Professional Negligence Claims Against Financial Advisers
Authored by Philip Nolan, Barrister
Introduction
1. Financial advice comes in many forms. Financial Advisers can help you with budgeting, investing, superannuation, retirement planning, estate planning, risk management, insurance and taxation.
2. The Royal Commission revealed instances of financial advice being provided to customers who were completely unaware of the risks associated with the financial products and schemes to which they were advised to enter. The problem did not surface until the global financial crisis hit, materialising those risks.
3. Financial Advisers are professionals and hold themselves out to give professional advice in the above areas. As with all professionals, that carries the expectation that such advice is carried out with due care and skill. When an adviser falls short of that standard, it may result in a claim for damages. This presentation will provide an overview of the elements of a financial advice negligence case.
Duty of Care
4. The duties of a financial adviser are the same as any professional and can be briefly stated. A financial adviser must exercise reasonable skill and care in making investment recommendations and in giving investment advice. This reflects the concurrent duty of care that exists in both contract and tort.1
Legislation
5. Financial Advisers are also subjected to a number of legislative duties and terms. Unlike the common law, these systems are long, convoluted and, dare I say, unnecessarily so. Nonetheless, it is necessary for practitioners to have a knowledge of these regimes, when looking into pursuing such claims.
ASIC Act:
6. The Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) has various protections for consumers against advisers providing a “financial service”.
Financial Products
7. The phrase “financial service” is defined in s. 12BAB of the ASIC Act to include “financial product” advice that is, relevantly, a recommendation or statement of opinion that is intended to influence a person in making a decision about a particular financial product. The term “financial product” is defined in s. 12BAA. Most products recommended by financial advisers would fall within that definition, however there is one exception worth noting.
8. That is the purchasing of real property.2 It is not uncommon for people to seek advice about the use of money to purchase property. Accordingly, any advice on the purchase of property would not be a “financial product”. However, the definition does include a “credit facility”, which is in turn defined to include the provision of credit and the provision of a mortgage that secures an obligation under a credit contract3. Accordingly, if advice is given about, say, the use of negative gearing to purchase a property, then the advice about that would be a financial product.
Implied Warranties
9. Once it is established that the financial adviser is providing a “financial service”, there is an implied warranty that the services will be rendered with due care and skill.4 Further, if a person supplies financial services to a consumer in the course of a business and the consumer makes known to the person a purpose for which the services are required or the result that he or she desires the services to achieve, there is an implied warranty that the services will be reasonable fit for that purpose or are of such a nature and quality that might be expected to achieve that result.5 Obviously, a breach of those implied warranties would result in an action for breach of contract.
Misleading, deceptive and unconscionable conduct
10. Further, the ASIC Act proscribes prohibitions against engaging in conduct that is misleading or deceptive or is likely to mislead or deceive,6 making false or misleading representations about the price of services7 or that those services have performance characteristics,8 and engaging in conduct that is unconscionable in all the circumstances.9
11. Section 12BB is an important provision. Pursuant to that section, where a person makes a representation with respect to future matter and does not have a reasonable grounds for making the representation, the representation shall be taken to be misleading. The section also creates a presumption of a lack of such reasonable grounds that is rebuttable by the person making the representation. That is, the person making the representation bears the onus of establishing that he or she had reasonable grounds for making the representation.
12. A person who suffers loss or damage by conduct of another person that contravenes the provisions referred to above may recover the amount of the loss or damage by action against that other person.10 The only added caveat for such an action is in relation to misleading and deceptive conduct. If a person suffers loss or damage as a result of his or her failure to take reasonable care, and the other person did not intend to cause the loss (or was not fraudulent), the the damages that the claimant may recover in relation to the loss or damage are to be reduced to the extent to which the court thinks just and equitable having regard to the claimant’s share in the responsibility for the loss or damage.11
Corporations Act:
Financial Product
13. The Corporations Act 2001 (Cth) (Corporations Act) also has protections for consumers “financial product advice”. A “financial product” under the Corporations Act has a similar meaning as the ASIC Act. I have already addressed this above.
14. However, there are some differences, the main one being the exclusion of a “credit facility” from the meaning of a “financial product”. The ASIC Act expressly includes it as a financial product, and the Corporations Act expressly excludes it.12 This means that a person advising another to purchase real property by way of negative gearing is probably captured by the ASIC Act, but not the Corporations Act.
