Jun 9, 2008 - Determination. Page 1 of 19. Case number: 227484. Investments - Managed Investments - Advice - Inappropria
Determination Case number: 227484 Investments - Managed Investments - Advice - Inappropriate advice 14 December 2012
Background 1.
This dispute concerns financial planning advice provided by an adviser between 21 December 2007 and 1 October 2008 (the “relevant period”). The advice was given to the Applicant in her individual capacity and in her capacity as one of the trustees of a self-managed superannuation fund (the SMSF).1 Throughout the relevant period, the adviser was an authorised representative of the Financial Services Provider (the FSP).2
Previous Events 2.
The Applicant first sought advice from the adviser in February 2007. At the time, the adviser was an authorised representative of another financial services provider (the Previous Company). That Company ceased trading in April 2009.
3.
The adviser provided a Statement of Advice to the Applicant on 26 February 2007 (the 2007 SOA). The 2007 SOA included recommendations to: a.
establish a geared portfolio in her own name
b.
rollover her existing superannuation into the SMSF, and
c.
invest the geared portfolio and the SMSF funds in a variety of investments, relevantly including the Prime Retirement and Aged Care Property Trust (Prime).
4.
On the adviser’s advice, the Applicant invested $60,000 personally and $230,000 on behalf of the SMSF in Prime (being $130,000 in February 2007 and another $100,000 shortly after then).
5.
On 3 August 2007, Prime was listed on the Australian Stock Exchange.
6.
Sometime between 4 and 10 December 2007, the adviser verbally advised the Applicant to sell some of her investments in both her geared portfolio and in the SMSF and use the money to purchase units in the Orchard Diversified Property Fund (Orchard). The Applicant followed that advice and invested in Orchard personally and on behalf of the SMSF.
1
2
In this Determination, reference to the Applicant means the Applicant in her personal capacity and as trustee of the SMSF. At all relevant times, the FSP held an Australian Financial Services Licence (AFSL).
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The FSP 7.
On 21 December 2007, the adviser became an authorised representative of the FSP. It appears that the Applicant was not advised of the change and she was not given a Financial Services Guide.3
8.
On 11 March 2008, the adviser provided the Applicant with a written portfolio review (the Review) for both her personal investments and those of the SMSF. The Review confirmed the changes recommended to the Applicant in December 2007, being: a.
the redemption of investments in Platinum International in both the Applicant’s own name and in the name of the SMSF
b.
the investment of $50,000 in Orchard by both the Applicant personally and by the SMSF
c.
the investment of $30,000 in the Platinum Asia Fund, and
d.
the repayment of $43,761 of the Applicant’s loan.
9.
After email exchanges, the Applicant had a meeting with the adviser on 25 March 2008. At that meeting, the adviser did not recommend that the Applicant make any changes to the portfolios.
10.
The Applicant claims that she raised concerns about the poor performance of the Orchard investments in telephone conversations with the adviser in March 2008. She claims that the adviser strongly recommended that she retain the investments in Orchard, as it was her “most secure investment”. The FSP denies that such conversations occurred.
11.
The Applicant contacted the adviser by email on 9 June 2008, expressing her intention to sell some of her investments. The adviser advised her to retain her Prime shares and told her that the FSP had a ‘buy’ recommendation on them.
12.
The Applicant was overseas from about June to late September 2008. Her son had a power of attorney to act on her behalf during her absence.
13.
On her return in late September 2008, the Applicant claims that she again raised her concerns about the poor performance of the Orchard investments in telephone conversations with the adviser. The Applicant says that the adviser again recommended that she retain the investments. The FSP also denies that these conversations occurred.
14.
On 1 October 2008, the Applicant terminated the services of the FSP and the adviser.
3
Although this was a breach of the Corporations Act, there does not appear to be any loss caused by the breach.
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The Dispute 15.
The Orchard investment became frozen in June 2008 and shares in Prime reduced dramatically in October 2008. Prime was subsequently delisted, with no redemptions being allowed. The Applicant therefore still holds investments in Orchard and Prime personally and as trustee of the SMSF.
16.
The Applicant lodged a complaint with the Financial Ombudsman Service (FOS) on 23 November 2010.4
17.
She claims losses of $112,097.14 in respect of Orchard, $243,928 in respect of Prime and $6,000 for other loss (as discussed below, being $3,000 for her Prime claim and $3,000 for the Orchard claim).
18.
This Dispute has been the subject of a Recommendation by a FOS Case Manager. The Recommendation was accepted by the FSP but not by the Applicant.
Summary of Applicant’s position 19.
The Applicant claims as follows: a.
