AFCA urged to align with ASIC on CSLR advice definitions

The Australian Financial Complaints Authority (AFCA) needs to get its classification of financial advice issues in order to ensure financial advisers are not unduly burdened by the cost of the Compensation Scheme of Last Resort, according to the Financial Advice Association of Australia (FAAA).

The FAAA has told AFCA that it needs to undertake a review of its complaints classification system in circumstances where it differs from that used by the Australian Securities and Investments Commission (ASIC).

“The use of different definitions and language by different oversight bodies (that is, ASIC’s FAR listing and AFCA product classification system) creates confusion for both consumers and industry,” the FAAA has said in a submission filed with AFCA this week.

“For example, the wording in the Proposed Operation Guidelines refers to investment advice, superannuation advice, advice and financial advice,” it said.

“Consistency is key to enhancing consumer understanding and navigation of Australia’s complex financial system and the protections within it. Adopting the existing financial advice definitions commonly used within the industry (processes and systems) and by ASIC can assist with simplifying the system for consumers, government and industry.”

It said the issue of AFCA’s complaint categorisation had become critical with the pending establishment of and proposed model for the Compensation Scheme of Last Resort (CSLR).

“The following three Bills to establish a CSLR are currently before Parliament:

• Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 (the TLAB Bill) • Financial Services Compensation Scheme of Last Resort Levy Bill 2023 (the Levy Bill)
• Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2023 (the Collection Bill).

Under the legislation, the CSLR will provide compensation to consumers as a last resort when AFCA has made a determination in favour of the consumer and the financial institution has not paid in accordance with the AFCA determination (typically because of insolvency). The limited scope of the proposed scheme means the CSLR will only apply to unpaid AFCA determinations involving financial misconduct in relation to the following four types of financial products and services:

• personal advice on relevant financial products to retail clients;
• credit intermediation; • securities dealing for retail clients; and
• credit provision.

“Complaint classification that is unclear and inconsistent with consumer and industry understanding and expectations, and other regulatory categorisations, will impact the effectiveness of the CSLR.

“The FAAA recommends AFCA undertake a review of its complaints classification system. We suggest the classification included in the ASIC Cost Recovery model and include specific and separate complaint classifications for financial advice should be considered. This should include separate categories for personal financial advice and general financial advice. This will ensure that a complaint about a product provider who is authorised to provide general advice will be appropriately categorised, even in instances where personal advice is provided outside the authorisation or the licensee.”