Tug of war

Accountants have historically had very few, if any, disputes with their clients. In the same way patients will generally accept their doctors’ advice, accountants’ clients are less likely than the clients of other financial services professionals to seek a second opinion.

“A lot of the accounting clients I’ve had have told me they’ve had very few disputes or they’ve never had any disputes in some cases,” says Jaime Lumsden Kelly, a solicitor from The Fold Legal.

“So in that context, it’s probably true that accountants aren’t doing a lot of things right now to mitigate the risk of complaints, because they’re accustomed to simply not having them.”

However, with recent financial services changes and the licensing regime in place, there is now a greater exposure for accountants to potential disputes. Therefore, firms need to put in place the necessary and appropriate risk-mitigation practices.

Dispute risk areas

As accountants are well aware, from July 1 this year, the accountants’ exemption was phased out, making way for a new licensing regime for accountants who provide superannuation advice.

With the new licensing regime is still new for many accountants, the Financial Ombudsman Service (FOS) says there has been no reports of disputes to date. However, based on the types of services licensed accountants are likely to be offering and the kind of disputes it commonly sees with financial advisers, FOS says there are several risk areas where accountants need to pay extra attention to.

FOS Ombudsman Allison Maynard says accountants operating under a licence or as an authorised representative need to assess how the costs and administrative requirements of the SMSF weigh up against the benefits to the client of having an SMSF.

“Often we see disputes where the balance that’s being transferred into the SMSF doesn’t seem to warrant the expenses and administration that would be involved in administering an SMSF, although sometimes there are good reasons for that,” Ms Maynard says.

“We also see disputes involving applicants who clearly don’t have an understanding of their responsibilities as trustees of the SMSF and are incapable of carrying out the functions of a trustee.”

It is also important that before any advice is given, the impact of what that client is being taken out of – such as a superannuation fund – is assessed and closely scrutinised.

“If they’re being advised to move from one super fund to another, well what is it they’re losing by moving from where they are?” Ms Maynard says.

Looking at what insurances the client has in their existing super fund is another crucial element.

“Sometimes people may be looking to set up an SMSF but have insurance within their existing superannuation arrangements and they may be in their 50s and have health conditions,” Ms Maynard says.

“The issue of insurance and whether existing superannuation arrangements should be kept because the clients can’t get equivalent insurance, [then needs to be considered].”

There is also a legal requirement to have a separate investment plan for the SMSF. Although this requirement is widely known and appropriately implemented most of the time, instances of oversight have been known to occur.

Tips for avoiding disputes

 Letters of engagement

Proper letters of engagement outlining to the client exactly what services the accountant is providing is extremely important for avoiding disputes. Accountants who have never operated under an AFSL may not be fully aware of this.

“A lot of disputes arise out of a misunderstanding about the service that’s being provided. The client thinks you’re advising on something you’re not, and then when things go wrong they blame you,” Ms Lumsden Kelly says.

“If you tell clients upfront that you’re not advising on something, they will understand that it’s something for them to sort out or they will ask to provide advice and you can then properly scope that advice.”

Slater and Gordon commercial litigation and business law claims senior associate, James Naughton, says if accountants have concerns about whether they’re able to provide a certain aspect of financial product advice under their licence, “they should seek advice on that prior to doing so”. Even the smallest oversight can result in a dispute lodgement and potential liability.

Guiding clients through the SOA

In many cases, the clarity of advice provided by a professional can also influence the likelihood of a dispute.

“You hear talk about statements of advice and how clear or unclear they are, but it’s not even about the disclosure document, it’s about the communication experience overall,” Ms Lumsden Kelly says.

“The SOA needs to be compliant. It should be clear, concise, effective and set out all of the strategies that you’re giving. It should tell the client what you’re advising on, what the risks are – all that sort of information, but it’s not enough to just hand it over and give it to the client.”

The accountant needs to walk the client through the document and help them to understand it, Ms Lumsden Kelly adds. The client will also be able to raise any questions they have.

“If someone doesn’t quite understand what something means or they think it means something when it means another thing, that’s where a dispute can arise,” she says.

“If you walk them through that, that particular issue can be clarified and resolved much earlier.”

Some clients don’t read the SOA properly, and may only do so when a dispute arises.

File notes

Keeping accurate records that go above and beyond the statement of advice is another important element in both best practice and in avoiding potential disputes.

Mr Naughton says without file notes of the conversations accountants or advisers have with their clients, there’s no way to establish was said in the event of a dispute occurring.

“It’s important to have a really clear document management process,” he stresses.

While there are already statutory obligations in relation to the statement of advice document, Ms Lumsden Kelly says records of meetings, telephone conversations and emails should also be saved to a central location and easily accessible with the client file.

If this information is not recorded and securely stored, there is no way of accessing them to establish whether the advice was given, whether the advice was accurate or whether you collected information from the client.

“Also, if you keep good records and you communicate with your clients, that will actually help to stop clients bringing a dispute in the first place, because you have actually kept that open dialogue happening with them,” Ms Lumsden Kelly says.

Let the client choose their services

Clients cannot always afford advice for all their needs. In these circumstances, Ms Lumsden Kelly says it’s best for the accountant to have an upfront conversation with the client about what their objectives are. The will allow the accountant to provide an upfront indication of what is involved and how much it will cost.

