Notesco Pty Ltd v Australian Financial Complaints Authority Ltd

[2022] NSWSC 285

Supreme Court

New South Wales

Medium Neutral Citation:

Notesco Pty Ltd v Australian Financial Complaints Authority Ltd [2022] NSWSC 285

Hearing dates:

28 February 2022 – 1 March 2022

Date of orders:

17 March 2022

Decision date:

17 March 2022

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Declare that Determination made by the Australian Financial Complaints Authority (AFCA) is invalid. Remit the complaint to AFCA to be determined by an AFCA Decision Maker who was not involved in the preliminary assessment or the Determination.

Catchwords:

FINANCIAL SERVICES – elderly French resident opens trading account with holder of Australian Financial Services Licence – accesses highly leveraged investments not then available in the EU – trades in CFDs – loses the lot – makes complaint to AFCA – AFCA staff consult AFCA Decision Maker when making preliminary assessment – AFCA Decision Maker consults AFCA staff when making Determination.

AUSTRALIAN FINANCIAL COMPLAINTS AUTHORITY SCHEME – external dispute resolution scheme – Part 7.10A Corporations Act 2001 (Cth) – AFCA Rules – complaint resolution process – procedural fairness requirement – the Court’s role – general review at [4]-[21].

JURISDICTION – construction of AFCA rules on jurisdiction at [127]-[140] – rule B.2.1 – definition of Financial Service (rule E.1.1) – broad jurisdiction – ‘one stop shop’ to resolve disputes about products and services provided by Financial Firms.

IMPARTIALITY – construction of AFCA rules on complaint resolution process at [144]-[157] – separation of preliminary assessment and Determination – separation of AFCA Decision Maker from preliminary assessment – Isbester applied – Determination not made in accordance with AFCA Rules – Determination invalid.

WAIVER – no requirement in AFCA Rules to raise jurisdictional challenge during complaint resolution process – no waiver – see [119]-[123].

ESTOPPEL – must be pleaded properly – pleading deficient – see [124]-[126].

WORDS AND PHRASES – “arise from” at [130] – “relate to” at [131] – “in connection with” at [139].

Legislation Cited:

Corporations Act2001 (Cth)

ESMA Decision 2018/706 of 22 May 2018 to Temporarily Restrict Contracts for Differences in the Union

Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Act 2018 (Cth)

Cases Cited:

Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 328 CLR 570; [2008] HCA 57

Australian Capital Financial Management Pty Ltd v Australian Financial Complaints Authority Ltd [2021] NSWSC 1577

Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546

Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279

Commissioner for Railways v Bielewicz [1963] NSWR 482

Commonwealth v Verwayen (1990) 170 CLR 394; [1990] HCA 39

Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305

Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VCSA 179; (2014) 313 ALR 469

D H Flinders Pty Ltd v Australian Financial Complaints Authority [2020] NSWSC 1690

Fraser v The Irish Restaurant & Bar Co Pty Ltd [2008] QCA 270

Frost v Kourouche (2014) 86 NSWLR 214; [2014] NSWCA 39

Greater Taree City Council v Murowski Investments Pty Ltd [2010] NSWLEC 258

Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641

Hatfield v Health Insurance Commission (1987) 15 FCR 487

Henry, Re; JL v Secretary, Department of Family and Community Services [2015] NSWCA 89

Investors Exchange Ltd v Australian Financial Complaints Authority Ltd [2020] QSC 74

Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20

Kioa v West (1985) 159 CLR 550

Larratt v Bankers and Traders Insurance Co Ltd (1941) 41 SR (NSW) 215

Legione v Hateley (1983) 152 CLR 406; [1983] HCA 11

Magrath v Parkside Hotels Ltd [2011] EWHC 143 (Ch)

Margetson v Glynn [1892] 1 QB 337

MetLife Insurance Ltd v Australian Financial Complaints Authority [2022] FCA 23; (2022) 397 ALR 316

Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; [2012] VSCA 185

Minister for Immigration and Citizenship v SZGUR (2011) 241 CLR 594; [2011] HCA 1

North v Homolka [2014] VSC 478

Plenary Research Pty Ltd v Biosciences Research Centre Pty Ltd [2013] VSCA 217

Quintano v BW Rose Pty Ltd [2008] NSWSC 793

R v Orcher (1999) 48 NSWLR 273; [1999] NSWCCA 358

Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1; [2003] HCA 6

Robson v QBE Insurance (Australia) Ltd [2020] NSWSC 1558; 94 MVR 341

Transtar Linehaul Pty Ltd v Deputy Commissioner of Taxation (2011) 169 FCR 271; [2011] FCA 856

Travelex Ltd v Federal Commissioner of Taxation (2010) 241 CLR 510; [2010] HCA 33

Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75

Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

Workers’ Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642

Texts Cited:

ASIC, Media Release 19-088MR: “Some AFS licensees may be breaking overseas laws”

ASIC, Regulatory Guide 227: “Over the Counter Contracts for Difference (CFD): Improving Disclosure for Retail Investors”

Revised Explanatory Memorandum to the Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Bill 2017

Sean Wilken and Karim Ghaly, The Law of Waiver, Variation, and Estoppel (3rd ed, 2012, Oxford University Press)

Category:

Principal judgment

Parties:

Notesco Pty Ltd (Plaintiff)
Australian Financial Complaints Authority Ltd (Defendant)

