CATCHWORDS – CORPORATIONS – security lodged in relation to a dealers licence – whether should be applied to compensate licensee’s client – whether failure of licensee to carry on business under the licence adequately and properly – whether client suffered pecuniary loss due to any such failure – decision set aside
Administrative Decisions (Judicial Review) Act, s 11
Australian Securities Commission Act 1989, s 11
Australian Securities and Investment Commission Act 1989, s 11
Corporations Act, ss 2, 18, 19, 20, 21, 786, 826, 830, 837, 842, 843, 844, 845, 849, 850, 851, 911A, 913B, 1430, 1431, 1432, 1436, 1437
Corporations Amendment Regulations 2002 (No 2), rr 2, 3
Corporations Law, ss 9, 18, 19, 20, 21, 92(1), 784, 786(2)(d, 786(9)), 786A, 826, 827, 830, 837, 842, 843, 844, 845, 849, 850, 851
Corporations Legislation Amendment Act 1990, s 2(1)
Corporations Regulations, rr 7.3.03, 7.3.04, 7.3.05, 7.3.06, 7.3.07
Financial Services Reform Act 2001, ss 2, 3
Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited) (2001) 19 ACLC 1006
Alexandra Private Geriatric Hospital v Blewett (1984) 2 FCR 368; 56 ALR 265
Astley v Austrust Ltd (1999) 197 CLR 1; 73 ALJR 403; 161 ALR 155
Australian Securities and Investment Commission v Citigroup Global Markets Australia Pty Ltd 160 FCR 35; [2007] FCA 963
Barrett v Minister for Immigration, Local Government and Ethnic Affairs (1989) 18 ALD 129
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1
Breen v Williams (1996) 186 CLR 71; 43 ALD 481; 70 ALJR 772
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541; 70 ALJR 866; 139 ALR 1
Bristol and West Building Society v Mothew [1998] Ch 1
Brown v Director of Public Prosecutions [1956] 2 All ER 189; 2 QB 369
Brown v Federal Commissioner of Taxation 42 ATR 118; 99 ATC 4516
Budd v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1540
Buzza v Comptroller of Stamps (Victoria) (1951) 83 CLR 286; 25 ALJ 23
Capricorn Financial Planners Pty Ltd v Australian Securities and Investment Commission and Anor (1999) 17 ACLC 855
Chalk v Commissioner for Superannuation (1994) 33 ALD 420; 50 FCR 150
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 71 ALJR 312; 141 ALR 312
Comcare v A’Hearn (1993) 45 FCR 441; 119 ALR 85
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297; 55 ALJR 434; 35 ALR 151
Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371; 60 ALJR 371; 65 ALR 193
Dix v Client Compensation Tribunal (1993) 1 VR 297
Doyle v Chief of Staff (1982) 4 ALD 636; 71 FLR 56; 42 ALR 283
Federal Commissioner of Taxation v Brown (1999) 42 ATR 672; 99 ATC 4852; [1999] FCA 1198
Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106; 45 ALJR 241
Hadid v Lenfest Communicatioins Inc [1999] FCA 1798
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; 58 ALJR 587; 55 ALR 417
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344; 7 ALD 315; 58 ALR 305
Hyde v Sullivan (1956) SR (NSW) 113
James v Commonwealth Bank of Australia (1992) 37 FCR 445; 109 ALR 334
Leach v R (2007) 230 CLR 1; 81 ALJR 598; 232 ALR 325
Lucic v Nolan (1982) 45 ALR 411
Mersey Docks and Harbour Board v Henderson Bros (1888) 13 AC 595
Phillips v Australian Girls’ Choir Pty Ltd & Anor [2001] FMCA 109
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; 75 ALJR 1067
Ralkon v Aboriginal Development Commission (1982)5 ALD 42; 69 FLR 328; 43 ALR 535
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Jade and Australian Postal Commission (1979) 2 ALD
Re Osborne and Australian Securities and Investment Commission [2000] AATA 917
Repatriation Commission v Tuite (1992) 37 FCR 571; 27 ALD 609
Samad v District Court (NSW) (2002) 209 CLR 140; 76 ALJR 871; 189 ALR 1
TCN Channel Nine Pty Ltd v Australian Mutual Provident Society (1982) 62 FLR 366; 42 ALR 496
Wacando v The Commonwealth (1981) 148 CLR 1; 56 ALJR 16; 37 ALR 317
Ward v Williams (1955) 92 CLR 496
Wedesweiller v Cole (1983) 71 FLR 256; 47 ALR 528
Windshuttle v Commissioner of Taxation (1993) 46 FCR 235; 27 ATR 88; 93 ATC 4992
DECISION AND REASONS FOR DECISION [2009] AATA 286
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2008/3115
GENERAL ADMINISTRATIVE DIVISION )Re:RICHARD ST JOHN BROWN
Applicant
And: AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION
Respondent
DECISION
Tribunal: Deputy President S A Forgie
Date: 27 April 2009
Place: Melbourne
Decision:The Tribunal:
1.
affirms the decision of the respondent dated 2 July 2008 to extend the time within which Mr Michael Gurry might lodge a claim under
r 7.3.04(c) of the Corporations Regulations to have the security bond lodged by Richard St John Brown & Associates applied to compensate him for certain pecuniary loss; and
2.in relation to the decision to apply that security bond:
(1)sets aside the decision of the respondent dated 2 July 2008; and
(2)substitutes a decision that the security bond lodged by Richard St John Brown & Associates not be applied to compensate Mr Michael Gurry for any pecuniary loss.
S A Forgie
Deputy President
At all relevant times, Mr Richard St John Brown was a director and secretary of Richard St John Brown & Associates (RSJBA).[1] RJSBA was deemed to be licensed under the Corporations Law (the Law) and was required to maintain with the then Australian Securities Commission (ASC), now the Australian Securities and Investments Commission (ASIC), a security it had approved for the amount of $20,000. Mr Michael Gurry approached RSJBA for investment advice and Mr Brown gave that advice on its behalf.
[1] T documents at 156
After realising the investments recommended by Mr Brown, Mr Gurry claimed that he had suffered a pecuniary loss due to RJSBA’s failure to carry on its business under the licence adequately and properly. Being dissatisfied with Mr Brown’s response to his complaint about his loss, Mr Gurry made a complaint to the Financial Industry Complaints Service Ltd (FICS). FICS resolved the complaint in his favour on 28 February 2005. It decided that RJSBA should pay Mr Gurry the sum of “$8,000 together with interest at the rate of 5% compound per annum from 30 August 2001 to the date of payment on the basis of its shared responsibility for the complainants’ losses.” Mr Brown refused to pay and, after FICS unsuccessfully took some steps to enforce its decision, Mr Gurry asked ASIC on 12 May 2006 to apply the security to compensate him for pecuniary loss that he considered was due to RJSBA’s failure to carry on business under its licence adequately and properly. His claim was made well beyond the time permitted and Mr Gurry asked that the time within which he could claim against the security bond be extended.
ASIC decided to extend the time to enable Mr Gurry to claim against the security bond. It also decided that:
“… his pecuniary loss resulted from the failure of RJSBA to carry on business adequately and properly, sufficient to justify the application of $8,000, together with interest at the rate of 5% compound per annum, from 30 August 2001 to date of payment from the $20,000 security, to compensate the Claimant.”[2]
[2] T documents at 5
I have decided to affirm ASIC’s decision to extend the time within which Mr Gurry might apply to have the security bond applied to compensate him but have decided that the security bond should not be so applied. In summary, I have decided that he has not established that he has suffered a pecuniary loss due to the failure of RJSBA or of Mr Brown to carry on business under RJSBA’s licence adequately and properly. Therefore, I have set aside ASIC’s decision in that regard and substituted a decision that Mr Gurry is not entitled to be compensated from the security bond.
BACKGROUND
There are a number of factual matters in this case that are not in dispute in this case. In light of that and on the basis of the material I have been given, I will set out the findings of fact that I have made on such matters.
Mr Michael Gurry
On the basis of his oral evidence, I find that Mr Michael Gurry was a secondary school teacher teaching maths and science. His wife had consulted RSJBA for financial advice some time before he decided to do so.
RSJBA’s Dealers Licence
On 5 March 1996, a delegate of the Australian Securities Commission (ASC) issued a Dealers Licence to RSJBA on the basis it had been licensed under the Securities Industry (Victoria) Code and was deemed to be licensed under the Corporations Law (the Law). The delegate went on to state that RSJBA would continue to be licensed as a Dealer under s 784 of the Law subject to the conditions and restrictions as prescribed as well as to ten further conditions endorsed on the Dealers Licence. The licence was granted with effect from 5 March 1996.[3] Among the conditions endorsing RSJBA’s Dealers Licence was that “it shall lodge and maintain with the ASC a security approved by the ASC for the amount of $20,000.”[4] RSJBA lodged that security with the ASC.[5]
[3] Law, s 784(5) and see Dealers Licence at T documents, 30
[4] T documents at 30
[5] T documents at 32-36
Mr Brown’s first meeting with Mr Gurry
Mr Gurry had heard about Mr Brown from his wife who had sought his professional advice regarding financial planning. They met on 1 March 2001.
RSJBA’s personal financial plan dated 18 March 2001
On 18 March 2001, Mr Brown sent Mr Gurry a plan that he described as a “Limited Advice Plan” and that he said had been designed on the basis of information provided and discussed at their meeting. He had prepared the plan as the authorised representative of RSJBA. Mr Brown invited Mr Gurry to call him if he had any questions regarding the plan or felt that some relevant information might have been overlooked. It was important, he wrote, to ensure that all information contained in the plan was correct before being implemented.[6] The report began with Mr Gurry’s personal details including his age, marital status and income together with his objective “To build superannuating benefits over the remaining 5 years and diversify into growth sectors with a 5-7 year time horizon.”[7] The report then listed Mr Gurry’s assets and the funds available for investment. There followed a list of “recommended areas of investment”[8] with an amount allocated to each.
[6] T documents at 80
[7] T documents at 82
[8] T documents at 85
The recommended areas of investment were:
“ZURICH SUPERANNUATION PLAN
International Share Fund $50.000
CML First State Australian Share Fund $20,000
Managed Growth Fund $30,000
Australian Share Fund $10,000
COLONIAL FIRST STATE INVESTMENT MANAGERS (AUSTRALIA) LIMITED SUPERANNUATION AND ROLLOVER FUND
High Growth Option $10,000
Global Share Option $12,000
Global health and Biotechnology Fund $ 3,134
$135,134”[9]
[9] T documents at 85
The report continued:
“COMMENTS
You have requested specific advice on the investment of your superannuation funds and financial resources for the total amount of $135,134. This plan is limited to the provision of that advice.
Your objectives as we understand them can broadly be described as a desire to ensure that you maximise the growth in the value of your investment and minimise the effect of taxation. More specifically we have established your objectives as follows:-
1.To use your superannuation funds and financial resources to provide a source of funds which with capital growth, will provide for your retirement needs.
2.To adopt a managed investment strategy which is reviewed at least each 12 mths.
We believe that by adopting the strategy recommended in this report, you will have a greater chance of achieving these objectives. We have considered the options available for you to achieve your objectives and have included the strategy we feel most appropriate based on the criteria provided.
BASIS FOR RECOMMENDATION
The recommendations that follow are based on the information you have provided to us. If we have misinterpreted this information, or have made assumptions that are incorrect, then you should advise us immediately as this may have an impact on the recommendations made.
The recommendations are also based on what we understand to be your risk profile and your investment time frame.
YOUR RISK PROFILE
In making investment fund recommendations it is necessary to consider your tolerance to risk, from our discussions we have arrived at a risk profile rating for you of ‘moderately assertive’ which we classify as follows:-
A ‘moderate assertive’ investor who understands the movement of investment markets. You are most interested in maximising long term capital growth, you are happy to sacrifice short-term safety in order to maximise long term capital growth.