The adviser did not have a reasonable basis for the advice provided to her during the relevant period because: he inappropriately relied on the 2007 SOA, which had expired and was not issued by the FSP he failed to provide the Applicant with a new statement of advice (SOA), as required under section 946A of the Corporations Act (the Act), and he did not perform an updated needs analysis or assessment of the Applicant’s circumstances.
4
b.
She spoke with the adviser on several occasions to express concerns about the performance of the Orchard investment and the adviser did not respond to those concerns.
c.
The FSP failed to satisfy the requirements of section 945A of the Act when advising the Applicant to remain in the Prime investment.
d.
The adviser failed to act in accordance with her instructions to sell her Prime investment.
e.
She suffered a loss because of the adviser’s recommendation that she remain in the investments.
Through the course of this dispute and for reasons set out in FOS correspondence to the parties dated 19 January 2012, the issues have been limited to the relevant period.
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Summary of FSP’s position 20.
The FSP claims as follows: a.
It has been unable to locate the adviser for a statement, as he is no longer an authorised representative of the FSP.
b.
The FSP is only responsible for the advice during the relevant period.
c.
The Applicant did not raise any concerns with the adviser about her investments in Orchard and the adviser did not recommend that the Applicant retain those investments.
d.
The advice to retain the Prime investments was reasonable, based on the Applicant’s needs and objectives at the time.
e.
The Applicant incurred no loss from the time of the Review until the time she terminated her engagement with the adviser. To the contrary, the Applicant made an overall gain of $460 and the investments could have been redeemed in October 2008.
Issues 21.
The main issues in dispute can be summarised as: a.
whether the adviser and/or FSP breached any obligation to the Applicant between 11 March 2008 and 1 October 2008
b.
whether the adviser and/or FSP acted in accordance with the Applicant’s instructions, and
c.
if there was a breach, whether the Applicant suffered a direct financial loss and/or consequential loss for which she should be compensated and, if so, the amount of that loss.
Reasons for Determination 22.
While the Panel has had regard to the law, good industry practice and relevant codes of practice, the Panel determines this complaint based on what it considers fair in all the circumstances.5
23.
The Panel has considered all the documents and submissions provided by the parties (including submissions after the Recommendation). The Panel is satisfied that the documentation on which it has based the findings has been exchanged between the parties.
5
Paragraph 8.2 of the FOS Terms of Reference.
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The law, good industry practice and codes of practice 24.
Liability can arise for a client’s loss for breach of contract, duty of care or statutory duty. The following laws, industry practice and codes of practice are of particular relevance to this dispute.
General duties 25.
Financial advisers and financial services providers have a common law duty of care. They are required to act with reasonable care and skill.6
26.
Under the Act, holders of an AFSL must:
27.
a.
do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly
b.
comply with financial services laws and take reasonable steps to ensure that its representatives comply with financial services laws
c.
have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements
d.
maintain the competence to provide those financial services, and
e.
ensure that its representatives are adequately trained and are competent to provide those financial services.7
Generally, AFSL holders are responsible for the conduct of their representatives.8
Appropriate Advice 28.
AFSL holders must ensure that any personal advice given to retail clients through its representatives (advisers) is appropriate. This does not mean that it must be ideal, perfect or the best advice.9 To have a reasonable basis for making a recommendation, before giving the advice, advisers are broadly required to “know” both the product and the client.10
29.
The Australian Securities and Investments Commission (ASIC) considers that, for an adviser to conduct reasonable enquires into the subject matter of the advice (i.e. to ‘know your product), the adviser must consider and investigate the financial products, classes of financial product and strategies on which advice is provided to the client.
6 7 8 9 10
Carmody v Priestly & Morris Perth Pty Ltd [2005] WASC 120 at [93] per Hasluck J. Section 912A of the Act. Pursuant to Part 7.6, Division 6 of the Act. ASIC Regulatory Guide 175.96. Section 945A(1) of the Act, which applies to AFSL holders and their representatives.
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30.
31.
32.
For advisers to “know your client”, they must consider the client’s relevant personal circumstances,11 including the client’s needs, circumstances, risk profile and the time frame for the investment. ASIC specifies factors that are relevant to making reasonable enquiries of a client’s circumstances, including: a.
the need for regular income (e.g. retirement income)
b.
the tolerance of the risk that the advice (if followed) will not produce the expected benefits
c.
the client’s existing investment portfolio, and
d.
the tax position, social security entitlements, family commitments, employment security and expected retirement age.12
The Financial Planning Association (FPA) Rules of Conduct relevantly provide that financial services providers must: a.
when preparing recommendations to clients, conduct or have access to research on financial strategies and products that may be appropriate to achieve the client’s identified needs and objectives13
b.
when preparing recommendations to clients, develop a suitable financial strategy or plan for the client based on the relevant information collected and analysed,14 and
c.
take reasonable steps to place the client in a position to comprehend the recommendations and the basis for the recommendations.15
Where advice is for a self-managed superannuation fund, it is important that the adviser consider both the personal circumstances of the members of the fund and the fund itself. This means that the adviser should obtain a copy of the superannuation fund’s investment strategy.16
Statement of Advice 33.
