Moloney, Gwen (On her own Behalf & as Joint Executor of the Estate of the Late Kevin Moloney) v ANZ Life Assurance Co Ltd (ACN 008 425 652)
[1997] FCA 1271
•21 NOVEMBER 1997
FEDERAL COURT OF AUSTRALIA
TRADE PRACTICES - false, misleading or deceptive conduct - whether respondent engaged in false, misleading or deceptive conduct in recommending an investment strategy to the applicants which involved the purchase of a joint life annuity - NEGLIGENCE - whether the respondent was negligent in its duty of care to the applicants by failing to exercise the skills and diligence of a reasonably prudent financial adviser in recommending that an appropriate investment strategy for the applicants was to purchase a joint life annuity - whether respondent in recommending the investment strategy to the applicants had regard to their health status and social security entitlements
Trade Practices Act 1974 (Cth) ss 52, 82
MOLONEY & ANOR v ANZ LIFE ASSURANCE CO. LTD
VG 857 of 1995
Before : PARKINSON JR
Place : MELBOURNE
Date : 21 NOVEMBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 857 of 1995
BETWEEN:
GWEN MOLONEY (ON HER OWN BEHALF AND AS JOINT EXECUTORS OF THE ESTATE OF THE LATE KEVIN MOLONEY)
FIRST APPLICANTPETER FRANKLIN (AS JOINT EXECUTOR OF THE ESTATE OF THE LATE KEVIN MOLONEY (DECEASED))
SECOND APPLICANTAND:
ANZ LIFE ASSURANCE COMPANY LIMITED (ACN 008 425 652)
RESPONDENTJUDICIAL REGISTRAR:
PARKINSON
DATE OF ORDER:
21 NOVEMBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDERS
THE COURT ORDERS THAT:
Judgment be entered in favour of the applicants against the respondent for damages assessed at $ 33,814.01.
The costs of the applicants be borne by the respondent less costs thrown away by the
respondent on 7 October 1997.
Interest is payable on the judgment pursuant to s51A of the Federal Court of Australia Act 1977 between date of the application and the date of judgment.
The proceeding be listed before Parkinson JR on Wednesday 26 November 1997 at 9.30 am for the making of orders including orders as to interest and costs.
By 5.00 pm on Tuesday 25 November 1997 the parties provide to the Associate to Parkinson JR an agreed minute of the orders to be made, or if agreement has not by then been reached, the forms of the minutes of orders for which they will respectively contend.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 857 of 1995
BETWEEN:
GWEN MOLONEY (ON HER OWN BEHALF AND AS JOINT EXECUTORS OF THE ESTATE OF THE LATE KEVIN MOLONEY)
FIRST APPLICANTPETER FRANKLIN (AS JOINT EXECUTOR OF THE ESTATE OF THE LATE KEVIN MOLONEY (DECEASED))
SECOND APPLICANTAND:
ANZ LIFE ASSURANCE COMPANY LIMITED (ACN 008 425 652)
RESPONDENT
JUDICIAL REGISTRAR:
PARKINSON
DATE:
21 NOVEMBER 1997
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
This action is brought by Mrs Moloney in her own right and as joint executor of the estate of her late husband Mr Moloney. Mr Moloney died on 8 October, 1994. The applicant alleges that the respondent has engaged in false, misleading and deceptive conduct in contravention of s52 of the Trade Practices Act 1974 (“the Act”) and seeks damages pursuant to s82 of that Act. The applicant further alleges that the respondent by its servant was negligent in the advice provided to Mrs and Mr Moloney as to the appropriate investment strategy for them.
It is appropriate to set out the facts in some detail. In August, 1993 Mr Kevin Moloney and Mrs Gwen Moloney were resident in Cairns, in the State of Queensland. Mr Moloney was aged 69 years and Mrs Moloney was 54 years. At this time both Mr and Mrs Moloney were retired from full time employment. They married on 10 January, 1976. Mr Moloney had 3 adult children from a previous marriage. Both Mr and Mrs Moloney originally resided in Victoria where Mr Moloney had operated a small business. They moved to Queensland in 1980 after Mr Moloney’s retirement in 1978. Mr and Mrs Moloney resided in Cairns in their mobile home permanently located at a tourist and residential trailer park. Since Mr Moloney’s retirement they were living off the interest earned upon the investment of the capital sums of $200,000 in debentures and $50,000 in a fixed interest trust. The evidence is that Mr Moloney had always been a conservative investor, not inclined to take any risk with his capital. In addition to these investments, from 1991 Mr Moloney was in receipt of an income on account of a part time job as District Secretary of a club.