Long term – 6 years and beyond.”[10]
[10] T documents at 87-89
There then followed an assessment of the asset allocation that Mr Brown had recommended:
“As you are aware, there are many factors to be considered when developing an investment portfolio. The particular investment vehicle, its sector, and the asset allocation are all dependent upon an individual’s circumstances, beliefs and attitudes.
To arrive at the most appropriate asset allocation, we have considered your attitude to investment and your goals for the future, together with current economic conditions and our research on investment funds.
This suggested allocation should provide you with the level of diversity you require in your portfolio, while reducing your risk of exposure to any one particular region, industry or investment manager.”[11]
[11] T documents at 91
Mr Brown followed this with a profile of each of the two companies behind the investments he was recommending and an analysis of each of the investments in each of them. The analysis of the investments included the objectives of the investment, the fund strategy, the fund size, investment time horizon and investment mix, its performance since its inception, estimated performance and fees and charges.
Near the end of the financial plan, Mr Brown wrote:
“All investments involve varying degrees of risk. There can be many outcomes associated with an investment influenced by factors beyond investor control and affect investment returns.
Market risk is the result of negative movements, which affect values of assets in a particular market. A fall in share market prices would create reduced values in some investment sectors. Funds invested in overseas markets are not only influenced by share prices, but also, the movement in the country’s currencies.
Currency risk occurs when there is movement in a foreign currency relative to the Australian $ and this adversely affects the domestic value of funds overseas and the income derived from them.
Volatility does not necessarily constitute risk. The element of risk is generally determined by the ‘Time Horizon’ adopted for the investment, that is, the timing in respect to the entry and exit of the particular investment. Long term investment 5-10 years significantly reduces the risk factor.
It is of importance that events affecting investments cannot always be anticipated, therefore, it is not always possible to protect investment against all risks.
Shares or Trusts are perceived to be the most volatile investment. Property follows in the scale of risk, then Fixed Interest and Cash. Assets of funds will rise and fall in value and investments in Trusts also carry varying degrees of risk.”[12]
[12] T documents at 101
The plan concluded with a Disclaimer that began with a statement that RSJBA provided the “… advice in good faith based upon Government legislation of the day.”[13] It went on to disclaim any responsibility or liability for any loss arising from the advice “as permitted by law at the time.”[14] No undertaking was given as to the accuracy or reliability of the information upon which the advice was based and “No guarantee is undertaken in terms of future performance of investments recommended.”[15]
[13] T documents at 102
[14] T documents at 102
[15] T documents at 102
RSJBA’s rollover investment plan dated 15 May 2001
On 15 May 2001, Mr Brown wrote to Mr Gurry. In many respects, the letter covered similar material to that covered in his previous letter. It began with the following paragraph:
“Thank you for the opportunity to discuss your financial position with you, specifically with regard to your superannuation arrangements. In preparing our recommendations, careful consideration has been given to your current situation, your concerns, needs, goals and objectives, as well as your attitude towards investments and insurance. This has been based on information gathered at our meeting of 1/03.2001. If any of these details have changed since our discussion, it is important that you let us know before you proceed.
The following plan provides our investment recommendations. After you have read the plan, I suggest we discuss the recommendations so that all areas are clear in your mind. We can then answer any questions you may have, or provide further details as requested.
…”[16]
[16] T documents at 103
The investment plan enclosed with the letter was entitled “Rollover Investment Plan”. It was written in a different format from the financial plan but contained much of the same type of information. At the bottom of the cover page was a note that read in part:
“ THIS IS AN IMPORTANT DOCUMENT
This Customer Advice Record should be read carefully to make sure you understand it.
If there is anything that you disagree with, or do not understand, please contact Richard Brown.…”[17]
[17] T documents at 104
The Executive Summary began by noting that Mr Gurry had asked for advice about the commutation of his Government Superannuation Fund Pension to a lump sum rollover in the amount of $130,163. The plan was limited to the provision of that advice. As to Mr Gurry’s objectives, Mr Brown wrote:
“Your objectives as we understand them can broadly be described as a desire to ensure that you maximise the growth in value of your investment and minimise the effect of taxation.
More specifically, we have established your objectives as follows:
*To protect the current value of your rollover
*To use your rollover to increase your net portfolio value and hence your net wealth position, taking into account inflation
*To use your rollover to provide a source of funds which, with capital growth, will provide for your retirement needs
*To invest the funds in such a way as to minimise taxation on investment income
*To have an easily managed investment strategy which is reviewed regularly
We believe that by adopting the strategy recommended in this report, you will have a greater chance of achieving these objectives.”[18]
[18] T documents at 106
Immediately after the Executive Summary, there was a second heading: “Basis for Recommendations”. It was followed by this passage:
“The recommendations that follow are based on the information you have provided to us. If we have misinterpreted this information, or have made assumptions that are incorrect, then you should advise us immediately as this may have an impact on the recommendations made.
The recommendations are also based on what we understand to be your risk profile and your investment time frame. These are described later and should also be checked for accuracy as a description of you as an investor.
The plan also contains forecasts (or projections) that we believe to be reasonable. Please be aware, however, that these are forecasts, not guarantees. The forecasts are made in light of the available information regarding the investments and also in regard to your investment timeframe. Investments, particularly sharemarket investments, can be volatile in the short term but are less so the longer the investments are held.
We have considered what options are available for you to achieve your objectives, and have included the strategy that we feel is most appropriate, based on the criteria given.”[19]
[19] T documents at 106
Mr Brown then described Mr Gurry’s risk profile:
“In making an investment fund recommendation, it is necessary to consider your tolerance to risk. From our discussions, we have arrived at a Risk Profile rating for you of Prudent, which we classify as the following:
A prudent investor who is seeking a greater growth component in your investment to protect your capital from tax and inflation. You remain curious towards taking high levels of risk, however, your general understanding of the investment market enables you to feel comfortable with some short term risk. Your priority is consistent capital growth with some income to smooth your returns.
Based on this risk profile rating, we recommend an investment strategy as
follows:
A Prudent portfolio has a higher exposure to growth assets than more conservative style portfolios. Its aim is to produce capital growth in the medium term. It has a ‘balanced’ exposure to shares, property and fixed interest assets which provides diversification whilst reducing volatility.”
Definitions of Time Frames Used
Short Term- at call to 3 years
Medium Term - 3 years to 6 years
Long Term- 6 years and beyond
Please satisfy yourself that this is a fair description of you as an investor as we need to ensure that any investments recommended match this profile.”[20]
[20] T documents at 106-107
Mr Brown went on to recommend that the rollover amount from the commutation of Mr Gurry’s pension be invested in managed funds which had an overall asset allocation to match his risk profile. He recommended that this be done by means of the Strategy Retirement Fund and that the investments and asset allocation strategy be reviewed on a regular basis. In the remainder of the report,
Mr Brown gave a more detailed explanation for recommending this investment strategy. He described the fund and its features and the services that it would make available to Mr Gurry. In summarising his recommendations, he set out the rollover amount, the initial contribution fee of $4,560.67 and the division of the remainder of the rollover amount between a Cash Account and the Strategy Retirement Funds portfolio described as “prudent”. “Prudent” was the fourth of six portfolios named “Conservative, Cautious, Defensive, Prudent, Assertive, Aggressive”.[21][21] T documents at 110
Mr Brown told Mr Gurry that, to implement the recommendations, he would need to “Talk to us if you still have any concerns or questions regarding this plan.”[22] If he agreed with the recommendations and would like to proceed, he would need to sign the Authority to Proceed attached to the report as well as complete the application forms found in the prospectuses or information brochures sent with the report.
[22] T documents at 111
The report also included several paragraphs under the heading of “Disclaimer”. Those paragraphs began with a statement that Mr Brown and RJSBA were:
“… responsible for ensuring that recommendations included in this plan are reasonably based, and that they are made with regard to your stated investment objectives, financial situation and particular needs. Otherwise, no liability is accepted for any loss incurred by any person in reliance on any statement or information contained in this letter.
…
NOTE: Projections of growth in this report have been determined by, and have been used to indicate an estimated return that may be achieved over the medium to long term of the investment. These returns are not guaranteed.”
…[23]
[23] T documents at 112
Appendix B to the report was headed “Additional Investor Information”.[24] It began with a statement to the effect that the return received from investments largely depends upon the segment of the investment market in which they are made and the proportion invested in each segment. This statement was followed by a section headed “The Risk/Return Equation”:
“Despite attempts by investment promoters over the years to convince investors to the contrary, there is no hiding from the fact that the higher the level of return offered by an investment, the higher the risk that your investment will suffer a loss of capital value, at least in the short term. In other words, your investment returns, and therefore the value of your investment, will fluctuate up and down.
Hence, risk, in an investment context, is usually measured by the relative amount of fluctuation in the returns from different investments. An investment which is characterised by returns that go up and down regularly, and sometimes severely, is more volatile and is said to be more risky than one whose returns are more even over time. Therefore, cash is regarded as a low risk, stable investment, while shares are generally more volatile, or risky, in the short term.
There are many investments available with differing levels of risk, and some people are more comfortable with risk than others. You need to be sure that your money is being managed in line with the level of risk with which you are comfortable. Clearly, the better the management of your investment, the higher the return you could get for the acceptable level of risk taken.
The table on the following page provides some indication of the returns available from the various market sectors over long periods.”[25]
[24] T documents at 116-121
[25] T documents at 116
A table set out the market returns for the years 1990 to 1999 in relation to cash, Australian fixed interest, international fixed interest, Australian shares, international shares and Australian listed property together with an annualised ten year return for each. Mr Brown followed this table with the following passage:
“As indicated above, the higher returns come from the growth assets, namely Australian & International Shares. These also carry the greatest degree of risk. Therefore, in managing your investments, it is important to consider risk and how it can be reduced, as well as look at how to maximise the return.”[26]
[26] T documents at 117
This was followed by passages regarding diversification, international share market investment, Australian share market investment, income or capital growth, dividend imputation, dollar cost averaging, investment time frame, reasons for choosing managed investment funds and master funds. The passage on diversification introduced the rest:
“The key to reducing risk is called ‘diversification’ – in other words, spreading the risk, or not putting all your eggs in one basket. The objective of diversification is to maximise the total return on your portfolio for a given level of risk or, conversely, to minimise risk for a given level of return. Diversification reduces risk and reduces the volatility of returns.
The economy and financial markets are constantly changing and history shows that not all types of investments behave in the same way at the same time. Changes in returns from one asset class are often compensated for by changes in the opposite direction in another asset class. The better you diversify your investments, the less likely it is that poor performance from one investment will have a major impact on the value or overall return of your total portfolio. Conventional wisdom also holds that the longer your investment horizon, the higher your weighting to growth assets like shares and property should be.
If you wish to get growth in the value of your funds, you must look to growth assets – that is, predominantly shares, both here and internationally, and also property.”[27]
[27] T documents at 117
Under “Investment Time Frame” appeared the following:
“The time period over which you are considering investing is very important. When considering financial assets, such as equities, the returns in the form of dividends and capital growth are not guaranteed and it is possible to experience periods of negative growth.
On the other hand, investments such as bonds and fixed interest assets have a much lower risk of not paying a coupon (or interest), however, due to this lower risk, they offer a lower return than equities.
It is fair, then, for investors to expect a higher return for the higher risk (ie. the risk of negative return) that they accept in their investment recommendations.
Since fixed interest products and bonds pay regular amounts of interest at set intervals (ie. an annuity), the time frame for investing can be relatively short term.
*When considering other asset classes such as fixed interest and cash, a time frame of 3 years or less may be appropriate. This is because these funds have very low risk and provide a positive return over a shorter period.