11
12 13
14 15 16 17 18
SOAs are documents prepared by advisers for clients. They set out advisers’ recommendations, the basis for those recommendations and other information such as fees, commissions and conflicts. SOAs must be worded and presented in a clear, concise and effective manner17 and contain the level of detail that a client would reasonably require to decide whether to act on the advice.18
The term “relevant personal circumstances” is defined in section 761A of the Corporations Act to mean “...such of the person’s objectives, financial situation and needs as would reasonably be considered to be relevant to the advice.” ASIC Regulatory Guide 175.104 Rule 109. Whether the FSP was actually a member of the FPA is not relevant, as FOS must look to good industry practice. Rule 110. Rule 113. Required by section 52(2)(f) Superannuation Industry (Supervision) Act 1993 (Cth). Section 947C(6) of the Act. Sections 947B(3) and 947C(3) of the Act.
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34.
SOAs must generally be given to clients when, or as soon as practicable after, the advice is provided and, in any event, before the investment is made.19
Outcome and Reasons 35.
The Panel determines this complaint based on what it considers is fair in all the circumstances, having regard to the relevant law, good industry practice, codes of practice and previous FOS decisions.20
36.
The Panel has considered all the documents and submissions provided by the parties (including submissions after the Recommendation was made). It is satisfied that the documentation on which it has based its determination has been exchanged between the parties.
37.
The issues in dispute are considered by the Panel under the headings set out below.
The Review 38.
39.
The Applicant says that she was advised in the Review to retain her investments and that was not appropriate for her circumstances, needs and objectives at that time. In particular, the Applicant claims that: a.
it was inappropriate for the FSP to rely on the needs analysis in the 2007 SOA, as it was provided by a separate entity – the Previous Company, and
b.
the adviser should have provided her with an SOA.
The FSP responded that the Review did not include advice to retain the Orchard investment and the advice to remain in Prime was appropriate for the Applicant’s personal circumstances needs and objectives at that time.
Personal or general advice or information only? 40.
The Applicant’s argument is only valid if the Review included “personal” financial product advice (as opposed to “general” advice or merely providing information). That is because the duty to give an SOA and the duty to provide suitable advice only arise when personal advice is provided.
41.
Financial product advice is either “general” or “personal” advice, with different duties attaching to each. Broadly, advice is personal if the adviser considered (or should have considered) one or more of the client’s
19
20
Section 946C(1) of the Corporations Act requires that FSPs “give” clients an SOA before providing a further financial service. According to ASIC Regulatory Guide 175.149 the SOA must be provided before arranging for a financial product to be issued. In other words, before implementing the advice in the SOA. This does not apply if the advice is given by another means (in which case other requirements apply). Paragraph 8.2 of the FOS Terms of Reference.
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objectives, financial situation and needs.21 All other financial product advice is general advice.22 42.
43.
It is therefore necessary to determine: a.
whether the Review merely provided information or whether it also included financial product advice, and
b.
if it included financial product advice, whether it was personal or general advice.
The Review states: “This document is a review of your investment portfolio and financial position from the 4th December 2007 to the 11th March 2008 provided to you as part of our ongoing service. If there are any errors or misrepresentations about your personal circumstances, financial situation, objectives or needs, this advice may be inaccurate or inappropriate. … We conducted a review of your portfolio during December. As part of this review we recommend the following transactions.” (emphasis added)
44.
The Review stated as follows in relation to the Prime: “At this time we are still recommending holding this asset as along with the quarterly income the units have a Net Tangible Asset of $1.05 per unit. … We regard this investment as extremely solid property investments and are recommending that our clients continue to hold these assets.”
45.
The FSP is adamant that the adviser never provided any advice to the Applicant in relation to Orchard. However, the Review clearly restates the recommendations made in December 2007 (including the investment of $50,000 in Orchard by both the Applicant personally and by the SMSF).
46.
The Panel is satisfied that the Review constituted the provision of personal advice. The Applicant’s personal financial information was included throughout the document. Additionally, the paragraph disclaiming responsibility for inaccurate personal circumstances, financial situation, objectives and needs, demonstrates that those factors were critical – thereby supporting the view that the advice was personal.