Representation:

Counsel:
Mr DR Sulan SC/Mr R Pietriche (Plaintiff)
Mr EAJ Hyde (Defendant)

Solicitors:
Piper Alderman (Plaintiff)
Hall & Wilcox (Defendant)

File Number(s):

2021/107996

Judgment

1. HER HONOUR: The plaintiff, Notesco Pty Ltd trading as “IronFX”, seeks declaratory and injunctive relief in respect of a Determination by the first defendant, Australian Financial Complaints Authority Limited (AFCA). AFCA is the operator of the AFCA Scheme, which is a financial services dispute resolution system authorised under part 7.10A of the Corporations Act2001 (Cth). The second defendant, French resident Jean Pasquier, made the complaint to AFCA about Notesco, which was the subject of the Determination, but did not participate in these proceedings.

2. Notesco relied on an affidavit of Loukia Kanarini, Chief Legal and Compliance Officer of Notesco’s parent company, Notesco Financial Services Ltd, which is a Cypriot company. Ms Kanarini was not cross-examined. AFCA relied on documentary evidence. Although AFCA had filed affidavits by two officers who were involved in making the determination – Ombudsman Nicolas Crowhurst and Case Manager May Chng – their affidavits were not ultimately read. Notesco submitted that I should draw an adverse inference from AFCA’s failure to call its officers; I infer that their oral evidence would not have assisted AFCA.

3. Notesco challenges the Determination on three grounds:

1. lack of jurisdiction;

2. lack of procedural fairness; and

3. unreasonableness, insofar as AFCA did not reduce the compensation payable to Mr Pasquier by reason of his own actions, or those of his agent / broker, Nextrade Ltd trading as “La Maison du Placement” or LMDP.

Before considering these challenges, and the events leading to the Determination, a description of the AFCA Scheme is necessary.

AFCA SCHEME

4. In 2018, the Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Act 2018 (Cth) amended the Corporations Act by adding Part 7.10A, “External dispute resolution”. As explained by the Revised Explanatory Memorandum, the legislative changes followed the Ramsay Review into the regulatory requirements concerning the dispute resolution and complaints framework for providers of financial services, which found problems arising from the existence of multiple external dispute resolution schemes: at [1.11]. (The three main precursor schemes are succinctly described in MetLife Insurance Ltd v Australian Financial Complaints Authority [2022] FCA 23; (2022) 397 ALR 316 per Colvin J at [4]-[6].) The amendments introduced a new external resolution framework for the financial system, where the Minister would be able to authorise a new “one stop shop” external dispute resolution scheme for the purposes of the Corporations Act, to be known as AFCA: at [1.2]. The new framework would ensure that consumers had easy access to a single external dispute resolution scheme to resolve disputes about products and services provided by Financial Firms: at [1.27].

5. AFCA would be based on an ombudsman model and be established by industry as a company limited by guarantee: at [1.14]. Financial Firms would be required to be members of AFCA; AFCA’s members would be contractually bound to comply with AFCA’s operating rules: at [1.15]. The operational aspects of the AFCA scheme would be based on private law (contractual) obligations between AFCA and its members: at [1.25].

Part 7.10A, Corporations Act

6. As amended, section 1050 of the Corporations Act empowers the Minister to authorise an external dispute resolution scheme if satisfied that the “mandatory requirements” of section 1051 will be met, and taking into account the “general considerations” for an external dispute resolution scheme under section 1051A: section 1050(1) and (2). As to the “general considerations”, section 1051A provides that the general considerations for an external dispute resolution scheme are the accessibility, independence, fairness, accountability, efficiency and effectiveness of the scheme.

7. As to the “mandatory requirements”, section 1051(1) provides that an external dispute resolution scheme must meet the organisational, operator, operational and compliance requirements of the section, in particular, the scheme must have an independent assessor (section 1051(2)(c)) and, as to operational requirements, section 1051(4) includes the following requirements: (emphasis added)

Operational requirements

(4)   The operational requirements are that:

(a)   the complaints mechanism under the scheme is appropriately accessible to persons dissatisfied with members of the scheme; and

(b)   complaints against members of the scheme are resolved (including by making determinations relating to such complaints) in a way that is fair, efficient, timely and independent; and

(c)   appropriate expertise is available to deal with complaints;

…

8. The Revised Explanatory Memorandum also notes, “When considering whether the [external dispute resolution] scheme is ‘fair’, the Minister may consider matters such as whether the complaints handling procedures of the scheme will accord with the principles of natural justice and industry best practice”: at [1.55]. Further, the mandatory requirements are designed to promote “robust and independent dispute resolution services”: at [1.58]. Section 1052 provides, “AFCA must ensure that the mandatory requirements for the AFCA scheme under section 1051 are complied with.”

AFCA Rules

9. In April 2018, the Minister authorised the AFCA Scheme by legislative instrument, pursuant to section 1050 of the Corporations Act. On 1 November 2018, the AFCA Scheme commenced operation. The AFCA Rules came into effect. In addition to the AFCA Rules, AFCA published Operational Guidelines to the Rules, which inform the administration of the AFCA Scheme. A financial services licensee who provides services to retail clients must be a member of the AFCA Scheme: sections 912A(1)(g)(i) and 912A(2)(c), Corporations Act.

