Will UGC cause the next CSLR advice levy increase?

The Australian Financial Complaints Authority (AFCA) is considering whether complaints against financial advice licensee United Global Capital (UGC), which saw its AFSL cancelled this week, will be covered by the Compensation Scheme of Last Resort (CSLR).

AFCA confirmed to Money Management that it has already received 31 complaints about the firm, which it described as a “financial advice licensee”, indicating it will be categorised under personal financial advice provided to retail clients on relevant financial products.

UGC’s AFS licence was cancelled based on ASIC’s findings that the firm:

• Used a client onboarding process that lured people into investing their retirement savings in UGC-related products by having calls made to prospective clients using details including those obtained from a third-party website operator, offering them a free superannuation “health check”.
• Through its authorised representatives, it recommended investments to clients that included speculative investments in Global Capital Property Fund Limited in which director Joel James Hewish had an interest.
• Attempted to contract out of its personal advice obligations whereas its representatives did give personal advice to clients in breach of those obligations, including by failing to act in clients’ best interests and giving them inappropriate advice.
• Contravened a number of its general obligations as an AFS licensee, including the obligation to do all things necessary to ensure the financial services authorised under its licence are provided efficiently, honestly and fairly; the obligation to take reasonable steps to ensure its representatives comply with financial services laws; and the obligation to have adequate arrangements in place to manage conflicts of interest.

Although UGC’s licence is cancelled, ASIC has specified the licence still has effect for limited purposes, including that UGC continues to be an AFCA member until May 2025, and it continues to have insurance cover for clients.

While AFCA said it is “standard practice” for a firm to be asked to retain its membership for a period of time following a cancellation, it has UGC listed as a “current matter” on its website and has received 31 complaints since the firm went into voluntary administration on 9 July.

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The firm is understood to be smaller than Dixon but the complaints volume is still likely to rise further if consumers have another 10 months to submit complaints.

According to AFCA data, Dixon Advisory, which was placed into administration in January 2022, received 65 complaints during the 2021/22 financial year which rose to more than 2,770 by June 2024.

As UGC is in administration and being managed by an external party, there is no certainty that it will be able to comply with AFCA orders for compensation. 

“As UGC is now under administration, and there is no certainty it would be able to comply with any AFCA order for it to pay compensation to complainants, AFCA needs to consider whether a complaint is within the scope of the Compensation Scheme of Last Resort," AFCA said.

“Whether it is in the scope of the CSLR depends on the individual circumstances of the advice a complainant was given, whether AFCA has jurisdiction to consider the complaint, and whether the complaint falls within the scope of the CSLR as set out in legislation. 

“If a complaint falls within AFCA’s jurisdiction and the complaint is likely to be in-scope for the CSLR, AFCA will consider the complaint further. If the complaint is not within the scope of the CSLR, AFCA will decide whether it can continue to consider the complaint.”

Hewish and UGC have appealed to the Administrative Appeals Tribunal for a review of ASIC’s decision.

ASIC’s investigation into the conduct of UGC, Hewish and related entities is continuing. 

CSLR backlash

Financial advisers have been critical of the CSLR and the financial impact it is having on them as the advice sector is disproportionately affected. They are already funding $18.1 million for the scheme out of a total $24.1 million – the majority of which relates to Dixon Advisory. 

Dixon Advisory held AFCA membership until 30 June when it was expelled from the organisation, following an AFCA board meeting. At the time of its exit, some 2,773 complaints had been made and alleged losses were as high as $458 million.

Last year, Financial Advice Association Australia (FAAA) general manager for policy, advocacy and standards Phil Anderson said the industry feared another “black swan” event like Dixon Advisory having an impact on future levy costs. 

Anderson has subsequently called for a public inquiry into Dixon Advisory and why it is not thoroughly investigated by the regulator. 

ASIC took court action against Dixon Advisory for breaches of the Corporations Act, and the Federal Court awarded a penalty of $7.2 million against Dixon Advisory plus $800,000 in costs in September 2022. This was far smaller than the potential maximum penalty that could be enforced of $110 million as it was based on the eight clients mentioned in the case rather than thousands affected.

"The financial advice profession, who will seemingly need to pay as much as $135 million as a result of this scandal, also deserves to know what really happened and to have confidence that everything was done to minimise the cost to them, as well as ensuring that it could not happen again," he wrote last month.