47.
Further, the FSP would not need to have argued that the advice to remain in Prime was appropriate, unless it was personal advice.
21
22
The advice must also have been provided by an AFSL holder or a person in his or her capacity as representative of an AFSL holder and be “financial product advice” ie there is a recommendation, statement of opinion or report that is intended to influence a person in relation to a particular financial product or a class of financial products or could reasonably be regarded as being intended to have such an influence: Subsections 766B(1) and (3) of the Corporations Act. Section 766B(4) of the Corporations Act.
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48.
As the Panel has found that the Review included financial advice that was personal, it is necessary to consider whether an SOA should have been provided at that time and whether the advice was suitable for the Applicant.
Statement of Advice 49.
Where personal advice is given, an SOA must be provided unless it falls within the exception, requiring that: a.
the “providing entity” is a financial services licensee and
b.
the advice is “further market-related advice”, which means that the provider previously gave the client an SOA that set out the relevant personal circumstances in relation to the advice and the basis for, and the personal circumstances relevant to, the further advice are not significantly different from those on which the previous advice was given.23
50.
That exception does not apply in the current dispute because, according to the solicitor for the FSP, the “providing entity” of the 2007 SOA was the adviser, not the Previous Company.24 Even if that was not correct and the Previous Company was the “providing entity” of the previous SOA, it clearly was not the same financial services licensee as was required to give an SOA in March 2008.
51.
Accordingly, the Panel is satisfied that the FSP should have given the Applicant an SOA when issuing the Review in March 2008.
Appropriateness of Review advice 52.
It is also relevant to consider whether the advice in the Review (not to alter the Prime or Orchard investments and to maintain the related loan) was suitable for the Applicant and the SMSF in March 2008.
53.
As no fact-finding exercise was ever conducted by the FSP, it is necessary to turn to the 2007 SOA as a starting point from which to understand the Applicant’s circumstances. As at 26 February 2007, the Applicant's personal circumstances, needs and objectives were as follows: Personal – she was widowed, aged 56, in excellent health and had resigned from her contract position, ceasing paid employment. Income - Her estimated income for the financial year ending 30 June 2007 was approximately $68,750 with an estimated tax assessment of $18,560. Expenses - Her living expenses were approximately $50,000 pa and she was seeking to meet these expenses by drawing down on investment earnings. She wanted to travel extensively during her
23
24
Section 946B(3) and (3A) of the Act as substituted by reg 7.7.10AE of the Corporations Regulations and section 947C of the Act. In which case section 947C of the Act applies and not the exception in reg 7.7.10AE.
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retirement and estimated this would cost approximately $30,000 pa above her normal living expenses. Assets - She owned her own home worth $850,000 and had an investment property worth $390,000 with a mortgage of $209,000. Her superannuation was worth $694,574 and she had $121,453 in cash and shares. 54.
The Applicant’s objectives as set out in the 2007 SOA were: In the short term – to retire and restructure her financial affairs to provide greater simplicity and opportunity and establish an effective retirement income stream from her current asset base. In the medium term – to continue to build her overall asset base and develop financial stability and a structure to take advantage of new opportunities. In the long term – to continue to generate a comfortable level of income from her retirement streams and continue to grow her investment base in a tax effective manner.
55.
The 2007 SOA defined the Applicant as a ‘growth investor’. It also stated that the recommendations in relation to the SMSF were biased towards “alternative investments” to provide a more consistent return.
56.
Suitability of the advice in March 2008 is not measured by asking if there were changes to the Applicant’s circumstances between February 2007 and March 2008. That approach wrongly assumes that the February 2007 advice was appropriate.25
57.
However, even if the 2007 advice was appropriate, there had been some significant changes in the Applicants circumstances between February 2007 and March 2008:
25
a.
The Applicant’s income in the 2007 SOA was based on the financial year ending 30 June 2007, which included income from her work. However, the Applicant had retired. Her income would therefore have altered by March 2008, as she had no income from work during that financial year. Her income was directly relevant to her ability to continue to meet the loan repayments of the strategy in the 2007 SOA.
b.
The 2007 SOA recommended that the Applicant invest $60,000 personally and $130,000 for the SMSF in Prime. Later in 2007, the Applicant invested a further $100,000 in Prime on behalf of the SMSF, following another recommendation by the adviser (without any further SOA).
c.
Interest rates had increased. The Applicant pointed out that she had borrowed $60,000 to invest and, by June 2008, interest rates were 9%. The tax deduction of the loan interest might have been an important
The question of the suitability of the February 2007 advice is not is in issue in this dispute.