15. However, it is common for financial advisers the use margin lending facilities for in the investment of shares. That does fall within the ambit of the Corporations Act.13
Misleading and Deceptive Conduct
16. Like the ASIC Act, a person providing financial product advice is prohibited from making false or misleading statements,14 dishonest conduct15 and misleading and deceptive conduct.16 Section 1041I creates an action for damages for breach of those provisions.
Licensing
17. Further, any person who carries on a “financial services business” must hold an Australian financial services licence.17 You can, however, be an employee of an entity that has such a licence. 18
18. Licensees must “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”.19 A licensee will fall short of that standard if the services fall short of being competent, capable and having and using the requisite knowledge, skill and industry,20 or involved serious departures from reasonable standards of performance of advice.21
Unconscionable conduct
19. As under the ASIC Act, a licensee is prohibited from engaging in conduct that is, in all the circumstances, unconscionable.22 A person has a right to damages where the advice has engaged in such conduct.23
Retail Clients and Personal Advice
20. Part 7.7 of the Corporations Act also imposes additional obligations to “retail clients” who are receiving “personal advice”.
21. The Corporations Act draws a distinction between a “retail client” and a “wholesale client”. There are various circumstances in section 761G which captures the latter, such as businesses with over 20 staff seeking insurance advice,24 or trustees of Superannuation Funds with net assets of over $10 million.25 Individuals or trustees of self-managed super funds would be covered as a “retail clients”.
22. The Corporations Act also draws a distinction between “personal advice” and “general advice”. The term “personal advice” is defined in section 766B(3) as financial product advice that is given or directed to a person in circumstances in which the provider of the of the advice has considered one or more of that person’s objectives, financial situation and needs, or a reasonable person might expect the provider to have considered those matters.
23. It is common to be confronted with situations where the financial adviser has recommended the setting up of a self-managed superannuation fund, and the wealth creation plan is designed within that fund. In that situation, it is not just the beneficiaries of the fund that needs to be considered, but the trustee of the fund as well. The trustee of the fund would need to be a Plaintiff in any proceedings of this nature against the financial adviser.
24. This issue was considered in Jamieson & Ors v Westpac Banking Corporation [2014] QSC 32; (2014) 98 ASCR 63. In that case, one of the recommendations from the financial adviser was to set up a self-managed superannuation fund and for the Jamieson’s to make superannuation contributions, including a sum of $600,000 to be borrowed from the Bank. It was then recommended that the trustee of the fund invest the contributions, when made, in instalment warrants.
25. In those circumstances, Jackson J held that the trustee of the fund was not a “personal advice”, because the recommendation was not “given or directed to” the trustee. It was given or directed to Mr and Mrs Jamieson, although it was foreseeable that a trustee of any superannuation fund which they organised might suffer loss if it acted on the recommendation. Therefore the “financial product advice” was not “personal advice” to the Trustee.
Statement of Advice
26. Once it is established that the financial adviser is providing “personal advice” to a “retail client”, he or she has obligations, relevantly, to provide the client with a written document, called a “statement of advice”.26 This is an important document, because it contains all facts relied upon by the adviser, the advice itself and the reasons why the advice is being given. It is an essential document in determining whether the financial adviser has acted with due care and skill.
Best Interest Obligations
27. From 1 July 2013, Part 7.7A, Division 2 of the Corporations Act, entitled “Best interests obligations” was introduced, which contains a detailed attempt to define what is, in effect, an obligation of good faith and unqualified faithfulness to the interests of the client. The primary obligation is simply expressed in section 961B(1) as a requirement to “act in the best interests of the client in relation to the advice”.
28. Importantly, section 961B(2) states that provider satisfies the duty, if the provider proves that he or she has done each of the following:
(a) identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
(b) identified:
(i) the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
(ii) the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances);
(c) where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
(d) assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
(e) if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
(i) conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
(ii) assessed the information gathered in the investigation;
(f) based all judgements in advising the client on the client’s relevant circumstances;
(g) taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.
29. Sections 961C (as to when something is reasonably apparent), s 961D (as to what is a reasonable investigation), s 961E (as to what would reasonably be regarded as in the best interests of the client), and s 961J (as to conflicts of interest of the client and the provider) provide further elaboration on what those expressions mean.
30. Section 961M of the Corporations Act creates an action for damages for contraventions of those best interest obligations.
Australian Consumer Law:
31. Even if the financial adviser was not providing “financial product” advice, the client has similar statutory protections under the Australian Consumer Law (ACL), which is Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA).
32. The ACL applies to “consumers” as defined. In that regard, in terms of s 3(1) of the ACL (and s 4B(1)(a) of the CCA) a person is taken to have acquired particular services as a “consumer” if the amount paid or payable for the services did not exceed $40,000, and the services are ordinarily acquired for personal, domestic or household consumption.
