The Australian Financial Complaints Authority (AFCA) has provided an explanation as to how it arrives at compensation amounts awarded and has stipulated its methodology does not result in higher payouts to consumers.
“[Using] capital loss [as the basis for a] compensation [calculation] doesn’t necessarily result in less compensation,” AFCA senior ombudsman Patrick Hartney confirmed during a recent members’ forum.
Hartney recognised industry perception that an actual loss approach would provide a better outcome for the sector has originated from some of the compensation calculations in the Dixon Advisory situation.
“I think part of the confusion that’s happening at the moment stems from the way the loss calculation tables we have in our Dixon determinations where [people] see the actual loss representing [a lower compensation amount], however, that actual position takes into account both conflicted and unconflicted and inappropriate and appropriate investments alike,” he noted.
“It’s a whole-of-portfolio approach because it’s designed to be used for a counterfactual [methodology].
“So it’s not accurate to say in those positions [using] actual loss results in [a lower compensation amount].”
To illustrate the point, he revealed complaint number 790630 from the Dixon Advisory situation would have resulted in a compensation amount of $59,495.37 based on capital loss, whereas the AFCA award was $53,699.52 using the counterfactual approach.
Similarly, complaint number 904327 saw an AFCA award of $158,734.49 instead of $174,423.49, which would have eventuated from an actual loss calculation.
AFCA investment and advice lead ombudsman Shail Singh also clarified the calculation process the government body uses to determine compensation outcomes for consumers.
“The [primary] approach we take to loss, which is supported by the courts, is [to use] a counterfactual [methodology, meaning] we look at the direct loss that arose to the consumer factoring in what they would have been [invested] in had the poor advice not been provided,” Singh said.
“We also look at what they have been [invested] in previously, that’s the second approach. The third approach, and we do it rarely, is if we can’t determine what they would have been [invested] in, we award actual loss.
“[It’s] also important to summarise that the actual loss used in the Dixon decisions is whole of portfolio. It’s not about the individual investments.
“So be careful what you wish for sometimes when you’re looking at these things and make sure you do your homework because I think it’s really important to understand all the facts before you provide submissions to CSLR (Compensation Scheme of Last Resort) to explain exactly what your position is and [avoid] assuming those approaches can result in [lower compensation amounts].”