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consideration were it not for the fact that the Applicant had retired and was not subject to the marginal rate of tax. d.
Additionally, the global financial crisis (GFC) had commenced during that time. The GFC was an important factor in light of the Applicant’s gearing and the portfolios as a whole.
e.
The Panel considers that it was not reasonable of the adviser to assume that the Applicant’s attitude to risk remained unaltered, as she had already lost $100,000 in the value of the Prime investments (as well as losing significant amounts with other investments).
f.
The Applicant had sold her investment property, which meant that she had reduced security. According to the Applicant, that meant that she was forced to sell her own home when she lost her money through the Prime and Orchard investments and was left with an outstanding loan.
58.
The FSP claims that the advice to retain the Prime investments was reasonable based on the Applicant’s needs at the time. However, there is no evidence that the adviser knew what the Applicant’s needs were by March 2008. The Panel is concerned by the failure of the adviser to take into account the changed personal circumstances of the Applicant in the Review.
59.
Further, the Review stated: “During the last 6 months we have moved your portfolio to a more defensive allocation”. That statement reflected, or possibly created, an expectation that the portfolios had been altered to be less aggressive (even for a growth investor).
60.
In addition to the above concerns with the suitability of the advice in March 2008, the Panel considers that a proper review in March 2008 is likely to have recommended changes to address the lack of diversification of the portfolios for the following reasons:
61.
Firstly, by March 2008, the Applicant had invested a total of $290,000 in Prime on her own behalf and for the SMSF following the adviser’s recommendations.26
62.
Secondly, the adviser effectively admitted that the investment in Prime was overweighted and that part of the rationale for originally investing so much in Prime had not proved to be valid. In his email of 16 June 2008, the adviser validated the son’s concern that too much (ie 20%) of the Applicant’s nonsuperannuation assets were invested in Prime. He explained that he had originally recommended a “higher position” for two reasons - because the high income suited the gearing strategy and because he anticipated listing at a premium. However, he acknowledged that the second reason had not proved to be accurate.
63.
Thirdly, the Panel is not only aware that the portfolios of the Applicant and the SMSF were overweight with investments in Prime. The Panel also considers that the Orchard and Prime investments meant that there was a
26
Although that was not the value of the investment at that time.
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lack of diversity as between different asset sectors in the overall financial position of the Applicant and the SMSF. The investments in Orchard in December 2007 exacerbated the existing over-exposure of the portfolios to the property sector. 64.
Fourthly, the advice in the Review did not ensure that the Applicant had sufficient liquid investments. That was critical for a geared portfolio where loan interest continued to accrue.
65.
The Panel considers that neither the alleged benefits of investing in Prime nor the research in support of Prime as at March 2008 justify such a lack of diversification (with the resulting increase in risk). That risk was heightened due to the non-liquid nature of the Prime and Orchard investments.
Conclusion 66.
In light of the above, the Panel is not satisfied that the advice in the Review to retain the existing assets and loan was appropriate for the Applicant or the SMSF.
67.
The Panel is persuaded that, if the FSP had complied with its obligations and provided appropriate advice in March 2008, it is likely that at least some of the investments in Prime and/or Orchard would have been sold and used to repay the loan and to invest in more defensive assets.
Alternative basis for conclusion 68.
Given the conclusion that the FSP breached its duties in March 2008, it is not necessary to consider the other breaches alleged by the Applicant. However, even if the Review did not amount to personal advice, the Panel is not satisfied that the FSP satisfied its common law duty to act with reasonable care and skill.
69.
When a financial service provider, acting with reasonable care and skill, should review an ongoing client of an adviser that is its new authorised representative, depends on the circumstances, including:
70.
a.
when the last review occurred
b.
the arrangement between the client and the adviser (eg if the client was paying for ongoing advice)
c.
the reasonable expectations of both adviser and client (eg given the history of frequency of reviews and the review obligations in any deed of transfer), and
d.
any change of circumstances since the last review (including a changed attitude to risk of which both the adviser and the client were aware or substantially changed market conditions).
If inappropriate advice was provided by a previous financial services provider, that entity could remain liable for loss that arises after the client moves to another provider. The period of loss for which a previous provider
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can be liable will depend on when the new provider should have reviewed the client’s position and what advice would have been reasonable at that time. 71.
The Panel is of the view that the FSP in this case was subject to a common law duty to ensure that proper reviews of the financial position of the Applicant and the SMSF were conducted regularly. Yet no full and proper review was conducted when the Applicant became its client (in December 2007) or even in March 2008, despite the fact that the financial position of the Applicant and the SMSF had not been reviewed since February 2007.