10. The AFCA Constitution states that the AFCA Rules “shall form a binding contract between each Member” and AFCA: clause 12.1(d). The AFCA Rules form a contract between each member, AFCA and the complainant: rule A.1.2, rule A.3.1. As such, when a complaint is made, the Rules form a tripartite contract between the complainant, AFCA and the member the subject of the complaint: Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VCSA 179; (2014) 313 ALR 469 at [87] (Warren CJ and Osborne JA); D H Flinders Pty Ltd v Australian Financial Complaints Authority [2020] NSWSC 1690 at [11]; Australian Capital Financial Management Pty Ltd v Australian Financial Complaints Authority Ltd [2021] NSWSC 1577 at [3]. The provisions of the AFCA Rules in respect of AFCA’s jurisdiction are considered further at [127] of this judgment.

Complaint resolution process

11. Section A of the AFCA Rules describes “Complaint Resolution Processes”. Rule A.2.1 provides:

AFCA will:

…

c)   consider complaints submitted to it in a way that is:

(i)   independent, impartial, fair,

(ii)   in a manner which provides procedural fairness to the parties,

(iii)   efficient, effective, timely, and

(iv)   cooperative, with the minimum of formality;

d)   support consistency of decision-making, subject to its obligations … to do what is fair in all the circumstances; …

12. When AFCA receives a complaint, it will notify the Financial Firm: rule A.5.1. The Financial Firm will be given a timeframe in which to resolve the complaint or provide its position in relation to the complaint to AFCA: rule A.5.2. AFCA will generally try to resolve the complaint by informal methods and, if unsuccessful, may either provide a preliminary assessment in accordance with rule A.12 or proceed to determine the complaint: rule A.8.1.

13. Rule A.9.1 notes that AFCA will often need to obtain information from the parties. A party to a complaint must comply with AFCA’s requirements to provide information within the timeframe specified by AFCA: rule A.9.1. After collecting relevant information and obtaining submissions from the parties, AFCA may provide a preliminary assessment of the complaint, setting out the reasons for any conclusions about the merits of the complaint and recommending how the complaint should be resolved: rule A.12.1.

14. As to when and how a preliminary assessment moves to a Determination, rule A.12 provides: (emphasis added)

A.12.3   The complaint must proceed to a Determination by an AFCA Decision Maker:

…

b)   … if:

(i)   the Financial Firm fails to accept AFCA’s preliminary assessment within the timeframe specified by AFCA; or

(ii)   either the Complainant or Financial Firm requests that the complaint proceeds to Determination, and provides reasons for disagreeing with the preliminary assessment, within the time specified by AFCA.

…

A.12.5   When determining a complaint at the request of a party, the AFCA Decision Maker must consider the party’s reasons for disagreeing with the preliminary assessment, but is not limited to those reasons.

15. An AFCA Decision Maker includes an Ombudsman appointed to that position under AFCA’s Constitution: rule E.1.1 (definition of AFCA Decision Maker). When allocating a complaint to an AFCA Decision Maker for determination, AFCA’s Chief Ombudsman must consider the AFCA Decision Maker’s expertise and experience “and whether they will be able to determine the complaint fairly and impartially”: rule A.13.3.

16. As to the opportunity to make submissions to the AFCA Decision Maker, rule A.10 provides:

A.10    Information sharing and opportunity to make submissions

A.10.1   AFCA will generally share information provided by a party to a complaint with the other parties to a complaint, including after the complaint has been closed when appropriate.

A.10.2   Before a complaint is determined by an AFCA Decision Maker, AFCA must provide the parties to the complaint:

a)   with access to relevant information; and

b)   an opportunity to make submissions.

A.10.3   Despite rules A.10.1 and A.10.2, AFCA need not provide the parties with any memoranda, analysis or other documents prepared by AFCA’s employees or contractors unless required by law.

That is, AFCA is not obliged to share its internal working documents with the parties to a complaint. But, critically, before an AFCA Decision Maker makes a determination, the parties must be given access to “relevant information” and have an opportunity to make submissions.

17. This is consistent with the obligation to accord procedural fairness. The relevant principles are succinctly summarised by Wright J in Robson v QBE Insurance (Australia) Ltd [2020] NSWSC 1558; 94 MVR 341 at [74]-[77]. The content of the obligation to provide procedural fairness depends on what is required to avoid practical injustice: Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1; [2003] HCA 6 at [37]; Frost v Kourouche (2014) 86 NSWLR 214; [2014] NSWCA 39 at [41]. A person entitled to procedural fairness will generally be entitled to be made aware of, and have the opportunity to address, any adverse information that is credible, relevant and significant to the decision to be made: Kioa v West (1985) 159 CLR 550 at 629 per Brennan J; at 587 per Mason J.

18. At a general level, procedural fairness requires a decision-maker to identify for the person affected any critical issue not apparent from the nature of the decision and to advise a party of any adverse conclusion which would not obviously be open on the known material: Minister for Immigration and Citizenship v SZGUR (2011) 241 CLR 594; [2011] HCA 1 at [9]. As Ashley JA summarised the position in North v Homolka [2014] VSC 478, “a want of procedural fairness is likely to be disclosed where a finding … is unexpected, could not have been reasonably anticipated …”: at [104]. Beyond that, a decision-maker is not “required to expose his or her thought processes or provisional views for comment before making the decision”: SZGUR at [9].

