AFCA’s ‘but for’ CSLR approach in question

Removal of the Australian Financial Complaints Authority’s (AFCA’s) ‘but for’ approach to Compensation Scheme of Last Resort (CSLR) claims is being thrust to the top of the post-election agenda irrespective of which party ultimately wins office on Saturday.

While the Government has remained largely silent on the appropriateness of the ‘but for’ approach, the Federal Opposition has made clear that it must be altered and submissions to both a Senate Economics Committee review of the CSLR and those Treasury have similarly backed a different approach.

The Federal Opposition’s criticism has been reinforced by the Shadow Minister for Financial Services, Luke Howarth who has used a letter to the Association of Independently Owned Financial Professionals (AIOFP) to declare excluding ‘but for’ compensation as a Coalition priority.

Expressing deep concern at the cost impacts of the CSLR on financial advisers, Howarth said: “The CSLR has become a scheme which is guaranteeing investment performance rather than acting as a ‘last resort’. 80 per cent of CSLR claims are ‘but for’ compensation for the hypothetical gains. This is unacceptable and comes on top of the Albanese Government’s slow, botched implementation of the Quality of Advice Review reforms”.

Elsewhere in his letter Howarth said that a Coalition Government’s starting point for reducing costs to advisers would be:

• Reinstating the $10m annual subsector cap, which Labor doubled to $20m, to immediately reduce the next industry levy to a capped maximum of around $600, rather than the thousands itcurrently is;
• Excluding ‘but for’ compensation for hypothetical capital gains, which makes up around 80 per cent of CSLR complaints; and
• Not issuing any ‘special’ levies for this year.

Howarth’s letter accords with the tenor of submissions filed with the Senate Economics Reference Committee Review of Wealth Management Companies which specifically deals with the failings of the CSLR, with both the Financial Services Council (FSC) and the Financial Advice Association of Australia (FAAA) singling out the ‘but for problem’.

The FSC listed as its Recommendation 2 “scoping the CSLR to compensate victims for capital losses but not for unrealised, hypothetical capital gains. This would require AFCA to determine actual losses rather than applying “but for” compensation principles”.

Similarly, the Stockbrokers and Investments Advisers Association (SIAA) said it had “serious concerns about the way in which the ‘but for’ method has been used in the AFCA lead case for the Dixon Advisory matters”.

For its part, AFCA explained to the Senate Committee that In determining loss, AFCA does not award capital loss but rather applies the “but for” test i.e. “But for” the failure of advice, what would the consumer have invested in.

“This approach has been endorsed by the Courts in the case of Patterson Securities Ltd v FOS [2015] WASC 321. For example, if a consumer was incorrectly placed in a high growth asset allocation, and they were found to be incorrectly classified, AFCA will determine loss based on the returns they would have received had they been invested correctly.”