*When considering growth investments such as Australian Share funds, a time frame of approximately 5 years is necessary. This does not mean that you cannot access your funds at anytime, just that you should, when investing, be prepared to leave the funds for that period in order to ride out highs and lows that come with investing in share markets.”[28]
[28] T documents at 119-120
Letter from RSJBA to Mr Gurry dated 24 May 2001
Mr Brown wrote to Mr Gurry on 24 May 2001 referring to their discussions and Mr Gurry’s email of 22 May 2001. He enclosed details of variations as discussed. Mr Brown asked Mr Gurry to sign the documents and to return them in the envelope provided. The attachments showed:
“AVAILABLE INVESTMENT
1. Mercantile Mutual Balanced Fund $27,185
2. AMP WOL Policy $19,162
3. Superannuation
Strategic $2,963
VicSuper $320
VicSuper $22,480 $76,223NAB Flex $50,460 $122,570
…
NEW AREAS OF INVESTMENT
SUPERANNUTION ZSP
International Share Fund $ 50,000
CML First State Aust. Share Fund $ 20,000
Managed Growth Fund $ 25,000Australian Share Fund $ 10,000
COLONIAL FIRST STATE ROLLOVER AND SUPERANNUATION FUND
Global Share Option $ 5,000
Global Health and Biotechnology Fund $ 3,408$113,408
NON SUPERANNUATION
COLONIAL FIRST STATE INVESTMENT MANAGERS (AUSTRALIA) LIMITED
High Growth Option $ 9,162
$122,570”[29]
Mr Brown’s Customer Advice Records sent to and signed by Mr Gurry during period July, August and September 2001
[29] Exhibit 8
On 9 July 2001, Mr Brown wrote two letters to Mr Gurry enclosing a Customer Advice Record for Colonial First State Rollover and Superannuation and another for Zurich Superannuation for his perusal and safekeeping. He asked
Mr Gurry to sign the bottom of each letter and return it to him. Mr Gurry did sign the letter on 7 August 2001 and returned it to RSJBA. He was sent a copy of each for his own records.[30][30] Exhibit 3
Each of the Customer Advice Records began with a statement:
“This is an important document. You should read it carefully and make sure you understand it.
If there is anything that you disagree with, or do not understand, please contact your life insurance adviser, or the life insurance company whose product has been recommended.
You may want to consult your adviser if you change your mind about the policies you decide to buy or any other action you decide to take. You have a statutory 14 day cooling-off period (your Life Insurance Company may give you longer) in which you may cancel any life insurance policy. You will find details of the cooling-off period in your policy document and/or the Key Features Statement.”[31]
[31] Exhibit 3
Each was completed in the same way. Part B concerned the information used in giving advice. Part 4.1 was completed because it was said that the advice and recommendations had been based on a Fact Finder dated 20 September 2000. Each then set out a brief summary of the facts in the Fact Finder and advised Mr Gurry that he might obtain a copy of the Fact Finder by asking his adviser for it. For Colonial First State Rollover and Superannuation, this read:
“Client wants consolidation of funds & direction towards accumulation for retirement.”[32]
[32] Exhibit 3
The Customer Advice Record ticked the box that said that Mr Gurry had:
“… elected to only receive advice about a more limited range of products than the adviser offers. They were:
Superannuation & rollover”
IMPORTANT NOTICE: Please noted that by not providing complete information you may receive inappropriate advice and thus make a financial commitment to a life policy that may not be appropriate to your needs and objectives.”[33]
[33] Exhibit 3
At the conclusion of Part B on each Customer Advice Record appears the following statement:
“IMPORTANT NOTICE: A life policy sold without completion of a Fact Finder may not be appropriate to your needs. By not receiving advice you risk making a financial commitment to a life policy that may not be appropriate for your needs and objectives.”[34]
[34] Exhibit 3
The Customer Advice Record noted that Mr Gurry would make an investment of approximately $8,900. The reason why the type of product recommended was likely to satisfy Mr Gurry’s needs and objectives was said to be:
“Product by design is suitable for retirement & accumulation of lump sum for retirement.”[35]
The particular product that had been recommended was likely to satisfy Mr Gurry’s needs and objectives because that “product provides wide selection of quality performance funds”.[36]
[35] Exhibit 3
[36] Exhibit 3
The Customer Advice Record in relation to Zurich Investments summarised the facts in the Fact Finder together with Mr Gurry’s identified needs and objectives as:
“Client wants Consolidation of funds, taxation effective & accumulation of funds for retirement.”[37]
Mr Gurry had elected to receive advice only about superannuation and rollover. The product, in which $105,000 was invested, was recommended for reasons similar to those given for the investment in Colonial First State Rollover and Superannuation.
[37] Exhibit 3
RJSBA sent a similar letter and attachment to Mr Gurry regarding an investment of $2, 317.67 in Zurich Superannuation Plan. That was dated 5 September 2001. This time the Customer Advice Record noted that a Fact Finder had been prepared but did not note the date it had been prepared. Part C dealt with the adviser’s recommendation. It set out Mr Brown’s recommendation that $2,317.67 be placed in the Zurich Superannuation Plan. Half would be in the international shares and half in Australian shares. The reason why the recommended product was likely to satisfy Mr Gurry’s needs and objectives was said to be:
“Client has need of a retirement savings vehicle which has good performance in investment & reasonable fees & charges.”[38]
[38] Exhibit 3
Next to this passage was a passage addressing how the particular product was likely to satisfy Mr Gurry’s needs and objectives:
“Client after discussion of financial needs analysis agreed that there was a need to accumulate for retirement & product specified fulfilled this need.”[39]
[39] Exhibit 3
Each of the three Customer Advice Records ended with the Adviser’s Declaration and the Customer’s Declaration. That signed by Mr Brown began with a declaration that the :
“… Customer Advice Record is an accurate and complete record of the advice and recommendations, if any, that … [he] gave the Customer. …”[40]
The Customer’s Declaration signed by Mr Brown stated:
“I have read and understood this Customer Advice Record and I declare that it is accurate and complete.”[41]
[40] Exhibit 3
[41] Exhibit 3
Events affecting Mr Gurry’s investments
Mr Gurry wrote a note dated 16 December 2008 setting out his views regarding his investments after the events on 11 September 2001 and the Asian market crisis. He said that he:
“… was totally unprepared for what these events would do to my investments so I was shocked to see them going down in value. Because Richard had only ‘talked up’ the potential of these investments then that made me anxious that they were actually losing values. Yes, the investment documentation did refer to a risk with investing but if the advisor does not emphasise that point or discuss it seriously with me they why should I regard it as significant? One of his points of defence is that the risk potential was outlined in the documentation so he’s really just using this as a weak defence after the horse has bolted. Why should he have expected me to take that issue seriously if he didn’t?
…”[42]
[42] Exhibit 4
Mr Gurry went on to explain that he met with Mr Richard McLean, to whom Mr Brown sold his business. That happened some time after March 2002.
MrGurry said that he and his wife had meetings with Mr McLean and continued:
“… it was at one of these meetings that I expressed my concern about the investments that Richard had set up for me and for which he (Mr Mclean) would now be managing. When he looked at them he said they were ‘quite high risk investments and that they were not the types of investments that I would have chosen’.
That comment obviously created concern and I therefore chose to get a second opinion on these investments from my original advisor Bill Harding who I had used before Richard. He agreed with Mr Mclean’s [sic] assessment and he raised concerns about other issues in my portfolio such as why my pension was commuted to a lump sum without significant reasons being outlined in writing for that decision. He was very surprised that I was put into high risk investments when, from his memory of my earlier dealings with him, I was not a high risk investor. He asked me if Richard did a proper Fact Find to prepare the investment portfolio and he showed me an example of one. I said I didn’t remember seeing a thick detailed document like that but I would go back through my correspondence from Richard. I could not produce a Fact Find document.
Based on these opinions I felt Richard had not given me good service so I sent my first letter of complaint to him on 15/10/02 seeking compensation for inappropriate and improper investment advice. I also made arrangements to transfer most of my investments across to Bill Harding who was gracious enough to take me back as his client. He chose a more moderate portfolio for me which was more in line with my risk profile.
…”[43]
[43] Exhibit 4
The cessation of RSJBA’s carrying on business under the Dealers Licence
After a period of ill health, Mr Brown retired on 4 April 2002. He did not give any advice or deal in securities after that date but RSJBA continued to hold a Dealers Licence. RSJBA’s Dealers Licence was not formerly revoked until
23 January 2004 by an Order made on 23 January 2004 and taking effect a few days later.[44] Although it had not dealt in securities, its Dealers Licence had remained on foot until Mr Brown had applied for its revocation on the basis that he had ceased to carry on the business to which it related.[45]
[44] Part of Exhibit 7
[45] Part of Exhibit 7
Mr Gurry’s complaint set out in a letter dated 15 October 2002 to Mr Brown
Mr Gurry attached to his complaint a copy of his letter dated
15 October 2002 to Mr Brown. His letter reads:
“I believe I was given inappropriate and improper investment advice for these reasons:
1.My risk profile was not satisfactorily assessed, and the implications of this confusion were profound. My first meeting with Richard was on March 1, 2001. In that meeting he reviewed my current investments and said that I would be better off having my money in more aggressive funds and that although they involved entry fees, the performance of the funds would far outway [sic] any upfront expenses. There was an unsatisfactory risk profile assessment, and little advice on the implications of the risk profile that he was setting up. In a letter dated March 18, I was somehow given an assessment of ‘moderately assertive’, and an investment portfolio was set up, but I was not advised of the degree of risk involved with this assessment, especially due to the high exposure to local and international shares. In a letter dated 15 May 2001 which related to my Strategy Retirement Fund investment, my risk profile was stated as ‘prudent’ which was ‘based on information gathered at our meeting of 1/03/2001’. How could my risk profile be both ‘moderately assertive’ and ‘prudent’ from the same interview? The implications of this difference, in terms of how my money would be invested, was never explained to me. I believe my proper assessment risk is prudent.
2.I was persuaded to cash in my current investments at the time and transfer most of this money to more risky investments without proper justification, or full explanation of the risk involved, and which also incurred exit fees.
3.I was persuaded to commute my government pension to a lump sum without appropriate justification or strategy advice to consider why it was a good idea.
4.My AMP insurance policy was cashed in without any strategy explanation of why this would be a good idea compared to other possible options, eg. an endowment policy.
5.In all our many discussions he constantly emphasized the potential gains to be made without stressing the possible risk involved with these investments.
The disclaimer notice attached to the March 18 documents which tries to absolve the licensee from any responsibility is absolute nonsense and carries no weight relevant to this situation.
I seek compensation in the form of:
(a)A refund of all commissions paid for inappropriate investment advice.
(b)Other compensation yet to be determined in the form of losses incurred as a result of inappropriate investments due to an incorrect assessment of my risk profile.”[46]
[46] T documents at 64
Mr Brown’s response dated 13 November 2002 to Mr Gurry’s complaint
Mr Brown responded to Mr Gurry’s complaint of 15 October 2002 in a letter dated 13 November 2002. His letter response was detailed. It began with an explanation of how RSJBA had established his risk profile:
“A risk profile is established by a collection of personal data from a client defining attitude in respect to various aspects of investment. The actual profile may vary in terminology depending upon the advisor, Dealer or Fund Manager. In terms of information provided and our discussion we classified your profile as ‘moderately aggressive’ ..
The profile used in your Strategy investment was ‘prudent’ as this was the closest category in terms of sector choice. We would see a prudent investor as marginally more conservative than ‘moderately aggressive’
The defined investment sectors for the Strategy Fund are as follows:
a.cautious
b.defensive
c.conservative
d.prudent
e.assertive
f.aggressive
The dissection of monies in the Strategy Prudent Fund is as follows:
%
Australian Fixed Interest 21
Cash15
Property10
Australian Shares 34
International Shares 20
100%”[47]
[47] T documents at 66
Mr Brown went on to quote a number of passages from the two reports that he had prepared for Mr Gurry. Most appear in the passages to which I have referred above. Mr Brown also made a number of observations and I refer to a selection of them:
“No variations to risk profile or asset allocation were received by you either in terms of our discussions or in writing, accordingly, we assumed that our assessment of your risk profile and asset allocation were in accord with your own perception. Furthermore your request to proceed (copy attached) was indicative of your acceptance.
