The Federal Court of Australia held that a self managed superannuation fund (SMSF) could recover the amount of an Australian Financial Complains Authority (AFCA) determination relating to a compensation claim against a financial adviser for an investment loss.
This article focuses on SMSF trustees rights to complain and seek compensation via AFCA for inappropriate financial advice and services with regards to the recent Federal Court decision in NextGen Financial Group Pty Ltd v WJ & V Drakoulis Super Pty Ltd ATF WJ & V Drakoulis Super [2023] FCA 789.
Background
The SMSF trustee acted on financial advice received from NextGen Financial Group Pty Ltd (NextGen) 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.
AFCA determined that 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.
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 that a court order was required to confirm the amount of the debt.
Background to AFCA
While AFCA is the complaints system for large Australian Prudential Regulation Authority (APRA) funds it also hears certain SMSF complaints. 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.
Indeed, 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. Other complaints by SMSF trustees relate to investment and financial advice under AFCA’s investments and advice jurisdiction.
Financial advisers should treat complaints seriously as AFCA can, subject to certain qualifications, hear complaints up
to $1 million.
The Corporations Act 2002 (Cth)
Section 912A(1)(g) of the Corporations Act 2001 (Cth) (CA) provides that 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”.
The AFCA Complaint Resolution Scheme Rules (AFCA Rules) provide a general framework for the consideration for an external dispute resolution scheme and the legal implications it may have on SMSFs in relation to obtaining financial advice. Relevantly, s 1051(4) of the CA provides the following operational requirements for the AFCA scheme include:
- complaints against members of the scheme are resolved (including by making determinations relating to such complaints) in a way that is fair, efficient, timely and independent;
- reasonable steps are taken to ensure compliance by members of the scheme with AFCA determinations; and
- determinations made by AFCA are binding on members of the scheme.
AFCA Rules
Thus, AFCA is a dispute resolution procedure that seeks to resolve complaints made against members of the scheme (eg, 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. 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. However, if that debt is not paid, then further legal proceedings may be required to recover that amount.
The Federal court analysis
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.
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] and quoting the following:
The determination itself was not enforceable as an exercise of power by AFCA and, as such, it lacks that essential characteristic of judicial power … Rather than being a judicial determination any decision is used as a foundation for action in the courts. In Attorney-General (Cth) v Breckler (1999) 197 CLR 83 at 111 [45] the High Court held that the only method of enforcement of the SCT [Superannuation Complaints Tribunal] decision was by “an independent exercise of judicial power” initiated by the commencement of separate proceedings and that negated the conclusion that judicial power was being exercised. The same conclusion arises under the AFCA scheme.
In 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. 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.
Thus, an AFCA determination while giving rise to a debt may, if the debt if not paid by the financial adviser, require separate legal proceedings to direct payment of that debt (ie, via an action in the courts). Note that a statutory demand may not always be the best method and legal advice should be obtained on available options to seek recovery.
Conclusions
The NextGen decision confirms that 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.
While legal representation is not required, it is strongly recommended. Naturally, DBA Lawyers would be pleased to assist advisers and SMSF trustees, subject to any conflict of interest (if we have previously acted for a particular client).
Related articles:
- Superannuation Complaints Tribunal orders fund trustee to refund fees to member for services ‘provided’ by financial adviser
(Note the SCT was merged in AFCA in late 2020)
- Seeking compensation for defective ATO administration
- SMSFs and contractual tips and traps
- Many building and similar contracts place SMSFs at risk
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler ([email protected]) Director and Bryce Figot ([email protected]), Special Counsel, DBA Lawyers.
DBA LAWYERS
24 July 2023
