AFCA still exceeding jurisdiction on wholesale complaints
The Australian Financial Complaints Authority (AFCA) has received another warning about continuing instances of it accepting complaints from wholesale clients.
The Stockbrokers and Investments Advisers Association (SIAA) has used a submission to bluntly tell AFCA that it is acting beyond its jurisdiction and legislative mandate in seeking to handle complaints by wholesale clients.
The SIAA reminded AFCA that it had been warning it about the issue since at least 2018 and that AFCA should not have within its rules any discretion whatsoever to deal with wholesale complaints when this exceeds its legislative mandate.
“For some time, SIAA has expressed our members’ concerns about the extent to which AFCA accepts complaints from wholesale clients. SIAA’s view is that the exercise of jurisdiction to hear complaints from wholesale clients is not the basis upon which the EDR framework was legislated by Parliament and is an issue of fundamental unfairness to both member firms and other retail complainants accessing the EDR scheme.,” the SIAA submission said.
“That wealthy and sophisticated clients are able to avail themselves of a dispute resolution service that Parliament never intended to apply to them goes to the heart of the issue of fairness and to the concerns of our members.
“These concerns were outlined in our submission to AFCA dated 29 June 2018 in relation to the proposed AFCA rules as well as our comprehensive submission to the independent review dated 26 March 2021.”
“We do not intend to repeat our various 3 arguments concerning wholesale clients availing themselves of the AFCA complaints service. We have made these points many times in our regular bi-monthly stakeholder meetings with AFCA. We do however wish to emphasise the following points:
- What constitutes a retail client and a wholesale client is not subject to discretion. It is clearly set out in the Corporations Act.
- It is only in respect of retail clients that licensees have an obligation to have a dispute resolution system that includes membership of the AFCA scheme.
- Different provisions in the Corporations Act apply to clients depending on whether they are retail or wholesale. For example, financial advisers who advise wholesale clients are not subject to the best interest duty or statement of advice requirements. Nor are they subject to the Financial Adviser Code of Ethics or Education standards. This is because the Parliament has decided that wholesale clients don’t require the same consumer protections that are afforded retail clients.
- There are many features of the AFCA scheme that operate as strong incentives for wholesale clients to bring complaints against member firms in a way that is inherently unfair to those firms.
- It is not only unfair to member firms for AFCA to re-categorise a client from wholesale to retail, but runs counter to the legislative scheme underlying Chapter 7 of the Corporations Act. It is not uncommon for high-net-worth clients to follow higher risk strategies in the pursuit of higher returns (such as options trading, participation in initial public offerings or alternative investments etc), that are not open to retail clients. This is one of the features of being a wholesale client – they are able to avail themselves of a greater array of financial products and services than retail clients and in so doing may take greater risks, having the resources and/or sophistication to absorb and assess those increased risks.
- AFCA is meant to provide a mechanism for low-cost access to justice to consumers who may not otherwise have the resources to bring such complaints through other legal channels such as a court. Wholesale investors have the means to pursue complaints through the court system. It is not uncommon for wholesale investors who lodge a complaint with AFCA to have legal representation or retain legal advice, which shows such complainants are financially capable of undertaking court proceedings.
- The burden on the AFCA scheme from handling wholesale complaints also creates delays for legitimate retail participants of the AFCA scheme, increases the workload for AFCA adjudicators and significantly increases the funding requirements (recovered from member firms). • For some of our member firms, the majority of claims brought against them under the AFCA scheme have been from wholesale clients.
You do realise that AFCA is just a money grab win or lose they win every time.. it’s probably reasonable for anyone to know in advance that even if you WIN you will still pay up so it’s a numbers game!
The bigger issue here is the use of the “sophisticated investor” loophole to bypass the consumer protection mechanisms. I’ve seen some absolutely shocking recommendations dished out to so called “sophisticated investors” who may be rich, but are financially dumb. The 90’s set thresholds are woefully inadequate. It would be interesting to see how many of these AFCA complaints are upheld V dismissed. THAT’s the only fact relevant in this discussion.
This is the classic “end justifies the means” argument used to defend bureaucratic abuse of power. I agree with you that the current regulations around wholesale investors are weak and need to be tightened up. However this needs to happen via the political and legislative process. It is NOT OK for unelected bureaucrats to take the law into their own hands. It gives rise to counterproductive bias and persecution, as we have seen time and again from ASIC and AFCA. It ultimately undermines confidence and trust in the whole regulatory system.
Nothing new here. AFCA acting out of their remit. Notice AFCA were very vocal, almost dictating that licensees/advisers should still retain SOAs, as if AFCA are the ones setting the rules now, not what the QAR recommends. Advice complaints should be dealt with a seperate body, not AFCA.