‘Recovering our costs and no more’: AFCA rejects fee explosion claims

The Australian Financial Complaints Authority’s (AFCA) chief operating officer, Justin Untersteiner, has told ifa the body is simply recovering the cost of its work.

“The CSLR legislation governs the recovery of costs by AFCA for work related to cases that may be eligible for the Compensation Scheme of Last Resort (CSLR),” Untersteiner said.

“Consistent with the CSLR legislation, and with AFCA’s status as a not-for-profit organisation, we are recovering our costs and no more for this work.”

AFCA has come under considerable fire as the cost of funding the CSLR rapidly expands.

The news that advisers are potentially on the hook for a $70 million bill in 2025–26, according to the CSLR’s estimated levy for the period, has seen anger directed not just at the government for the construction of the scheme or Dixon Advisory and United Global Capital (UGC) as the major contributors to client claims, but also at AFCA.

Fee blowout concerns

The latest major point of contention related to AFCA and the CSLR is the amount that financial advisers are being billed for the determinations being made.

In the actuarial report breaking down the CSLR’s estimate of the costs for the third levy period, it showed that AFCA’s fees for processing UGC and Dixon complaints ($3.6 million and $3.2 million, respectively) is higher than the $2.77 million attributed to all other financial advice claims.

Combined, AFCA fees account for $8 million of the $70.11 million attributed to financial advice, while CSLR costs make up $2.39 million and the Australian Securities and Investments Commission costs are estimated at $625,000.

Earlier this week, Financial Advice Association Australia (FAAA) general manager for policy, advocacy and standards Phil Anderson explained that the cost of AFCA processing the claims is set to grow, based on the CSLR actuarial report.

“The report estimates that the cost of AFCA processing each claim will increase substantially from an estimate of around $12,450 in the 2024–25 estimate to $21,334 per claim in the 2025–26 year,” Anderson said.

“This is a huge increase and one that AFCA is yet to publicly respond to. This is really bad news for financial advice if it turns out to be correct. Not only will the advice profession need to pay for the AFCA fees for all the post-CSLR Dixon Advisory cases, all the UGC cases and any other financial advice cases; if this significant jump in AFCA fees occurs, then it puts the pre-CSLR total cost at risk.”

According to Untersteiner, these figures are simply CSLR projections based on its assumptions, including about the “cost of AFCA determinations that are yet to be finalised”.

Although he did not provide any specifics on what AFCA expects the cost per claim will be, the complaints authority’s estimate is “much lower”.

“Estimates made by the CSLR are a matter for the CSLR, however, our estimate of the cost per determination for the period in question is much lower than the assumption in the report,” he told ifa.

The CSLR’s actuarial report claims that despite the initial estimate for the second levy period, FY2024–25, pegging AFCA’s fees at around $12,100 per complaint, this is not what has transpired.

“The experience to date suggests an AFCA fee of around $20,713 per determination, significantly higher than initial indications,” the report said.

The CSLR used this experience, coupled with an expected 3 per cent indexation of AFCA’s fee structure, to estimate an increase to $21,334 per claim.

“The average AFCA cost per complaint may be higher or lower than the recent experience, depending on the complexity of complaints and the effort needed by AFCA to make its determinations for those complaints,” the report said.

According to Untersteiner, AFCA’s aim is that it will “develop further efficiencies of scale that will lead to lower costs per complaint” as it progresses through its work on the determinations.

“We are confident this will happen,” he said.

“We are aware of the industry’s wish to keep the costs of the CSLR to a minimum but also that the industry has called for these complex matters to be addressed in a rigorous and robust way. We continue to balance those considerations.”

‘But for’ still gaining traction

Much has been made of the so-called “but for” approach, which CSLR chief executive David Berry revealed on an ifa webinar in November saw around just 20 per cent of claims making it to the CSLR involving an actual capital loss.

He added that for the 80 per cent that include what he termed a “hypothetical loss”, AFCA calculates whether, because of poor advice, the complainant “didn’t get the return that they would have had they got good advice”.

The push to exclude the “but for” portion from the CSLR has been ongoing for months and featured prominently in many submissions to the Senate’s Dixon inquiry.

AFCA has previously defended the use of the “but for” approach, highlighting that the standard actually predates AFCA’s existence.

Namely, the Supreme Court of Western Australia ruled in favour of the approach back in 2015, when Patersons Securities launched action against the Financial Ombudsman Service.

However, FAAA CEO Sarah Abood late last year said that while AFCA’s methodology is not new, how it interacts with the CSLR is.

“I think, certainly from our perspective, it seems completely unfair, but also obviously unsustainable,” she said.

“That a compensation scheme of last resort should be paying, basically an income guarantee to those clients. 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.”

The outcry has made inroads, with Financial Services Minister Stephen Jones addressing the concerns, acknowledging that the CSLR is “not about guaranteeing investment returns”.

Shadow minister Luke Howarth also reiterated his concerns in an address to the SMSF Association national conference in Melbourne on Thursday, saying the “issue sits squarely with how AFCA makes its assessments”.

“The scheme isn’t a ‘last resort’ anymore, it is guaranteeing investment performance,” Howarth told the conference, adding that “We need to limit or filter out these ‘but for’ claims when it is the CSLR footing the bill.”

As ifa previously reported, there is an expectation that far fewer UGC determinations are likely to be comprised solely of these hypothetical capital gains.

While the limited number of published determinations means it is too early for any solid conclusions on the total make-up of the claims, the large investment amounts and shorter time frame of investment compared with Dixon clients are critical factors in how effective excluding the “but for” component would be in reducing the levy on advisers.