Share markets both within Australia and internationally have fallen significantly over the past 2 years, but more so internationally. These falls have been influenced by world terrorist activity and poor economic conditions prevalent in the U.S.A., Japan and Europe.
The current markets have sustained a prolonged downturn longer than normally experienced. Markets always come back and historically rise above their previous high point.
Time Horizon and Asset Allocation
Our letter of 18th March 2001 indicated a proposed time horizon of 5-7 years.
Page 2 Objective
To build superannuation benefits over the remaining 5 years and diversify into growth sectors with a 5-7 year time horizon.”[48]
[48] T documents at 68-69
“Risk at Interview
It has always been our business practice to discuss risk factor at discussion prior to implementation of any financial plan. This information is subject to open discussion as well as confirmed in writing as indicated. There is adequate opportunity to vary investments prior to plan implementation but no changes were requested.
Your written request to accept recommendations and proceed with implementation is enclosed.
Proposed time frame for your investments is 5-7 years. Your investments have only been in force for 5 [sic] months, therefore no assessment in terms of recommendations can be made at this time.
Disclaimer
Contrary to your comments disclaimers constitute an essential part of any advice. Copy of both disclaimers attached.
Summary
1.Your risk profile was assessed in terms of information provided. The assessments were conveyed in writing with the opportunity to Contest any accuracy [sic]. No communication was made by you either in writing or verbally.
2.Asset allocation of investments were made in writing with the opportunity For [sic] variation if required.
3.Risk equation was explained at interview and confirmed in writing.
4.Time horizon proposed in the financial plans indicate [sic] 5-7 years. Investments have only been in force 15 months therefore no assessment can be made.
5.Your written authority to proceed with the strategy is held.”[49]
[49] T documents at 71
Mr Gurry’s response dated 19 December 2002 to Mr Brown’s response
In a letter dated 19 December 2002, Mr Gurry told Mr Brown that he had not satisfactorily addressed his concerns regarding inappropriate and improper investment advice. He pointed to the different descriptions given to his risk profile -
moderately aggressive and moderately assertive – and his belief that Mr Brown had not explained how he arrived at his risk profile. Mr Gurry also told Mr Brown that he had not given him an adequate explanation of his other complaints and expanded upon them.[50][50] T documents at 76
Mr Brown’s response dated 4 January 2003 to Mr Gurry’s further response
In a letter dated 4 January 2003, Mr Brown replied to Mr Gurry’s letter of 19 December 2002. He advised Mr Gurry that he was at liberty to direct his complaint to FICS and gave him its address and telephone number. Mr Brown also responded to the specific matters that Mr Gurry had raised:
“1. Your comments ‘Re Stating of Paragraphs from Documentation that already exists’ is correct. This documentation confirms the written options available to you:
a.Dispute your risk assessment.
b.Make you aware of the risk.
c.Not proceed with the investment.
d.Vary your recommended time horizon.
2.Your risk profile is established from our interview and your Fact Finder your definition is ‘splitting hairs’ our written submissions provided adequate opportunity for you to respond should you not concur with our analysis. No such variation was ever tendered by you. Otherwise our recommendations would be varied.
3.The reason to cash in your existing investments was to provide higher returns in growth investments over the nominated time horizon. This was explained to you at interview including the element of risk and volatility (further confirmed in our written correspondence). There are no exit fees on your investments that have an entry fee.
4.The Fund Managers chosen are in high regard and investments sectors selected provide good historical returns. Diversification of funds is always important and the selected areas of investment are volatile rather than high risk. Accordingly, time horizon is always important in selecting growth, hence the nominated period of 5-7 years.
Selection of these sectors would never be included in a 1-3 year time horizon. You are making an assessment within 15 months which is way outside the parameters of our recommendations.
5.The recommendation to commute your proposed pension was that investment over the long term would be more beneficial.
6.The recommendations to cash in your AMP Policy was based on the following premise.
a.You no longer required the Death Cover therefore you were paying for something you did not need.
b. Bonuses on your life policy were low in a low interest environment and investment into growth areas over the long term would provide better returns.
7.I totally reject your claims that the implications of your investments were not explained. Every client at interview immediately prior to investment received the benefit of full discussion on the nature of:
a. Selection of Fund Manager
b. Sector choice
c. Stock market movements and volatility
d. Importance of time horizon
This information is also included in our written submission.”[51]
[51] T documents at 78-79
Mr Gurry’s complaint to FICS
Mr Gurry made a complaint to FICS dated 19 February 2003[52] about the financial advice he had received from RJSBA regarding superannuation and managed funds. He estimated the amount in dispute to be $16,163.00 and said that his complaint concerned inappropriate advice that he had occurred or began on
1 March 2001. He attached his letters to Mr Brown to indicate the scope of his complaint. He also complained about Mr Brown’s responses which he felt had “shown little empathy”[53] with his concerns and had not addressed those concerns satisfactorily.[52] T documents at 53-58
[53] T documents at 56
Mr Gurry told FICS:
“ In September last year [2002] I had two other financial advisors look at the financial plans and investment selection that Richard chose for me. I saw them separately yet they both felt that he chose high risk areas that were inappropriate for my moderate or prudent risk profile. They also pointed out other issues that I included in my letters to Richard.
I recall mentioning on more than one occasion before the investments were finalised, that I was concerned about the high entry fees, etc. but he assured me that I was not to worry because the performance of the investments will more than make up for the initial costs involved. This was typical of his whole approach, in spite of what provisos may be written in his financial plans. …”[54]
[54] T documents at 57
Mr Gurry told FICS that he did not include the Strategy Retirement Fund in his claim:
“… because although it made substantial losses, the spread of investment sectors for the Prudent category is probably well balanced.”[55]
[55] T documents at 57
Mr Gurry told FICS that he calculated the amount he claimed as compensation in this way:
“(1) Re-imbursement of commissions paid
$5,481.88 + $314 + $727.24 = $6,523.12
(2)50% compensation due to losses incurred as a result of inappropriate advice
=50% of ($15,085.56 + $1,450.89 + $2,743.49)
=$9,639.97
(1) + (2) = $16,163.”[56]
[56] T documents at 57
FICS sent the complaint to Mr Brown who was then away from Victoria but who replied in a letter dated 16 March 2003. His response was detailed but I have already referred to its substance in these reasons. Mr Brown also set out the procedures adopted for new clients:
“Initial Interview
a.Provision Adviser Services Guide and brochure
b.Overview of Company’s operation.
c.Remuneration explained by way of commission fully disclosed in a financial plan in $ and % terms.
d.Client advised that no other fees made for ongoing services for the Life of our association other than investment of new monies.
e.Upon completion of Fact Finder a written financial plan is prepared and Despatched to the client.
f.A follow up interview in some 2/3 weeks later at which time the financial plan is Discussed in great detail including
a.Investment Risk
b.Commissions
c.Assessment of risk profile
d.Investment selection
e.Time horizon
f.Annual reviews or earlier”[57]
[57] T documents at 63
In later correspondence, Mr Gurry advised FICS of the dates on which he had withdrawn the investments originally recommended by RSJBA and the status of those he had not. That information, together with Mr Brown’s original advice is set out in Exhibit C and 5 and his original advice:
| Investment | Date invested | Amount shown in fund documents $ | Less Charges | Date withdrawn or date value assessed | Amount realised or value | Value of investments if realised at 28 August 2008 $ |
| Zurich Superannuation Plan[58] | 9 July 2001 | 20,566.00 89,071.62 109,637.62 | Portfolio Management Charge 1,253.84 6,735.71 | 4 December 2002 | $87,881.60 | 139,661.00[59] Gain of 34,746.00 based on initial investment of 104,915 |
| Colonial First State Rollover and Superannuation Fund[60] | 10 August 2001 | 8,601.47 | Application fee 356.85 | 5 November 2002 | 6,555.56 | 6,788[61] Loss of 1,776.00 based on initial investment of 8,564 |
| Colonial First State Managed Investment Funds[62] | 13 August 2001 | 19,833.79 | Closing balance 30 June 2004 | 16,254.36 | 16,270.00[63] Loss of 3,563.00 based on initial investment of 19,833.00 |
[58] Exhibit 2 at 5-8
[59] Exhibit C
[60] Exhibit 2 at 10-11
[61] Exhibit C
[62] Exhibit 2 at
[63] Exhibit C
Mr Brown’s request to ASIC to return the bank guarantee for $20,000: 1 June 2003 to 23 January 2004
In a letter dated 1 June 2003, Mr Brown advised ASIC that he as the principal and proper authority holder of RSJBA had retired on 4 April 2002. He said that no advice had been given or financial transactions since that date and enclosed the licence for cancellation. He also asked ASIC to return the bank guarantee for $20,000, “which should no longer be required”.[64]
[64] Exhibit 7
ASIC advised Mr Brown that he needed to apply for the revocation of the licence. In order to do that, he had to complete Form 703 and lodge it with the licence attached. He did that in December 2003 and repeated his request for the return of the guarantee. In a response dated 23 January 2004, ASIC advised him that it had revoked RJSBA’s licence and also advised him of the steps he would need to take regarding the discharge of the security.
Course of Mr Gurry’s complaint with FICS: December 2003 to 24 June 2004
Between December 2003 and 24 June 2004, there was various correspondence between Mr Brown and FICS. Most of it centred on Mr Brown’s refusal to pay a Panel Fee to FICS amounting to $3,000. Some of it related to
Mr Brown’s “goodwill offer of $3000 to settle this matter” on the basis that the “cost of proceeding to a tribunal hearing is $3000 and the hearing may not be conducted for 10 months”.[65] Mr Gurry rejected the offer.[66] In view of that, Mr Brown repeated his refusal to pay the Panel Fee, said that Mr Gurry could undertake legal processes to achieve his claim and addressed Mr Gurry’s concerns in detail.[67] That occurred in a letter dated 15 February 2004 and Mr Brown repeated his refusal in further exchanges of correspondence between him and FICS between 1 March 2004 and 29 June 2004.[68][65] T documents at 128
[66] T documents at 130
[67] T documents at 131-135
[68] Exhibit D at XVII, XVIII, XIX, XX, XXI and XXII
Steps taken by Mr Brown to obtain discharge of security from 8 April 2004
On 26 July 2004, ASIC received a letter from Mr Brown enclosing a copy of the notice he had published in the Herald Sun on 8 April 2004.[69] The notice stated that RJSBA had applied for discharge of the security because it had ceased trading and the licence had been revoked. If a person had a claim on that security, he or she was required to lodge particulars of it with ASIC within three months of the publication of the notice.
[69] T documents at 37-38
In a letter dated the same day, ASIC then asked Mr Brown to make a statement:
“that to the best of your knowledge, no person has, or is likely to have, a claim against [company name] for pecuniary loss due to the failure of [company name] or an agent or employee, to carry on business under the licence adequately or properly”[70]
[70] Exhibit A
I am unable to find a record of Mr Brown’s having made this statement at this time although he did so later.[71] The security continues to be held by ASIC pending the outcome of Mr Gurry’s claim.
[71] See [69] below
Cancellation of RJSBA’s membership of FICS
On 15 August 2004, Mr Brown wrote to FICS enclosing a copy of ASIC’s order revoking RJSBA’s licence and asking it to cancel its membership.[72] On 20 October 2004, FICS wrote to Mr Brown advising that it had formally terminated RJSBA’s membership with effect from 13 October 2004.[73]
[72] Exhibit D at XXIII
[73] Exhibit D at XXIV
FICS’s resolution of Mr Gurry’s complaint
In its determination dated 28 February 2005, FICS set out the background to Mr Gurry’s complaint and both his and Mr Brown’s positions on the issues raised by the complaint.