19. As to the decision making approach of the AFCA Decision Maker, rule A.14 provides:

A.14.2   … the AFCA Decision Maker must do what the AFCA Decision Maker considers is fair in all the circumstances having regard to:

a)   legal principles;

b)   applicable industry codes or guidance;

c)    good industry practice; and

d)   previous relevant Determinations of AFCA or Predecessor Schemes.

A.14.3   An AFCA Decision Maker is not bound by rules of evidence or previous AFCA or Predecessor Scheme decisions.

A.14.4   A Determination must be in writing with reasons. …

20. An AFCA Decision Maker may decide that the Financial Firm is to compensate the Complainant for direct financial loss (including monetary compensation up to $500,000 per claim), indirect financial loss (up to $5,000) or compensation for non-financial loss (up to $5,000) such as injury to feelings or humiliation in respect of a complaint relating to an individual’s privacy right or, for other complaints, inconvenience or interference with the complainant’s expectation of enjoyment or peace of mind: rule D.3, D.4. A Determination by an AFCA Decision Maker is final and is binding upon the parties if accepted by the Complainant: rule A.15.3. The seriousness of the consequences of the relief which may be visited upon a Financial Firm inform the content of the requirements of procedural fairness: Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75 at [59] (per Spigelman CJ). Where the remedies which the AFCA Decision Maker has the power to confer are substantial, the obligation to accord procedural fairness is commensurably substantive.

The Court’s role

21. As explained by Tadgell JA in Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546, if a domestic tribunal’s decisions owes its binding quality to a contract (being, in this case, the AFCA Rules) the courts will recognise that the decision must be consonant with the contract and, if not, a declaration to that effect may be obtained and an appropriate injunction granted at the suit of an aggrieved person whom the decision purports to bind: at 550; followed in Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; [2012] VSCA 185 at [38]. The power of a Court to review the decision of a body such as AFCA may be seen as deriving as a matter of law from the necessity for the attainment of justice in respect of the functions of tribunals of the general type in question or it may be seen as deriving as a matter of fact from the necessity to give business efficacy to the particular contract in issue: Cromwell at [62], [256].

FACTS

22. Mr Pasquier’s complaint concerned trading in foreign exchange (FX) Contracts for Difference (CFDs) and margin FX contracts, being a type of CFD. AFCA has issued a “Contracts for Difference and Margin FX Case Handling Guide”, which helpfully explains these products and the obligations owed by providers of such products. In particular, a CFD is an agreement to exchange the difference between the value of an underlying asset at the time the contract is open and its value at the time the contract is closed. CFDs are a way of betting on the change in value. As the value of CFDs relies on the value of the underlying asset, the financial product is a derivative. CFDs are complex and highly leveraged, giving investors a large exposure to the underlying asset with comparatively little initial capital outlay. The leverage significantly magnifies gains or losses on comparatively small movements in the price of the underlying asset. Margin FX contracts are also complex and highly leveraged. A margin FX contract allows investors to bet on the movement of value between two currencies, known as ‘currency pairs’, such as the movement of value between the US dollar and the Australian dollar.

23. As AFCA’s case handling guide also explains, the issuers of CFDs and Margin FX contracts are “market-makers”, that is, they are the counter-party to every transaction. The issuers set the prices they are willing to buy and sell CFDs and Margin FX contracts. The relationship between the CFD provider and the investor is a principal-to-principal relationship as the CFD provider and investor are contracting with each other; each is the counter-party to the other. As such, the issuer of CFDs and Margin FX contracts are not brokers nor the investor’s agent. Further, CFDs and Margin FX contracts are financial products and are subject to the product disclosure regime in the Corporations Act. Issuers are required to make available a copy of their Product Disclosure Statement (PDS) before or when issuing or making an offer to issue a CFD or Margin FX contract.

24. In 2011, the Australian Securities and Investments Commission (ASIC) issued Regulatory Guide 227, “Over the Counter Contracts for Difference (CFD): Improving Disclosure for Retail Investors”, which noted that, in Australia, most CFDs are not traded on an exchange but issued as over-the-counter (OTC) products marketed to retail investors, many of whom do not seek or receive financial advice before deciding to invest, but rely on advertising and disclosure materials to inform their decision to invest: RG 227.3. ASIC’s research suggested that many retail investors did not fully understand the risks of trading in CFDs, partly due to the inherent complexity of the subject matter: RG 227.5. Retail investors are often attracted to CFDs in anticipation of promised high rates of return for limited capital outlay. ASIC regarded CFDs as “complex products with a number of inherent risks”: RG 227.6.

25. To address these concerns, Regulatory Guide 227 promulgated seven disclosure benchmarks to be addressed in the PDS. The first disclosure benchmark is “client qualification”, which obliges the issuer of CFDs to maintain a client qualification policy that sets out the minimum qualification criteria that prospective investors will need to demonstrate before the issuer will open an account on their behalf. In particular, at RG 227.40:

An issuer should assess a prospective investor against qualifying criteria that address the investor’s understanding of and experience with the product. For example, criteria should address the investor’s:

a)   previous experience in investing in financial products, including securities and derivatives;

b)   understanding of the concepts of leverage, margins and volatility;

c)   understanding of the nature of CFD trading, including that CFDs do not provide investors with interest or rights in the underlying assets over which a position is taken;

d)   understanding of the processes and technologies used in trading; and

e)   preparedness to monitor and manage the risks of trading.