Until early 1992 Mr Moloney had been in reasonable health and was an active and regular participant in golf and other activities. In 1992 Mr Moloney was diagnosed as suffering from diabetes and he was also diagnosed to be suffering with prostate cancer. In the period June, 1992 to December, 1992 he underwent intensive treatment for the cancer. In the course of his radiation therapy in August, 1992 Mr Moloney developed pericarditis/pleurisy. He was hospitalised on a number of occasions in the latter part of 1992 on account of the pericarditis and in November 1992 was required to take medication known as Prednisone on a regular basis in an attempt to stabilise the pericarditis. Prednisone is a cortisone type drug used to suppress the patient’s immune system. The evidence is that Prednisone had a potential for a number of serious side effects, about which Mr and Mrs Moloney had been informed. These side effects, referred to in the affidavit of Dr Suthers, Mr Moloney’s Consultant Physician, included aggravation of diabetes mellitus and predisposing the user to infections, heart attack and stroke. The evidence is that notwithstanding these serious side effects, it was the only medication available to control Mr Moloney’s condition. In 1993, Mr Moloney’s health continued to be of concern and the subject of frequent medical treatment, consultations and drug therapy. Mrs Moloney’s evidence is that during that year Mr Moloney suffered a continuing deterioration in his health. The evidence is that in July 1993 Mr Moloney, as a consequence of his poor health, found it necessary to resign his part time employment as District Secretary of the Masonic Centre, a position he had held for some years. Mr Moloney was able to avoid further hospitalisation until December, 1993 when he was again hospitalised in Brisbane.
In 1993 Mr and Mrs Moloney had investments comprising $100,000, and $75,000 in fixed term debenture stock returning respectively approximately $10,600 and $10,050 per annum. They held a further $25,000 upon deposit, returning an annual amount of $4,800. In addition Mr Moloney received income from his part time employment until July, 1993. The fixed debentures were due to mature in September and October, 1993 and Mr and Mrs Moloney were concerned that as a consequence of falling interest rates a reinvestment in debentures was unlikely to produce the same income return as had previously been earned. In addition Mr Moloney, as a result of his poor health, had been forced to resign his part time employment. As a consequence of these matters, Mr and Mrs Moloney investigated their entitlement to social security benefits and subsequently sought advice from the respondent as to their investment options. They approached an officer of the Department of Social Security and made application for a pension and were advised to seek professional investment advice as to the best way to structure their assets for the purpose of ensuring their eligibility or continuing eligibility for a pension having regard to the means testing attaching to assets. Mr Moloney and Mrs Moloney applied for and were granted pensions at around this time. It appears from the evidence that the pension had been approved at the time investment advice was sought. The pension entitlement arose out of Mr Moloney being of an age where he was entitled to claim the age pension. Mrs Moloney as his spouse became entitled to a pension on that basis. The aged and wife’s pension at that time was in the sum of $8,000 per annum or an amount of $311 per fortnight each.
Mr and Mrs Moloney approached the respondent for advice and were referred to its employee financial adviser, Mr Hay. Mr Hay commenced employment with the respondent as a personal investment manager on 29 July, 1993 and was still in a probationary employment period at the time of his consultations with Mr and Mrs Moloney. Mr Hay’s duties were to provide financial services and advice to customers of the respondent. Mr Hay developed an investment strategy for Mr and Mrs Moloney, which involved the allocation of their capital to a lifetime joint annuity and investment in a fixed interest trust. The investments were entered on 6 September, 1993. In August, 1994 Mr Moloney again became seriously ill being diagnosed with terminal cancer, death from which was imminent. Shortly before he died Mrs Moloney became aware that she would not be entitled to a Social Security Pension upon her husband’s death, nor would she have enough capital immediately available to her to relocate her residence to Victoria where her relatives and friends lived. As a consequence of this matter, Mr and Mrs Moloney revisited the investment plan which had been recommended and sought to commute the annuity. Upon commutation of the annuity and redemption of the fixed interest trust, Mr and Mrs Moloney were paid an amount of $113,850 upon their original capital investment in the annuity of $150,000 and $43,276.46 upon their original investment in the fixed interest trust of $ 50,000. Mr Moloney died on 8 October, 1994.
It is convenient to set out the representations relied upon as being false and misleading. They are contained at Paragraph 6 of the amended statement of claim.