Under the heading “Outcome and Reasons”, FICS began by stating that Mr Gurry sought “… compensation from the member [RSJBA] for losses allegedly sustained as a result of poor financial planning and advice.”[74] It then stated:
“In order for the complainant to succeed he must establish on the balance of probabilities that the member did not act in accordance with the duty of care it owed him and as a result he suffered financial losses.”[75]
[74] T documents at 47
[75] T documents at 47
FICS set out a definition of “professional negligence” and an extract from Financial Services Law[76] in which it was said that a financial services licensee must bring to its task the competence which is usual among persons practising as financial services licensees. FICS said:
“Financial advisers must provide their clients appropriate recommendations in relation to investments in order to meet their duty of care. An adviser must take into consideration the clients’ needs, circumstances, risk profile and time frame for investment before providing their advice.
The financial adviser, in making recommendations to the complainants about their investments, is required to have had a reasonable basis for making the recommendations to the complainants. The adviser would have had a reasonable basis for making the recommendations to the complainants if he had complied with Section 851(2) of the Corporations Law.”[77]
[76] Baxt, Black and Hanrahan, 6th edition at [1306]
[77] T documents at 48
FICS went on to set out two rules from the Financial Planning Association Rules of Conduct:
“In preparing oral or written recommendations to clients, a member shall conduct, or have access to, research on financial strategies and products that may be appropriate to achieve the client’s identified needs and objectives.”[78]
“In preparing oral or written recommendations to clients, a member shall develop a suitable financial strategy or plan for the client based on the relevant information collected and analysed.”[79]
[78] Financial Planning Association Rules of Conduct, Rule 109
[79] Financial Planning Association Rules of Conduct, Rule 110
FICS found that RJSBA had properly disclosed his fees to Mr Gurry and provided service for the fees. Those fees would have been levied regardless of the particular investment made on Mr Gurry’s behalf. With regard to Mr Gurry’s complaint regarding poor financial planning and advice, FICS wrote:
“The Panel is satisfied that this dispute largely results from the complainant’s dissatisfaction with the performance of the investments. The Panel cannot award compensation for such losses unless there has been misrepresentation, non-disclosure or poor advice.
Nevertheless, the member is hindered in this complaint because of his inability to produce a fact find or other evidence of how the complainant’s risk profile was established. This is significant as there were two different assessments of the complainant’s profile, namely ‘moderately aggressive’ and ‘prudent’ for two different recommended investments. The complainant accepts that he was a prudent investor and should only be compensated for losses sustained as the result of his being placed in investments on the basis that he was ‘moderately aggressive’. He in fact originally sought 50% of the losses that he sustained as a result of these investments.
The Panel notes that the complainant did have the opportunity to have the member’s representative alter his risk profile assessment or the asset allocation prior to the implementation of the plan and did not do so. However, there is an argument that if he was not provided with a fact find to make an assessment he may have had some difficulty doing this adequately.
The Panel is satisfied that the member must take some responsibility for the losses in light of the fact that there are conflicting risk assessments and no evidence can be provided on how they were made. The member argues that the complainant had crystallized his loss by redeeming his funds early. However, the law is clear that if a client loses confidence in his/her adviser’s poor service or advice it is not unreasonable for him/her to take flight to safety to mitigate any loss.”[80]
[80] T documents at 50-51
After setting out Mr Brown’s calculation that Mr Gurry would have made a profit had he retained his investment and Mr Gurry’s assessment of the loss he had incurred, FICS said:
“The Panel in reaching a figure to compensate the complainant has to consider what is fair and reasonable in all the circumstances. After weighing up the figures the Panel directs that the member pay to the complainant the sum of $8,000 together with interest at the rate of 5% compound per annum from 30 August 2001 to the date of payment on the basis of its shared responsibility for the complainant’s losses.”[81]
[81] T documents at 51
Mr Brown’s complaint to FICS
In a letter dated 26 April 2005, Mr Brown complained to FICS that he regarded its decision as “unreasonable, unfair and unacceptable”.[82] He set out his reasons for reaching that conclusion referring to matters such as costs to him but not to the complainant, lack of procedural fairness, omission of the basis on which the amount of compensation was assessed, lack of timeliness and lack of appeal rights.
[82] Exhibit D at XXVII
FICS replied on 11 May 2005. It concluded its letter by asking
to comply with its ruling within seven days.[83]
Mr Brown[83] Exhibit D at XXVIII
Compliance action taken on behalf of FICS
On 27 July 2005, solicitors acting on behalf of FICS wrote to
Mr Brown. They said that, as RJSBA had been a member of FICS at the time Mr Gurry made his complaint, it was bound by FICS’ rules. Clause 38 of those rules stated that members agreed to abide by its decisions and that FICS could take any action, including legal action, to enforce its decisions.[84] Mr Brown’s solicitors responded on 8 August 2005 advising that RJSBA had terminated its membership as at 13 October 2004.[85]
[84] Exhibit D at XXIX
[85] Exhibit D at XXX
Mr Brown’s statement that no claims against RJSBA likely
On 21 April 2006, Mr Brown wrote on RJSBA’s behalf to ASIC referring to the regulator’s earlier letter dated 29 June 2005:
“To the best of our knowledge no person has or is likely to have a claim against Richard St. John Brown & Associates Pty Ltd for pecuniary loss due to the failure of Richard St. John Brown & Associates Pty Ltd or an agent or employee to carry on business under the licence adequately or properly.”[86]
[86] Exhibit D at XXXI
Mr Gurry’s claim to ASIC
In a letter dated 12 May 2006 and addressed to ASIC, Mr Gurry stated that he wished to make a claim amounting to $10,086 on the security deposit. He referred to the FICS’ decision to award him compensation and to Mr Brown’s refusal to comply with the decision. Had Mr Brown paid him the amount awarded by FICS by 30 May 2006, it would have amounted to $10,086. Mr Gurry attached a copy of the FICS decision to his letter.[87] In a further letter dated 8 June 2006, Mr Gurry made it clear that the amount claimed would be $10,127 were Mr Brown to pay it by
30 June 2006.[88][87] T documents at 28
[88] T documents at 29
ASIC’s decision
In a Report and Decision, ASIC’s delegate canvassed the events in detail. In summary, she found that Mr Brown had not acted adequately and properly in advising Mr Gurry and particularly in his explanations of why he appeared to have chosen conflicting risk profiles:
“… In my view, a person acting adequately and properly would have completed and kept a ‘fact find’ – by whatever name – a document of the information gathered about the client, referred to the risk profile it revealed when making investment recommendations, explaining any apparent departures, in a way that a lay client could understand, and would then have reviewed it from time to time to ensure that it still met the client’s needs, or on receipt of a complaint, after the licence had been cancelled, recommend that the client should seek further advice.
I also note that the duties of an adviser acting properly and adequately include ensuring the safe keeping [sic] clients’ records for at least 7 years. The document in question the ‘fact find’ was ‘certainly not kept safely for that length of time, and apart from Mr Brown’s assertions, there is no certainty that it was ever completed. The Claimant claimed it was “not properly done”. This would be another possible explanation of how Mr Brown came to recommend investments in two different risk categories without explanation. Like FICS, I believe Mr Brown must take responsibility for this.
The Claimant did not express dissatisfaction with the profile he was given ‘moderately assertive’ for the first lot of investments, although quite explicitly invited to do so by Mr Brown in the advice and recommendation. Nor again, when invited to raise any disagreement, on the occasion of the second, uncontested, lot of investments did he raise the differences in profiling, even though he later states that ‘prudent’ was the correct assessment of his tolerance.
However, in my view, it is appropriate to acknowledge that Mr Brown was a paid financial adviser, and the Claimant was a ‘lay person’, someone seeking to use Mr Brown’s expertise in arranging his financial affairs to support his chosen life style. It is not surprising that the Claimant relied heavily on the advice given by Mr Brown at the time, not realising that it was unorthodox to change investment risk profiles. It is also understandable that he lost faith in Mr Brown, in the absence of a persuasive argument from him, and no longer relied on his advice to stay in the investments he had recommended for the longer term, as he advised.
I note that the Claimant did not claim compensation in relation to the second lot of investments under the heading of ‘prudent’.
I am satisfied that the Claimant’s pecuniary loss resulted from the failure of RSJBA to carry on business under its licence adequately and properly, sufficient to justify application of $8,000, together with interest at the rate of 5% compound per annum, from 30 August 2001 to date of payment from the $20,000 security, to compensate the Claimant.”[89]
LEGISLATIVE FRAMEWORK
[89] T documents at 20-21
The law relating to RSJBA’s licences prior to 15 July 2001
RSJBA was first licensed as a dealer under the Securities Industry (Victoria) Code with effect from 15 March 1989.
The Law came into operation on 1 January 1991.[90] Chapter 7 of the Law was entitled “Securities”. In broad terms, Parts 7.3 to 7.7 inclusive of that Chapter prescribed the responsibilities of those who gave investment advice and those who operated managed investment. Section 780(a) in Part 7.3 of that Chapter provided that a person must not carry on a securities business unless holding a dealers licence or an exempt dealer. An “exempt dealer” is a person who is a dealer or investment adviser but who does not carry on a securities business except in one of the capacities or circumstances set out in s 68(2) of the Law or of the Corporations Act.
[90] Corporations Act 1989 as amended by Corporations Legislation Amendment Act 1990, s 2(1), Gazette S335, 21 December 1990
The expression a “securities business” had the meaning given by
s 93.[91] Section 93(1) provides that “A securities business is a business of dealing in securities.” Subject to qualifications that are not relevant in this case, the term “securities” meant:
[91] Law, s 9
“(a) debentures, stocks or bonds issued or proposed to be issued by a government; or
(b)shares in, or debentures of, a body; or
(c)interest in a managed investment scheme; or
(ca)in Parts 7.3 to 7.6 (inclusive) – interests that would be interests in a managed investment scheme but for paragraph (h) of the definition of managed investment scheme in section 9; or
(d)units of such shares; or
(e)an option contract within the meaning of Chapter 7;
but does not include a futures contract or an excluded security.”[92]
The effect of s 93(1)(ca) was that interests in a regulated superannuation fund, an approved deposit fund, a superannuation trust, or a public sector superannuation scheme, within the meaning of the Superannuation Industry (Supervision) Act 1993 are securities for the purpose of s 93(1).
[92] Law, s 92(1) and see also s 9
Section 784 provided for the situation in which a body corporate, such as RSJBA, applied for a licence. Section 784(5) provided that a licence granted under a previous law of the jurisdiction corresponding with s 784, was deemed to have been granted under the Law. Where a licensee maintained a security as a condition of a licence, the security had effect as if it had been lodged under s 786(2)(d) of the Law and the ASC were taken to be a party to the security.[93]
[93] Law, s 786A
Section 786, which was then in force, provided that a licence is subject to any terms and conditions that are prescribed and, subject to s 837,[94] such conditions and restrictions as the ASC imposed when granting licence or at any time when the licence was in force. Among the conditions that could be prescribed was:
“a condition requiring the holder of a dealers licence … to lodge and maintain with the Commission a security approved by the Commission for such amount not exceeding the prescribed amount as is, from time to time, determined by the Commission in relation to the holder of that licence”.[95]
[94] Section 837 provided that the ASC had to give the applicant an opportunity to be heard before imposing or varying the conditions of a licence.
[95] Law, s 786(2)(d)
Section 786(9) provided that:
“Where a security is lodged with the Commission pursuant to a condition to which a licence is subject in accordance with paragraph (2)(d), the security may be applied by the Commission in such circumstances, for such purposes and in such manner as is prescribed.”
