The Australian Securities and Investment Commission (ASIC) has published its findings on the ‘social impact of misconduct in the financial services industry’.

 

ASIC  found examples of misconduct leading to financial losses inflicted by fraud, misinformation, inappropriate advice, defective disclosure and ‘misleading or deceptive conduct’.

 

ASIC's Consumer Advisory Panel (CAP) ) commissioned Susan Bell Research to conduct a study into the social impacts of investors suffering losses due to licensee misconduct in circumstances where the licensee is unable to provide full compensation.

 

The research was commissioned to ‘better understand the personal consequences’ of investors not being fully refunded of losses inflicted by fraudulent practices.

 

Key findings of the study are:

  • investors who suffered the most had invested all their money, had not diversified or went into debt as part of their investment strategy;
  • most investors’ losses were associated with an underlying product that was either frozen or collapsed;
  • the impact of the monetary loss was immediate on investors without a financial buffer, for others the first six months from when they discovered their loss were critical. Most investors received none, or only a few cents in the dollar back;
  • investors had little knowledge of existing avenues of redress, such as their financial service provider’s internal dispute resolution system or the external dispute resolution scheme they belonged to;
  • investors were reluctant to commence legal action to recover their monetary loss, particularly where they blamed themselves;
  • some investors suffered ‘catastrophic loss’ as their loss was ‘so significant their life will never be the same’. Some felt prolonged anger, uncertainty, worry and depression; and
  • investors who suffered monetary loss lacked confidence in the Australian financial system, financial advisers, the government and regulators including ASIC.

 

ASIC Senior Executive Leader, Consumer, Advisers and Retail Investors, Delia Rickard, said: "The report highlights the importance of helping clients get proper compensation in these difficult cases, which has been and continues to be a key priority of ASIC.

"Encouragingly, the report reveals that where ASIC took legal action on behalf of investors, they were compensated more fully and more quickly."

 

Ms Rickard said that financial advisers are advised to respond to complaints as promptly and professionally as possible, especially in times of market instability.

 

"Licensees should also advise their clients of the right to complain to external dispute resolution schemes on their websites, in disclosure documents and more crucially when handling complaints. This is part of having a proper dispute resolution system, and failure to do so is a breach of a licensing obligation."

 

"‘Investors need help if their investment fails and ASIC is developing clear and concise information on its MoneySmart website about what to do in these situations. This is an important part of fostering confident and informed investors."

 

Chair of ASIC’s Consumer Advisory Panel, Jenni Mack, said: ‘This research highlights the very real social costs of investor losses following misconduct by financial advisers and will help inform the debate on whether a statutory compensation scheme should be introduced in Australia.’

ASIC encourages financial service providers to review their complaints handling processes against the requirements in Regulatory Guide 165 Licensing: internal and external dispute resolution (RG 165). ASIC also encourages the schemes, the Financial Ombudsman Service Limited and the Credit Ombudsman Service Limited to continue to widely promote their dispute resolution services so all Australian investors are aware of their right to complain to external dispute resolution schemes.

In the context of the Future of Financial Advice Reforms and as part of the Government’s review, Richard St John, published a consultation paper on 20 April 2011 to explore the need for and cost/benefits of a statutory compensation scheme.

 

More information is at www.asic.gov.au