33. The ACL provides for guarantees that the services will be rendered with due care and skill,27 be fit for a particular purpose made known to the supplier,28 and achieve a result made known to the supplier or a person by whom any prior negotiations in relation to the acquisition of the services was conducted.29
34. Section 267(4) allows the consumer to recover damages for any loss or damage suffered by the consumer because of the failure to comply with the guarantee if it was reasonably foreseeable that the consumer would suffer such loss or damage as a result of such a failure.
Scope of Advice:
35. Because financial advice can be delivered on a many number of matters, it is common for attempts to be made to limit the scope of the retainer. This is commonly referred to in the financial industry as “scaled” advice. That is why, when pursuing or defending such claims, an analysis of the scope of the retainer is critical.
36. Sometimes, financial advisers will provide clients with “general” advice about investment options. In such circumstances, the adviser is required under the Corporations Act to issue a warning to the client that the advice has been prepared without the client’s objectives, financial situation or needs.30
37. In ASIC v Westpac Securities Administration Ltd [2019] FCAFC 187, Westpac for sent out letters and made cold calls to existing customers, in an attempt to have them transfer their funds from external superannuation accounts into Westpac’s, known as “BT Super”.31 ASIC prosecuted, in alleging that this was “personal advice”.
38. The Full Court agreed, finding that the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for marketing or general advice. It is a decision that requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer. The Court noted that Westpac could, perhaps, have avoided this conclusion and result by the callers ensuring that the customers had the opportunity to consider their own positions and, having done so, later communicate an acceptance, if they wished. Instead, the callers were to try and get the customers to make the decision over the phone.32
39. Even if there is such a warning, that may be sufficient to defend a claim under the Corporations Act, but whether an adviser would escape liablity under the common law is less clear.
40. In Evans & Ors v Brannelly & Ors [2008] QDC 269, the Plaintiffs were approached and advised to invest in some failed investments. They sued the advisers. One of the arguments made by the advisers was that the advice was scaled and relied on letters that they sent out stating that the transactions were “made without personal advice ie advice relating to your personal advice ie advice relating to your personal situation”.
41. McGill J rejected such an argument, and held:33
“…The defence proceeded on the basis that advice was given only if it was personal advice, and only personal advice if it was given as a result of a specific retainer to give advice after a full consideration of the plaintiff’s financial situation. There may be a legislative context in which that is a relevant consideration, but it is irrelevant to liability at common law, and irrelevant to the question of whether conduct was misleading or deceptive.
Whether or not there has been some detailed consideration of the whole financial position of a person, if a financial adviser purporting to act as a financial adviser says to a person, in substance, “you should invest in X”, that adviser is giving advice to that person, and it is advice about the suitability of that investment for that person.
If an investment adviser purporting to act as such says to a person in substance “people should invest in X” or “X is a good investment” then that is advice as to the suitability of that investment as a general proposition, though it is not necessarily advice as to the suitability of that investment for the particular person in question. However, where such advice is given in circumstances where there is nothing said to suggest that a general suitability of X as an investment is inapplicable to the particular person addressed, and where the investment adviser knows that that person is contemplating making an investment, in my opinion that is in substance also advice that “you should invest in X”. I find the arguments in favour of a much more limited concept of advice advanced on behalf of the defendants wholly unpersuasive and I reject them.”
Breach of Duty:
Civil Lability Act and Peer Professional Opinion:
42. As to breach, it is important to note that the Civil Liability Act 2003 (Qld) (‘CLA’) applies to these claims. This is because the CLA applies to any civil claim for damages for harm.34 The term “harm” is defined to include “economic loss”35.
43. This means that, in determining breach, a financial planner exercise reasonable care to take reasonable precautions against a foreseeable risk of harm that was not insignificant.36
44. The onus is on the Plaintiff to clearly identify what should have been done and prove that it was unreasonable in the circumstances not to do it.37 In determining what was reasonable, regard must be had to the probability that the harm would occur if care were not taken, the likely seriousness of the harm, and the burden of taking precautions to avoid the risk of harm.38
45. Further, as giving financial advice is likely to be considered a “professional service”, the advice given will not amount to a breach of its duties if it is established that the professional acted in a way that (at the time the service was provided) was widely accepted by peer professional opinion by a significant number of respected practitioners in the field as competent professional practice.39
Storm Financial Case:
46. As to breach, it is useful to provide some examples of where financial advisers have been found to be negligent.
47. The first case worthy of note is Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023, because it goes through a great deal of common critical mistakes that financial advisers make in the provision of advice.
