Morgan’s Presentation - DRAFT

Phil Anderson, General Manager, Policy & Professionalism

WELCOME

Today’s webinar • 1 Hour CPD available – AFA will send details within the next week.

• As a webinar attendee you are on ‘mute’ during the webinar

• Questions will be answered at the end of the presentation. Please use the Zoom QA function (not the Chat function) to ask your question.

Shail Singh, Ombudsman

AFA PresentationTips and Tricks for dealing with AFCA10 December

Australian Financial Complaints Authority Slide 4

Investments & Advice

AFCA General

Our Decision Makers

Complaint Statistics

Case Studies

10 Ten Tips

AFCA - general


Who we are

Responsibilities

Our responsibilities include:

> resolving complaints

> identifying systemic issues and working with financial firms to resolve them

> supporting regulators by reporting certain matters to them

> promoting awareness of AFCA – including discussion of approach

Slide 7

AFCA’s role in complaint resolution> In everyone’s interest to have matters resolved

quickly.

> Three way discussion / get parties talking.

> AFCA can:

‒ act as a circuit breaker and help to build trust with customers

‒ identify and focus on the real issues

‒ provide an independent view based on fairness

‒ be flexible and adaptable to meet parties needs

The complaint resolution process


Page 9

General approach to complaints When determining any complaint (other than a superannuation complaint) AFCA must do what is fair in all the circumstances having regard to:

> legal principles

> applicable industry codes or guidance

> good industry practice and

> previous relevant determinations of AFCA or predecessor schemes.

What you can expect from AFCA

Australian Financial Complaints Authority

What we will do

> Independent review of issues and merits of the complaint.

> Experienced complaint resolution staff with industry knowledge.

> Respectful engagement from our staff who will listen to your queries and concerns.

> Regular telephone contact.

> Targeted requests for information to ensure we understand your perspective and position.

> A flexible and adaptable complaint resolution model.

Slide 10

What we expect from our members


What you will do

> Active engagement with the AFCA process.

> Work with us to resolve complaints, including

‒ Participation with complaint resolution methods such as conciliation

‒ Open and honest communication

‒ Negotiate in good faith

‒ Provide all relevant information in a timely manner

> Abide by the Rules and the Constitution.

Slide 11


Principles underpinning our process> Fairness

> Natural Justice

> Accessibility

> Engender trust

> Simplicity

> Consistency with flexibility

> Timeliness

> Efficiency

> Transparency

> Effective engagement

Our Decision Makers


Who are we?

Complaint statistics

AFCA Overall - The last 12 months1 October 2019 to 30 September 2020

Slide 16

41%

25%

9%

9%

6%

6%

2% 2%

Complaints received by product line

Credit

General Insurance

Deposit Taking

Superannuation

Payment Systems

Investments

Life Insurance

Other

80,833 complaints received

As at 30 September 2020

79% have been closed

1 One complaint can have multiple product lines.

27,922

16,390

9,801

4,5982,486

Bank

Gen

era

l in

sure

r

Cre

dit p

rovid

er

Supe

rann

uatio

n f

un

dtr

uste

e o

r ad

vis

or

Debt co

llecto

ror

buye

r

Complaints received by top 5 financial firm types

Complaints received


Investments and advice

1/10/2019

1/11/2019

1/12/2019

1/01/2020

1/02/2020

1/03/2020

1/04/2020

1/05/2020

1/06/2020

1/07/2020

1/08/2020

1/09/2020

Total

Investment complaints 313 623 330 336 222 326 365 408 555 451 361 305 4,595

313

623

330 336

222

326

365

408

555

451

361

305

0

100

200

300

400

500

600

700

1/10/2019 1/11/2019 1/12/2019 1/01/2020 1/02/2020 1/03/2020 1/04/2020 1/05/2020 1/06/2020 1/07/2020 1/08/2020 1/09/2020

I&A Complaints - product and industryFrom October 2019 to September 2020

4,595 Investment & Advice complaints received

Top 5 products Total

Shares 669

Foreign Exchange 633

Superannuation Fund 424

Mixed Asset Fund/s 388

Property Funds 379

Top 5 industry types Total

Financial advisor / planner 962

Derivatives dealer 607

MIS operator / fund manager 585

Stockbroker 488

Bank 435

Most common I&A complaints1 October 2019 to 30 September 2020


Issue Total

Misleading product/service information 781

Inappropriate advice 556

Failure to act in client's best interests 508

Service quality 459

Failure to follow instructions/agreement 397

Investments2,701

complaints

Complaints received and Top 5 issue types

Accepted complaints and non-response rateInvestments and advice


1/10/20

19

1/11/201

9

1/12/20

19

1/01/20

20

1/02/20

20

1/03/20

20

1/04/20

20

1/05/20

20

1/06/20

20

1/07/20

20

1/08/20

20

1/09/20

20

Total

No response

received

91 58 33 103 119 63 54 40 82 54 134 54 885

Response received 136 182 498 121 149 118 151 158 230 263 246 206 2,458

Total accepted

complaints

227 240 531 224 268 181 205 198 312 317 380 260 3,343

% of no response 40% 24% 6% 46% 44% 35% 26% 20% 26% 17% 35% 21% 26%

At what part of the process did they close?

