The Australian Financial Complaints Authority (AFCA) has come in for rare criticism after it emerged that the dispute-handling body most likely did not act impartially and fairly in handling two cases that were lodged against DH Flinders, a specialist funds management advisory business.

Evidence and submissions provided to the Supreme Court of NSW showed an AFCA staff member “actively encouraged the expansion” of complaints against DH Flinders, potentially breaching the rules that govern how the body should manage disputes. He also took other actions that contravened the rules.

The AFCA Rules provide that complaints will be handled independently, impartially and fairly. Additionally AFCA must manage complaints in a manner that provides procedural fairness to the parties involved.

Justice James Stevenson, who presided over the case, stated he “would have been inclined to conclude that AFCA did act in breach” of its obligations.

But because he had ruled AFCA does not have the authority, jurisdiction or power to deal with the complaints against DH Flinders arising from alleged false representations about a product that was not issued by the business, it was not necessary for him to decide if AFCA had in fact breached its obligations.

The purported transgression was one of two matters that DH Flinders had raised in the legal action it took against AFCA. The other was whether the complaints were within AFCA’s jurisdiction since the cases involved misrepresentations from an authorised representative of DH Flinders.

AFCA’s position is that DH Flinders “is liable” for the alleged misconduct, whether or not the authorised representative was acting with authority and that it thereby has the power to deal with the complaints.

The complaints were initially directed at Equitable Financial Solutions, which DH Flinders appointed in April 2016 as authorised representative for a product called EFSOL Income Fund. DH Flinders suspended the appointment a year later in April when it discovered that the representative had conducted business in addition to and unrelated to its role as the investment manager of the Income Fund product. In November, the appointment was terminated.

The complainants had invested in another product, EFSOL Ameen Investment Program, that was offered by Equitable Financial Solutions and had no relation to DH Flinders. They turned to AFCA for redress when Equitable Financial Solutions, which was placed into administration in November last year, failed to repay investments due.

Two of the complainants who filed their complaints in March and April last year did not know at that time that Equitable Financial Solutions was a DH Flinders-appointed authorised representative when they decided to proceed with the investment.

An AFCA staff member who had a telephone conference with the two complainants told them about the link, explaining to them he had “on a whim” decided to perform a free search on the Australian Securities and Investments Commission (ASIC) site to see if Equitable Financial Solutions had ever been authorised by an Australian Financial Services (AFS) Licensee or a credit licensee.

He told the complainants AFCA “can open a complaint” against DH Flinders and in his notes to one of them, he said “DH Flinders may be responsible for” Equitable Financial Solutions’ conduct as a corporate authorised representative.

In his internal memo, he told the Lead Ombudsman and a senior manager that “we are also looking at whether complainants with unpaid determinations can lodge complaints against DH Flinders”.

Justice Stevenson says these actions show AFCA “was hardly behaving in a manner procedurally fair to DH Flinders nor in a manner that was impartial”.

“I think [DH Flinders] was correct to submit that AFCA had here ‘entered the fray’ and was acting in an advisory relationship with the complainants,” he said.

There are now 24 active complaints against DH Flinders, all of which arose from the complainants’ investment in the failed financial product that had no relation to DH Flinders.

AFCA says in an email to insuranceNEWS.com.au it will review and consider the court’s decision, and will continue to work with financial firms and complainants to resolve disputes fairly.

Dean Pinto, Partner and Financial Lines Specialist with law firm Wotton + Kearney, says Justice Stevenson’s “obiter comments are a reminder that it is not AFCA’s role to effectively make that complaint for the customer”.

“If the customer does not know of the [AFS licence holder], then they cannot make a complaint against it,” he told insuranceNEWS.com.au.

He says customers who want to seek redress from the responsible AFS licence holder “must know of its relationship with the authorised representative”.

Finlaysons Lawyers Special Counsel Ralph Bönig says the court decision “reinforces the proposition that statutory/regulatory bodies need to understand what their boundaries are.”

“Going beyond these boundaries can cause an injustice to another party and possibly lead to an unfair outcome,” he told insuranceNEWS.com.au. “The starting point is usually what Parliament has set them up to do and entrusted them to do.”

Click here for the court ruling.