72.
Accordingly, the Panel is satisfied that the FSP breached its common law duty.
Causation and contribution 73.
Compensation for loss does not automatically follow from the Panel being satisfied that the FSP has breached the law. In determining this dispute, it is necessary to consider whether the Applicant has established on the balance of probabilities that: a.
there was a breach (which has already been found)
b.
the breach caused the loss (causation), and
c.
that loss was a direct, reasonably foreseeable financial loss (loss).
74.
The onus is on Applicant to establish, on the balance of probabilities, not only that the FSP breached its duties, but that the breach caused the Applicant and/or the SMSF to suffer a loss. (The Applicant does not need to show that the breach was the only, or even most significant, cause of the loss.27 It is sufficient if it had a substantial, rather than a negligible effect on the loss.28)
75.
Causation is a question of fact to be decided by the application of common sense principles.29 In general, the application of the “but for” test will be sufficient to prove the necessary causal connection (ie would the Applicant have acted differently and avoided (or reduced) the loss but for the FSP’s wrongful act or omission?).30
76.
The issue of causation in the current dispute is whether the Panel is satisfied that the inappropriate advice and lack of SOA from the adviser caused the loss claimed by the Applicant. The answer to that question depends on whether the Applicant would have followed a recommendation in March 2008 to sell some of the Prime and/or Orchard investments.
27
28 29 30
Foxeden Pty Ltd v IOOF Building Society Limited & Anor [2006] VSC 47 at [20]. I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [33], [57]. March v Stramare (E and MH) Pty Ltd (1991) 171 CLR 506. Sali & Anor v Metzke & Allen: [2009] VSC 48 per Whelan J at [19]-[23]. If the answer is yes, the FSP’s breach is likely to have caused the loss. This test is only a guide. The ultimate test is whether, as a matter of common sense, the relevant breach caused the loss.
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77.
The FSP says that the Applicant should bear some responsibility for the loss, as she decided not to sell the investments in Prime in June/July 2008, despite expressing an intention to do so.
78.
However, the Panel accepts that the Applicant was persuaded not to sell at that time (and notes that the relevant advice was expressed very strongly by the adviser). The extent to which the Applicant relied on and followed the adviser’s recommendations is evident from an examination of correspondence between the Applicant, her son and the adviser in June and July 2008. That shows that the Applicant followed the adviser’s suggestions, despite serious misgivings.
79.
That situation reinforces a conclusion that it is likely that the Applicant would have followed proper advice if it had been given in March 2008.
80.
That view is supported by the fact that the Applicant was not an experienced investor.
81.
On balance, the Panel is satisfied that, if not for the inappropriate advice, it is likely that the Applicant would have sold the Prime and/or Orchard investments (as discussed below) and that the adviser’s recommendation in the Review to retain her investments caused the losses.
82.
Therefore, the Panel is satisfied that the FSP’s breaches caused the claimed loss and the Applicant did not contribute to that loss.
83.
The issue then arises as to what loss resulted.
The Nature of the Loss 84.
FOS may decide that an FSP must compensate an Applicant for direct financial loss or damage but cannot award punitive, exemplary or aggravated damages.31 Compensation for consequential financial loss or damage is limited to a maximum of $3,000 per claim.32
85.
In addition to loss incurred as a result of the allegedly inappropriate advice, the Applicant seeks compensation of $6,000 ($3,000 for Prime and $3,000 for Orchard) because she was forced to sell her home.
86.
Under clause 9.3(b) of the Terms of Reference, the Panel may award compensation for non-financial loss where there has been “an unusual degree or extent of physical inconvenience, time take to resolve the situation or interference with the Applicant's expectation of enjoyment or peace of mind”.
31
32
Paragraphs 9.2 and 9.6 of the Terms of Reference. The amount of the compensation is subject to the maximum specified in paragraph 9.7. Paragraph 9.3(a) of the Terms of Reference. This amount is subject to the overall maximum specified in paragraph 9.7.
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87.
The Applicant says that she has had to return to work and sell her home to pay off the investment loan, as the interest was compounding and she did not have the resources to meet the increasing liability.
88.
The Panel is satisfied that the Applicant suffered an unusual degree of physical inconvenience as a result of the Dispute, particularly as she had to sell her home.
89.
Given that the maximum compensation amount applies in respect of the SMSF’s loss (see below), the Panel considers that the SMSF is not entitled to compensation in respect of non-financial loss. Additionally, the maximum that the Panel can award for non-financial loss is $3,000 (as discussed above).
90.