ASIC considered an online test, a face-to-face interview or telephone interview to be appropriate methods for conducting an assessment and also suggested that the issuer offer a practice account, which allowed investors to trade on a virtual basis before opening an actual account: RG 227.42.

26. As noted in AFCA’s case handling guide, “Thanks to ASIC’s Regulatory Guide 227, issuers usually don’t allow investors to open a CFD or Margin FX trading account unless they are satisfied the investor has a certain level of understanding of the products offered. While this is not a legal obligation, it is indicative of good industry practice.”

27. Regulators in other jurisdictions have imposed a range of measures in respect of CFDs. Of relevance in this case, in 2018, the European Securities and Markets Authority temporarily restricted CFDs in the European Union (EU): ESMA Decision 2018/706 of 22 May 2018 to Temporarily Restrict Contracts for Differences in the Union. The leverage offered for CFDs was restricted to between 1:2 and 1:30, depending on the volatility of the underlying instrument.

Notesco

28. Notesco offers CFDs to retail clients. In 2012, Notesco obtained an Australian Financial Services Licence, with the following authorisation:

This licence authorises the licensee to carry on a financial services business to:

(a)   provide general financial product advice for the following classes of financial products:

(i)   derivatives; and

(ii)   foreign exchange contracts;

(b)   deal in a financial product by:

(i)   issuing, applying for, acquiring, varying or disposing of a financial product in respect of the following classes of financial products:

(A)   derivatives; and

(B)   foreign exchange contracts; and

(ii)   applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of the following classes of products:

(A)   derivatives; and

(B)   foreign exchange contracts; and

(c)   make a market for the following financial products:

(i)   foreign exchange contracts; and

(ii)   derivatives;

to retail and wholesale clients.

29. It was a condition of Notesco’s licence that it be a member of an external dispute resolution scheme “which covers … complaints made by retail clients in relation to the provision of all of the financial services authorised by this licence.” In compliance with this condition, Notesco is a member of the AFCA Scheme. In addition to conditions imposed by its licence, Notesco is, of course, obliged to “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”: section 912A(1)(a), Corporations Act.

30. As Ms Kanarini described it, Notesco uses its Australian Financial Services Licence to operate the Metaquotes MetaTrader 4 electronic trading platform. Notesco licences the software required to operate the trading platform and provides the software for use by its clients. The software consists of a client and server component: the server component is run by Notesco under licence; the client software is provided to enable clients to access live streaming of prices and charts, place orders for trading in the market and manage their accounts. Through the trading platform, Notesco offers its clients the ability to trade in Margin FX in respect of all major currencies and currency crosses and CFDs in respect of currencies. In offering these financial products to clients, Notesco does not provide any financial advice to clients but deals on an execution-only basis, that is, Notesco facilitates the placement of trades and permits clients to monitor, manage and execute market positions through the trading platform. Notesco offers clients access to its trading platform, through which clients can trade the financial products in which Notesco is licensed to deal, by way of the PDS and subject to the Terms and Conditions.

Product Disclosure Statement

31. Details of Notesco’s product offering are contained in its PDF, which states that it was prepared by Notesco “as the issuer of over-the-counter contracts (OTC Contracts) for Foreign Exchange (FX) products (referred to as FX Transactions).” Further:

IronFX is required to give this PDS because it is deemed to be the issuer of financial products (the FX Transactions) which are derivatives.

…

1.4   OFFER IN AUSTRALIA

The FX Transactions offered under this PDS are available only to persons receiving this PDS (electronically or otherwise) in Australia. It is therefore the sole responsibility of a client to ensure that he understands and complies fully with any laws and/or regulations relevant to him in his own country prior to placing any trade with IronFX.

The distribution of this PDS in jurisdictions outside Australia may be subject to legal restrictions. Any person who resides outside Australia and who gains access to this PDS should comply with any such restrictions that apply to them in relation to applications for the FX Transactions failure to do so may constitute a violation of financial services laws.

…

1.5   PERSONAL ADVICE

IronFX will not give personal financial advice about the FX Transactions.

This PDS does not constitute a recommendation or opinion that any of the FX Transactions are appropriate for you.

32. The PDS considered each of the disclosure benchmarks for OTC FX products referred to in Regulatory Guide 227 as compared with Notesco’s offering. The PDS noted that Notesco “partially” met the “client qualification” benchmark: Notesco met the requirement with respect to Australian residents but not for non-Australian residents.

33. The PDS outlined the key features of FX Transactions, noting the benefits and risks. Amongst the benefits, the PDS noted that “Foreign exchange products provide important risk management tools for those who manage foreign currency exposures. … The significant benefits of using FX Transactions as a risk management tool are to protect your exchange rate and provide cashflow certainty.” Further:

In addition to using FX Transactions as a risk management tool, you can benefit by using the products to speculate on changing exchange rate movements. You may take a view of a particular market, or the markets in general and therefore enter into FX Transactions according to this belief in anticipation of making a profit.

