Apportioning Liability for Bad Financial Advice by TurksLegal

Apportioning Liability for Bad Financial Advice By John Myatt | February 2009 Area of Expertise | Financial Services & Life Insurance

Summary We have recently seen a series of spectacular corporate collapses arising from poor management decisions which may not have been readily apparent to investors and their financial advisers at the time. Financial advisers are usually the first ones to be called upon when investors seek compensation in these situations, but is it possible to apportion liability between the financial adviser and the other parties who, if sued, might also be responsible for the client’s loss? In particular, is the Financial Ombudsman Service (FOS) required to apportion liability when it determines a complaint made against the adviser? A recent failed attempt by a financial adviser at judicial review in the Supreme Court of Victoria arising out of the Westpoint saga has shed some light on the answer ...

Who Does This Impact? Financial advisers and AFS licence holders who are members of the Financial Ombudsman scheme.

What Action Should Be Taken? The decision demonstrates that the laws of proportionate liability may be irrelevant to the FOS in determining a member’s liability to compensate a customer for inappropriate ﬁnancial advice and that where a member is at fault it will be held liable to pay the whole amount of compensation to a customer suffering loss. Where there are other parties who, if sued, would also be liable to compensate the customer, the member may still be capable of bringing its own civil action to obtain contribution from that party in the courts if it has a case for recovery as a joint tortfeasor.

Background In 2004 Wealthcare Financial Planning Pty Ltd (‘the adviser’) recommended that a retired couple, Mr. & Mrs. Norris roll over a $65,000 loan they had made to a ﬁnance company which was part of the Westpoint property development group. The ﬁnance company went into administration in December 2005 and the investment was ultimately lost as a consequence of the collapse of the group. Mr. & Mrs. Norris made a complaint to the Financial Industry Complaints Service (‘FICS’) now the Financial Ombudsman Service). The FICS upheld the complaint. The FICS determined that the adviser had failed to make ‘reasonable inquiries’ within the meaning of Section 945A of the Corporations Act 2001 (Cth) (‘the Corporations Act’) in relation to the client’s personal circumstances and had failed to adequately investigate or give such consideration to investigations of the subject matter of the advice as was reasonable in the circumstances.

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Apportioning Liability for Bad Financial Advice by John Myatt

It also found the advice was not ‘appropriate’ to the client, having regard to that consideration and investigation within the meaning of Section 945A. Section 953B of the Corporations Act confers a right to bring a civil action for damages for breach of Section 945A. The Panel determined that the adviser should pay Mr. & Mrs. Norris the whole amount they had lost, plus interest, on certain conditions. The adviser commenced an action in the Supreme Court of Victoria seeking a judicial review of the Panel’s decision. The grounds of review were in substance that there were a number of other parties that might have been found liable for the same loss if they had been sued by Mr. & Mrs. Norris in a court of law. They included the ﬁnance company itself, its directors, the Westpoint group generally, its auditors, and the research house on whose reports the adviser had allegedly relied. The adviser consequently claimed that the Panel’s determination was contrary to the Rules of the FICS in that it failed to apply principles of proportionate liability in determining Mr. & Mrs. Norris’ complaint.

The Decision THE ROLE AND FUNCTION OF THE DISPUTE RESOLUTION SCHEME Justice Cavanough examined the legal basis of the Court’s power to review decisions of the FICS, noting the history and nature of the dispute resolution scheme and that its power to determine a dispute involving members of the scheme was based upon the FICS rules that established a private contract and not upon any statutory power.1 His Honour further noted that: The role of a FICS Panel is not equivalent to that of a court. It is not established to hear and determine legal proceedings. For constitutional reasons it could not be so established.

As a result, the scheme was less concerned with the assessment of the parties’ legal rights than with the fair and practical resolution of the dispute between them. Consequently, His Honour observed that its decisions created new rights and obligations rather than declared existing ones. His Honour also undertook a detailed review of the Rules as they applied to the complaint, noting that the FICS was obliged to deal with the complaint on its merits and do what, in its opinion, was fair in all the circumstances. It was required to have regard to but was not necessarily bound to apply: any applicable legal rule or judicial authority (including one concerning the legal effect of an express or implied term of the contract or other document).