Paragraph 6
In or about August of 1993 the respondent represented to the Moloneys that:
(a) it, and in particular its agent one Paul Hay, had the expertise to provide accurate financial planning advice to the Moloneys;
(b) the appropriate strategy (“the Strategy”) to meet the current needs and the expected future needs of the Moloneys was to purchase a Guaranteed Income Plan Policy in the sum of $150,000 (“the Policy”) and units in an ANZ fixed interest trust at a cost of $50,000 (“the Units”);
(c) that provided the Strategy was adopted in the event of the death of Kevin Moloney, the
first named applicant would receive:
(i) a social security pension which was then in the vicinity of $8,000 per annum;
(ii) gross income from the Annuity which was then in the vicinity of $6,650 per annum;
(iii) gross income from an ANZ fixed interest trust, which was then in the vicinity of $3,880 per annum
(“the Representations”);
(d) that the Strategy developed by Paul Hay would meet the current needs of the Moloneys and also provide for their future;
(e) the Strategy was good considered financial advice; and
(f) the Moloneys should not exercise the right to cancel the policy within 14 days of its receipt.
As to the negligence claim set out at paragraph 9 in the statement of claim, the applicant contends that the respondent failed in its duty of care to Mr and Mrs Moloney by making the representations set out above which it is alleged were inaccurate and by failing to exercise the skills and diligence of a reasonably prudent financial adviser, by ensuring that the Moloneys were fully and adequately informed of the nature and basis of the investment being made. In particular reference is made to the failure to identify the relevance of health and social security to the appropriateness of the investments.
The respondent contends that it at all times exercised due care and skill and says that the investments were appropriate to the needs of Mr and Mrs Moloney at the time they were entered, that the advice given as to future matters was reasonable in the circumstances and that the adviser exercised due care and skill in the provision of the advice to Mr and Mrs Moloney.
Nature of the Joint Life Annuity.
A Joint Lifetime Annuity operates by the purchase of a policy which provides for the payment of a lifetime annual pension amount dependant upon the value of the initial capital outlay. The terms of the annuity guaranteed a minimum payment for a period of 10 years and thereafter at 75% of the initial amount. In the event that either of the annuitants died within the first 10 years the payments continue at the agreed rate until the expiration of the guaranteed period. After that agreed period the payments revert to 75% of the amount. Payments cease in the event of the death of the last annuitant after the expiration of the guarantee period and in this case there was no capital residual. It is clear from the evidence of both expert witnesses in this proceeding, to which I will turn shortly, that an annuity of this type constitutes to some extent a gamble on the life expectancy of the recipients of the annuity. This was also conceded by Mr Hay to be the case. This factor of life expectancy would appear to be a fundamental aspect of the annuity and upon which the actuarial calculations determine the amount of the annuity payable annually and the resultant risks to the provider of the annuity, in this case ANZ Life Limited.
Evidence of Mr Hay and Mrs Moloney as to conversations
I now turn to a consideration of the evidentiary matters in dispute which principally relate to the discussions between Mr and Mrs Moloney and Mr Hay on 9 August, 13 August and 6 September, 1993. There was some confusion in Mrs Moloney’s evidence as to the dates particular meetings occurred, however she conceded that the first meeting between Mr and Mrs Moloney and Mr Hay took place at his office at the respondent’s branch on 9 August, 1993. There is conflict in the evidence as to the discussions which occurred at that meeting and the information which was provided and received. The evidence of Mrs Moloney is that Mr Hay asked for information as to their age and health and that this was provided in some detail to Mr Hay. Her evidence is that whilst Mr Moloney was inclined to understate his health difficulties, she expressly advised Mr Hay that her husband was not well. Her evidence is that she advised Mr Hay that Mr Moloney was a diabetic who had undergone recent treatment for prostate cancer, that he was a non-insulin dependant diabetic and that he suffered from pericarditis, attacks of which had occurred as recently as end November, 1992. Mrs Moloney stated that Mr Moloney advised Mr Hay that they desired to maintain their capital so as to generate income, but also to arrange their affairs to qualify for a social security pension. Whilst it is apparent from the evidence that at this time the Moloneys already had been granted social security pensions, it is apparent that the advice was sought in the context of ensuring ongoing entitlement. Mrs Moloney’s evidence is that Mr Hay was informed by Mr Moloney that because of the difference in age and health between them, it was likely that Mrs Moloney would survive him for a number of years. A further appointment was arranged for 16 August, but was cancelled as a consequence of Mr Moloney’s health. Mrs Moloney states that at the first meeting no policy or explanatory documents were provided to her or her husband explaining the operation of a fixed life annuity or its consequences or implications. On 13 August and 25 August, 1993 further meetings took place where according to Mrs Moloney, Mr Hay confirmed his earlier views and recommended that the best investment for them was to invest in a lifetime fixed annuity with a residual investment in a fixed interest trust. Mr Eley the applicant’s supervisor was present at the 13 August meeting, for the purpose of assessing the applicant’s performance as an employee. His evidence is that he took little part in the meeting and was not familiar with the detail of the investment strategy. The documents were executed at a brief meeting on 6 September, 1993.
