Advisers can be liable to pay for bad advice following AFCA ruling

Leading SMSF lawyer Daniel Butler, director of DBA Lawyers, said the NextGen decision confirms SMSFs have a ready means to seek compensation where they suffer loss resulting from inappropriate investment or financial advice.

Therefore, AFCA can provide a free and convenient complaints system.

Mr Butler said in this case, the SMSF trustee acted on financial advice received from NextGen Financial Group Pty Ltd to establish an SMSF to purchase a residential investment property. “However, the funds were instead invested in a fund that was wound up, which meant the property transaction could not proceed,” he said.

AFCA determined NextGen owed the SMSF the sum of $270,523.67 in relation to its investment loss including interest of $9,128.77.

NextGen did not respond to the AFCA complaint, nor did it seek to dispute the debt in the AFCA proceedings.

The SMSF issued a statutory demand requesting NextGen pay the sum of $270,523.67 as a result of the AFCA determination plus interest accrued from that date.

“The statutory demand was issued as a precursor to entitle the SMSF to issue winding-up proceedings against NextGen if the debt was not paid,” Mr Butler said.

NextGen sought to set aside the SMSF’s statutory demand on the grounds that an AFCA determination does not have the effect of creating a debt enforceable by way of a statutory demand.

NextGen unsuccessfully argued a court order was required to confirm the amount of the debt.

“While AFCA is the complaints system for large Australian Prudential Regulation Authorit funds it also hears certain SMSF complaints,” Mr Butler said.

“AFCA can consider complaints relating to investment or financial advice from financial firms, including complaints from SMSF trustees.”

The types of investment and financial advice complaints AFCA considers include derivatives and hedging; managed investments; securities; and real property.

He said AFCA regularly receives complaints from individuals who have received advice to establish an SMSF and subsequent investment decisions of the SMSF especially if the SMSF was not suitable for the members.

“Some complaints have involved an SMSF being established where the SMSF acquired real estate under a limited recourse borrowing arrangement (LRBA) that resulted in a significant loss,” Mr Butler said.

“Other complaints by SMSF trustees relate to investment and financial advice under AFCA’s investments and advice jurisdiction.”

Both the Corporations Act and AFCA’s own rules helped determine the court’s ruling and Mr Butler said it is a warning to advisers they should treat complaints seriously as AFCA can, subject to certain qualifications, hear complaints up to $1 million.

He explained that under The Corporations Act 2001 Section 912A(1)(g), if a financial services licensee provides services to retail clients, the licensee must have a dispute resolution system which complies with s 912A(2).

“Section 912A(2) provides that the licensee must have an internal dispute resolution procedure and have “membership of the AFCA scheme,” he said.

AFCA provides a dispute resolution procedure that seeks to resolve complaints made against members of the scheme such as financial advisers and complainants.

“The relevant cause of action is in contract law and financial advisers that are members of AFCA are bound by the AFCA Rules,” Mr Butler said.

The AFCA Rules provide, among other things, the following:

• The scheme is free of charge for complainants and complainants do not need legal or other paid representation (rule A.1.3).
• A determination is binding upon the parties to the dispute once accepted by the complainant (rule A.15.3).
• If a complainant rejects a determination, they can pursue other legal avenues such as the courts (rule A.15.4).

“In short, an SMSF can lodge a complaint for free and, if they obtain a favourable AFCA determination, a debt that is due and payable can be established,” he said.

“However, if that debt is not paid, then further legal proceedings may be required to recover that amount.”

In the NextGen case, the Federal Court held at [29] that the amount claimed in the statutory demand is the amount of the AFCA determination plus the interest accrued from the date of that claim. This amount was immediately due and payable.

In its defence, NextGen referred to the decision of the Full Court in QSuper Board v Australian Financial Complaints Authority Limited [2020] FCAFC 55 (QSuper Decision) as authority that AFCA’s decision was not enforceable, of itself, and that an additional independent exercise of judicial power was required prior to issuing a statutory demand.

The Federal Court confirmed the debt was due and payable and responded to NextGen’s argument that a determination by AFCA does not create an enforceable debt by referring to the Q Super Decision at [144].

“On this case, the Federal Court refused NextGen’s application to set aside the statutory demand on the basis that the debt was due and payable,” Mr Butler said.

“This means that if NextGen does not pay, the SMSF can proceed to bring a winding-up application against NextGen.

“NextGen’s failure to dispute the debt at AFCA, and the fact that NextGen did not respond to the AFCA complaint were additional grounds for the Federal Court to refuse NextGen’s application.”