48. In that case, ASIC commenced proceedings against Mr and Mrs Cassimatis, who were the directors of Storm Financial (Storm). In particular, ASIC focused on a particular cohort of former clients of Storm that that had five matters in common:
(a) they were all over 50 years old;
(b) they were retired or approaching and planning for retirement;
(c) they had little or limited income;
(d) they had few assets, generally comprised of their home, limited superannuation, and limited savings; and
(e) they had little or no prospect of rebuilding their financial position in the event of suffering significant loss.
49. ASIC claimed that this cohort of clients were not suitable to the Storm “model”, that was advertised and implemented by Storm. In that “model”, almost 90% of Storm’s clients were advised to adopt a strategy described in evidence as “double gearing”. This advice involved:
(a) borrowing against the security of their homes;
(b) obtaining a margin loan; and
(c) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm’s fees.
50. The model was a form of “margin lending” which significantly intensified the risk of loss during a downturn. Whilst such a model worked well when the market was performing, the GFC hit in 2008, and as a result many client had to sell their homes and either come out of retirement, or prolong their planned retirement, to meet the margin calls arising from the drop in the market.
51. In advising this model to the above cohort, Edelman J found Mr and Mrs Cassimatis to be in breach of the provisions of the Corporations Act that applied at the relevant time. The reasons for that provide a neat overview of the breaches that commonly arise in financial advice claims.
52. The first breach that Edelman J referred to, was the failure to give reasonable consideration to, or conduct reasonable investigation of alternative investment strategies for the relevant investors. His Honour stated that, although the investors were often advised to see other financial advisers who might have advised on other financial possibilities, Storm was still required to give reasonable consideration to, and conduct reasonable investigation of, alternative investment strategies for those investors who had limited income.40 His Honour found that the “pros and cons” of any alternative strategies should be contained in the Statement of Advice.41
53. The second breach found by Edelman J was the failure to adequately determine the objective of the advice which it gave, which objective required measurement and, where possible, “quantification”.42 The objectives of the client is pivotal in providing financial advice to clients. The expert evidence in the matter, which was accepted by Edelman J, noted that the amount of wealth that the clients wanted to create, and the timeframe in which to achieve that level of wealth was critical in determining what financial resources and how much risk needs to be applied to achieve that objective.43 Storm failed to do this.
54. The third breach was the failure to conduct an adequate “sensitivity analysis” before advising the relevant investors.44 A “sensitivity analysis” was described in the reasons as explaining to the client the outcomes you would expect with a positive return on investment, but also the outcomes you would expect on a negative return. This ensures that the client very clearly understands the type of risk that they are taking.45 His Honour held that the investors should have been advised how their net assets would be affected by downturns in the market.46
55. Fourth, His Honour held that Storm failed to give reasonable consideration to the income of the relevant investors in all their circumstances.47 This is another example of the importance the financial adviser needing to know the full details of the client before providing financial adviser. Here, Edelman J held that Storm failed to identify whether the investors had the capacity to fund borrowing costs in the event of a market downturn, from their own resources (without having to sell their family home).48 As stated above, the cohort that ASIC focused on were retired or nearly retired, and so they did not have the financial capacity to meet any margin calls.
56. Fifth, Edelman J looked at the appropriateness of the risk profiles allocated to the investors. This is an important process in the financial advice industry. It is common for prospective clients to complete a questionnaire, which looks at a client’s appetite for risk. Following the completion of that questionnaire, the financial adviser would analysis the answers, and place the client in one of the following risk categories:
(a) Conservative – low risk, bias towards secure income producing investments;
(b) Moderately Conservative – bias towards income producing but with more growth investments than Conservative;
(c) Moderate – this portfolio will produce slightly more income than growth;
(d) Balanced – balance of returns between income producing and growth investments;
(e) Moderate Growth – will produce more growth than income;
(f) Growth (also referred to as Moderately Aggressive) – bias towards growth with a small component of income producing investments; and
(g) High Growth (also referred to as Aggressive) – high risk, all growth and some speculative investments.
57. Once a client’s risk profile is determined, the financial adviser would then make recommendations that fits within the client’s risk profile.