Slide 4* AFCA and FOS

4,423 Investment & Advice

complaints closed*

Status %

Registration 26%

Case management 54%

Preliminary assessment 9%

Decision 11%

Complaints closed by outcome


Investments and advice – October 2019 to September 2020

Outcome Number Percentage

Outside Rules 1,427 32%

Resolved by FF 1,135 26%

Negotiation 631 14%

Discontinued 458 10%

Decision in Favour of complainant 246 6%

Decision in Favour of FF 207 5%

PreliminaryAssessment in Favour of FF 111 3%

PreliminaryAssessment in Favour of complainant 98 2%

Conciliation 85 2%

Assessment 17 0%

Outside Terms of Reference 7 0%

Determination Trustee decision substituted 1 0%

Total 4,423 100%

Focus area: complaints about financial advice

Top 5 products Total

Superannuation Fund 263

Self-managed superannuation fund169

Mixed Asset Fund/s 163

Shares 70

Income Protection 47

Top 5 Issues Total

Inappropriate Advice 342

Failure to act in client’s best

interests304

Incorrect fees/ costs 158

Failure to provide advice 5

Misleading Product/ Service

Information73

1,213 Financial Advice

complaints received

Slide 23

Financial Advice complaints – what was the outcome?

Outcome Number %

Resolved by financial firm 301 25%

Outside Rules 1 0%

Negotiation 302 25%

Discontinued 136 11%

Decision in favour of complainant 97 8%

Decision in favour of financial firm 60 5%

Outside Terms of Reference 1 0%

Preliminary assessment in favour of complainant 71 6%

Conciliation 44 4%

Preliminary assessment in favour of financial firm 39 3%

Assessment 5 0%

Total 1,213

Slide 24


The AFCA Engagement Charter

Whilst we provide some information in our Operational Guidelines as to how we expect parties to engage with EDR we think that we should provide more detail on the following principles

That the parties will engage with each other and with AFCA in a way that is:

• transparent and honest

• respectful and fair

• in good faith and with “clean hands”

• efficiently

• co-operative and reasonable with a common goal to resolve the complaint.

COVID-19


COVID-19 approach

> AFCA worked closely with the Government, regulators, peak bodies, consumer groups and our members to respond proactively to the challenges of COVID-19.

> Where appropriate, we have modified our existing approaches and outcomes (e.g. to extend time for property sales).

> We extended some of our timeframes temporarily

> We provided factsheets and information


COVID-19 complaints

Open and closed complaints by product

Product Total Open Closed

Total 8356 2020 6336

Banking and Finance

(including Financial Difficulty)

3697 924 2773

Financial Difficulty 1589 364 1225

General Insurance

(including Travel insurance)

3414 834 2580

Travel insurance 2895 606 2289

Superannuation 1059 177 882

Life insurance 77 31 46

Investments and Advice 114 60 54

Case studies

Best interest duty

Obligations

Obligation Section 945A Best Interests Best Interests and Code of Ethics

Prior to 1 July 2013 1 Jul 2013 to 1 Jan 2020 1 January 2020 onwards

Know your product Y Y Y

Know your client Y Y Y

Provide Appropriate Advice

Y Y Y

Taken any other stepat the time the adviceis provided that is in the best interests of the client

Y Y

Code of Ethics Y


Scenario 1 Retail/ Wholesale

> John says the Financial Firm gave him misleading information about initial public offerings.

> He is seeking compensation of $1.7 million

> Qualified accountant’s certificate said that he held assets of $2.5 million (but not the SMSF or his trustee)

Slide 31

Certificate

I / We understand that for the purpose of being classified as a ‘sophisticated investor’:

the legal entities listed in the accountant’s certificate (emphasis added) will be eligible to invest in boutique Sophisticated Investment offerings that arise from time to time. These offerings are not made pursuant to a disclosure documents and you, as a sophisticated investor client (sic) must make your own assessment on the merits, value and risks of any investment in these types of offerings.

‘Sophisticated investors’ are exempt from normal disclosure requirements necessary to the provision of financial services of financial products (sic). These include various disclosure documents including but not limited to Disclosure Documents, Financial Services Guides, Statements of Advice and Product Disclosure Statements.

…”

Slide 32

The complaint

The complainant describes the circumstances in which he signed the SIA as follows:

“6.The sophisticated investor form I was told

1) that it gives me access to all the good and profitable deals not available to the ordinary investor.

