D H Flinders Pty Ltd v Australian Financial Complaints Authority Limited

1. [1]

   The plaintiff, DH Flinders Pty Ltd, holds an Australian Financial Services Licence.

2. [2]

   The first defendant, the Australian Financial Complaints Authority Limited (“AFCA”) is a company limited by guarantee and the operator of the “AFCA Scheme”. The AFCA Scheme is a financial services external dispute resolution system authorised under the Corporations Act 2001 (Cth) (“the Act”).

3. [3]

   AFCA is the single authorised operator of the AFCA Scheme. [1] There were a number of predecessor schemes that existed prior to AFCA, including the Financial Ombudsman Service Ltd..

4. [4]

   As a financial services licensee, DH Flinders is required to be a member of the AFCA Scheme. [2]

5. [5]

   The second and fourth defendants, Dr Muhammad Imad Khan and Mr Ahmed Ibrahim, have made complaints to AFCA regarding financial services provided to them by Equitable Financial Solutions Pty Ltd (in liq) (“EFSOL”). [3]

6. [6]

   Between 16 April 2016 and 28 November 2017, EFSOL was a corporate authorised representative of DH Flinders for the purposes of Div 6 of Part 7.6 of the Act, albeit only in relation to one wholesale product that was never operational.

7. [7]

   During that period EFSOL allegedly made representations to a number of people, including Dr Khan and Mr Ibrahim, concerning financial products with which DH Flinders has no connection. DH Flinders had no knowledge of or dealings in association with those products prior to the steps that DH Flinders took to suspend and then cancel EFSOL’s authorisation as its representative.

8. [8]

   A number of persons, including Dr Khan and Mr Ibrahim have now brought separate complaints (“the Complaints”) to AFCA against DH Flinders arising from the representations made to them by EFSOL.

9. [9]

   The principal question in these proceedings is whether AFCA has authority, jurisdiction or power to deal with the Complaints.

10. [10]

    Each member agrees with AFCA to be bound by the AFCA Complaint Resolution Scheme Rules (“AFCA Rules”) [4] .

11. [11]

    Once a complaint is made to AFCA, the AFCA Rules form a binding tripartite contract between the complainant, AFCA and the member the subject of the complaint. [5]

12. [12]

    Thus, now that Dr Khan and Mr Ibrahim have made a complaint to AFCA about DH Flinders, the question of AFCA’s authority, jurisdiction or power to deal with that complaint is to be determined by reference to the proper construction of the contract thereby created and as set out in the AFCA Rules.

13. [13]

    DH Flinders also contends that, assuming AFCA does have authority, jurisdiction or power to deal with the Complaints, AFCA has breached its obligations of independence, impartiality and fairness or procedural fairness required by the AFCA Rules [6] by “encouraging” Dr Khan and Mr Ibrahim to make their complaints against DH Flinders.

14. [14]

    As I have set out at [8], persons other than Dr Khan and Mr Ibrahim have also made the Complaints. Those individuals will not be bound by the outcome of these proceedings. It is, however, common ground before me that as a practical matter the result of this case will influence the future course of events. This is, in that sense, a “test case”.

Decision

1. [15]

   AFCA does not have authority, jurisdiction or power to deal with the Complaints.

2. [16]

   Accordingly, it is not necessary to decide whether AFCA has acted in breach of its obligation of impartiality and fairness. Were it necessary for me to decide that question, I would been inclined to conclude that AFCA did act in breach of those obligations.

The proceedings

1. [17]

   The proceedings before me were conducted with admirable economy by Mr Sulan, who appeared with Ms Forrester for DH Flinders, and by Mr Wise QC, who appeared with Mr Goodwin for AFCA.

2. [18]

   Dr Khan entered a submitting appearance. Mr Ibrahim’s solicitor entered an appearance but did not participate in the hearing before me.

3. [19]

   I was also greatly assisted by counsel’s written submissions. Much of what follows, especially as to uncontroversial background matters, is drawn, with gratitude, from those submissions.