58. In this case, Edelman J held that Storm had incorrectly determined that the cohort described above as “balanced” investors, when they were, in fact, “conservative”.49 His Honour provided four reasons for that conclusion:
(a) Whilst the investors were warned about the possibility of losing their home and some of the risks of borrowing to invest in the Statement of Advice, that advice was more than 100 pages long, and there were other statements in the advice which would have “alleviated concern about risk”;50
(b) The investors were placated substantially about any of the risk involved in the Storm model, particularly in oral presentations, with slides, which were shown n at Storm workshops and encouraged the investors to adopt the view that any risk involved in the Storm model was minimal and that debt should not be feared;51
(c) Regardless of the warnings given, the risk profile questionnaires completed by the investors were consistent with a conservative profile, not a balanced one;52
(d) As a general proposition, the closer one gets to retirement, the less attractive borrowing against the house becomes, and a more conservative approach has to be adopted for persons who were at or near retirement. His Honour held that, in these circumstances, it was appropriate that they be treated, and advised, as conservative investors, even if the investors had an “unusual appetite for risk”. They might choose to reject that advice, but it was the appropriate basis for the advice that should have been given.53
59. The sixth breach found by Edelman J was that the advice was not suitable because the family home was “inappropriately treated as an asset in the investment portfolio” of each relevant investor.54 Such treatment was inappropriate because, being retired or approaching retirement, having little income and few assets other than his or her home, and little or no prospect of rebuilding his or her finances in the event of suffering significant loss, he or she could not reasonably tolerate any chance of having to sell the house.55
60. Finally, Edelman J held that the advice was “inappropriate in any event”. Edelman J concluded that the circumstances of each relevant investor meant that double geared investment (which was concentrated in the share market) was not appropriate for him or her as it involved high risk.56 The expert evidence of Mr McMaster, on which Edelman J relied, demonstrated that the Storm model performed so poorly during the global financial crisis because of:57
(a) the concentration of assets in the share market;
(b) the high levels of debt relative to assets; and
(c) the absence of financial capacity to maintain the position during a downturn.
61. His Honour noted that,58 “[t]o these reasons must be added the possibility of a significant market fall”. While the extent of the global financial crisis could not have been reasonably foreseen at the time at which the advice was given, “a significant downturn”, such as a 22% fall, “was a possibility”. The experts agreed that a person, retired or nearing retirement, should not generally be advised to invest in high risk investments.59
Bankier’s case
62. In 1997 Ms Bankier was seriously injured in a motor vehicle accident. She was 16 years old at the time. Five years later she was awarded nearly $2 million in damages for the injuries she suffered and for her future loss, medical expenses and associated matters.
63. After legal expenses, she had about $1,746,682.00 to invest and, in or around 2002, sought advice from Anthony Avery, a financial planner, to advise her with respect to investing a large part of the sum she had been awarded.
64. After Mr Avery was retained, Ms Bankier went through a significant portion of the settlement sum. In particular, Ms Bankier made the following purchases:
(a) Repayment of loans from her mother and brother in the amount of $150,000.00;
(b) The purchase of a unit at Burleigh Heads, at a cost of $392,000, plus $20,000 in renovation costs;
(c) The setting up and running of a surfing photography business, which was not specifically quantified in the Judgment but was in the manner of tens of thousands of dollars, including overseas trips to San Diego, South Africa and Hawaii for the purpose of engaging in surf photography;
(d) The purchase of an investment property at Palm Beach (which was financed completely by way of borrowings), resulting in costs on interest and the inability to partially liquidate.
(e) The leasing of a shop in Burleigh Heads to sell her photos, at a cost of $60,000 per year.
65. In the Judgment, Martin J held that Mr Avery was negligent because he failed to advise Ms Bankier of the material risks of the investments in the Palm Beach Property and the Burleigh Heads shop.60
66. Perhaps more significantly, Martin J held that Mr Avery was negligent for failing to warn Ms Bankier about the material risks of her spending.61 It was found that Mr Avery should have read the reasons supporting the award of damages and, if he did, he would have been aware of the significant medical and rehabilitation expenses that Ms Bankier would have to incur in the future. Martin J held, relevantly: 62
“Ms Bankier was a confident, perhaps headstrong, young person who was determined not to let her injuries confine her. But, she was owed a duty, at least, to warn her about the full consequences of her spending. It was not enough to say that she would have to eat into her capital to pay for her travel. That was only a primary consequence. The material risk to which, I find, she would have attached significance, was the harm it would do to her capacity to fund her medical expenses. Notwithstanding her enthusiasm for her photography and its associated activities, I am satisfied that she would have changed her ways and she would have reduced her spending if she had been adequately alerted to the effect it would have on her financial position.