The evidence of Mr Hay is that in the first meeting he discussed in detail with Mr and Mrs Moloney their investor profile and their particular requirements. His evidence was that he also provided Mr and Mrs Moloney with information about the immediate annuity product. His evidence was that there was no discussion between himself and Mrs Moloney as to Mr Moloney’s health status other than that he recalled being advised that Mr Moloney had suffered prostate cancer and that it had cleared up. In cross examination his evidence was that it was possible he had been told of Mr Moloney’s diabetes although he did not recall this to be the case. Mr Hay’s evidence was that he made inquiries of Mr Moloney and Mrs Moloney’s health status and was informed by Mr Moloney that his health was “average” and by Mrs Moloney that her health was “marvellous”. His evidence was that on this basis and having been informed that Mr Moloney’s prostate cancer had cleared up, he made no further inquiries. This is the information which he recorded in the internal investor profile document. Mr Hay denied advising or representing to Mr and Mrs Moloney that Mrs Moloney would have an ongoing entitlement to a social security pension. He was not able to recall whether there had been any discussions at all as to the age pension in the course of the meetings with Mr and Mrs Moloney. Mr Hay’s evidence is that he advised Mr and Mrs Moloney that an appropriate investment strategy for them was to purchase a Joint Life Annuity and to purchase units in a fixed interest trust. This advice was as a result of the express desire of Mr and Mrs Moloney to maximise their income and took account of their income needs as advised to Mr Hay. Mr Hay’s initial advice was that $175,000 ought be allocated to the purchase of the Joint Life Annuity. In the event Mr and Mrs Moloney placed the investments at $150,000 and $50,000. Mrs Moloney’s evidence is that Exhibits GM6 and GM7 were handwritten representations by Mr Hay as to the amount of income which would be achieved by both herself and Mr Moloney as a consequence of adopting the investment recommendations made by him. The resulting income stream which was to be achieved for each of Mr and Mrs Moloney was $6,384 in social security payments on account of a pension and pension related entitlements, $3,324 in monthly payments on account of the annuity instalments and $ 2,500 in fixed interest income, a total income to be generated of $24,426. Mrs Moloney’s evidence was that these amounts were confirmed by handwritten notes made by Mr Hay on the back of exhibit GM8, the document dated 30 August, 1993. There were some adjustments to this sum as to the annuity instalment payments which resulted in a slightly lesser total amount being attributable to the annuity.
I have noted Mr Hay’s uncertainty as to some of the matters said by Mrs Moloney to have been discussed at the first meeting. In particular, his uncertainty as to the applicant’s diabetes. There were a number of matters about which Mr Hay was unable to give certain evidence and whilst I accept that he was forthcoming in his evidence, I found his recollection of events and conversations, even when aided by notes made contemporaneously, to be vague and uncertain. In contrast the evidence of Mrs Moloney as to the conversations which occurred between the parties was firm and precise. Whilst there were aspects of her recollection of dates which were shown to be incorrect, nevertheless I found her to be a clear and precise witness who was not reluctant to make concessions as to conclusions, even against her own interest. In addition her evidence as to some aspects of the conversations is consistent with the documentary material. In this regard I refer to her evidence as to there being discussions as to the age pension. Mr Hay is unable to recall whether or not this matter was discussed. The documents which constitute the profile of the clients, completed by Mr Hay, make specific reference to the “age pension” in respect of both Mr and Mrs Moloney. Correspondence sent on 10 September, 1993 to the department of Social Security by Mr Hay on behalf of the Moloneys as to their changed and increased age pension entitlements suggests that the entitlement to an age pension both presently and into the future was very relevant to the investment strategy. In my view this is also confirmed by the various handwritten notes identifying the components of the projected income and which identified consideration of the relative values accorded the investment for social security entitlement consideration. I accept Mrs Moloney’s evidence that the entire investment package was exampled by reference to the pension entitlement component from Department of Social Security. It is apparent from the exhibits that the projections made in relation to Mrs Moloney expressly include the government pension and assume the existence of that pension whether or not Mr Moloney survived. I accept Mrs Moloney’s evidence that Mr Hay represented, without qualification, that in the event one or other died, the surviving spouse would continue to receive the pension, together with the annuity payments and income from the fixed trust.
As to the discussions as to Mr Moloney’s health status, the evidence of Mrs Moloney as to her husband’s recent health history, his ongoing health difficulties and the significant impact upon her own lifestyle and quality of life, which is apparent from the circumstances, also satisfies me that she was realistic as to her husband’s health situation and would have been unlikely to allow an inaccurate account of this matter to be given to Mr Hay. In material respects I prefer the evidence of Mrs Moloney to that of Mr Hay. I accept her evidence that she informed Mr Hay of Mr Moloney’s health status and that the respondent was aware of the severe health problems of Mr Moloney at the time the investment was entered.