Background

1. [20]

   The AFCA Scheme commenced operation on 1 November 2018. The AFCA Rules bear that date.

2. [21]

   Financial service licensees who provide services to retail clients are required to obtain AFCA membership as a condition of their financial services licence.

3. [22]

   AFCA can implement a variety of remedies against financial service licensees including, relevantly, monetary compensation up to $500,000 per claim and any remedy where the value can be readily calculated, such as the waiving of a debt.

4. [23]

   Any determination made by AFCA is, if accepted by a complainant, final and binding. [7] The financial services licensee does not have a discretion as to whether to accept a determination of AFCA. Once a determination is made and accepted by the complainant, the licensee is bound with no right to appeal within the AFCA Scheme.

5. [24]

   If a financial service provider does not comply with a determination made by AFCA, it may be expelled as a member of AFCA. This would result in a breach of the financial services licensee’s licence.

6. [25]

   DH Flinders appointed EFSOL as a corporate authorised representative on 16 April 2016 for the sole purpose of acting as investment manager of a product known as the “EFSOL Income Fund”.

7. [26]

   The EFSOL Income Fund was established as a wholesale debt fund but never became operational.

8. [27]

   On 26 April 2017 DH Flinders suspended EFSOL’s representative authority as DH Flinders had identified that EFSOL had conducted business in addition to and unrelated to its sole role as the investment manager of the EFSOL Income Fund.

9. [28]

   On 28 November 2017, DH Flinders terminated EFSOL’s appointment as its authorised representative.

10. [29]

    On 1 October 2015, prior to EFSOL’s appointment as corporate authorised representative of DH Flinders, EFSOL issued a Product Disclosure Statement in relation to the “EFSOL Ameen Investment Program”.

11. [30]

    The complaints that Dr Khan and Mr Ibrahim and others have made to AFCA against EFSOL relate to representations made by EFSOL concerning the EFSOL Ameen Investment Program and to EFSOL’s failure to return funds invested in relation to that product.

12. [31]

    On 23 October 2019 administrators were appointed to EFSOL. On 26 November 2019 EFSOL was placed into liquidation.

13. [32]

    The liquidators estimate that, as at 9 December 2019, 127 complaints had been lodged with AFCA against EFSOL.

14. [33]

    According to the statutory report of the EFSOL liquidators dated 26 February 2020, the amount owing to unsecured creditors is some $21.8 million.

15. [34]

    There does not appear to be any prospect of there being any return to unsecured creditors.

16. [35]

    A common feature of the complaints made to AFCA concerning EFSOL is that EFSOL has failed to repay investments when due.

17. [36]

    Mr Ibrahim made a complaint to AFCA on 22 March 2019. Dr Khan made a complaint on 17 April 2019.

18. [37]

    Each of Dr Khan and Mr Ibrahim complained that EFSOL failed to complete requests made by them to withdraw their investments from the EFSOL Ameen Investment Program.

19. [38]

    A number of EFSOL customers who have made complaints against EFSOL have now made the Complaints to AFCA against DH Flinders. These include Dr Khan and Mr Ibrahim

20. [39]

    There are 24 active Complaints, all of which arise out of the complainants’ investment in the EFSOL Ameen Investment Program and not in relation to any financial service offered by DH Flinders.

21. [40]

    It is common ground that EFSOL did not have actual authority from DH Flinders to offer the EFSOL Ameen product to its clients. There is no suggestion in the evidence that DH Flinders did anything to hold out EFSOL as having its authority to offer the EFSOL Ameen product to its clients, or which would otherwise suggest EFSOL had ostensible authority from DH Flinders concerning the EFSOL Ameen product. Indeed, as I have said, DH Flinders had no knowledge or involvement in such matters until it took steps to suspend and then cancel EFSOL’s authority to act as its representative.

22. [41]

    I will return to the detailed circumstances in which Dr Khan and Mr Ibrahim made their Complaints against DH Flinders when considering DH Flinders’ alternative case that, assuming that AFCA has authority, jurisdiction or power to deal with the Complaints, it has acted in breach of its obligations of impartiality and fairness.