Other benefits were noted, including the potential to profit in both rising and falling currency markets, depending on the strategy employed. D146

34. In order to trade, the PDS explained that a client needed to establish a trading account by completing an application form on Notesco’s website. Operation of the trading account was subject to the Account Terms and Conditions and the PDS. Further,

Trading in the financial products that IronFX offers may not be suitable for all investors due to the significant risks that to the products. IronFX can only accept retail investors who can demonstrate a satisfactory understanding of the different aspects of trading. This will be done by IronFX asking you questions via an online quiz in order to assess your understanding and experience with OTC derivatives.

It should be noted that the online quiz is applicable only to Australian residents. In regards to Non Australian residents, the Company obtains information related to the potential client’s knowledge and experience.

If it should be necessary, IronFX will recommend that you obtain further experience and education before opening an account. Applicants who initially fail the assessment may re-apply for an account and redo the assessment.

35. Clause 6.8 of the PDS dealt with dispute resolution. Notesco informed potential clients, “If you have a complaint about the financial product or service provided to you,” the client should contact Notesco, which would try to resolve the complaint. “If you still do not get a satisfactory outcome, you have the right to complain to [AFCA], if your complaint is within its rules.”

Terms and Conditions

36. Notesco’s Terms and Conditions provided that the official language of Notesco was English; the Client was to refer to the legal documentation posted on Notesco’s website for all information and disclosures about the company and its activities.

37. Clause 3.1 described the investment services provided by Notesco, being those described in its Australian Financial Services Licence (reproduced at [28]). The client acknowledged that the services involved transactions in Financial Instruments not admitted to trading in Regulated Markets or a Multilateral Trading Facility; the client acknowledged and gave their express consent for executing such transactions: clause 3.2. The client also acknowledged that the services did not constitute the provision of personal advice. Further, “The Company will not provide any personal or financial product advice to the Client, in relation to … the merits of any trade. The Company deals with the client on an execution-only basis and the advice the Company gives the Client will be general advice only”: Clause 3.3. Clause 25 contained a number of exclusion clauses.

38. By clause 6.4, the client had the right to use a Power of Attorney to authorise a third person to act on their behalf in all business relationships with Notesco,

39. Clause 18 dealt with client complaints, noting that Notesco was a member of the AFCA Scheme; the client was entitled to refer disputes to AFCA for determination in accordance with its rules.

ASIC raises concerns with licensees

40. On 11 April 2019, ASIC issued media release 19-088MR (“Some AFS licensees may be breaking overseas laws”), which relevantly provided:

Australian financial services (AFS) licensees that offer OTC derivatives to retail investors located in some overseas jurisdictions may be providing unlicensed or unauthorised services in those jurisdictions.

Retail OTC derivatives are highly risky. Regulators in many jurisdictions (such as Europe, Japan, North America and China) have restricted or prohibited the provision to retail investors of certain OTC derivatives, such as binary options, margin foreign exchange and other contracts for difference (CFDs) to mitigate harm to retail investors.

AFS licensees are on notice that in addition to overseas consequences of potential breaches of overseas law, ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’.

41. On 18 April 2019, ASIC wrote to licensees expressing concern that licensees providing financial services or soliciting clients in overseas jurisdictions may be breaching the law of that jurisdiction. Licensees were asked to seek advice on the legality of any offerings made available to clients in overseas jurisdictions and, if the licensee was providing such services in breach of overseas law, to cease the provision of such services or the unlawful solicitation of such clients.

Opening an account

42. On 6 May 2019, Mr Pasquier opened a trading account with Notesco. A document entitled “Account Registration Form/KYC” (where KYC means “Know Your Client) was completed, which indicated that Mr Pasquier lived in France and was 83 years old. A personal email address in France was provided. Accompanying the application was Mr Pasquier’s French identity card and a recent utilities bill issued to him in France. The Ombudsman later noted “as an aside” that Mr Pasquier’s address on the form was incorrect. Certainly, it did not match his French identity card; perhaps he had moved in the decade since it was issued in 2009. Perhaps more significantly, his address was close to, but did not match, his address as it appeared on the utilities bill. As I understand it, these discrepancies pointed to the form being completed by someone other than Mr Pasquier.

43. According to the form, Mr Pasquier was retired and proposed to fund his trading from savings and investments. Mr Pasquier’s estimated annual income was said to be $250,000 or more. His estimated net worth was also stated to be $250,000 or more. The fact that his estimated annual income was the same as his estimated net worth was possible, but perhaps odd.

44. The form called for details of the applicant’s trading experience in foreign exchange and CFDs. Mr Pasquier was said to engage in such transactions daily, with the average volume size per transaction of $200,000 to $250,000. Reconciling these figures with Mr Pasquier’s estimated annual income and estimated net worth was less possible and, indeed, difficult.

45. Mr Pasquier was asked to provide details of any trading experience in shares, bonds or other derivative products; he disclosed no experience. The Ombudsman later attached significance to the fact that Mr Pasquier did not disclose any experience in trading in mainstream financial products yet professed significant experience in the more complex products of foreign exchange and CFDs.

46. The form called for details of Mr Pasquier’s investment knowledge. Mr Pasquier was asked whether he had attended a seminar or course on CFDs and foreign exchange and replied “No”. Mr Pasquier said, however, that he had previous work experience or relevant qualifications that helped him to understand Notesco’s products and services as well as the risks involved. That was possible; Mr Pasquier may, for example, have worked in the financial services industry before retiring, presumably, many years earlier.