Accordingly, the Panel considers it fair that the Applicant be awarded $3,000 compensation for non-financial loss in respect of her personal investments.
The amount of the loss 91.
The Applicant claims the total loss in value of the Prime and Orchard investments from 21 December 2007 until 2 February 2012, being $243,928 (for Prime) and $112,097.14 (for Orchard).
Several Claims within the dispute 92.
The maximum compensation that can be awarded is $150,000.33 This cap applies in respect of each ‘claim’. There can be more than one claim in each “dispute” before FOS. According to the FOS Operational Guidelines: “FOS takes the view that for the purposes of the TOR, the expression “claim” refers to the set of facts that, put together, give an Applicant the right to ask for a remedy. This means a set of separate events or separate facts that lead to the alleged losses. FOS does not aggregate a number of claims into one claim just because the claims all arose from an ongoing relationship between an FSP and an Applicant.”
93.
The Panel is satisfied that this dispute is comprised of two claims – one in respect of the Applicant’s personal loss and one for the SMSF’s loss.
Frozen investments 94.
33
The investments in dispute are frozen and may: a.
be worthless, in which case, it would be unfair to deduct amounts from the compensation for their current (theoretical) value, or
b.
have residual value, in which case it would be unfair not to deduct amounts from the compensation. Otherwise the Applicant and/or SMSF would benefit twice.
Paragraph 9.7 of the Terms of Reference.
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Determination
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95.
The uncertainty of the future of the investments can be resolved by not deducting any amount for the current notional value of the investments from the compensation but requiring that they be assigned to the FSP on request. The assignments would be subject to the terms of the trust deeds of the Funds and payment of any relevant transfer or assignment fees by the FSP.
Timing of loss 96.
In the current dispute, the Panel considers that the loss should be measured from the date of the inappropriate advice/lack of appropriate advice, being 11 March 2008.
97.
With respect to an end date for calculation of loss, the FSP submitted that the Applicant ceased to be its client on 1 October 2008 and the FSP cannot be liable for any diminution in the value of the investment after that date because it was no longer able to advise on it.
98.
The Panel does not agree. If, for instance, a person is wrongly advised to take out a particular geared investment and he or she is unable to afford to redeem that investment due to falling values, it would be unfair for the adviser to cease to be liable for the resulting loss, simply because the client (or the FSP) decides to terminate their arrangement.
99.
Similarly, it might not be reasonable to expect that a person subsequently redeem an investment. For instance, the only way that a person might be able to repay the associated loan might be by selling his or her house, which would generally not be expected. Alternatively, the investment might have reduced in value to such an extent that that it would be considered reasonable to retain it (to avoid crystallising the loss).
100.
If a financial services provider breaches its duties, it is responsible for reasonable loss that results from that breach, even if some or all of the loss arises after the relationship has ended. The critical questions are whether the loss was caused by the breach (ie causation) and whether the Applicant took reasonable steps to mitigate the loss.
101.
In view of the conclusions above regarding causation and contribution and below regarding mitigation, the Panel is satisfied that the Applicant’s financial loss in this Dispute should be measured from 11 March 2008 to date.
Loss Calculations 102.
34
In calculating loss, the Panel’s objective is to restore, as closely as possible, the Applicant to the position that she would have been in but for the conduct of the financial adviser.34 This is not generally achieved by refunding the amount originally invested. It is done by comparing the position of the Applicant after suffering the breach of duty with the position she would have been in had the breaches not occurred.
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1.
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Determination
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103.
In some cases, this is a relatively simple matter to determine. For example, an applicant says that he would not have withdrawn his existing term deposits to invest in a speculative investment recommended by the adviser if he had known of the risks (and he provides material to support this claim). The “loss” in that case would be the difference between the notional value of the term deposits and the actual value of the recommended investment. In a falling market, the loss may be significant but in a rising market, there might not be any loss (in fact, the applicant might have gained from the speculative investment).
104.
In other cases it is not easy to determine the amount of loss. Mere difficulty in estimating damages does not relieve the Panel from the responsibility of estimating them as best it can, sometimes even to the extent of guess work rather than estimation.35 However, where information is available relevant to a claim for compensation, that information should be used rather than to speculate on the quantum of the loss.36
105.
The onus is on the Applicant to show the position she and the SMSF would have been in but for the FSP’s breach. The Panel must consider that evidence in light of all of the facts of the dispute, taking care to factor in the limitations of relying on the Applicant’s hindsight.
106.