Statutory attribution of liability

1. [42]

   In circumstances that I consider below, on 3 September 2019 AFCA wrote to DH Flinders contending that it had authority, jurisdiction and power to consider Dr Khan’s complaint against DH Flinders Pty Ltd. In that letter, AFCA stated:

2. [43]

   As that letter shows, and as was put before me, AFCA’s position is that DH Flinders is liable to EFSOL’s conduct, whether or not EFSOL was acting with DH Flinders’ authority and that AFCA thereby has authority, jurisdiction and power to deal with the Complaints.

3. [44]

   Division 6 of Part 7.6 of the Act provides for the “Liability of Financial Services Licensees for Representatives” and provides for a statutory attribution of responsibility for Australian Financial Services Licensees for the actions of their Corporate Authorised Representatives, whether or not those actions were within authority.

4. [45]

   Section 917A provides:

5. [46]

   Section 917B provides:

6. [47]

   Section 917D provides that a financial services licensee is not responsible under s 917B if:

7. [48]

   Section 917F(1) provides:

8. [49]

   Section 917F(3)(b) provides that nothing in the Division imposes any civil liability under a provision of this Act apart from this Division on a financial services licensee that would not otherwise be imposed on the licensee.

9. [50]

   In Casaclang v WealthSure Pty Ltd [8] Buchanan J explained the effect of these proceedings as follows:

10. [51]

    The effect of these provisions is that, were Dr Khan or any other of the complainants to bring proceedings against DH Flinders, DH Flinders may be liable for the conduct of EFSOL while it was DH Flinders’ corporate authorised representative, notwithstanding the fact that EFSOL did not have DH Flinders’ authority to make representations concerning the EFSOL Ameen Investment Program.

11. [52]

    Whether these provisions are relevant to AFCA’s contractual authority jurisdiction or power to deal with the Complaints is a different matter to which I will now turn.

AFCA’s Authority, jurisdiction or power to deal with the Complaints

1. [53]

   AFCA is a complaints-handling body, not a regulator, and it derives its authority to determine complaints solely as a matter of contract.

2. [54]

   The tripartite contract represented by the AFCA Rules defines the limits of AFCA’s authority.

3. [55]

   The AFCA Rules are divided into a number of sections including:

   1. (1)

      Section A – Complaint Resolution Processes

   2. (2)

      Section B – Requirements

   3. (3)

      Section C – Exclusions

   4. (4)

      Section D – Remedies

   5. (5)

      Section E – Defined Terms

4. [56]

   The rules provide that:

5. [57]

   It is common ground that the exclusions in Section C are not relevant to the matter before me.

6. [58]

   Rule A.4.2 provides, under the heading “Complaints that AFCA considers”:

7. [59]

   Rule A.4.3(a) provides:

8. [60]

   The requirements for AFCA’s authority, jurisdiction or power to deal with a complaint are set out in Section B, the relevant provision of which is cl B.2.1 which provides:

9. [61]

   There is no dispute that the Complaints relate to a “Financial Service”, namely, the EFSOL Ameen Investment Program.

10. [62]

    The critical question is whether the Complaints relate to the provision of that Financial Service “by” DH Flinders “to” Dr Khan and the other complainants.

11. [63]

    DH Flinders did not itself provide the EFSOL Ameen Investment Program to Dr Khan and the other complainants so it did not, itself, provide the Financial Service “to” those complainants.

12. [64]

    The question is, whether by reason of the extended definition of “Financial Firm” to which I will shortly refer, DH Flinders is taken to be the Financial Firm that provided financial service “to” those complainants.

13. [65]

    “Financial Firm” is defined to mean, first, “an AFCA Member”.

14. [66]

    Thus there is no doubt that AFCA has authority, jurisdiction or power to deal with complaints against EFSOL because, on any view of the matter, EFSOL provided the relevant Financial Service “to” the complainants.

15. [67]

    Mr Sulan submitted that, because there is no dispute that DH Flinders did not, itself, provide that financial service “to” those complainants, that the enquiry as to AFCA’s authority, jurisdiction or power to deal with the Complaints ends at this point.

