AFCA has published an article explaining how it calculates loss when it upholds a consumer’s financial advice complaint.
AFCA is required to determine the direct financial loss from a breach.
It says the process involves calculating loss in a ‘counterfactual’ manner: a counterfactual is when you consider what should have happened, but for the breach.
In some cases, AFCA applies a “no-transaction” counterfactual. This assumes that, had the client received appropriate advice, they would have taken no action at all. This method is particularly relevant when:
- The original investment was in a stable, regulated product.
- The advice to sell the original investment was clearly unsuitable.
- The advice to invest elsewhere led to significant losses.
In situations where a no-transaction approach doesn’t make sense, such as cases involving long-term financial advice relationships, AFCA considers the client’s risk profile and an appropriate market benchmark to estimate the returns the client should have reasonably achieved with that level of market exposure.
If there is a scenario where AFCA can’t determine what the client would have been invested in, it may award compensation based on a capital loss, which calculates loss based solely on the decline in value of a specific investment, even though it does not account for potential gains or losses in other, suitable investments.
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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.