Evidence as to Mr Moloney’s Health Status
The uncontested evidence of Dr Suthers is that at the time the annuity was entered, Mr Moloney had less than a 50% chance of living for 5 years. This was because of the applicant’s history of illness and the conditions he suffered and was predisposed to as a consequence of medication he was taking. The evidence is also that on the life expectancy tables being utilised by Mr Hay, the average life expectancy for a man of 69 years of age in good health was 78. It was apparent from the outset that Mr Moloney, statistically at least, was not likely to survive to the end of the 10 year guarantee period. The applicant contends that as a consequence of the advice received from Mr Hay, she and Mr Moloney purchased investment products which were unsuitable to their circumstances.
Expert evidence as to the nature of the Financial Advice provided to Mr and Mrs Moloney
Mr Anthony Muston was called to give expert evidence on behalf of the applicants. He is the Managing Director of an investment service known as Retireinvest and is an experienced financial adviser of many years expertise in a diverse number of investment fields. Mr Muston’s evidence was that assuming the correctness of Mr Hay’s affidavit as to the information he provided, a prudent financial adviser in advising Mr and Mrs Moloney would have advised and considered a number of matters, in particular the matters which he referred at paragraph 9 of his affidavit which were set out in paragraph 9 (a) - (s) as follows:
(a)Explain investments in general and explain how a range of investments work so that an objective and adequate assessment could be obtained of Mr and Mrs Moloney’s ability to assess the risks involved in the various types of investments that were open to them to enable them to choose which risk level was suitable.
(b)Explain to Mr and Mrs Moloney how both the life annuity and fixed interest trust investment products operate, including any redemption costs or penalties.
(c)Provide a detailed description of the risks associated with investing in a life annuity and a fixed interest trust.
(d)Ensure that Mr and Mrs Moloney understood all investment options available to them which would provide a guaranteed income over a number of years.
(e) Provide a written financial plan to Mr and Mrs Moloney.
(f)Explain that if the fixed interest trust was cashed in the short term there was a substantial risk that Mr and Mrs Moloney would not recover their investment value.
(g)Make further inquiries in relation to Mr Moloney’s illness having been alerted to his prior diagnosis of prostate cancer and that his health was only “average”, and highlight to him that unless both he and Mrs Moloney lived longer than normal life expectancies, they would be liable to lose on the annuity investment in particular. He should have advised Mr Moloney at least to seek advice from his medical adviser as to his likely life expectancy.
(h)Explain the terms of the investments and make recommendations as to how long they should invest in both the annuity and fixed interest trust to ensure good returns.
Provide a detailed assessment of how the annuity and fixed interest trust met Mr and Mrs Moloney’s needs and explained the adverse features of those investment products.
(j)Explain investment strategies to Mr and Mrs Moloney, including those which would have given the same income benefits, without tying their capital down as does investing in an annuity.
(k)Explain the concept of commutation and the likely effects of commuting either the annuity or fixed interest trust.
(l)Explain that if the life annuity is commuted in the circumstances outlined in the policy brochure, the investors can receive a substantially lower value than the investment made.
(m)Explain that a life annuity operates as a gamble with the life assurance company that the investor outlives their normal life expectancy and with a medical history akin to Mr Moloney’s there was a low prospect of this occurring.
(n)Considered the difference in age between Mr and Mrs Moloney and Mr Moloney’s medical condition and considered how Mrs Moloney would be provided for if Mr Moloney died. In particular, consider and assess the effect of either spouse dying and how they would obtain access to their capital if their needs suddenly changed. For example, as they were living in a caravan park in Queensland after having lived all their lived in Victoria and their family reside in Victoria would they need money to relocate back to Victoria if either of them died?
(o)Advise of the eligibility of Mrs Moloney to receive an aged pension or any other pension should Mr Moloney die, leaving her as the sole beneficiary of the entire investment portfolio.
(p)Cautioned anyone who has or has had a life threatening disease against taking a life time annuity unless satisfied by their medical practitioner that they were perfectly healthy or that the guaranteed payment period equalled their normal life expectancy.
(q) Disclose to Mr and Mrs Moloney that a commission was payable and the amount of that commission.
(r)Explain the nature of an annuity and a fixed interest trust to Mr and Mrs Moloney, not simply rely on any explanation in a brochure, as such an explanation would be inadequate for inexperienced investors such as Mr and Mrs Moloney. Mr and Mrs Moloney were elderly, probably inexperienced in such matters with little, if any, knowledge about the types of investments available to them. In my experience, such people require a detailed explanation of the investments before they grasp an understanding of them and remember the advice given. Therefore it is important for a financial adviser when giving advice to set out clearly in writing and take steps to ensure and check verbally that the client understands the advice which is being given. In my opinion, a prudent investment adviser is not entitled to assume that the Moloneys had the requisite knowledge and experience or understood the nature of the advice.