2)this is where the real money is made

3)Do not bother with the details of the form just sign and get it back to [name] asap so we can make some real money

4)This is just a standard form they everyone users.” [Quoted verbatim]

Slide 33

ASIC Guidance MR 14 – 191

‘Where the financial service relates to a superannuation product, a trustee of a SMSF will be classified as a retail client under the Corporations Act unless the fund holds net assets of at least $10 million at the time the service is provided.

If a financial service does not relate to a superannuation product, the general test for determining whether the trustee is a retail or wholesale client applies under the Corporations Act. Under the general test the circumstances in which the trustee will be a wholesale client include if the trustee has a certificate from a qualified accountant stating they have net assets of $2.5 million or if the value of the investment is at least $500,000.’

Slide 34

MR 14 – 191

ASIC’s revised approach

ASIC's revised approach means that, for example, where the trustee of an existing superannuation fund receives advice about how to invest the fund’s assets, ASIC will not take action if the person providing the advice determines whether the trustee is a wholesale client based on the general test mentioned above (e.g. if the trustee has net assets of at least $2.5 million), rather than applying the higher $10 million net asset test. ASIC will adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund.

…

Although ASIC will not take action where such financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test), this will not affect any private rights of action that may be available to third parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks.”

Slide 35

Decision

The financial firm cannot rely on the Sophisticated Investor Acknowledgement

I am satisfied that:

the complainant didn’t read the SIA as he was informed, and reasonably believed, the document to be a “standard form … everyone uses”

the adviser didn’t explain the consequences of the complainant signing the form,

the complainant was unaware of the consequences of signing the form

the complainant wasn’t given adequate time to consider the SIA before signing it.

Slide 36

Loss

The complainant has “cherry-picked” losing trades

The complainant has only complained about losing trades recommended to his SMSF by the financial firm’s adviser, including shares in DSH, SGH, ECG, SRI and NST. On this basis, the complainant has calculated the SMSF’s loss as $1,702,500. This is referred to as “cherry-picking”.

The problem with “cherry-picking” loss making trades is that it ignores the profitable trades and, therefore, the overall performance of the portfolio. It is for this reason that AFCA will usually take a portfolio-wide view on calculating loss.

Slide 37

Loss

The loss is the actual portfolio performance against an appropriate portfolio

In the circumstances, it is fair to measure the loss by comparing the actual performance of the SMSF’s portfolio with the estimated performance of an appropriate portfolio (ie, a portfolio that would have been in place had the adviser performed the services set out in the Client Service Agreement) during the period commencing 24 July 2014 up to, and including, 20 December 2016.

The 24 July 2014 and 20 December 2016 dates are, respectively, the date the complainant’s SMSF commenced as a client of the financial firm and the date the complainant’s SMSF ceased as a client of the financial firm.

I consider the appropriate advice would have been for the SMSF’s portfolio to have been more conservatively invested in a basket of S&P ASX 200 shares.

Slide 38

Case Study 2

> Couple with 2 young children seeks financial advice.

> One is working limited hours while raising the children, but has full time earning potential of about $115k.

> The other earns $115k plus overtime. They have a combined $131k in super and are in the process of selling an investment property worth $1 million.

Slide 39

Case Study 2

> Their key objectives are:

Short term - to purchase a family home with an

anticipated purchase price of $1.6 million.

Medium term - to build superannuation

Longer term may be interested in purchasing an

additional property.

Slide 40


Case Study 2 Advice

The adviser recommended that after the sale of the investment property the couple

should:

• direct $50,000 of the sale proceeds to their superannuation as a non-concessional contribution

• direct the remaining proceeds to the new home purchase• establish an SMSF• rollover their most of their existing superannuation to the SMSF • Borrow within the SMSF to purchase an investment property up to $450,000

borrowing 70% of the purchase price• retain remaining SMSF funds in an offset account for future investment

opportunities.


Case Study 2Related company involvement

The financial firm is part of a group of companies that includes a real estate agency.

The advice emphasises the importance of property selection to the strategy and

refers the couple to the realty arm. The realty arm works with the adviser and the

couple to provide a property recommendation to align with the SOA. The real estate

agency received a 6.6% commission on the property sale.


AFCA must have regard to industry codes

When determining any other complaint, the AFCA Decision Maker must do what the AFCA Decision Maker considers is fair in all the circumstances having regard to:

a) Legal principles, b) Applicable industry codes or guidance, c) Good Industry Practice andd) Previous relevant determinations of AFCA or Predecessor Schemes.

This means that AFCA will consider the FASEA Code of Ethics for adviser’s conduct from 1 January 2020. The code covers standards of ethical behaviour, client care, quality process and professional commitment.