16. [68]

    I think that submission begs the question of the effect of the extended definition of Financial Firm to which I now turn.

17. [69]

    Subclause (d) of the definition of Financial Firm provides that, for relevant purposes, “Financial Firm”:

18. [70]

    The effect of subclause (d) of the definition of Financial Firm is, amongst other things, to include as Financial Firm a “representative” of the Financial Firm.

19. [71]

    AFCA’s position is that the effect of this provision is that, because EFSOL was DH Flinders’ corporate authorised representative during the period when EFSOL made the impugned representations to the complainants, EFSOL is taken to be DH Flinders for the purposes of Rule B.2.1 and DH Flinders is thus taken to be the Financial Firm that provided the impugned financial services “to” the complainants.

20. [72]

    In effect, this involves reading the word “representative” in subparagraph (d) of the definition as including, by reason of s 917B of the Act, a representative acting without authority.

21. [73]

    Indeed, that is AFCA’s precise point as was made clear when Mr Wise and I had this exchange during submissions:

22. [74]

    I do not accept that submission.

23. [75]

    Many of the defined terms in Section E of the AFCA Rules are expressed by references to provisions in the Act.

24. [76]

    Thus:

    1. (1)

       “Foreign Collective Investment Scheme” is defined to mean, amongst other things, “a managed investment scheme under section 9 of the Corporations Act”;

    2. (2)

       “Incorporated” is defined to mean “registered under the Corporations Act…”; and

    3. (3)

       “Regulated Superannuation Fund”, “Related Body Corporate”, “RSA Provider”, “Superannuation Provider”, and “Traditional Trustee Company Service or Services” are defined to have “the meaning in the Corporations Act.”

25. [77]

    Section E makes no separate provision for the definition of “representative” and thus does not suggest it has a meaning “informed” by s 917B of the Act. The absence of any such provision, when contrasted to the numerous incorporations by reference of definitions from the Act, suggests that “representative” has its usual meaning: “a person chosen or appointed to speak or act for another or others” [12] . That is, a person acting with authority.

26. [78]

    There are no words in the definition of “Financial Firm” itself which suggest that “representative” includes a representative acting without or beyond authority.

27. [79]

    The words in subclause (d) of the definition of “Financial Firm” following the word “including” expand the extended definition of “Financial Firm” beyond any “employee representative, agent or contractor of the Financial Firm” to “any person who has actual ostensible or apparent or useful authority” to act on behalf of the Financial Firm. Their effect is to include as a Financial Firm any person who has authority to act on behalf of the Financial Firm, whether or not that person is an employee, representative, agent or contractor of the Financial Firm.

28. [80]

    The words do not, in my opinion, have the effect of including as a Financial Firm any employee, representative, agent or contractor of the Financial Firm which or who or that did not have such authority.

29. [81]

    Indeed, in my opinion, those words emphasise that, in order to be deemed to be the Financial Firm in question, the entities named in subparagraph (d) must be acting within authority.

30. [82]

    The construction of subclause (d) for which AFCA contends would involve reading it as if it provided:

31. [83]

    Mr Wise drew my attention to Rule E.2.4 of the Rules which provides:

32. [84]

    I do not see that this provision takes the matter any further. Its effect so far as concerns subclause (d) is that what follows in subclause (d) beyond the word “including” does not limit the meaning of that which precedes it, namely “any employee, representative, agent, or contractor of the Financial Firm”.

33. [85]

    For these reasons, my opinion is that, on the proper construction of these provisions, a “representative” of a Financial Firm is only taken to be that Financial Firm if the representative was acting within authority.

34. [86]

    Accordingly, in circumstances where the Financial Firm in question did not itself provide the relevant Financial Service “to” the complainant for the purposes of Rule B.2.1 it is only taken to do so by reason of the conduct of its representative if that conduct was within the representative’s actual, ostensible or apparent use of authority.

