Planners pocket commissions, even as advice falls short

The Australian 12:00am December 11, 2017

Ben Butler, Michael Roddan

The Financial Ombudsman Service has ruled in favour of a financial adviser who secretly pocketed a $25,800 property investment commission despite finding he engaged in misleading conduct.

In an extraordinary ruling last month, ombudsman Sarah-Jane Christensen said adviser Grahame Davis, who works for dealer group Beacon Financial, was not required to pay a cent to his client, Perth man Craig Dickson.

The ruling throws light on the dangers of direct property investment, where unlicensed spruikers are able to charge big commissions because of a carve-out in the Corporations Act.

In Mr Dickson’s case, he was covered by the act, and able to go to FOS — which is set to be abolished — because he invested through his self-managed super fund. However, Ms Christensen, a former senior ANZ lawyer, found that Mr Dickson could not show a loss on the $480,000 property because she was “not satisfied that the price paid for the property was inflated by the commission”.

“The payment of the commission may have reduced the property developer’s profit from the sale but not the purchase price,” she said in her November 22 ­determination.

Mr Dickson questioned Ms Christensen’s logic, pointing out that the commission amounted to about 5.6 per cent. “If we’d bought another property — I don’t know any real estate agent that charges 5.6 per cent,” he said.

Mr Dickson also complained that Ms Christensen failed to take into account that there were two versions of a financial services guide apparently issued by Mr Davis.

One, produced by Mr Davis, allowed him to charge property commissions of “between 0 per cent and 6 per cent”, while the other did not.

“I didn’t get any explanation as to why they’re different and FOS, amazingly, didn’t think it was ­relevant because it didn’t go to showing a loss,” Mr Dickson said.

Ms Christensen also found Mr Davis misled his client.

“I am satisfied that the ­adviser’s failure to disclose his ­entitlement to a commission was misleading,” she said. “The existence of the commission may have altered the applicant’s decision to accept the adviser’s property ­recommendation.”

Mr Dickson was told of the commission only when it came time to settle the deal, which Ms Christensen said was inadequate.

“The adviser’s entitlement to a commission was not made in ­adequate time for the applicant to make an informed decision whether to proceed with the property purchase,” she said.

Mr Dickson said the ruling sent “a clear message to all ­financial planners around the country that they will not be penalised no matter how much they take in undisclosed commissions, so long as they do it in such a way that means their clients can’t prove any losses incurred were as a direct result of the commission having been taken”.

Ms Christensen declined to comment while Mr Davis and Beacon managing director Peter Daly did not return calls.

ASIC records show Mr Davis, an industry veteran, has a clean disciplinary record.

Industry-run FOS, which is to be replaced by a new government body, the Australian Financial Complaints Authority, from the middle of next year, said it could not comment on specific cases.

“FOS does not in any way ­condone undisclosed commissions,” spokeswoman Virginia Wallace said. “In cases where a commission is not disclosed, we would expect the FSP [financial services provider] to report this directly to ASIC whenever it comes to their attention.

“We would also refer the ­matter to ASIC as a compliance breach of the licence holder under our obligation to report misconduct.

“In order for FOS to be able to award compensation an adviser’s inappropriate conduct needs to be the cause of the loss suffered by the consumer.”

The exemption for self-­financed investment property has attracted the interest of politicians and regulators.

Property is not a “financial product” under the Corporations Act, which means advice or financial services related to property investment are not regulated by ASIC. However, the use of an SMSF to purchase property is monitored by ASIC.

In response to a question on notice from a Senate hearing ­earlier this year, ASIC admitted property investment advisers who only provide advice to ­consumers on real property are “not prevented from receiving conflicted remuneration”.

“This is because ... they are not regulated as financial advisers,” ASIC said. “ASIC has not ­provided any recent recommendations for reform of advice on property investment.”

The Greens’ senator Peter Whish-Wilson said: “It beggars belief, with half a trillion dollars in investment property, there is next to no coverage of this asset under financial regulations.”

“Property spruikers are being paid commissions of up to 6 per cent to sell properties,” he told The Australian.

“There is absolutely no ­requirement for them to disclose this interest or ensure the clients best interest.”

Senator Whish-Wilson said: “If ever there was a case of conflicted remuneration, this is it. With the property market coming down off its ridiculous peaks, developers are likely to get more desperate to sell, so it is urgent we act now to address it.”

There has been a renewed ­interest in self-managed super funds borrowing to buy into the property market amid surging house prices and prudential ­controls on lending. SMSF ­borrowing for property has grown from $2.5 billion in 2012 to more than $24bn this year.

The government’s Financial System Inquiry, chaired by banker David Murray, recommended SMSF borrowing be banned. However, the proposal was ­ignored by the government.