The Australian Financial Complaints Authority published an explainer for financial advisers on how it determines direct financial loss when it upholds a financial advice complaint, focusing on the counterfactual methods it uses to reach compensation outcomes. AFCA highlighted two main counterfactual approaches. A “no-transaction” counterfactual assumes the client would have taken no action if properly advised, and is used where the original investment was stable and regulated, the recommendation to sell was clearly unsuitable, and the switch led to significant losses, with loss calculated by comparing the performance of the original holding with the actual investment outcome. Where a no-transaction scenario is not appropriate, including in long-term advice relationships, AFCA uses an “estimate” counterfactual based on the client’s risk profile and an appropriate market benchmark (for example, a passively managed portfolio such as a Vanguard Fund) so compensation reflects the market risk the client should have borne. It said a pure capital loss approach, based only on the decline in value of the specific investment, is used rarely and mainly where AFCA cannot determine what the client would otherwise have been invested in, noting that in market downturns a counterfactual approach often produces lower compensation than a capital loss approach.
Australian Financial Complaints Authority 2025-04-03
Australian Financial Complaints Authority explains how it calculates direct financial loss in upheld financial advice complaints
The Australian Financial Complaints Authority released guidance for financial advisers on determining direct financial loss in upheld complaints, emphasizing two counterfactual methods: a "no-transaction" approach for unsuitable recommendations and an "estimate" approach based on the client's risk profile and market benchmarks. A pure capital loss approach is rarely used, primarily when the client's alternative investment cannot be determined.