(s) Explain the effect the investments will have on their livelihood, particularly should one spouse die.
It was also Mr Muston’s evidence that in the event Mrs Moloney’s evidence as to the discussions held were to be correct, Mr Hay ought to have positively discouraged the investment plan which was recommended.
Mr Wickenden is a financial investment planner also of many years experience called by the respondent. His evidence was that, assuming the correctness of Mr Hay’s evidence as to what had been discussed as to health matters, the advice given and the steps taken by Mr Hay were appropriate and consistent with what would be expected of a reasonably prudent financial adviser. It was his view that the investments were the only way the expressed income requirements of the clients could be achieved without higher risk products. Mr Wickenden expressed the opinion that it was not necessary for Mr Hay to inform Mr and Mrs Moloney of either the implications of the commutation provisions or the life expectancy provisions, nor was he of the opinion that either the health status or social security entitlements of Mr and Mrs Moloney were matters into which Mr Hay ought to have inquired.
Mr Wickenden’s evidence was that contrary to what was suggested by Mr Muston in his evidence, it would be unusual for an investment adviser to suggest that a client seek advice from a medical adviser as to their life expectancy. However he qualified this evidence by stating: “it is always assumed that the person buying the annuity is - is in good health otherwise they wouldn’t be buying it.” Mr Muston’s point as to this matter was precisely that the product should not have been sold to any person who was not in good health and that it was incumbent upon a reasonably prudent financial adviser to make adequate inquiries as to this matter. In the course of his evidence, Mr Wickenden conceded that a written plan ought to have been provided to the clients and agreed that had the respondent been supplied with the information as to the other health problems these would have been relevant matters of consideration. The evidence of Mrs Moloney is that the only documents provided to her were those which were exhibited in these proceedings and that the proposal and prospectus for the plans were not provided until after the investment had been entered when they were received in the mail. I accept her evidence that no other documents providing detail of the investment portfolio plan was provided to her. It was the evidence of the respondent that other profile documents had been completed in respect of Mr and Mrs Moloney, but were lost prior to the time of these proceedings. Whilst there was a deal of agreement in their evidence I am satisfied that to the extent their evidence differed the evidence of Mr Muston is to be preferred to that of Mr Wickenden. I am satisfied that Mr Wickenden’s consideration of the advice given suffered from his not having a full appreciation of the circumstances of the advice and the information which was before Mr Hay at the time the advice was given.
It is apparent from the evidence in this proceeding that the specific interests and expectations of Mrs Moloney were not given any detailed or significant consideration. Mr Hay’s evidence is that Mr Moloney did most of the talking and that Mrs Moloney played little part in the discussions. It is apparent that Mr and Mrs Moloney presented themselves as two persons seeking investment advice and the advice sought was for the purpose of ensuring the ongoing financial security of both parties. Irrespective of whether Mr Moloney referred to the likelihood of his wife outliving him as being because of age or health differentials, it seems to me that it was probable on the information available to Mr Hay at the time that Mrs Moloney would outlive Mr Moloney and the consequences for Mrs Moloney ought to have been the cause for serious and concentrated attention on the part of Mr Hay. It is apparent that he was being asked to provide investment advice to both Mr and Mrs Moloney and in so doing a prudent investment adviser would look to the matters which may touch upon the interests of each individually. They are the matters which were discussed by Mr Muston in his evidence. I am satisfied that the advice given to Mrs Moloney was not sound nor was it based upon a fully informed analysis of her needs as an individual in the event that Mr Moloney predeceased her. Mr Hay’s affidavit acknowledges that the applicant and Mr Moloney came to him for advice as a consequence of the DSS “urging them to see a financial adviser”. The context of their seeing him is another matter which sways me to the belief that the social security obligations and entitlements of the couple ought to have been discussed by the financial planner with the applicant and Mr Moloney. It is clear from the evidence that there was no discussion with Mrs Moloney as to the implications of various scenarios and that she was not informed, as she ought to have been, that the consequence of the investment was that she was locked into the annuity, with a loss of capital entitlement and no right to redeem the capital without severe penalty in the event that Mr Moloney died at an early time. Her options and alternatives in the event that she survived Mr Moloney ought to have been clearly outlined to her. It is apparent that no such discussion took place as to Mrs Moloney’s future expectations. In the circumstances of the investment being made, the interests of each person as an individual was as relevant as their plans as a couple. This is particularly so in view of the health history of Mr Moloney and his age.
