‘Flawed business models’ to blame for CSLR blowout: AFCA

Amid increasing criticism of AFCA’s role in the ever-increasing cost of the Compensation Scheme of Last Resort (CSLR), Shail Singh, lead ombudsman, investments and advice, has emphasised that “ultimately, the main driver of the cost of the scheme is flawed business models leading to consumer complaints”.

During AFCA’s member forum last month, Alexandra Sidoti, senior ombudsman – investments and advice, said that too often, advice firms were recommending SMSFs to get clients into a conflicted product.

“Complaint volume is the main thing that flows through to costs of the CSLR and the big things that we’re seeing both for CSLR complaints, actually, and our business-as-usual complaints, are conflicted advice models and SMSFs,” Sidoti said.

Echoing these findings, Singh said these issues were “the most prevalent issues behind complaints that then lead to CSLR claims”.

“In 2024, one in five of the complaints we received in investments and advice alleged failure by the adviser to act in their client’s best interest or to provide appropriate advice,” he added.

Despite the financial services royal commission putting a spotlight on conflicted advice, Singh said it remains a “prominent” cause of financial advice complaints.

“We have observed troubling behaviour where some advisers recommend products based on incentives rather than what is in the best interests of the client.”

“To put it simply, instead of finding a product for the client, some advisers are finding clients for a product.”

The complaints authority once again highlighted SMSFs as an area of concern, with some advisers recommending them “primarily as a way to direct client funds into in-house investment products”.

“Instead of a thorough assessment of whether an SMSF is suitable for the client, the goal is to facilitate a particular investment,” Singh said.

“Let’s be clear: SMSFs are not inherently problematic. For many investors, they can be an appropriate vehicle for managing retirement savings. However, an issue arises when SMSFs are recommended not for their benefits but as a mechanism to move client funds into high-risk or conflicted products.”

He also pointed to a worrying trend of cold-calling tactics being employed to drive unsuspecting consumers into these conflicted environments.

“AFCA has seen cases where individuals have been contacted by call centres, often after submitting their details online to secure a superannuation ‘comparison’,” Singh said.

“These calls are typically from unlicensed representatives who persuade consumers to switch to an SMSF and invest in a specific product. While AFCA can’t consider the actions of unlicensed entities, consumers are then referred to a financial adviser who formalises the transaction.

“Again, the aim is to lead consumers into an investment that benefits the firm rather than the client.”

A recurring theme in criticisms of AFCA as it relates to the CSLR surround advisers being on the hook for product failures, rather than advice failures – a claim the complaints authority has consistently refuted.

“A product failure is never a good thing. It’s not good for the financial firm. It’s not good for the consumer,” Sidoti said at the member forum.

“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.”

Product failures, Singh said, “only result in adviser liability” in instances where the advice itself was flawed.

“We have seen in numerous complaints 50, 60, 70 or even 100 per cent of a client’s funds being directed to a single investment. At that level of exposure, the failure of a single product can be catastrophic for consumers.”

“We don’t expect advisers to have a crystal ball, but we do expect them to follow sound financial planning principles.

“In the past, we saw this with SMSFs investing in a single property, often with a kickback to the adviser. This lack of diversification is playing out again today with high concentrations in unlisted or high-risk investment schemes.”

The ombudsman stressed that the financial advice sector played a “crucial role” in protecting consumers, adding that it was “important that consumers have access to competent advice”.

“While most advisers act in their clients’ best interests, problematic business models – particularly those involving conflicted advice, misuse of SMSFs and aggressive sales tactics – continue to drive complaints to AFCA, potentially feeding through to CSLR claims,” Singh said.

“Advisers are concerned about the cost to them of the CSLR, while consumers are concerned about access to fair compensation when they have been the victims of misconduct. From our perspective as dispute resolution specialists, we can see that the ‘win-win’ is to prevent complaints in the first place.”