Regulation 7.3.03 of the Corporations Regulations 1990 (Regulations) provided that the prescribed amount of the security was $20,000. The Regulations went on to provide:
“For the purposes of subsection 786(9) of the Corporations Law, a security lodged with the Commission in relation to a licence may be applied by the Commission in accordance with this regulation to compensate a person who has suffered pecuniary loss due to the failure of the licensee, or an agent or employee of the licensee, to carry on business under the licence adequately and properly.”[96]
The ASC might apply the security in this way whether or not the licensee had been convicted of an offence in relation to its failure to carry on business under the licence adequately or properly.[97]
[96] Regulations, r. 7.3.04(1)
[97] Regulations, r 7.3.04(2)
Regulation 7.3.04(6) sets out the way in which the pecuniary loss that a person may claim is calculated. It is calculated by using the formula:
“loss + costs - other entitlements
where:
‘loss’ means the pecuniary loss suffered by the person;
‘costs’ means the total of the amounts the Commission thinks are:
(a)the reasonable costs of; and
(b)disbursements of a reasonable amount that are incidental to;
making and proving the claim;
‘other entitlements’ means the amount or value of all moneys and other benefits paid or payable to the person by a person other than the Commission in reduction of the pecuniary loss.”
If the total of the claims admitted by the Commission does not exceed the amount of the security, it must be paid in full.[98] If it does, a proportion of the claim is paid and that proportion is the proportion that the amount of the security bears to the total of the admitted claims.[99]
[98] Regulations, r 7.3.04(7)(a)
[99] Regulations, rr 7.3.04(7)(b)
The ASC could not apply the security to compensate a person unless that person had lodged a written claim no later than:
“(a) if the Commission has, by notice published in accordance with subregulation (4), advertised for claims for compensation to be paid out of the security and specified a date not less than 3 months after publication of the notice – that date; or
(b)if no notice is published and paragraph (c) does not apply – 6 months after the person becomes aware that he or she has suffered the pecuniary loss; or
(c)a later date the Commission allows in a particular case.”[100]
The notice to which reference is made in r 7.3.04(3)(a) must be published in “a daily newspaper of general circulation in this jurisdiction”[101] i.e. in a State or the Australian Capital Territory.[102] If the ASC so required the notice also had to be published in a newspaper circulating generally in a State or Territory where the holder of the licence or its agent or employees carried on business under the licence.[103]
[100] Regulations, r 7.3.04(3)
[101] Regulations, r 7.3.04(a)
[102] Law, s 9
[103] Regulations, r 7.3.04(4)(b)
Regulation 7.3.06 for the discharge, return or release of the security. In so far as it is relevant, it provided that the Commission may:
“(a) discharge in whole or in part a security maintained by it under a condition of a licence; or
(b)return the security in whole or in part; or
(c)release, in whole or in part, any surety who provided the surety;
if:
(d)a person ceases to hold a licence; or
(e)…
(f)…
(g)…
and a written application is made by the former licence holder …”.[104]
[104] Regulations, r 7.3.06(1)
The law relating to RSJBA’s licences after 15 July 2001: the Corporations Act 2001
The Corporations Act 2001 (Corporations Act), which came to take the place of the Law, came into operation on 15 July 2001.[105] The text of Chapter 7 mirrored that of Chapter 7 in the Law.
The law relating to RSJBA’s licences after11 March 2002: the Corporations Act 2001 and then as amended by the Financial Services Reform Act 2001
[105] Corporations Act, s 2, Gazette, S285
The Corporations Act was then amended by the Financial Services Reform Act 2001 (FSR Act) with effect from 11 March 2002.[106] Among the amendments was the repeal of Chapter 7 and its replacement with a new Chapter 7.[107] The new Chapter 7 established a new system for the regulation of financial services and licences. As part of that system, licences were required in order to carry on certain activities. Among them was an Australian Financial Services Licence (AFSL), which a person was required to hold if carrying on a financial services business within the jurisdiction.
[106] FSR Act, s 1(2), Gazette 2001, GN42
[107] FSR Act, s 2, Schedule 1, item 1
Part 7.6 of Chapter 7 of the Corporations Act provided for AFSLs. The holder of an AFSL is a financial services licensee for the purposes of Chapter 7.[108] It is subject to the financial services disclosure obligations provided for in Part 7.7 and the provisions relating to conduct connected with financial products and financial services found in Part 7.8 of Chapter 7.
Transitional provisions relating to the amendments effected by the Financial Services Reform Act 2001: Corporations Act, Part 10.2
[108] Corporations Act, s 761A
In contemplation of the amendments that were made to Chapter 7 of the Corporations Act, the Financial Services Reform (Consequential Provisions) Act 2001 (FSRCP Act) amended the Corporations Act by inserting Part 10.2.[109] That Part came into operation on 27 September 2001.[110] It set out transitional provisions relating to the FSR Act. I will deal first with those set out in Division 1 of Part 10.2.
[109] FSRCP Act, s 3, Schedule 1, item 223
[110] FSRCP Act, s 2(3)
Item 1 of 1430 provided that the holder of a Dealers Licence immediately before the commencement of the FSR Act was a “regulated principal”. Its “regulated activities” were those that its licence, as in force immediately before the commencement of the FSR Act, authorised it to carry on.[111] The effect of s 1431 of the Corporations Act was that a regulated principal was not required to hold an AFSL during the period starting on the date of the commencement of the FSR Act, of two years from the date of the commencement of the FSR Act (11 March 2002) and ending when the first of the four events specified in ss 1431(1)(a) to (d) occurred. The period between the commencement date on 11 March 2002 and the occurrence of the first of the events was known as the “transition period”.[112] Of relevance in this case is the event specified in s 1431(a) which was the period of two years commencing on the commencement of the FSR Act and ending on 11 March 2004.
[111] Corporations Act, s 1430, item 1, column 3
[112] Corporations Act, s 1431(1)
With only a handful of exceptions, Parts 7.6, 7.7 and 7.8 of the Corporations Act as amended by the FSR Act did not apply to “… a regulated principal and their regulated activities during the … transition period …”.[113] Except for situations that are not relevant in this case:
“… during the transition period for a regulated principal, the relevant old legislation (if any) continues to apply, despite its repeal:
(a)to, and in relation to, the regulated principal and their regulated activities; and
(b)to any other person to whom it is expressed to apply, but only in relation to matters related to the regulated principal and their regulated activities.”[114]
[113] Corporations Act, s 1431(1)
[114] Corporations Act, s 1432(1)
Section 1437 applies to all but one of the provisions in Division 1 of Part 10.2 of the Corporations Act.[115] More importantly in this case are the provisions specified in s 1437(1)(b) as provisions to which it applies. They are the provisions of the Corporations Act that continue to apply because of ss 1432(1) or what is said to be s “1436(3)” of the Act.[116] Section 1437(2) gives ASIC the power to exempt certain persons or classes of persons from some or all of the specified provisions to which it applies. It also empowers it to declare that some or all of the provisions apply as if they were modified or varied as specified in the declaration.[117] ASIC’s power to modify is subject to the provisions of s 1437(3). One of those is that ASIC may make a declaration providing for the “… continued application … of provisions referred to in paragraph (1)(b), even after the end of the period of 2 years starting on the FSR commencement” i.e. 11 March 2002.
[115] Corporations Act, s 1437(1)(a)
[116] Corporations Act, s 1437(1)(b) A reading of the FSRCP Act in the form in which it was introduced as a Bill shows that s 1436(3) did not exist in the original draft. Given that s 1436 deals with the treatment of the representatives of a regulated principal and given that s 1436(2) appears to complement s 1432 as well as s 1431, it would seem that the reference to s 1436(3) should be a reference to s 1436(2). Nothing turns on the issue in this case.
[117] Corporations Act, s 1437(2)
Section 1444 comes within Division 2 of Part 10.2 of the Corporations Act. Section 1444(1) provides that:
“The regulations may deal with matters of a transitional, saving or application nature relating to the relevant amendments and the transition from the application of the old legislation to the application of the new legislation. Regulations made for this purpose may make such provision as is necessary to take account of the fact that, because of Division 1, different provisions of the amended Corporations Act start applying (and different provisions of the old legislation stop applying) in relation to different people, things and matters at different times.”
“Matters of a transitional, saving or application nature” were described in s 1444(8) to include but not to be limited to any of the five matters specified in s 1444(8) of the Corporations Act. The first two were:
“(a) how a matter that arose or existed under the old legislation is to be dealt with under the new legislation;
(b)the significance for the purposes of the new legislation of a matter that arose or existed under the old legislation”.
Section 1444(2) provided for any inconsistency between regulations made for the purposes of the section and a provision of Division 1 of Part 10.2 or certain regulations made under a provision of that Division. In general, regulations made under s 1444 had no effect to the extent that they were inconsistent with a provision of Division 1 or a regulation made under that Division.
Transitional provisions relating to the amendments effected by the Financial Services Reform Act 2001: Regulations, Part 10.2
Part 10.2 of the Regulations was inserted by the Corporations Amendment Regulations 2002 (No 2) with effect from 11 March 2002.[118] It deals with matters of a transitional, saving or application nature relating to the amendments made by the FSR Act and with the transition from the application of the old legislation to that of the new legislation.[119]
[118] Corporations Amendment Regulations 2002 (No 2), r 3, Schedule 1, item 203 and see r 2(1)
[119] Regulations, r 10.2.01
These principles have been developed in contexts different from that in which r 7.3.04(3) finds itself but they remain equally applicable. The manner in which the Commission’s power to alter the date by which a person may lodge a claim indicates that Parliament has not imposed an onus of proof upon the person seeking to lodge his or her claim at a later date. Parliament has not required that the would be claimant satisfy the Commission that it is proper to specify a different date.
Regulation 7.3.04(3)(a) and (b) specify the time within which the claim should normally be made. It would be normal to expect that a would be claimant would explain why he or she did not make the claim by one or other of the dates specified in those two paragraphs. The explanation will enable his or her circumstances to be viewed against a background of the course that Parliament expects a claimant will normally follow.
Unlike an application for an extension of time in a court or in the Tribunal in which the court and the Tribunal are neutral entities charged with deciding the application, the Commission not only is charged with deciding the different date but, arguably, has its own interest in the outcome of its decision. Its interest arises because, when a security is lodged and maintained with it, s 786A of the Law provides that the Commission is taken to be a party to it. Putting aside its interest in the outcome, the other interests that the Commission would have to consider are not so different from those considered by the courts and the Tribunal on an application for an extension of time. Those interests include those of the persons who are immediately interested in the application being the person claiming the security and the person who has lodged the security. They would also include those who are more remotely interested in that they have already lodged their applications within time or who could have but did not either because they chose not to or overlooked the time limits for doing so.
Also relevant are the actions of the person claiming the security to inform the Commission and the person who lodged the security of his or her potential claim against it. The publication of any notice will be a relevant factor as will the identity of the newspaper or newspapers in which it is published and the likelihood of its being seen by those who might have a claim.
The time at which a would be claimant became aware that he or she had suffered a pecuniary loss and his or her knowledge of his or her right to make a claim is also relevant. If he or she believed that he or she had a claim for a pecuniary loss that could potentially be made but did not do so, that will be relevant as will any action he or she took to notify the Commission and the licensee of the loss. If others have claims or potential claims, their actions may be relevant as may the consequences to them if the person is allowed to make a claim by a later date. That could arise in situations in which the size of the security would be insufficient to meet all of the claims and potential claims were they to be made. It could also arise in circumstances in which the Commission has already, or is in the process of determining, claims that have been made by the date specified in rr 7.3.04(3)(a) or (b). These are but examples.
A further factor to consider is any prejudice that a claim outside the dates allowed in rr 7.3.04(3)(a) or (b) would cause. Prejudice in this context means any “… harm, detriment or disadvantage”[216] that may be caused to another. That it exists or does not exist does not necessarily determine one way or the other the question of whether a later date should be allowed. It must, however, be taken into account.