67. The effect of this judgment is that a financial adviser, in appropriate circumstances, will be required to analyse the financial position of the client, and provide sufficient warning about whether the client’s spending intentions are beyond their means.
68. I note that the Bankier case is currently on appeal.
Insurance cases and “churning”:
69. As stated above, financial planners advise on a broad range of issues, including life insurance products. It is common for financial advisers to push clients into switching from an existing insurance product to a new insurance product offered by a bank that the financial advisor is aligned with. This is commonly referred to as “churning”.
70. Additionally, sometimes a financial adviser will advise clients to change Super Funds without addressing the change in insurance products held within those Super funds.
71. There are rules surrounding what a financial adviser can do when recommending replacement insurance products. Section 947D of the Corporations Act states, relevantly, that if a client is advised about switching insurance products, the financial adviser must, in the Statement of Advice, provide information about the potential benefits (pecuniary or otherwise) that may be lost, and any other significant consequences of the switch for the client.
72. Some cases on this topic illustrate the losses that can occur.
73. In Commonwealth Financial Planning v Couper [2013] NSWCA 444, Mr Stevens had a life insurance policy with Westpac Life. The financial adviser (a subsidiary of the Commonwealth Bank) persuaded him to take out cover with another insurer, CommInsure, and cancel his existing policy.
74. Mr Stevens’ true medical history was not disclosed to CommInsure. When Mr Stevens was diagnosed with pancreatic cancer, CommInsure avoided the policy for non-disclosure pursuant to s 29(3) of the Insurance Contracts Review Act 1984 (Cth), which entitled an insurer to avoid a life insurance policy for innocent non-disclosure within three years from entry into the contract. After three years, the Insurer has to prove fraud. That three year period had long since expired in relation to Mr Stevens’ Westpac Life policy.
75. It was held at trial that CommInsure validly avoided the policy, and no appeal was brought from that decision. It was held on appeal that the financial planner was negligent, in that he misled Mr Stevens into believing that the two Insurance products were the same, when they clearly weren’t – the CommInsure policy could be avoided for innocent non-disclosures and the Westpac policy couldn’t. Had Mr Stevens been aware of this, he would have stayed with Westpac.
76. In Swansson v Harrison & Ors [2014] VSC 118, the plaintiff had a death and terminal illness policy with AXA since 2004. In 2012, the plaintiff received, and accepted, advice from a financial planner to cancel his AXA policy and obtain a new policy with AIA and together they filled out an AIA application form.
77. When filling out the application form, the plaintiff did not disclose to the financial planner that he had been referred to a gastroenterologist, who had ordered a scan. It was described in the application form that the plaintiff had a stomach complaint which had “resolved”. The plaintiff then received cover from AIA and cancelled his insurance with AXA.
78. Shortly after the AIA policy commenced, the results of the scan came back, and the plaintiff was diagnosed with pancreatic cancer, which was subsequently determined as being terminal.
79. The plaintiff lodged his claim, and AIA avoided the policy for failing to disclose the referral to the gastroenterologist. He also lodged a claim with AXA but that claim was declined on the basis that the policy had been cancelled.
80. The plaintiff sued the financial adviser. The Trial Judge found that the financial adviser, on more than one occasion, gave the plaintiff advice about the duty of disclosure. However, the Judge looked at whether the financial planner should have made further inquiries about the stomach complaint.
81. In finding that the financial planner breached his duty of care, His Honour pointed to the significance of the fact that the plaintiff went to the doctor two days before completing the application form, which is a very short space to be sure of any recovery. That fact, among others, persuaded the Trial Judge to find that a reasonably prudent adviser would have checked again with his client before finally cancelling the existing policy. That is particularly so given the magnitude of the risk to the client if he unwittingly failed to disclose a relevant medical matter, thereby imperilling his new cover.
82. However, it was also found that the plaintiff, having been advised of his ongoing duty of disclosure, was also culpable for failing to advise the financial planner about his ongoing stomach condition. On that basis, the court found that the damages should be reduced by 50% for contributory negligence.
Causation and Damages
83. As the Civil Liablity Act applies, the onus is on the Plaintiff63 to show that the breaches were a necessary condition of the occurrence of the injury.64 Further, evidence led by the Plaintiff about what they would have done, had they received proper advice, is inadmissible.65 The course that the Plaintiff would have taken will usually need to be inferred from the evidence as a whole, taking into account “character” and “likely attitudes”.66 Evidence of a person’s tendency to follow (or not follows) warnings or directions in the past can be used to draw inferences that that person would have equally followed any hypothetical direction relevant to the case.67 Accordingly, the fact that the Plaintiff followed the negligent advice in the first place creates a strong inference that proper advice would equally have followed.