Whilst I accept that it is not possible for a financial adviser to anticipate what social security entitlements may be affected by government legislative or regulatory changes in the future, in this case I am satisfied that the advice as to the investment was given by Mr Hay absent any consideration of the present position as to social security entitlements and how such entitlements would impact upon the investment strategy in the event of one or other of the annuitants dying. In this case the Moloneys were recommended an investment which was geared to maximise income and to do so in a manner which was dependent for its effectiveness upon an entitlement to social security benefits. It was an ongoing investment, into which the Moloneys committed their principal capital sum. Once the investment was made, the capital sum was ostensibly lost to the applicant and Mr Moloney. In the absence of social security entitlements being payable to Mrs Moloney, it is clear that the investment was not, at the time it was entered, appropriate to her needs. I accept the evidence of Mrs Moloney that she understood from the discussions held with Mr Hay that in the event of the death of her husband she would continue to receive a total income amount which was comprised of the annuity amount, guaranteed for 10 years, and her social security entitlements.
I am satisfied that in this case where the respondent was not only selling a product but acting as a personal investment adviser, it owed a duty to Mr and Mrs Moloney to ensure that they were fully informed of the options available to them and the advantages and disadvantages to them individually, of the investment being recommended as appropriate to their circumstances. It is not to the point for it to be suggested by Mr Hay that he developed proposals which Mr and Mrs Moloney were free to accept or reject. It is clear that neither Mr or Mrs Moloney were experienced investors in the type of product being discussed with them. Whilst Mr Moloney had a general knowledge of the investment process he had a history of confining himself to relatively uncomplicated investments, singularly debentures, and it is clear that Mr and Mrs Moloney attended upon Mr Hay for the purpose of receiving the Professional Financial Advice advertised. I am satisfied that in this case the failure of Mr Hay to pay other than cursory attention to the health status of a person entering an annuity is not reasonable, particularly in circumstances where the applicant for the annuity had recently been treated for a potentially terminal disease and suffered diabetes and ongoing health difficulties. As discussed earlier in this decision, I am satisfied that Mr Hay was informed of Mr Moloney’s ongoing poor health and was informed as to his diabetes and recent hospitalisation. The investment in an annuity was described by Mr Hay and both experts as a bit of a gamble in that if either annuitant died earlier than the projected 10 years the bank was a winner, and if both lived longer than that time the bank lost.
The investment was described by Mr Wickenden in his evidence as not being in the nature of an investment product but more in the nature of a risk insurance product. This evidence as to the nature of the product suggests that in recommending or advising as to such a product, the purchasers ought reasonably to have been informed of the significance of health to the ongoing appropriateness of the plan to their circumstances. The evidence establishes that the investment was represented as appropriate to the Moloneys’ circumstances both present and into the future. In the absence of a full and proper consideration of the health and social security matters it is my view that the representation as to appropriateness was misleading and deceptive as to an existing fact at the time of entering the investment, that existing fact being that the investment was an investment appropriate to the circumstances at that time of the applicants, the adviser having taken due account and regard to each of their health and social security entitlements. In so far as it is contended that the representations were as to future matters, to which ss51A(1) and (2) of the Act apply, the respondent has not established that the representations were made reasonably. This is because there is an absence of any proper investigation or consideration of Mr and Mrs Moloney’s health status or future social security entitlements.
I am also satisfied that in not fully discussing and investigating these matters the adviser did not conduct himself as a reasonably prudent investment adviser. Further it would appear that in circumstances where there was direct benefit to the respondent from the circumstances of one or other of the annuitant’s early death, it would be prudent for the health matters relevant to the annuitants’ interests to be carefully considered before the investment decision is made, in much the same way as the health status of both Mr and Mrs Moloney was required to be assessed for the purpose of exit from the annuity in November 1994. In my view these matters makes the provision of information and inquiry as to health status even more relevant and reasonable.
Mr Hay was not able to remember whether the aged pension was or was not discussed. I am satisfied that in the context of the discussions being held with Mr and Mrs Moloney a prudent financial adviser would have considered the nature of the entitlement to a pension if any, because the investment success and appropriateness in Mr and Mrs Moloney’s circumstances was inextricably linked to there being a continuing entitlement in Mrs Moloney to a Government Pension. That it was a significant factor in the investment portfolio is evidenced by the documents of the respondent where the proposal form itself, as completed by Mr Hay, states “age pension”. I am satisfied that there was discussion as to the age pension entitlements and that at least Mrs Moloney was under the impression from the nature of the discussions with Mr Hay that she had a continuing pension entitlement, which formed a vital part of the investment plan entered. It is apparent from the documents, including the ‘ Intelligent Portfolio Calculator’ a document produced by Mr Hay and a document entitled ‘ Projected Cash Flow for Kevin and Gwen Moloney (1st year)’ also created by Mr Hay, that the Department of Social Security monetary entitlements figure strongly in calculations by Mr Hay of the amount of earnings being generated by the investment strategy. In addition it is clear from the respondent’s material promoting the services of Mr Hay and other investment advisers, that along with annuities and investment plans, Age Pension Entitlements is one of the matters about which the respondent holds itself out as offering advice. I am satisfied that a reasonably prudent investment adviser would, having regard to the circumstances of Mr and Mrs Moloney, have inquired as to the entitlements of Mrs Moloney to a pension and advised her of the effect upon the investment plan of the death of her husband prior to her attaining 60 years of age. I accept Mrs Moloney’s evidence that she did not become aware that she lost her entitlement to a pension upon her husband’s death until shortly before he died.