47. In selecting the trading account settings, Mr Pasquier requested a leverage of 200. At the time, this degree of leveraging was not available in the EU: see [27]. Mr Pasquier declared that he had read and understood the entire text of Notesco’s legal documentation, including its PDS. However, Notesco’s legal documents were in English. Whether Mr Pasquier reads English is not known. As Notesco later advised AFCA, Mr Pasquier selected the French language as his language of choice when establishing his accounts. All email communications from and to Mr Pasquier, in evidence, are in French.

48. Ms Kanarini understands that KYC identification checks were undertaken to verify Mr Pasquier’s identity and proof of residence, as well as a search on the World Check database of politically exposed persons. His application was approved and an account opened. Notesco sent Mr Pasquier an email in the French language confirming that a trading account had been approved and opened. Two payments, each of EUR 2,500, were made that day from a credit card to the trading account.

49. The next day, on 7 May 2019, a Power of Attorney form – apparently a standard form available on Notesco’s website – was completed, by which Mr Pasquier granted a Power of Attorney to Nextrade in respect of the trading account. Mr Pasquier’s signature on the Power of Attorney bore little resemblance to his signature on his French identity card. Nor was his signature witnessed, as the form provided it should be. In these proceedings, Ms Kanarini explained that Notesco received the power of attorney through the platform DocuSign, which facilitates the execution of documents by electronic signature. Notesco submitted that this evidence indicated that a reasonable explanation was readily available for the way in which the signature was presented. It may explain why Mr Pasquier’s signature did not match his French identity card, but does not explain why his signature was not witnessed.

Trading

50. On 8 May 2019, trading began on Mr Pasquier’s trading account. As Mr Pasquier’s attorney later advised AFCA, Mr Pasquier never logged onto Notesco’s website to place trades nor executed any transactions by himself; all his positions on the platform were opened and closed by Nextrade.

51. On 10 May 2019, Notesco’s compliance department sought further time from ASIC to respond to its request for information concerning licensees potentially breaking overseas laws.

52. On 3 June 2019, Nextrade sent an email to Mr Pasquier reporting on trading results thus far. On 11 June 2019, Mr Pasquier opened a second trading account with Notesco. (Ms Kanarini said it is common for clients to open more than one account, although the Account Registration Form /KYC is only completed once.) Notesco sent Mr Pasquier an email in the French language, confirming the details of the second account. A second Power of Attorney was submitted. This time, Mr Pasquier’s signature was simply his initials and, again, unwitnessed. Two credit card payments, each for EUR 2,500, was paid to the first trading account, from which EUR 8,000 was transferred to the second trading account. (The dates in Mr Pasquier’s bank statements and his trading account do not always align). On 12 June 2019, trading began on the second account. On 27 June 2019, EUR 1,000 was transferred from a bank account to Mr Pasquier’s first trading account, from which EUR 1,000 was transferred to the second trading account.

50. On 5 July 2019, Notesco provided ASIC with a list with the number of clients in overseas jurisdictions and the total client money held for each jurisdiction. For France, 753 clients were noted with combined funds of $461,189. Also in July 2019, the European Securities and Markets Authority restriction lapsed such that further trades by Mr Pasquier in Australia were not necessarily unavailable in the European Union.

51. On 15 July 2019, EUR 20,000 was transferred from a bank to Mr Pasquier’s second trading account. A further EUR 15,000 was transferred on 17 July 2019. On 17 July 2019, EUR 30 was withdrawn from Mr Pasquier’s second trading account. On 19 July 2019, a bank transfer of EUR 5,000 was credited to the second trading account.

52. On 22 July 2019, a request was submitted to Notesco to open a third trading account for Mr Pasquier. The account request was approved and a third account opened. Notesco sent a confirmatory email to Mr Pasquier. In fact, no trades were made on the third trading account. A bank transfer of EUR 10,000 was credited to the second trading account. On 23 July 2019, a bank transfer of EUR 10,000 was credited to the second trading account. On 24 July 2019, a bank transfer of EUR 4,000 was credited to the second trading account.

53. On 24 July 2019, a request was submitted to Notesco to open a fourth and fifth trading account. Emails were sent by Notesco to Mr Pasquier, confirming that the accounts had been opened. The fourth trading account (ending 307) never traded. On 5 August 2019, three credit card payments totalling EUR 3,000 were credited to the fifth trading account. On 14 August 2019, bank transfers of EUR 14,000 were credited to the second trading account.

54. On 28 August 2019, Mr Pasquier sent an email to Nextrade (in French), which was forwarded by Nextrade to Notesco. On 29 August 2019, bank transfers of EUR 25,000 were credited to the second trading account. On the same date, the EUR 3,000 standing in the fifth trading account were transferred to the second trading account. Presumably Mr Pasquier email related to these matters. A further EUR 5,000 was credited to the second trading account following a bank transfer on 30 August 2019. On 10 September 2019, a further bank transfer of EUR 10,000 was credited to the second trading account.

55. In these proceedings, AFCA noted that there was no power of attorney for the fifth trading account. However, it does not appear that there was any trading using the fifth trading account. Rather, funds were deposited into that account and transferred to the second trading account, from which trades were made. Whether Mr Pasquier transferred the funds from one account to the other, or whether a power of attorney was needed to make such transfers, is not known (he did sent an email on the day that it happened). Nor did the Ombudsman consider this matter.

