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Dealing with AFCA complaints—beware

June 2020

The wide jurisdiction of the Australian Financial Complaints Authority (AFCA), the 'one stop shop' for financial disputes, demands financial firms have strong compliance and complaints handling systems in place and treat AFCA complaints with caution.

Special counsel Selina Nutley explains how this significantly impacts the likes of fund managers and sets out some essential tips for formulating a coordinated strategy.

Key takeouts

  • An explosion of AFCA complaints has significantly increased the prospect of fund managers being scrutinised by AFCA.
  • Until 30 June 2020, AFCA can accept complaints about investments dating back to 1 January 2008.
  • There is limited scope to challenge AFCA determinations.
  • Treat AFCA complaints with caution from the outset and formulate a co-ordinated strategy.

Beware AFCA's increased jurisdiction

AFCA opened for business on 1 November 2018 with a wider jurisdiction than its predecessors. Australian Financial Services (AFS) licensees who provide financial services to retail clients must be members of AFCA. That obligation does not extend to licensees who only provide financial services to wholesale clients.

Importantly for fund managers, AFCA's increased jurisdiction means it can now consider complaints in relation to investments by wholesale clients up to $1 million. While licensees who provide only financial services to wholesale clients are not required to be members, they expose themselves to AFCA's extended jurisdiction where they use the same licence for both retail and wholesale activities. For example, where an advisory group has multiple licences and advises both wholesale and retail clients, it would be preferable to advise retail clients using one licence and wholesale clients from the other licence to eliminate the potential for wholesale clients to access AFCA.

Also, following the Hayne Royal Commission findings, AFCA has been bestowed with legacy jurisdiction and, until 30 June 2020, can accept complaints about investments dating back to 1 January 2008.

The combination of these two factors has seen an explosion of complaints, vastly increasing the prospect of fund managers being scrutinised by AFCA.

AFCA does not have jurisdiction to hear complaints about the performance of financial products, but many complaints manifest themselves as complaints about misleading and deceptive conduct, or non-disclosure, which do fall within its jurisdiction. One lesser known aspect of AFCA's jurisdiction
is its ability to investigate 'systemic issues' in a licensee's conduct, and then report that conduct to regulators (such as ASIC, APRA or the ATO). While what are systemic issues will obviously be very circumstance driven, an example might be where AFCA finds a PDS or IM issued to a complainant was misleading and may have misled other investors who have not complained. In addition to notifying regulators, AFCA can require a licensee to send a letter to all affected investors (even those who have not complained to AFCA), publish advertisements in newsletters to promote contact with affected investors, and agree a compensation regime.

In many ways these powers mirror those already available to ASIC, and it remains to be seen whether AFCA will ultimately seek to exercise those powers or leave it to ASIC. In either case, it reinforces the need to have strong compliance systems throughout the entire life cycle of an investment, but particularly in the product development phase when offer documents are being prepared.

Challenging decisions made by AFCA

Another commonly misunderstood issue is the ability for licensees to challenge decisions made by AFCA. A licensee must accept a final determination of the dispute based on AFCA's opinion of what is fair in the circumstances. 

Recent challenges to AFCA's decisions in the Supreme Court of Queensland and the Federal Court of Australia have both failed. The Supreme Court of Queensland concluded a determination by AFCA can only be set aside where—

  • no reasonable tribunal could have properly come to it on the evidence
  • it is inconsistent with AFCA's rules
  • it is the result of bad faith, bias, fraud or dishonestly, or is the product of the breach of the rules of natural justice, or
  • the AFCA decision maker misconceived the task required.

Essential tips for dealing with AFCA complaints

It is clear AFCA has a very broad discretion in making determinations, and those determinations are subject to limited challenge. Its powers now extend far beyond the reach of just one isolated complaint into a broader oversight role. For these reasons, it is very important AFCA complaints are treated with the appropriate degree of seriousness from the outset, and a coordinated strategy formulated.

Here are some practical tips to assist you to deal with AFCA complaints:

  1. Ensure the dates a party acts as authorised representative under an AFSL are correctly recorded in ASIC's register.
  2. Thoroughly examine the complaint immediately on receipt to ensure it falls within AFCA's subject matter and monetary jurisdiction. 
  3. Obtain all relevant records from authorised representatives as soon as the complaint is received.
  4. Consider whether the complaint may reveal any systemic issues. If so, develop a coordinated strategy for dealing with those issues at an early stage.
  5. Wherever possible, provide services to wholesale and retail clients via separate licences.

How can we help?

We encourage you to contact us about how you can best meet AFCA's expectations and requirements and to deal with any complaints. Our experience in developing compliance and risk solutions for fund managers ensures we are well-placed to help you address and mitigate any potential issues.