84. The Civil Liability Act also imposes a “scope of liablity” threshold on causation. This is in addition to establishing factual causation. It is an assessment of whether liablity should be attributed to the Defendant. In Westpac Banking Corporation v Jamieson [2016] QD R 495; [2015] QCA 50, is was held68 that there is no principle, and no consideration of justice and equity, why the bank should not be legally responsible for the loss which its breaches caused. There is no sound reason why responsibility for the financial harm which the bank caused should not be imposed upon it.
85. Remoteness of the damage is another consideration. The impact of the GFC has been the subject of argument, when looking at scope of liablity.
86. In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028, it was argued that the assessment should not be made not be assessed with the wisdom of hindsight and without regard to the worldwide and systemic impact of the global financial crisis on the whole range of financial markets and products. In rejecting that argument, Rares J held:69
“The extremity of events may be such as to show that a particular problem was unpredictable or unforeseeable or so remote as not to warrant any prior warning or precaution. But, this can hardly apply to financial products issued in markets in which extreme systemic events were known risks that could affect structured products in ways or to degrees to which less complex products were not subject.”
87. In Jamieson (ibid), the Bank tried to argue that the poor market performance or a general market decline was “extraneous” or “supervening” to the Bank’s breaches. The Court of Appeal disagreed:70
“Loss that resulted, in part, from the poor performance of the investment or a general market decline cannot be fairly described as “supervening” or “extraneous”. It supervened only in the sense that the loss crystallised after the date of the transaction. This kind of loss was the very thing which both parties had in contemplation in agreeing that the loss to which Mr Jamieson should be exposed, in the event of a poor return on investment, should not exceed ten per cent of the Jamiesons’ net overall wealth.”
No transaction and alternative cases
88. In financial advice negligence matters, it is common for plaintiffs to not only plead the actual losses that he or she made due to the negligent advice, but also any gains on the portfolio that the plaintiff would have made if he or she received reasonable advice and followed it. This is commonly referred to an “alternate transaction case”. The well known authority for that proposition is found in Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; (1986) 160 CLR 1:71
“Because the object of damages in tort is to place the plaintiff in the position in which he would have been but for the commission of the tort, it is necessary to determine what the plaintiff would have done had he not relied on the representation. If that reliance has deprived him of the opportunity of entering into a different contract for the purchase of goods on which he would have made a profit then he may recover that profit on the footing that it is part of the loss which he has suffered in consequence of altering his position under the inducement of the representation. This may well be so if the plaintiff can establish that he could and would have entered into the different contract and that it would have yielded the benefit claimed.”
89. On other occasions, the plaintiff may want to claim for the actual losses caused by the negligence only. This is commonly referred to as a “no transaction” case.
90. In Jamieson, the plaintiffs argued a “no transaction” case. The Trial Judge awarded damages, however reduced the award due to evidence being led by the Bank to prove that the Jamiesons would have entered into different (and loss making) transactions anyway. In the Appeal, the Jamieson’s lodged a cross appeal, arguing that such hypotheticals are irrelevant in a “no transaction” case. The Court of Appeal disagreed with the Jamieson’s arguments:72
“A plaintiff can claim damages on the basis of a lost opportunity to profit on an alternative investment that probably would have been made if the plaintiff had not been induced to make the subject investment. In such a case, reliance upon the defendant deprived the plaintiff of the opportunity to enter into a different transaction, and the plaintiff can seek to establish what that transaction would have been. If it is relevant to consider an alternative, profitable transaction, it is hard to see why, in principle, a defendant in a different case cannot contend that by entering into the subject transaction, the plaintiff did not make an alternative, loss-making investment, and thereby avoided that loss.”
91. However, very recently, the Full Federal Court in Wyzenbeek v Australasian Marine Imports Pty Ltd (in Liq) [2019] FCAFC 167 disagreed with the Court of Appeal’s approach in Jamieson.73 With respect to a pleaded “no transaction” case, the Full Court held:74
“But, the appellants in the present case were is not required to prove, and, in our opinion, the respondents could not seek to prove, that there were other courses of action open, such as the purchase of another vessel, that, if taken, would have resulted in the claimant being in a similar position as that induced by the wrongdoer’s contravention of s 52. That analytical approach is contrary to established and binding principle. It involves assessing the chance that the claimant would have entered into a different commercial or other opportunity and what financial outcomes that opportunity would have resulted in for the claimant. Such an analysis would deflect the court from its task of deciding whether the claimant suffered loss or damage in accordance with the rule expressed in s 82, namely by the wrongdoer’s contravention of s 52. If that contravention is a cause of the loss or damage, ordinarily, it is not necessary or appropriate to divide up that loss or damage and analyse the operation of other possible causes.