“The client can then make their own decision about what their priority is, rather than you deciding for them,” she says.

“So if they can’t do everything, then they need to decide what’s right for them right now.”

Accountants – especially those under a limited licence – who are unable to service all their clients’ needs will need to refer to other professionals, and this arrangement needs to be made clear to the client from the onset.

“The best step to take in that case is to not just give the client the details of the contact, but to actually facilitate the meeting or contact and the recommended adviser. It keeps the accountants in the loop to start with, so it looks like they’re providing a good service to the client and they will know the client’s needs are being taken care of,” Ms Lumsden Kelly says.

The IPA has released a document titled ‘Guidelines for IPA member referrals of clients for financial services’ developed on behalf of IPA members by IPA’s lawyers, Maddocks. It assists members on how to navigate referral arrangements.

Preventing a dispute reaching an EDR

Every limited or full AFS licence holder is required to become a member of an external dispute resolution (EDR) body. They are also required to establish their own internal dispute resolution process. If a firm has robust internal systems for resolving complaints, this will help prevent complaints from escalating, Ms Maynard says.

She says FOS encourages firms to resolve disputes in the first instance by speaking to the client early on. There is a 45-day time frame for resolving disputes internally.

If a consumer has a complaint, Ms Lumsden Kelly recommends addressing the matter with the client as soon as possible.

“If they feel like you’re being attentive and you’re taking their complaint seriously, they will feel a bit more loved. They will feel like you’re actually interested in what their issue is. I think that actually helps to make things easier to resolve.

“If a client feels like you don’t care about their complaint or that you’re not taking them seriously, then they tend to get more hostile. If they get more hostile, they’re more likely to take it to an EDR.”

Firms may be able to prevent a dispute going to an EDR by simply acknowledging there was a problem in their advice or service.

“Sometimes it’s relatively easy to fix. If it’s not a big deal you might make a small payment to a client or refund fees or offer a discount on future fees… things like that can go to clients who’ve got a small complaint that isn’t hugely serious,” Ms Lumsden Kelly says.

“The more serious complaints where people have lost substantial amounts of money, those are not going to be easy to smooth over. Realistically, that’s going to be a PI claim, and then insurers will get involved, whether that goes to an EDR tends to be a little out of your hands.”

Ms Lumsden Kelly says a good resolution system should have a section that deals with who’s authorised to settle complaints and what solutions they’re able to offer, whether that’s a rebate on fees or some other form of compensation.

Calling in help

In a typical dispute scenario, the licensee will make a decision internally about how to deal with the issue and inform the consumer who will then decide if they’re happy with the response.

“If they’re not, they’ll then take it to FOS or the Credits Investments Ombudsman,” Ms Lumsden Kelly says.

Under the obligations of a licence, the licensee must inform the consumer of their right to go to an external dispute resolution body.

There may be some instances where firms decide to consult with an expert before the complaint reaches an EDR, but in most cases companies only involve experts when the dispute reaches the litigation stage, Ms Lumsden Kelly says.

“At the internal dispute resolution stage, you wouldn’t want to make that kind of expenditure on it, because you don’t yet know how far it’s going and how serious it is.”

Once the dispute has reached the litigation level, the accounting firm needs to engage lawyers with experience in financial services who understand what financial product advice is and what the relevant best interest obligations are.

 Personal indemnity insurance issues

It’s important to note that deciding when to call in external help will have a lot to do with the terms of the personal indemnity insurance policy held by the firm, Mr Naughton says.

“If a professional negligence claim has been made against an accountant or they’ve been notified about a potential claim, in many cases they really need to check their professional indemnity insurance to determine whether that’s a notifiable event. They may have obligations towards their insurer to disclose that,” he explains.

“Obviously it is in the accountant’s best interest to obtain legal advice to understand what their potential risk is, and then get advice about the best way to manage the litigation process if that’s on the horizon, so it’s important to get that advice early.”

Ms Lumsden Kelly says deciding the right time to notify the insurer can be a balancing act.

“There is a competing pressure because people don’t want to notify claims as that can potentially affect next year’s premium,” she says.

“You want to notify the insurer to make sure you are actually covered for it, but you don’t want to notify because your premium might go up. If it doesn’t actually go anywhere, if nothing ever comes of it, then you’ve notified it and impacted your premium for no good reasons.”

It is also important that accounting firms pay attention to any changes with their policy as they can change from year to year, Ms Lumsden Kelly warns.

Recovering from a lengthy dispute

Recovering from a serious dispute or lengthy dispute process with a client is never easy, but Ms Maynard says maintaining a relationship with the disgruntled party will go some way to limiting any negative ramifications.

Once a proceeding is issued and a matter is on the court record, Mr Naughton says it becomes publically available information and will be difficult for a professional to stop the news from spreading.

However, if a professional relationship has been maintained to the best of the accountant’s ability – including showing the client your willingness to solve any outstanding issues and being attentive to their concerns – this can, to a degree, mitigate risks to your reputation.

“However, prevention really is the best strategy for accounting firms,” Mr Naughton says.