However, the FICS was also to have regard to applicable principles of good industry practice as well as the objective of resolving complaints in an accessible, efﬁcient and timely way.

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Apportioning Liability for Bad Financial Advice by John Myatt

His Honour cited with approval the following passage from the judgment of Justice Ousely in R v Financial Ombudsman Service Limited; ex parte Norwich and Peterborough Building Society2 which dealt with a disputed ruling in relation to a building society account by the Banking Ombudsman under the English Banking Code, in which the trial judge said: The very concept of ‘unfairness’ is very wide, and permits reasonable people to disagree. But its very width serves as a caution against over-active judicial intervention in the approach adopted by the Ombudsman, in the criteria which he develops or in the application of those criteria or of the concept of unfairness to the circumstances of the case.

Justice Cavanough concluded that the central task of the Ombudsman in that case involved the exercise of a ‘broad discretion’ and took the view that the same considerations applied to the FICS panel. Consequently, if there was an obligation to apply a legal principle of proportionate liability it was, at most, one of a number of matters that the FICS would have to keep in mind in reaching a resolution of the dispute that was fair in all the circumstances.

PROPORTIONATE LIABILITY The adviser relied on statutory provisions imposing proportionate liability which were introduced in similar terms around Australia as a result of the reform of public liability and tort laws which took place in the wake of the collapse of HIH and the so-called ‘insurance crisis’. The adviser relied mainly on Part IVAA of the Victorian Wrongs Act 1958, (the ‘Wrongs Act’) which came into operation on 1 January 2004. The mechanics of this legislation are discussed in great detail in the judgment. In summary, like similar provisions in other Australian jurisdictions, it provides for the apportionment of damages awarded by a court in an action for economic loss or damage to property arising from either negligence or breach of contract, where more than one party was responsible for the loss in question. Such a person is described as a ‘concurrent wrongdoer’ and, in relation to a claim, is: a person who is one of 2 or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim3.

In a legal proceeding involving an apportionable claim, the Wrongs Act has the effect of limiting the liability of a concurrent wrongdoer to an amount reﬂecting the proportion of the loss that the court considers just, having regard to the extent of the defendant’s responsibility for the loss or damage in question. The adviser’s argument was that in Victoria (and by implication other states where similar legislation had been enacted) proportionate liability was now a fundamental ‘legal norm’ and therefore had to be applied by the FICS. However, as Justice Cavanough pointed out, Part IVAA of the Wrongs Act is not universal in its application and only applied in a legal proceeding involving a court or statutory tribunal. It may, not, for example, apply to arbitration. He consequently concluded that the principle can only ‘happily operate’ in a forum which potentially had jurisdiction over all the parties who were liable to pay damages.

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Apportioning Liability for Bad Financial Advice by John Myatt

The FICS (and its successor, the FOS) only have jurisdiction over the respondent to a complaint where the respondent is a member of the FICS. As such, the Wrongs Act did not appear to be applicable in the context of a determination by the FICS.