That, in our respectful opinion, is the error in the reasoning in Jamieson [2016] 1 Qd R 495; namely, it failed to examine what the wrongdoer did that caused theclaimant to suffer damage. It embarked on an irrelevant inquiry to the question posed by s 82; namely, has the claimant proved that he, she or it suffered loss or damage by the wrongdoer’s contravention of s 52. As the High Court authorities show, it is sufficient for the claimant to prove that the wrongdoer’s conduct is a cause of the loss claimed.”
92. Accordingly, if the authority in Wyzenbeek is accepted, plaintiffs will need to make a tactical decision about whether the run an “alternative transaction” case. If the plaintiff decides to allege that he or she would have entered into a different transaction, then the onus is on the plaintiff to prove what would have happened. The Plaintiff may also fail to establish what would have happened, meaning that he or she has been unable to establish a loss.75
Conclusions
93. This paper does not capture all of the issues that arise in these types of claims. The above should only be seen as a guide.
94. There are also complicated limitation issues which practitioners need to be aware of. That would require a separate presentation.
1 Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2-12) 301 ALR 1; [2012] FCA 1028 [721] – [723].
2 See note 2 in section 12BAA of the ASIC Act.
3 Section 12BAA(7) of the ASIC Act
4 Section 12ED(1) of the ASIC Act.
5 Section 12ED(2) of the ASIC Act.
6 Section 12DA of the ASIC Act.
7 Section 12DB(g) of the ASIC Act
8 Section 12DB(e) of the ASIC Act
9 Section 12CB of the ASIC Act
10 Section 12GF(1) of the ASIC Act
11 Section 12GF(1B) of the ASIC Act
12 Section 765A(1)(h)(i) of the Corporations Act..
13 The exclusion in section 765A(1)(h)(i) relates to a “credit facility within the meaning of the regulations (other than a margin lending facility)” [my emphasis added].
14 Section 1041E of the Corporations Act
15 Section 1041G of the Corporations Act
16 Section 1041H of the Corporations Act
17 Section 911A(1) of the Corporations Act ,
18 Section 911B(1) of the Corporations Act
19 Section 912A(a) of the Corporations Act
20 ASIC v Camelot Derivatives Pty Ltd (in Liq) (2012) 88 ACSR 206; [2012] FCA 414 at [69]; ASIC v Westpac Securities Administration Ltd [2019] FCAFC 187 at [426].
21 ASIC v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [673].
22 Section 991A(1) of the Corporations Act
23 Section 991A(2) of the Corporations Act
24 Section 761G(5) of the Corporations Act
25 Section 761G(6) of the Corporations Act
26 Section 944A
27 Section 60 of the ACL
28 Section 61(1) of the ACL
29 Section 61(2) of the ACL
30 Section 949A(2) of the Corporations Act.
31 ASIC v Westpac Securities Administration Ltd [2019] FCAFC 187,
32 Summary of conclusions, at paragraph 5
33 At [83] – [84].
34 Section 4 of the CLA
35 See schedule 2 of the CLA
36 Section 9(1) of the CLA
37 Coca-Cola Amatil (NSW) Pty Ltd v Pareezer [2006] NSWCA 45 at para [3]
38 Section 9(2) of the CLA.
39 Section 22 of the CLA
40 At [251].
41 At [253].
42 At [261].
43 At [263].
44 At [274].
45 At [274].
46 At [275].
47 At [285].
48 At [286].
49 At [299] – [300]
50 At [302] – [304]
51 At [305].
52 At [313]
53 At [314].
54 At [316].
55 At [321].
56 At [328].
57 At [329].
58 At [330].
59 At [331].
60 At [151].
61 At [152].
62 At [152].
63 Section 12 of the CLA.
64 Section 11(1)(a) of the CLA.
65 Section 11(3)(b) of the CLA
66 Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 589 – 590
67 Wilkins v Council of the City of Broken Hill [2005] NSWCA 468 at para [48]
68 At [141].
69 At [856].
70 At [131].
71 Per Mason, Wilson and Dawson JJ, at [13].
72 At [145].
73 At [92].
74 At [93] – [94].
75 BHP v Steuler; Protec v Steuler [2014] VSCA 338 at [611].