If you have or are an authorised representative, you need to be aware of an important change to AFCA Rules.
It started a few days ago when I received my regular Federal Register of Legislation Subscription email. The first item intrigued me. It read:
ASIC Corporations (AFCA Regulatory Requirement) Instrument 2021/0002
This instrument requires the Australian Financial Complaints Authority to amend the Australian Financial Complaints Authority (AFCA) Complaint Resolution Scheme Rules without consultation by inserting a new definition and amending an existing definition.
Some or all of this item commenced on 6/01/2021
My first thought was, given ASIC has effective control of the way AFCA works anyway, why is this necessary? Secondly, why the requirement to amend its Rules without consultation?
Further investigation has revealed some perfidious action by AFCA officers and a Court case that AFCA lost. At face value, ASIC has stepped in to remedy the situation by insisting on a change in AFCA’s Rules. I suspect it was AFCA’s call to ASIC following that legal case loss that has led to this new Legislative Instrument being passed and not the other way around.
ASIC has not issued any Media Release about this small but highly important change.
What started this?
On 26 November 2020, Justice Stevenson provided a decision in D H Flinders Pty Ltd v Australian Financial Complaints Authority Limited  NSWSC 1690. For those interested in the full judgment, click here.
D H Flinders appointed Equitable Financial Solutions Pty Ltd (â€œEFSOLâ€) as a corporate authorised representative under the Corporations Act (“the Act”) on 16 April 2016. This was for the sole purpose of acting as investment manager of a product known as the â€œEFSOL Income Fundâ€. The fund was a wholesale debt fund but never became operational. Between the date of its appointment to 28 November 2017, EFSOL allegedly made representations about financial products with which D H Flinders has absolutely no connection with to a number of individuals, these being the EFSOL Ameen Investment Programâ€™ (“Ameen Program”). The licencee suspended EFSOL as a representative on 26 April 2017 when it initially became aware of its action. It subsequently cancelled EFSOLâ€™s authorisation as its representative.
EFSOL in administration and AFCA complaints
On 23 October 2019, EFSOL appointed administrators. According to liquidators, it owes $21.8 million and there’s little chance of any return for unsecured creditors.
Unsurprisingly, AFCA received a number of complaints about EFSOL’s activities, mainly that it failed to repay investments when due. AFCA wrote to D H Flinders on 3 September 2019 and stated that under s.917A and s.918B of the Act, it was liable for EFSOL’s actions. This was regardless of whether or not it was acting with the AFSL holder’s authority because under s.917A:
â€¢ the conduct relates to a financial service,
â€¢ during the period EFSOL was a representative of [DH Flinders]; and
â€¢ the client(s) (read complainants) relied on that conduct in good faith.
Section 917B provides provision for an AFSL holder to avoid responsibility under certain circumstances. In most situations, though, it’s not the case. Under s.917F(1), an AFSL holder is responsible for the conduct of their representative. A client has the same remedies against the licensee that the client has against the representative.
Under Rule A.4.2, under the heading â€œComplaints that AFCA considersâ€, it states that â€œ[a] complaint must be about a Financial Firm that is an AFCA Member at the time that a complaint is submitted to AFCA (even if not an AFCA Member at the time of the events giving rise to the complaint).â€
Rule A.4.3(a) requires that â€œ[t]he complaint must arise from a customer relationship or other circumstance that brings the complaint within AFCAâ€™s jurisdiction.â€
This is where AFCA became unstuck because the Court found that AFCA only had jurisdiction to hear complaints against an AFSL holder where the representative acts according to its authority.
With EFSOL acting outside of its authority, the Court found that AFCA didn’t have jurisdiction to consider complaints. Stevenson J. even went so far as to grant an injunction preventing AFCA from considering the matter further.
ASIC’s Legislative Instrument
So, back to where we started. Reading between the lines, AFCA reported the case loss to ASIC. ASIC has responded by requiring AFCA’s Rules be changed on or before 15 January 2021.
Note there has been no media release by ASIC about this important change. Equally, AFCA’s website merely states it’s been proactive in reviewing the impact of this case (see here).
The Rule changes are as follows:
(a) In the appropriate place in rule E.1.1, insert:
â€œRepresentative means any person or entity for whose conduct a Financial Firm is or may be liable, including but not limited to a representative within the meaning of the Corporations Act, and a credit representative within the meaning of the National Consumer Credit Protection Act 2009.â€ and
(a) omit paragraph 4 of the definition of Financial Firm in rule E.1.1 and substitute:
â€œ4. For the purposes of rule B.2, A.7.1, A.7.2 and A.7.6 in relation to a complaint other than a Superannuation Complaint, â€œFinancial Firmâ€ also includes any employee, agent or contractor of the Financial Firm, any Representative of the Financial Firm regardless of whether the Representativeâ€™s conduct is within or without authority, and without limiting the foregoing, any other person who has actual, ostensible, apparent or usual authority to act on behalf of the Financial Firm or authority to act by necessity in relation to a financial service.â€
What does this mean?