The Applicant says that, given her loss, if not for the inappropriate advice, she “would most likely have relied on further advice as to alternative investments”. She then suggests that, given her loss, she “would have been focused on investing in low risk investments, such as term deposits, unless other advice was provided that would have been more appropriate for her needs”. She pointed out that she also would not have incurred the ongoing interest payments and would not have been forced to sell her home.
107.
In the circumstances, the Panel considers that a proper review of the portfolios in March 2008 is likely to have resulted in the investments in Prime and Orchard being sold and replaced with more defensive assets that would have retained their value but not produced any gains (in terms of income or capital). That conclusion is reinforced by the fact that the Prime investments had lost $100,000 in value in the three months before 11 March 2008.
108.
The Panel accepts that it is likely that the loan would have been retained following a proper review in March 2008. It is not, therefore necessary to compensate the Applicant in respect of the capital or interest payments on the loan.
109.
This results in a loss of $80,784 in respect of the relevant investments held by the Applicant personally, calculated as follows:
35 36
Foxeden Pty Ltd v IOOF Building Society Limited & Anor [2006] VSC 47 per Habersberger J. HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; Henville v Walker (2001) 206 CLR 459.
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Determination
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Prime Value of the shares at 11 March 2008
$36,000
Less distributions to the Applicant since 11 March 200837
-$3,180
Loss
$32,820
Orchard
110.
Value of the units at 11 March 2008
$50,000
Less distributions to the Applicant since 11 March 2008 38
-$2,036
Loss
$47,964
The loss in respect of the relevant SMSF investments is $173,934, calculated as follows: Prime Value of the shares at 11 March 2008
$138,000
Less dividends to the SMSF since 11 March 200839
-$12,190
Loss
$125,810
Orchard
111.
Value of the units at 11 March 2008
$50,000
Less distributions to the SMSF since 11 March 200840
-$1,876
Loss
$48,124
The maximum compensation limit of $150,00 applies in respect of the compensation amount for the SMSF.
Mitigation 112.
Applicants who suffer as a result of a breach by a financial services provider have a duty to take all reasonable steps to avoid or minimise the loss arising from that breach.41 It is therefore relevant to consider whether the Applicant mitigated her loss in this matter.
113.
The FSP says that the Applicant should bear some responsibility, as she failed to mitigate her loss by not selling her Prime investments in June-July 2008. That issue has been considered above in the context of whether the Applicant contributed to her loss.
37 38 39
40 41
Being $1,260 paid on 16 April 2008, $1,320 paid on 16 July 2008 and $600 on 21 October 2008. Being $1,018 on 29 April 2008 and $1,018 on 25 July 2008 (rounded). Being $2,100 and $2,730 on 16 April 2008, $2,200 and $2,860 on 16 July 2008 and $1,000 and $1,300 on 21 October 2008. Being $860 on 29 April 2008 and $1,016 on 25 July 2008 (rounded). E G Falco v James McCune & Co Pty Ltd [1977] VR 447.
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Determination
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114.
The Orchard investment was frozen in June 2008 and the shares in Prime fell to such levels in October 2008 that they were not reasonably worth selling. The Panel accepts that the Applicant had no (or no reasonable) opportunity to sell the Prime and Orchard investments after ceasing to be a client of the FSP. For that reason, the Panel is not persuaded that the Applicant failed to mitigate her loss.
Interest 115.
Under the Terms of Reference, the Panel may decide that interest be paid on compensation to an applicant.42 The Panel considers it is not appropriate to award interest in this case, as the compensation calculated above already takes into account dividends (on the replacement investments) and a further award of interest would result in interest being double counted.
Determination 116.
The Panel determines in favour of the Applicant (personally and as trustee of the SMSF).
117.
The Panel determines that:
118.
42
a.
the FSP pay $83,784 (being $80,784 and $3,000) to the Applicant, and
b.
the FSP pay $150,000 to the trustees of the SMSF (which is a settlement amount, not a contribution or benefit).
If the Applicant accepts this Determination (on her own behalf and in her capacity as trustee of the SMSF), she agrees to take all necessary steps to assign to the FSP: a.
all the rights and interests in respect of the Prime and Orchard investments held by her personally within 14 days of receiving a written request and payment of any transfer or assignment fee from the FSP. Such written request may only be sent by the FSP within 14 days of payment by the FSP of the amount detailed in the preceding subparagraph, and
b.
all the SMSF’s rights and interests in respect of the Prime and Orchard investments up to the value of $150,000 within 14 days of receiving a written request and payment of any transfer or assignment fee from the FSP. Such written request may only be sent by the FSP within 14 days of payment by the FSP of the amount detailed in the preceding subparagraph.
Paragraph 9.5(a) of the Terms of Reference.
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Determination
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