35. [87]

    There is no question here that EFSOL had authority from DH Flinders to make any representations to the Complainants concerning the EFSOL Ameen Investment Program.

36. [88]

    Thus, the Complaints are not with respect to the provision of the Financial Service “to” the complainants “by” DH Flinders.

37. [89]

    Accordingly, AFCA Rule B.2.1 is not enlivened and AFCA has no authority, jurisdiction or power to deal with the Complaints.

38. [90]

    Mr Wise submitted that “even an error by an AFCA decision maker regarding jurisdiction is one within the ambit of the decision-making power pursuant to the tripartite contract [comprised by the Rules] and is not reviewable” because the appropriate standard of review of a decision of AFCA, including a decision not to exercise its discretion to exclude a complaint (and thereby assert jurisdiction), is legal unreasonableness.

39. [91]

    In support of that proposition, Mr Wise referred to Cromwell Property Securities Ltd v Financial Ombudsman Services Ltd [13] , Mickovski v Financial Ombudsman Service Ltd [14] , and Patersons Securities Ltd v Financial Ombudsman Service Ltd [15] .

40. [92]

    However, unlike those cases, this is not a case where AFCA is said to have:

41. [93]

    For that reason, the observations made in those cases concerning judicial restraint and intervention only in the case of legal unreasonableness are not to the point.

42. [94]

    Here, the question is whether AFCA had authority to consider the Complaints. It could only have such authority under the AFCA Rules and, in my opinion, on their proper construction, it does not.

43. [95]

    Having come to that conclusion, it is not necessary for me to consider DH Flinders’ alternative case concerning procedural fairness. However, in deference to the detailed submissions made by counsel, I will do so, albeit briefly.

Procedural fairness

1. [96]

   The AFCA Rules provide that AFCA will consider complaints submitted to it:

2. [97]

   The AFCA Rules also provide that AFCA:

3. [98]

   The AFCA Rules referred to in the preceding paragraph are directed to assisting complainants with the task of submitting a complaint they had themselves decided to make about a Financial Firm; hence the reference to a complainant’s anterior dissatisfaction with the Financial Firm’s response to their complaint.

4. [99]

   I do not see these rules as contemplating AFCA giving advice as to whether a complaint about one Financial Firm might better, or alternatively, be directed to another Financial Firm.

5. [100]

   Indeed, in AFCA’s “Operational Guidelines to the Rules” it is stated:

6. [101]

   Mr Sulan submitted that AFCA had “stepped beyond its complaint-handling role to facilitate claims” by:

7. [102]

   To consider the submission it is necessary to look at the circumstances leading up to the making of the Complaints.

8. [103]

   It is convenient to do so by looking at the events leading to the complaint by Dr Khan.

9. [104]

   On 10 October 2016 a representative of EFSOL sent Dr Khan a product disclosure statement for the EFSOL Ameen Investment Program.

10. [105]

    On 29 December 2016 Dr Khan entered into an Investment Management Agreement with EFSOL concerning the EFSOL Ameen Investment Program.

11. [106]

    On 8 May 2019 Dr Khan wrote to EFSOL:

12. [107]

    Dr Khan did not receive repayment of his funds and, on 13 June 2019, had a telephone conference with Mr Ian Donald from AFCA.

13. [108]

    In an internal memorandum written by Mr Donald a few days later [21] Mr Donald reported:

14. [109]

    Those searches revealed that EFSOL was a corporate authorised representative of DH Flinders Pty Ltd from 16 March 2016 to 27 November 2017.

15. [110]

    Mr Donald’s note of his telephone conference with Dr Khan included:

16. [111]

    It is clear from Mr Donald’s note that by the time he spoke to Dr Khan he had done the ASIC searches of which he wrote a short time later and had ascertained that EFSOL had been a corporate authorised representative of DH Flinders between 16 March 2016 and 27 November 2017 (having conducted those searches “on a whim”).

17. [112]

    Further, I would infer from the terms of Mr Donald’s note that Dr Khan had no prior knowledge of that fact.