AFCA role is not to enforce the code, but we must have regard to it in our decision making. Breaches could result in non-financial loss awards.


Legislative Basis for the Code

Section 921E of the Act requires all relevant providers (as defined in section 910A of the Act) to comply with the Code of Ethics made by FASEA under paragraph 921U (2)(b) of the Act.

Mandatory from 1 January 2020.

Code is a legislative instrument and forms part of the law.

Importantly, the Code is principles based rather than a checklist. The Code requires relevant providers to exercise their professional judgement in the best interests of their client guided by the values and standards of the Code.


It’s a Values Based Code The legislative instrument states:

“Collectively, financial planers and advisers are members of Australia’s newest profession. As such, while they formerly provided a commercial services, they should be committed to offering a professional service – informed by a c ode of ethics intended to shape every aspect of their professional conduct.”

It is a values based code and advisers must always act in a way that demonstrates, realises and promotes the following values:(a) Trustworthiness(b) Competence(c) Honesty(d) Fairness(e) Diligence

12 Ethical Standards

> Comply with the law

> Act with integrity

> Avoid conflicts of interest

> Client must give informed consent

> Appropriate advice / client must understand the advice

> Take into account broad effects of advice

> Fees represent value for money

> Accurate record keeping

> Act in good faith (not mislead / deceive)

> Maintain knowledge and skills

> Co-operate with ASIC and monitoring bodies

> Uphold ethical standards of the profession

Ethical behaviour

Client care

Quality process

Professional commitment

Slide 46

AFCA’s approach to the FASEA Code

AFCA will only assess adviser conduct against the Code where the conduct has occurred after 1 January 2020

AFCA will take a measured and considered approach to interpreting the Code’s provisions by giving the Code its practical meaning taking into account:

> The intentions and objectives of the Code

> The current environment that the Code operates

> FASEA’s guidance (New Guidance released in October)

> ASIC’s expectations (facilitate approach particularly with regard to standards 3 and 7)

> No code monitoring body as yet.

Slide 47

Relevant Provisions of the Code

> Standard 2 – You must act with integrity and in the best interests of each of your clients.

> Standard 3 - You must not advise, refer or act in any other manner where you have a conflict of interest or duty.

> Standard 5 – All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.

Slide 48Australian Financial Complaints Authority

Relevant Provisions of the Code

> Standard 6 – You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances

> Standard 7 – The client must give free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged.

> Standard 9 – All advice you give, and all products you recommend, to a client must be offered in good faith and with competence and be neither misleading or deceptive.


Case Study 2 - Issues

> Is this a conflict of interest?

> Does disclosure fix the problem?

> Is the adviser allowed to recommend property from which a related entity profits?

> Is advice in the best interests of the complainant?

Slide 50

Top 10 Tips

Page 52

Top 10 tips for financial advisers

1. Take detailed file notes

2. Clear goals and strategy

> Eg. to retire at 65 on an income of $50,000 pa, not just “wealth creation” or “capital security”

> How will the recommended strategy achieve the goals and objectives?

3. Turn clients away when appropriate

> If you don’t offer the product or have the requisite expertise

> Consider carefully how to proceed if clients are seeking a return that does not match their risk profile

Page 53


4. Explain the risks

> Especially for clients who want to act against your advice

> Test the understanding / sensitivity testing

> Explain the risk / reward trade off

5. Explain what types of services you are providing

> General, personal advice and scaled advice (reasonable attempts to obtain information)

> Execution only

> One off or ongoing advice, fees

Page 54


6. Use templates carefully

> Errors, irrelevant references, reflect a lack of care and diligence

> Don’t use cookie cutter SOAs

7. Use risk profiling tools carefully

> Consider inconsistencies in answers provided

> Consider the client as a whole

> Don’t amend the risk profile lightly

8. Super switching and SMSFs

> Need good reasons to recommend a switch

> Need compelling reasons to recommend an SMSF, especially where the account balance is low

> Set out alternatives

Page 55


9. Understand and explain the products

> Don’t cut and paste from the PDS

10. Be clear about the advice relationship with clients you know

> Treat the person as you would another client

> Declare any conflicts

Wrap up and Questions

AFCA contact details

> Website: www.afca.org.au

> Email: [email protected]

> Telephone: 1800 931 678

> Address: GPO Box 3, Melbourne VIC 3001

AFCA membership contacts

> Telephone: 1300 56 55 62

> Email: [email protected]

> Secure services: www.afca.org.au/members


@AustralianFinancialComplaintsAuthority

AFCA_org_au


Follow us on social media

Thank you

Access to webinar content

• Today’s webinar recording and presentation slides will be uploaded to afa.asn.au

• All registrants will receive an email confirming when available

• Get in touch at [email protected] if you have any questions

Thank you for joining us today

mailto:[email protected]