All AFSL holders providing services to retail clients are required to be a member of the Australian Financial Complaints Authority (AFCA). If an AFCA determination is accepted by the consumer, it is automatically binding on the licensee. Actions by ASIC seeking to cancel an AFS licence due to a failure to comply with an AFCA determination are nothing new. However, as partner Selina Nutley explains, a recent Federal Court case shows ignoring an AFCA determination can not only lead to the loss of an AFS licence, but see the financial firm deemed insolvent.

Background

• NextGen Financial Group (NextGen) provided financial services to WJ & V Drakoulis Super (Drakoulis), the trustee of a self-managed super fund.
• Drakoulis complained to AFCA, alleging it had suffered loss because of inappropriate advice provided by NextGen.
• AFCA agreed with Drakoulis, and determined NextGen was required to pay Drakoulis $261,394.90 within 28 days.
• NextGen did not participate in the AFCA process and did not challenge the determination.

Cautionary tale 1: NextGen did not pay Drakoulis

NextGen didn’t pay Drakoulis within the 28 days. Drakoulis served a statutory demand on NextGen. The statutory demand process obliges a company to pay a debt due and owing within 21 days. If it does not, the company is presumed insolvent under the Corporations Act and can be wound up in liquidation. In this case, Drakoulis demanded payment of the determination amount, plus interest, putting the total owed at over $270,000.

Cautionary tale 2: AFCA determinations are enforceable by statutory demand

NextGen applied to the Federal Court to set aside the statutory demand, arguing the AFCA determination of itself could not be recovered by a statutory demand. NextGen essentially said Drakoulis needed to obtain an order from a court, and only then would a debt be due and owing.

The court found NextGen’s argument was untenable, and that it was clear the amount of the determination plus interest was due and payable by NextGen at the date of the statutory demand, even without a court order. The court readily dismissed NextGen’s application. It also ordered NextGen to pay Drakoulis’ costs on a full indemnity basis because the application should never have been brought. This is a relatively rare step by the court but demonstrates the judge’s clear view on NextGen’s conduct.

NextGen is now required to pay the amount claimed in the statutory demand or it will be deemed insolvent. If it doesn’t pay, Drakoulis will be able to pursue the liquidation of NextGen in a relatively straightforward fashion.

Key learnings

The overriding message of this case is that AFCA determinations are ignored at a licensee’s peril. Not only does failure to satisfy a determination give ASIC a clear basis for cancellation of an AFS licence, but:

• It may also lead to a loss of control of a company through the placement of it in the hands of liquidators.
• Liquidators are bound to investigate the reasons for the failure of a company, and directors may become indirectly liable for debts of the company, including AFCA determinations.
• Directors, officers, and responsible managers of licensees may also be exposed to regulatory action by ASIC, including banning orders.

What should licensees do when they receive an AFCA complaint?

Where licensees disagree with a complaint, or with AFCA’s treatment of it, it is essential they engage with the process in any case. You can read more about our key tips for dealing with AFCA complaints.

Our Funds Management and Litigation teams have extensive experience in dealing with AFCA. We encourage licensees treat AFCA complaints with caution from the outset, formulate a co-ordinated strategy, and reach out to us for assistance.