PROPORTIONATE LIABILITY AND THE CORPORATIONS ACT His Honour noted that the FICS Panel had determined that the adviser was in breach of Section 945A of the Corporations Act and that in the course of its determination had also quoted Section 953B inferring that the Panel found a contravention of both provisions, as well as on Section 851(2) of the Corporations Act, (the predecessor of Section 945A) in respect of the initial recommendation it had made to invest money with the finance company in the first place. Justice Cavanough then applied the reasoning of the Federal Court in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd4 to the effect that had Mr. & Mrs. Norris brought a claim against the adviser in the Federal Court under those provisions, their claim could not have been defeated by Part IVAA of the Wrongs Act. In Dartberg Justice Middleton found that the ‘express purpose’5 of the relevant portion of the Corporations Act was to make each alleged transgressor, if found liable, legally responsible for the whole of the loss. Justice Middleton had also noted6 that the Federal Parliament had introduced proportionate liability provisions into the Corporations Act in 2004, but they only applied to conduct which contravened Section 1041H (which prohibits misleading and deceptive conduct in relation to a financial product or a financial service). They were not made applicable to Section 945A or the other provisions relied on by the Panel. The adviser claimed that the FICS had wrongly determined that that the Dartberg decision meant the adviser’s liability could not be reduced on the basis of proportionate liability. On the contrary, Justice Cavanough concluded firmly that: In my view there is no substance in this ground. The decision of Middleton J did show, in my opinion, that had the Norris’ claim been brought in the Federal Court in reliance on Section 851(2) or s 945A and s 953B of the Corporations Act 2001, their damages could not have been reduced by reference to the principles of proportionate liability.

CONCLUSIONS The Court found against the adviser on all points. •

The FICS Panel was not absolutely required to apply any legal principles of proportionate liability to the complaint as it had broader obligations of fairness;

•

The Wrongs Act was not applicable to proceedings commenced other than before a court or tribunal; and

•

In any event, the law of proportionate liability was not applicable to claims brought under Sections 945A and 953B of the Corporations Act.

Justice Cavanough consequently did not consider that the Panel’s decision was made in breach of the Constitution and Rules of the FICS and the adviser’s application for judicial review was therefore dismissed.

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Apportioning Liability for Bad Financial Advice by John Myatt

Implications The FICS Panel and its successor, the FOS, are required to ‘have regard’ to all of the law that is relevant or capable of being applied and the judgment suggests (without deciding) that they may also be required to ‘properly interpret and understand that law ... as a fundamental element in making the decision.’ However, there is no requirement to resolve complaints by making determinations strictly by application of principles of law to the facts as found, and the FOS is free to resolve disputes in another way which does not involve the strict application of legal principle if, in all the circumstances, this produces a fair result. Proportionate liability laws are not ‘capable of being applied’ in this situation, firstly because they are only suitable for courts and tribunals that have potential jurisdiction over all the parties that are liable to pay damages and, secondly, because they do not operate in relation to claims under Sections 945A and 953B of the Corporations Act. The adviser’s submissions were not couched in terms that its liability should have been reduced by an amount reflecting the responsibility of other wrongdoers but in absolute terms that it should not have been held liable at all. The judgment leaves it open for the Panel to have taken into account some analogy with proportionate liability resulting in a reduction in the amount of compensation awarded if it considered this produced a fair outcome. However, the decision in Dartberg (which the Court expressly approved) suggests that this would mean the complainant in this case would be awarded less than the law would otherwise provide. It remains to be seen whether the Panel of the FOS will be willing to exercise its discretion in that manner. The law already provides remedies for joint tortfeasors to obtain contribution from one another through the courts. Justice Cavanough observed that: (the adviser) ... was guilty of common law negligence (in other words that it failed to take reasonable care. Had the case been before a court of competent jurisdiction (whether State or Federal) and had a negligence finding, alone, been made, then there might have been room for the application of Part IVAA of the Wrongs Act.7

It is clear that in these situations rights of contribution can still be pursued, but not necessarily through the FOS. Wealthcare Financial Planning Pty Ltd v Financial Industry Complaints Service Ltd & Ors [2009] VSC 7.

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Apportioning Liability for Bad Financial Advice by John Myatt

Endnotes 1

See generally Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd [2006] FCA 1805.

[2002] EWHC 2379 Queenâ&#x20AC;&#x2122;s Bench Division (Admin).

Section 24AH of the Wrongs Act 1958 (Vic)

[2007] FCA 1216 (Middleton J)

At [10]-[12] and [33].

At [18].

At [44]

For more information, please contact:

John Myatt Partner T: 02 8257 5740 john.myatt@turkslegal.com.au

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