For the reasons set out above, I am satisfied that Mr and Mr Moloney relied upon the advice given them by Mr Hay and invested in the product as a direct consequence of the advice. I am satisfied that the investment strategy recommended to Mr and Mrs Moloney was not appropriate for their circumstances and that respondent misrepresented the appropriateness of the investment to the circumstances of Mr and Mrs Moloney. In addition I am satisfied that it was represented to Mr and Mrs Moloney that the social security entitlements were a continuing part of the investment entered. I am satisfied that without such representations Mr and Mrs Moloney would not have entered the investment and I am satisfied that as a consequence of the representations, which were false and misleading, damage has been suffered. Further I am satisfied that the respondent has acted negligently in the provision of advice to Mr and Mrs Moloney and that the advice was deficient in that there was a failure to fully advise Mr and Mrs Moloney of the commutation consequences and cost and the limited exit provisions of the investment. There was a failure to take account of the age of the annuitants and the reasonable likelihood that Mr Moloney would not live beyond the guaranteed term of 10 years, and failure to take proper account of and fully inquire into the health of the annuitants and to advise Mrs Moloney as to the implications of early death of Mr Moloney. I am also satisfied that the respondent behaved negligently in failing to take account of, investigate or advise of the implications for the investment of entitlements to government pension and a failure to investigate the entitlements of Mrs Moloney to ensure the accuracy and appropriateness of the investment plan being proposed. I am not satisfied that there is established contributory negligence on the part of Mr Moloney. That claim for contribution raised in the respondent’s defence is rejected. I turn now to consider the question of remedy.
The applicants seek damages. In the course of the proceeding the amount of the loss was particularised in the sum of $ 33,814.01. This loss was described as the applicants’ minimum loss. The amount was calculated by reference to the amount of capital which the applicant would have had available as at the date of exit from the investments, had the investments not been made and investment in debentures instead been made. I am satisfied that Mr and Mrs Moloney would not have entered the investment in either the annuity or the fixed interest trust but for the advice and representations made by the respondent which have been found to be false and misleading and negligent. I am satisfied that the applicants suffered loss and damage by the conduct of the respondent and are entitled to damages. I accept that the appropriate manner of calculating the loss is the approach proposed by the applicants, which is an approach consistent with the approach taken by the Full Court in Kenny & Good Pty Ltd & Anor v MGICA (1992) Ltd (1997) 147 ALR 568 and also the proper measure of damages in Tort. The order of the court will be that the respondent pay to the applicants damages in the sum of $33,814.01 together with interest pursuant to s51A of the Federal Court of Australia Act 1976 (Cth) calculated from the date of these proceedings being instituted by the applicant. An order that the respondent pay the applicants costs will also be made. The parties are to confer and produce agreed minutes of orders. The matter is listed for the making of final orders on Wednesday 26 November, 1997. In the event that agreement as to the amount of interest and costs cannot be reached the parties will be heard as to those matters on 26 November.
The court orders that:
Judgment be entered in favour of the applicants against the respondent for damages assessed at $ 33,814.01.
The costs of the applicants be borne by the respondent less costs thrown away by the respondent on 7 October 1997.
Interest on the judgment is payable pursuant to s51A of the Federal Court of Australia Act 1977 between date of the application and the date of judgment.
The proceeding be listed before Parkinson JR on Wednesday 26 November 1997 at 9.30 am for the making of orders including orders as to interest and costs.
By 5.00 pm on Tuesday 25 November 1997 the parties provide to the Associate to Parkinson JR an agreed minute of the orders to be made, or if agreement has not by then been reached, the forms of the minutes of orders for which they will respectively contend.
I certify that this and the preceding sixteen (16) pages are a true copy of the Reasons for Judgment herein of Judicial Registrar Parkinson.
Associate:
Dated: 21 November 1997
Counsel for the Applicant: Mr. I. A. Arnold Solicitor for the Applicant: Lander & Rogers Counsel for the Respondent: Mr. C.C. Macauley Solicitor for the Respondent: Minter Ellison Date of Hearing: 6, 8, 9 & 13 October 1997 Date of Judgment: 21 November 1997
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