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SNAPSHOT Dennis
FOS Dispute 241767
Borrow approximately $2.8m over nine years to invest about $3.4m in agriinvestments, shares, capital protected equity funds and a property
Borrow to invest:
GEARING?
About half of the agri-investments financed 100% by loans
100% investment loans
RISK PROFILE
Balanced (1999) and growth-orientated (2004)
Balanced
ADVICE
• $300,000 in a capital protected share portfolio • $151,000 in two agri-investments
MOST SUITABLE INVESTMENTS? The Court rejected the submission that the FSP had any higher obligation to advise Dennis regarding the “most suitable investments”. The Judge found the FSP was only required to have a reasonable basis for the advice. This is consistent with the applicable legislation and the approach taken by FOS.
REASONABLE BASIS The Court found that “Mr Dennis has not shown that the initial plan lacked a reasonable basis or that, in preparing it, the respondents breached their duties to him”. The Court considered the recommendations to invest in agri-business were not beyond the range of suitable investments for a ‘growth-orientated’ investor in Dennis’ circumstances since he was able to obtain: 1 Significant tax benefits from the investments; and 2 Potential long-term returns via agricultural production. In contrast, FOS determined the recommended agri-investments were high risk, primarily because of the levels of gearing. FOS noted that “borrowing to invest is generally considered to be a high-risk approach to investing”. Given the lack of explanation provided to the Applicants about the borrowing structure or its risks, FOS considered that “the recommended investments were too risky for the Applicants, whether they were regarded as balanced or more cautious investors”.
RECORD KEEPING The key point of distinction between the approaches
taken by the Court and FOS relates to recordkeeping and the availability of contemporaneous evidence to support the FSP’s position. In Dennis, the Judge accepted that the FSP did not meet the Financial Planners Association best practice guidelines for recordkeeping, but did not consider this to be fatal to the FSP’s defence. The “question falling for determination is not whether those rules were complied with, but whether the statutory reasonable basis requirement” was met. FOS takes a stringent approach to poor recordkeeping. There, the onus is on the FSP to keep detailed records of oral advice, otherwise the presumption is against the FSP. The lack of records in the FOS Dispute meant the FSP was not able to establish, to FOS’ satisfaction, that it had had detailed discussions about the investor’s attitude to risk. In the absence of that evidence, FOS determined that “it was unreasonable for the advisor to assess the Applicants as balanced investors”.
“Although the FOS process tends to be more cost effective, this has to be balanced against the significant risks that remain for FSPs” LESSONS? The facts of these two cases are not identical and so it cannot be said that the results reflect the forum of the dispute as opposed to the merits. However, it is necessary to consider the appropriate forum for financial planning claims. There are reasons why a determination by FOS may not be appropriate, such as its jurisdictional limits and that there is no scope within FOS’ terms of reference for an FSP to join third parties or to otherwise bring cross claims. Although the FOS process tends to be more cost effective, this has to be balanced against the significant risks that remain for FSPs in a forum that only has to have regard to the law and where the rules of evidence do not apply. These factors mean that investors will continue to initiate claims in FOS, where the presumption is in their favour. After all, if they are not successful they can subsequently have their day in court.
Heidi Nash-Smith is a partner in Wotton + Kearney’s Sydney office. Her practice focuses on PI and D&O claims, with her core area of expertise being financial services litigation, in particular the defence of claims arising from allegedly negligent financial planning advice. Jack Geng is an associate in Wotton + Kearney’s Sydney office.
AUGUST 2014 | 41