[216] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers
In the sense of harm, detriment or disadvantage, prejudice to the licensee and to the Commission must be considered. An obvious example of prejudice in the case of a licensee relates to its ability to gather relevant material and to recollect the circumstances giving rise to the potential claim. Its ability to do so may be limited because employees have come and gone and, even if they have not, memories have faded. The effect of the passage of time on its ability to do so and so any prejudice to it for that reason, would be considered against a background of any records it is required to maintain and any information regarding proper record-keeping and office management practices. This is but an example of possible prejudice to a licensee and particular cases will give rise to particular claims relating to it.
The Commission may also suffer prejudice if time were extended. Again, it is not possible to predict all of the circumstances that might arise. By way of example, if it had already considered claims, calculated the proportion of the whole that each claimant was to receive and distributed part of the security on that basis, it might wish to argue that it would be prejudiced. Whether it would be successful must remain to be seen in an appropriate case. If the Commission had undertaken the calculation and paid the amounts leaving none of the security, the application for a later date under r 7.3.04(3)(c) would have to fail. The Commission would no longer be holding a security that it could apply to compensate the would be claimant or anyone else.
The merits of the claim, were it permitted to be made at a later date and actually made, are also relevant. If this were a case in which the Commission had made a decision only in relation to allowing a later date by which Mr Gurry could lodge a claim and not in relation to the merits of the claim, I would not think it appropriate to undertake a detailed consideration of its merits. I would, instead, follow the lead of the courts and consider only whether the claim that he would wish to make discloses an arguable case. It is not the time to assess whether Mr Gurry would or would not ultimately be successful if he were permitted to make a claim. If, on its face, the claim that he would make appears frivolous or that it is bound to fail as a matter of law that is a different matter. That assessment can and should be made and is relevant in reaching a decision whether or not to allow the claim to be lodged by a later date.
In this case, the Commission has in fact made two decisions: one in relation to allowing a later date and the other in relation to the claim taken to have been made no later than that date. Both are reviewable within the meaning of s 1317B of the Corporations Act and are not excluded from review by s 1317C. In those circumstances, the two steps become more difficult to separate but, it seems to me that it is still appropriate that I do so for they remain separate decisions.
I have referred to others who have made claims to be compensated from a security, those who could have but chose not to and those who did not for one reason or another. All of those persons would feel that they have suffered a pecuniary loss. Although their individual circumstances may differ, to that extent they are in the same circumstances as the person who asks the Commission to allow him or her to make a claim at a later date. Those other persons must be kept in mind in considering whether it is fair to allow that person to make the claim outside the normal time frame permitted by rr 7.3.04(3)(a) and (b).
CONSIDERATION: should Mr Gurry be permitted to make a claim at a later date?
I have decided that Mr Gurry should be permitted to make a claim outside the period permitted by r 7.3.04(3). That is so even though his claim was not made until 11 May 2006 and so well beyond the three month period that began with the publication of the notice in the Herald Sun on 8 April 2004 and ended three months later. It is also a substantial period of time after Mr Gurry felt that he had suffered a pecuniary loss as a result of Mr Brown’s, and so RJSBA’s recommendations.
I do not, however, have any evidence that Mr Gurry was aware of his right to make a claim against the security bond until some time in May 2006. Despite his lack of knowledge, I find that Mr Gurry did pursue his claim against RJSBA first by entering into correspondence with him and then by approaching FICS. Even though Mr Brown did not accept the outcome reached by FICS, he was well aware that Mr Gurry had not abandoned his complaint. He would also have been well aware that this was so when FICS sought to enforce its decision.
There is no prejudice to ASIC as a result of the delay in Mr Gurry’s making his claim. There have been no other claims against the security bond. RJSBA suffers some disadvantage if interest should be a component of pecuniary loss.
An application for an extension of time is not the time to consider the merits of a case in detail. Although I find that there is no basis for Mr Gurry’s claim, I think that, on its face and without the detailed consideration I have given it, he had an arguable case on its face. It was a case that warranted consideration and was not a claim that was, on its face, obviously without merit.
Having regard to all of these matters, I decided that the time within which Mr Gurry could make a claim against the security bond should be extended to 12 May 2006 and so affirm ASIC’s decision to do so.
CONSIDERATION: the merits of Mr Gurry’s claim
Mr Gurry’s claim must be considered in light of the law as set out in rr 7.3.03 to 7.3.07 of the Regulations. It is apparent from the law that his claim will be successful if it meets the criteria set out in those regulations. What is equally apparent is that those regulations are not intended to be used as a means of enforcing a decision reached by an independent dispute resolution body such as FICS. Mr Gurry’s claim must be considered by reference to the regulations. The findings of a body such as FICS are irrelevant to the outcome. Not only are they irrelevant, they are made on criteria different from those required to be met under the regulations. On my understanding of rr 7.3.03 to 7.3.07 they do not, for example, recognise a principle “… that if a client loses confidence in his/her adviser’s poor service or advice it is not unreasonable for him/her to take flight to safety to mitigate any loss.” If the security lodged with ASIC is used to compensate Mr Gurry the amount he is awarded will not be the amount ASIC considers “fair and reasonable in all the circumstances”. That is the test adopted by FICS but r 7.3.04(1) permits the security to be applied only to “compensate a person who has suffered pecuniary loss due to the failure of the licensee, or an agent or employee of the licensee, to carry on business under the licence adequately and properly.” As r 7.03.04(6) sets out the way in which the pecuniary loss is calculated, the broader test adopted by FICS cannot be applied. Therefore, if the security should be applied to compensate Mr Gurry, the amount applied may or may not be that calculated by FICS.
I find that the advice, which is the subject of this case, was given as part of Mr Brown’s, and so RSJBA’s, carrying on business under a Dealers Licence.
A more difficult issue concerns the basis on which Mr Brown, and so RJSBA, advised Mr Gurry as to the investments he should consider. I spent some time setting out the authorities relevant to fiduciary relationships generally and to financial advisers in particular.[217] I do not intend to make a finding whether any fiduciary relationship existed between Mr Brown and Mr Gurry. It is not necessary. What I do find is that, if there were a fiduciary relationship between the two, the fiduciary obligations imposed upon Mr Brown were not unlimited. I find that the nature of their relationship was one in which Mr Gurry sought advice and Mr Brown gave it. The substance of Mr Brown’s advice, however, must be dependent upon the information that he had about Mr Gurry. Given that Mr Brown was holding himself out as a person who had expertise in financial matters and was undertaking to perform an advisory role, his fiduciary obligations would have extended to his requesting adequate and appropriate information about Mr Gurry and which was a sufficient basis on which he could give advice. An obligation of that sort is inherent in the obligation imposed by s 851 to have a reasonable basis for a securities recommendation. I do not think that a consideration of any fiduciary obligations will take the matter any further.
[217] See [144]-[152] above
Much of the discussion centres on whether Mr Brown prepared a document called a “Fact Find”. This, I understand, is a document that sets out a person’s personal and social circumstances, personal aspirations and current, income, assets and liabilities. It is a document of the sort referred to in SPS 122[218] and a document that can provide evidence that the securities adviser has met the obligation imposed by s 851 to have a reasonable basis for making the recommendations that were made. In light of the role of a financial adviser, I am satisfied that proper practice requires that a financial adviser not only prepare a document such as a Fact Find but retain it.
[218] See [141]-[142] above
I accept Mr Gurry’s evidence that he could not find a copy of a “thick detailed document” of the sort that he was shown by Mr Bill Harding and that he understood to be a Fact Find document. I also accept that he could not recall such a document. Neither necessarily leads to the conclusion that Mr Brown did not prepare a document that contained the type of information typically included in a document of that sort.
Evidence that suggests that he did begins with Mr Brown’s evidence of his usual practice when consulted by new clients. The fifth step under the heading of “Initial Interview” is worded in this way:
“Upon completion of Fact Finder a written financial plan is prepared and Despatched to the client.”
There is no suggestion in that step that a copy of the Fact Find is provided to the client. Therefore, the fact that Mr Gurry could not find it does not automatically lead to the conclusion that it was not prepared. The statements in the Customer Advice Records for Colonial First State Rollover and Superannuation and for Zurich Superannuation both point to the conclusion that a Fact Find was completed. They both contained statements that the advice and recommendations given to Mr Gurry had been based on a Fact Finder dated 20 September 2000. That was some six months before they first met on 1 March 2001 but would accord with Mr Brown’s having been consulted on an earlier occasion by Mr Gurry’s wife.
I make that finding on the basis of Mr Gurry’s oral evidence. On that basis, I also find that he acknowledged that his wife had told Mr Brown about his intentions when they had met on that earlier occasion. Mr Gurry made no mention in his evidence, and I can find none in the written evidence, that he asked Mr Brown for a copy of the Fact Find even though each of the Customer Advice Records told him that he could do so and that he was expressly advised:
“A life policy sold without completion of a Fact Finder may not be appropriate to your needs. By not receiving advice you risk making a financial commitment to a life policy that may not be appropriate for your needs and objectives.”[219]
[219] Exhibit 3
That he did not ask for a copy of it would suggest that Mr Gurry acknowledged at the time that there had been a Fact Find and that he had regarded as sufficient. So too does the fact that he signed the letters containing the Customer Advice Records and returned them to Mr Brown. The later Customer Advice Record sent to Mr Brown in a letter dated 5 September 2001 did not set out the date on which a Fact Find was prepared but it did refer to its having been prepared. The fact that
Mr Gurry signed a statement on each of the three Customer Advice Records that they were accurate and complete also suggests that Mr Brown completed a Fact Find. That is particularly so given that each had begun with a statement directing Mr Gurry to their importance and the need to make sure that he understood them and that he contact Mr Brown if he disagreed with, or did not understand, their contents.
Also tending to the conclusion that Mr Brown obtained information at their first meeting on 1 March 2001 is the statement in Mr Brown’s letter dated
15 May 2001. That letter specifically refers to the consideration that Mr Brown had given to Mr Gurry’s “… current situation, your concerns, needs, goals and objectives, as well as your attitude towards investments and insurance” based on the information gathered at their meeting on 1 March 2001. I find that Mr Gurry did not question that statement even though Mr Brown specifically drew his attention to the importance of letting him know if any of the details had changed.
Taking all of the evidence into account, I am satisfied that the weight of evidence lies in my finding that Mr Brown did prepare a document that was a Fact Find, or that contained information of the sort contained in a Fact Find, relating to
Mr Gurry’s circumstances. It may be that the information was prepared in part when Mr Brown saw Mr Gurry’s wife but, whether it was or was not, I am satisfied that
Mr Brown gathered relevant information when he saw Mr Gurry on 1 March 2001.
I am also satisfied that Mr Gurry accepted that Mr Brown had prepared documentation that he recognised as a Fact Find at the relevant times in 2001 even though he is no longer of that opinion.