18. [113]

    Later on 13 June 2019 Dr Khan wrote to Mr Donald:

19. [114]

    Later on 13 June 2019 Mr Donald wrote to Dr Khan setting out his understanding of the nature of Dr Khan’s complaint concerning the EFSOL Ameen Investment Program and also enclosing:

20. [115]

    Mr Donald continued:

21. [116]

    On 17 June 2019 AFCA wrote to DH Flinders stating that a complaint against it had been lodged with AFCA by Dr Khan.

22. [117]

    Under the heading “Time Frame” the letter stated that “relevant information provided to us by the Applicant is outlined below” following which there was a table as follows:

23. [118]

    Somewhat coyly, AFCA left blank the provision in the table for information concerning “how the complainant complained”.

24. [119]

    Under the heading “Complaint summary” the letter recited the representations made by EFSOL to Dr Khan and concluded:

25. [120]

    This letter suggested AFCA had already concluded DH Flinders was responsible for EFSOL’s conduct.

26. [121]

    On 20 June 2019 Mr Donald prepared the Internal Memo to which I have referred, and which was addressed to Ms June Smith, the Lead Ombudsman and Ms Ennis, the Senior Manager, in which he also recorded:

27. [122]

    On 31 July 2019 DH Flinders wrote to AFCA contesting its responsibility for EFSOL’s conduct, stating:

28. [123]

    AFCA responded on 3 September 2019 in the terms that I have set out at [42] above.

29. [124]

    The letter also stated that:

30. [125]

    AFCA adopted a similar course in relation to Mr Ibrahim. Mr Donald had a telephone conversation with Mr Ibrahim on 9 July 2019, evidently with the assistance of an interpreter.

31. [126]

    Mr Donald’s note includes:

32. [127]

    On 16 July 2019, AFCA sent a letter to DH Flinders stating Mr Ibrahim’s complaint in the same format as its 17 June 2019 letter concerning Dr Khan and, again, left blank the provision in the table for an explanation as to “how the complainant complained”.

Consideration

1. [128]

   In these circumstances, my conclusion is that Mr Sulan was correct to say that Dr Khan and Mr Ibrahim only brought their complaints against DH Flinders after DH Flinders’ existence and role was expressly brought to their attention by Mr Donald.

2. [129]

   Mr Sulan submitted that this occurred only after Mr Donald actively encouraged the expansion of the complaints that Dr Khan and Mr Ibrahim wished to make about EFSOL to include a complaint about DH Flinders.

3. [130]

   In my opinion there is substance to this submission.

4. [131]

   Thus, in the case of Dr Khan:

5. [132]

   By following this course, AFCA was going a good deal further than assisting Dr Khan, as a person dissatisfied with EFSOL’s response to his complaint about EFSOL, to submit a complaint about EFSOL.

6. [133]

   AFCA was positively suggesting to Dr Khan that he also submit a complaint about DH Flinders, evidently because AFCA had formed the view, which I infer it conveyed to Dr Khan, that DH Flinders “was responsible for the conduct of EFSOL”. [22]

7. [134]

   More generally, Mr Donald had recorded, evidently without demur from Ms Smith and Ms Ennis, that by 20 June 2019 AFCA was “looking at” whether EFSOL complainants could make complaints against DH Flinders and had decided that where complaints of false representations by EFSOL were made during the period between 16 March 2016 and 27 November 2017, complaints against DH Flinders “must be considered” and where appropriate “opened and joined to the EFSOL cases” [23] .

8. [135]

   This was hardly behaving in a manner procedurally fair to DH Flinders nor in a manner that was impartial. I think Mr Sulan was correct to submit that AFCA had here “entered the fray” and was acting in an advisory relationship with the Complainants.

9. [136]

   However, having concluded that AFCA has no contractual authority, jurisdiction or power to deal with the Complaints, it is not necessary for me to say anything further about this.

Conclusion

1. [137]

   I propose to make a declaration to the effect that AFCA does not have contractual authority, jurisdiction or power to determine the Complaints.

2. [138]

   I invite the parties to confer and agree on what other orders are necessary to give effect to these reasons.