If you have authorised representatives (either ACL or AFSL), you may need to undertake some soul searching.
Whilst some lawyers and industry representatives were aware of this minor, albeit important, difference, AFCA presumably wasn’t. This is probably because of their presumption that s.917B was all-encompassing. Representatives have no need to join it as a member.
Following this Court case, a number of law firms have published comments. Essentially, they suggested complainants seeking recompense from an AFSL holder for wrongful conduct of a representative under Section 917B may need to litigate in the Courts rather than through AFCA. ASIC’s action negates that. Bluntly, for both AFSL and ACL holders, it means that they can no longer avoid AFCA action arising out of any unauthorised financial service action by a representative. With AFCA’s Rules allowing it to act even where the representative or licencee was not a member at the time, this effectively backdates their ability to make a determination.
What should you do now?
ACL and AFSL holders should now look to supervise a representative’s entire business rather than in accord with their authorisation. If the licence holder doesn’t have the resources to do so properly, it may be prudent to divest that representative.
This has the potential to lead to some financial service businesses being unable to continue operating. It highlights the need to hold your own licence and may significantly affect some franchisors within the financial sector.
One thing’s for sure though. For all entities with representatives, the idiom “what I don’t know won’t hurt me” has now no place in financial services. You need to know everything they do.
The plaintiff argued it’s very pertinent to look at AFCA’s role in what occurred as it’s immoral.
AFCA is an allegedly independent complaints authority. It has a statutory requirement to provide fair, transparent and impartial decisions to all parties.
AFCA’s Rules state that the scheme is made “appropriately accessible” to those dissatisfied with the licence holder’s response. It can help Complainants submit a complaint and its staff can also “assist Complainants to submit a complaint.”
Stevenson J at  states “I do not see these rules as contemplating AFCA giving advice as to whether a complaint about one Financial Firm might better, or alternatively, be directed to another Financial Firm.” Indeed, the Court noted that AFCA’s Rules state “we are impartial and do not act for either party to advocate their positionâ€¦.” yet this is exactly what occurred.
AFCA staff actions
The judgment records that one AFCA officer, Mr Ian Donald, in his own notes, after discovering EFSOL was a representative of D H Flinders stated “we can open a complaint against that entity as well. I explained we could join D H Flinders to this complaint in due course.” After one complainant authorised him to open a complaint against the plaintiff, Mr Donald notes ” As discussed, you may lodge a complaint against D H Flinders and I can assist you with lodging this complaint”.
AFCA’s own records show that there was no response entered as to the question “How the complainant complained”. Stevenson J. said this was rather coy.
Following a meeting with Senior AFCA staff, Mr Donald recorded “where the complainant makes an allegation that EFSOL made a false representation during the period 16 March 2016 to 17 November 2017, we [are] asking them if they would like AFCA to open a complaint against D H Flinders Pty Ltd [as the Australian Financial Services Licencee] responsible for EFSOL’s conduct). So far three complaints have been opened. Three more will be opened in the next week or so.”
These complaints were only brought against D H Flinders after Mr Donald found EFSOL was a licencee representative. AFCA’s behaviour is utterly reprehensible and shows at least some staff are not impartial.
It’s unfortunate the Court did not make a determination as to whether AFCA had breached its obligations of impartiality and fairness. Had this been necessary, the presumption is the Court would find AFCA had acted unfairly and certainly biased towards the complainant.
Some transparency from AFCA would be good. To date, there appears to be nothing on AFCA’s website about the rule change. The webpage about the case dated 10 December 2020 merely states “AFCA is proactively contacting relevant complainants and financial firms to advise them that we are reviewing the impact of the case.” ASIC has yet to issue a Media Release about this important change.
AFCA must take immediate steps to ensure its staff are fair and impartial to both parties. They are not there simply to assist complainant obtain some form of financial compensation or remediation.
This isn’t the first time this has occurred. We are aware from our own clients’ experiences some AFCA staff have coached and assisted complainants. The wording was too precise for a consumer and drafted in a way the member must capitulate and provide recompense.
In my view, AFCA must perform an independent audit. Any other instance of similar action being taken should be reported to both the Minister and its members. Where recompense has been awarded to the complainants in such instances, the financial service provider should be refunded.
AFCA should be required to publicly apologise for this indiscretion. It needs to restore trust with those that must pay for its services. More importantly, it needs to demonstrate it does not favour the consumer over the financial services provider.
The sooner the Fairness Project starts, the better the industry will be.