I am also satisfied that Mr Brown made comprehensive enquiries of
Mr Gurry’s personal and social circumstances, personal aspirations in relation to his financial situation and current, income, assets and liabilities. They were enquiries of the sort described in [PS 122.101]-[PS122.104] and were enquiries of the sort needed to make an investment recommendation. They were the foundation of the information he set out in the Limited Financial Plan dated 19 March 2001 and in the Rollover Investment Plan dated 15 May 2001. Having examined those documents, I am satisfied that they set out comprehensive information of this sort. That information is of the sort described in [PS 122.104] of SPS 122. It is information that formed a reasonable basis for the recommendations that Mr Brown made to Mr Gurry within the meaning of s 851
In giving evidence and in Exhibit 4, Mr Gurry spoke of Mr Brown’s telling him that he could do better in investments other than those he was in at the time. As Mr Gurry put it in giving evidence, Mr Brown said that his investments were not working as hard as they should be. Mr Gurry said that he had gone to
Mr Brown to see what he would recommend as to how he could achieve future growth. He had said earlier in Exhibit 4, that he believed Mr Brown had “talked up” the potential of the investments he recommended and not dealt with other matters. I accept that Mr Gurry was, as he said in Exhibit 4, totally shocked when the value of his investments went down. He acknowledged that Mr Brown had referred “to a risk with investing but if the advisor does not emphasise the point or discuss it seriously with me then why should I regard it as significant?”[220] Mr Brown drew his attention to his letter dated 18 March 2001 enclosing the Limited Advice Plan and to his request that Mr Gurry contact him if he felt that some relevant information had been overlooked in their initial discussion or if he had any questions. Mr Gurry’s response was that he did not have any questions as the plan seemed to be very good but that was his view in the absence of his understanding the risk implications of the investments. Mr Brown had not explained to him that there was a large exposure to shares. That constituted a risk but was not made clear to him. It was never put to him that the investments could drop in value. When Mr Brown drew his attention to the statement in the Limited Advice Plan that the objective was to build superannuating benefits over five years and to diversify into growth sectors with a five to seven year time horizon, Mr Gurry replied that this meant that they would show growth in five to seven years. When told that he had realised the investments after only 18 months,
Mr Gurry responded that he had done so because all the impression that he had from Mr Brown was that his investment would be growing. He was totally unprepared for what happened after the first 18 months.[220] Exhibit 4
I can understand that Mr Gurry felt that he was totally unprepared for what happened in the first 18 months but that does not lead me to conclude that his lack of preparedness was something for which Mr Brown was responsible. It is not something that leads me to conclude that he had failed to carry out his business under the licence adequately or properly. We are all human and can come away from a meeting remembering only the things that seemed important to us. We can recall events in the past in a way that leads us to recall only those aspects that had a particular consequence for us, be it positive or negative. Even if Mr Gurry did only recall certain comments made at his meeting with Mr Brown on 1 March 2008 and he heard only the positive side of investing and not the possibility of losses as well as gains, his impression should have been dispelled when he received The Limited Advice Plan almost three weeks later. Even if Mr Brown did only focus on the growth side of investing, and I do not accept that he did, his omission was rectified by that Limited Advice Plan.
The Limited Advice Plan sets out Mr Gurry’s then current financial and personal situation and set out what Mr Brown understood to be his objectives.
Mr Brown explained what he meant by a “moderately assertive” investor. He emphasised that the information, including the risk assessment, was based on information that Mr Gurry had given him. Under the heading of “Investment Risk”, Mr Brown addressed the varying degrees of risk attaching to differing categories of investments. He wrote about negative movements affecting the value of assets and specifically referred to a fall in share market prices and the effect that it can have on reducing values in some investment sectors.
A financial adviser cannot make the recipient of his advice understand the advice. He or she cannot be expected to undertake what may be an impossible task. What a financial adviser can be expected to undertake is to give advice in such a way that it is, when viewed objectively, likely to be understood by the person who sought the advice. In this case, that person is Mr Gurry. Mr Brown knew that he was a schoolteacher. Therefore, it was reasonable for him to expect that Mr Gurry would be able to read and understand a document of the sort that he sent to him on 18 March 2001. It was a document written in quite straightforward language. Although it might have been too sophisticated for some to understand, I find that it was not a difficult document for many people, and particularly those qualified to teach children, to understand. Mr Brown, I find, was very clear in what he meant by his description of Mr Gurry as a “moderately assertive” investor. Had Mr Gurry not agreed with the description of him as a “moderately assertive” investor, I find that he would have been able to understand Mr Brown’s advice to contact him immediately to alter it. Had he not agreed with it, I also find, he was not under any obligation to proceed.
I find that Mr Gurry could reasonably be expected to be able to understand Mr Brown’s rating his risk profile as “prudent” in the later Rollover Investment Plan. Mr Brown, I find, set out what he meant by this description. There is not a great deal of difference between this risk profile and that of “moderately assertive”. One difference is that an element of “moderately assertive” is that the investor is “happy to sacrifice short-term safety in order to maximise long term capital growth” and an element of “prudent” is that the investor feels “comfortable with some short term risk”. Both recognise the investor as a person who has some understanding of the investment market. The priority of both is capital growth but, unlike the moderately assertive investor, the prudent investor wants some income to smooth the returns.
It seems to me that the assessment of a potential investor’s risk profile is not something that can be reached with mathematical precision. There is no precise formula that can be applied. A financial adviser must obtain as much information as possible from the potential investor and then assesses that information in light of his or her experience of human nature. Inherent in the assessment will be an understanding of the varying degrees of resilience that individuals have to risk when their own money is at stake. Also inherent will be an understanding that some people prefer to portray a bravado to risk that does not necessarily equate with their true feelings on the subject. Furthermore, some may display a bravado that does match their true feelings at the time but their views of their tolerance to risk alters when they have parted with their own money and it is managed by others over whom they have no control.
A financial adviser must bear matters such as these in mind when obtaining information and must bear them in mind when assessing a risk profile but he or she cannot be expected to know the mind of the potential investor. A potential investor plays an essential role in formulating his or her own risk profile. That role is played in providing information to the financial adviser and it is played again in reading the financial adviser’s summary of that information and the description of the risk profile. If there are errors in either, it is for the potential investor to correct them and to require the financial adviser to reconsider the assessment in light of the revised information. If the potential investor does not recognise him or herself in the description of the risk profile, it is up to him or her to tell the financial adviser that is so. The burden is shared between the financial adviser and the potential investor although who carries the greater part of that burden will vary according to the stage reached in the investment process.
In this case, Mr Gurry did not question Mr Brown’s summary of the information that he had given him or his description of the risk he was prepared to accept. After the Rollover Investment Plan, I find that there were discussions between Mr Brown and Mr Gurry. That is based on Mr Brown’s reference to Mr Gurry’s email of 22 May 2001 when he wrote to him on 24 May 2001. There may also have been discussions after the Limited Advice Plan as there are handwritten notations that appear on the copy in the T documents and in Mr Brown’s documents but they differ and are not in the same hand.
Having regard to all of the findings that I have made in the previous paragraphs, I am satisfied that Mr Brown prepared the risk profile that appears in the Limited Investment Plan and in the Rollover Superannuation Plan upon proper bases. I accept that they were different in the way in which they were worded and in the way in which they were described. Certainly, a description of “moderately assertive” may suggest a more robust approach to investment that a description of “prudent” but an analysis of the components of those two descriptions leads me to conclude that they are not different in substance.
SPS 122 does not set out a table of gradations of risk and I am not aware of any such table. Mr Brown chose his from the descriptions given of the financial products he chose. There is nothing improper about his having done so although it may highlight a need to have a standardised formulation of various categories of risk profiles. Financial advisers could then select one to suit the client or select one with modifications. Potential investors might be more able to understand their risk profile and where it stands in relation to other categories of risk profile. If financial products used the same descriptors, they would be even better assisted in comparing products.
In both plans, Mr Brown described the financial products he recommended to Mr Gurry. On the basis of the evidence that I have, and it is not extensive, I am satisfied that the products that he recommended accorded with the risk profile that he had assessed for Mr Gurry. I accept that Mr Gurry has received advice from two other financial advisers regarding the recommended products. Mr Gurry understood Mr Richard McLean to have told him that “they were ‘quite high risk investments and that they are not the types of investments that I would have chosen’”[221] and that Mr Bill Harding had expressed surprise that he had been “put into high risk investments”.[222] Neither Mr McLean nor Mr Harding was called to give evidence to explain why he might hold these views. No evidence was given as to the structure of the funds or the relative risk attached to the areas in which the funds were invested. Even though the Tribunal is not bound to apply the rules of evidence and so conceivably may have regard to hearsay evidence of the sort given by Mr Gurry on this matter, I do not feel able to make a finding that the investments were high risk on the basis of it.
[221] Exhibit 4
[222] Exhibit 4
In view of my findings, I have concluded that Mr Brown had a reasonable basis for making the recommendations that he made to Mr Gurry. He has fulfilled his statutory obligation under s 851 by having a reasonable basis for making those recommendations as he made them on the basis of information meeting the description set out in s 851(2)(a) and they were based on that information and on his investigation within the meaning of s 851(2)(b).
I have referred to fiduciary duties above. RJSBA and through it,
Mr Brown, was under a fiduciary duty to act in Mr Gurry’s best interests. On the basis of the findings of fact that I have already made, I consider that he has fulfilled his duty. He obtained Mr Gurry’s consent to proceed with the investments and he did so after providing advice based on information that he had obtained from his client and that he had clearly and repeatedly asked him to check.
My findings lead me to conclude that RSJBA and Mr Brown have not failed to carry on business under the licence adequately or properly. Therefore, any pecuniary loss that Mr Gurry has suffered is not due to any such failure and there is no basis upon which ASIC may apply the security bond.
Should I be incorrect in my conclusion, I will address the issue of pecuniary loss for a moment. It seems to me that r. 7.3.04(1) requires an assessment of the actual pecuniary loss that has been suffered. Due to the amount of the security, a person may not be compensated for the entire amount of any loss but that does not detract from the need to determine it. It seems to me that this requires a consideration of what loss is due to the licensee’s failure to carry on business under the licence adequately and properly and what loss may be due to other factors. This is not necessarily an easy question to answer because there may be a number of causes for any loss. This is a case in which there may be more than one cause. It is common ground between the parties that the stock markets declined in value after the events of 11 September 2001 and that was followed by the Asian market crisis. I have no evidence of the investments which would have been recommended to Mr Gurry had he been given a more conservative risk profile. I have no evidence of the loss of value that they would have incurred as a result of events that affected the whole of the stock market. In the absence of evidence addressing those wider issues, I cannot apportion that part of the loss of value in Mr Gurry’s investment which was due to any failure by Mr Brown and that part which was due to other causes. Indeed, I find myself unable to determine whether any part of the loss of value would be due to any such failure.
A loss in value at a particular time does not necessarily equate with a pecuniary loss due to failure to carry on business under a licence adequately and properly. Mr Brown made his recommendations on the basis of Mr Gurry’s holding his investments for a period vastly in excess of the 18 months or so that he did hold them. His reports highlighted the fact that markets can rise and fall but his recommendations were made in the longer term and not on the basis of short term gain. I find that Mr Gurry crystallised his loss when realised the investments. He certainly suffered a pecuniary loss but it cannot be attributed to any failure by
Mr Brown to carry on business under a licence adequately and properly. Had he held the three investments for the period recommended by Mr Brown in his Limited Advice Plan and realised them in August 2008, I find that Mr Gurry would have incurred a loss of $5,339 in relation to his investments in Colonial First State Rollover and Superannuation Fund and Colonial First State Managed Investment Funds but would have made a profit of $34,746.00 in relation to the Zurich Superannuation Plan. That would have given him a net profit of $29,407.00. An investment strategy of the sort proposed in the Limited Advice Plan must be assessed on its overall results and not upon the performance of its individual elements.
For these reasons, I:
3.
affirm the decision of the respondent dated 2 July 2008 to extend the time within which Mr Michael Gurry might lodge a claim under
r 7.3.04(c) of the Corporations Regulations to have the security bond lodged by Richard St John Brown & Associates applied to compensate him for certain pecuniary loss; and
4.in relation to the decision to apply that security bond:
(1)set aside the decision of the respondent dated 2 July 2008; and
(2)
substitute a decision that the security bond lodged by Richard St John Brown & Associates not be applied to compensate
Mr Michael Gurryfor any pecuniary loss.
I certify that the preceding two hundred and fourteen paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: .......................................................................
Kate Conners Associate
Date of Hearing 17 & 18 December 2008
Date of Decision 27 April 2009
Solicitor for the Applicant Self-represented
Counsel for the Respondent Mr Anthony Lewis
Solicitor for the Respondent Ms Judith Birch
Australian Securities and Investment Commission
- AGLC
- Brown and Australian Securities and Investment Commission [2009] AATA 286
- Case
- [2009] AATA 286
- Decision Date
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