implementing this role, the FAAA said, would go some way to addressing the imbalance of the financial advice profession being “blamed for poor consumer financial outcomes and expected to take responsibility”.

In August 2024, FAAA chief executive Sarah Abood had argued that nobody acting on behalf of an insolvent firms is a “core issue”.

“There’s no one saying, ‘Well, hang on a minute, here are all the reasons why we don’t believe that claim is fair and reasonable’,” Abood said.

While the administrator is appointed to sit in place of the AFSL in AFCA proceedings in cases such as these, Shail Singh, lead ombudsman, investments and advice at AFCA, conceded that “the reality is they sometimes do and will provide an explanation for the claim, and they sometimes don’t”.

“We do go to the administrator first and ask them if they have any comments. We try to get documentation from them, so we get a fuller understanding of what’s going on,” he said.

However, the main obligation of an administrator is to the creditors, which Abood said effectively puts them in the position of “acting on behalf of the client, rather than the firm that is being accused”.

“That’s something that is the case at the moment, but we’d like to see a change, and we would like to see the firm being explicitly represented by someone with the firm’s interest in mind, or the advisers’,” she said.

Singh added that the body has an “obligation to be fair to both parties”.

“In circumstances where a financial firm can’t respond or is unable to respond, we treat those matters extremely seriously, and we would put them before a panel of a consumer representative, a financial representative, and an ombudsman, to determine if we have enough information to satisfactorily decide whether the conduct was inappropriate and whether compensation is justifiable. But it is a much trickier situation to deal with,” he said.

‘Friend of CSLR’

The other role put forward by the FAAA is not to be an advocate of advisers but to hold those responsible for misconduct to account.

“In the short life of the CSLR, we have already observed a number of financial firms going into administration or liquidation, leaving clients exposed to a loss of investments and an inability to make a claim to recover the loss,” the FAAA said.

“The CSLR has provided a pathway for these clients to seek remediation, however this places the CSLR in a position where they need to then seek recovery from the firms where funds may be available or recovery action may be possible against the firm, directors or officers.

“This activity, including the resources to investigate the underlying conduct, is important in seeking to minimise the cost to those who would otherwise need to contribute to the cost of funding claims paid by the CSLR.”

However, the CSLR would need “additional powers” in order to take on this activity, as well as funding.

According to the FAAA submission, this activity would need to be “separately and appropriately funded” so it doesn’t add to the burden on advisers through the CSLR levy.

“We believe this role could be played by an entity established and funded by government as a ‘Friend of CSLR’,” the submission said.

“We seek government funding to support the establishment of a ‘Friend of AFCA’ and a ‘Friend of CSLR’ role.”