56. On 12 September 2019, Mr Pasquier sent an email to Nextrade, which was forwarded to Notesco. These emails are in French. On 21 September 2019, a request was submitted to Notesco to open a sixth trading account for Mr Pasquier. The account was opened and a confirmatory email sent by Notesco to Mr Pasquier. The sixth trading account was never used. On 24 September 2019, bank transfers totalling EUR 15,000 were credited to the second trading account. On 25 September 2019, further bank transfers of EUR 65,000 were credited to the second trading account. On 26 September 2019, a further bank transfer of EUR 5,000 was credited to the second trading account. Further bank transfers to the second trading account occurred on 8 October 2019 (EUR 10,000), 22 October 2019 (EUR 20,000), 23 October 2019 (EUR 10,000), November 2019 (EUR 2,400), 5 November 2019 (EUR 15,000), 19 November 2019 (EUR 15,000), 20 November 2019 (EUR 13,000) and 21 November 2019 (EUR 7,000).

57. On 2 December 2019, the balance of the second trading account, being EUR 919, was transferred to the first trading account. Mr Pasquier’s attorney later advised that, on 15 January 2020, Mr Pasquier received a trading statement from Nextrade reflecting the balance of his account, following which he made several unsuccessful attempts to withdraw part of this sum and found that the balance of his account was in fact EUR 4.56. Trading continued on the first trading account until 16 March 2020, when no funds remained. On the last day of trading, Mr Pasquier sent an email to Nextrade (in French). Another was sent on 24 March 2020. No response is in evidence. Mr Pasquier’s attorney later complained that Mr Pasquier had attempted numerous times to contact Nextrade’s representatives for an explanation regarding his losses, but had been unable to make contact.

58. In total, Mr Pasquier transferred funds to Notesco by bank transfer or credit card on 39 occasions. Notesco executed 6,313 trades from Mr Pasquier’s trading accounts on instructions from Nextrade. Mr Pasquier lost EUR 306,900.

The complaint

62. On 3 June 2020, Mr Pasquier lodged a complaint with Notesco, submitted by his attorney-at-law, Mr Milov. It is apparent that Mr Pasquier was then unsure whether any trades had actually been effected. According to the complaint, Mr Pasquier was not acquainted with the trading of financial instruments and did not possess knowledge, experience or qualifications concerning these financial markets. Rather, Mr Pasquier was looking for a source of additional income. He came across a website operated by Nextrade and sought further information. Mr Pasquier was contacted by Nextrade’s representatives, who made various representations, including promising a guaranteed profit.

63. According to his complaint, Mr Pasquier entrusted the management of his investment to Nextrade, which created an account with Notesco’s trading platform, created and operated his trading accounts and “had access to my client’s bank accounts and made direct transfers to the three trading accounts”. Mr Pasquier lost his life’s savings. It was suggested that Notesco should never have allowed Nextrade to illegally solicit French clients and propose highly speculative services to elderly people with “absolutely no experience”. Notesco was said to have breached European law. It was suggested that Notesco was involved in Nextrade’s nefarious activities. A refund of the funds outlaid by Mr Pasquier was demanded.

64. On 20 July 2020, Notesco advised that it had thoroughly researched the complaint and found that the transactions were in accordance with the Terms and Conditions and the powers of attorney in effect on Mr Pasquier’s accounts. Notesco referred, in particular, to the Client’s warranty that he had a full understanding of the risks of the product and was willing to accept those risks (clause 24.1(x), Terms and Conditions). Notesco also relied on the exclusion clauses.

65. On 28 July 2020, Mr Pasquier lodged a complaint against Notesco with AFCA. The online complaint noted that Mr Pasquier came across the website of Nextrade, representing themselves as acting on behalf of Notesco. “Through deception and misrepresentation, our Client invested his entire retirement savings to IronFX. All his possessions were taken by [Nextrade] through IronFX … We suspect that our Client is a victim of fraud by deception through misrepresentation of the financial services of IRONFX, illegal solicitation of the services in France and illegal management of the account by third party.” It was suggested that Notesco had not complied with the conditions laid down in a decision of l’Autorité des marchés financiers of 1 August 2019, regarding the marketing, distribution or sale of CFDs to retail investors in France.

Investigating the complaint

66. On 31 July 2020, AFCA notified Notesco of the complaint and invited Notesco to resolve the complaint directly with Mr Pasquier or provide a response outlining Notesco’s position by 30 August 2020. Further:

AFCA Jurisdiction

At this stage we have not assessed whether we have jurisdiction under our rules to consider the complaint. …

If you believe that the complaint is outside our rules, you can ask us to review this now. If the complaint is assessed as being outside our rules, we will close the complaint …

Notesco did not respond to this invitation. AFCA contends this resulted in waiver or estoppel, to which I will return at [117].

67. On 28 August 2020, Notesco responded to AFCA, noting “Mr Pasquier established his account on his own accord”. A copy of the Account Registration Form/KYC was provided. Attention was drawn to the information provided on the form to the effect that Mr Pasquier was an experienced trader who traded in high volumes of FX and CFD’s on a daily basis, with appropriate investment knowledge to understand the risks involved. Upon establishing his account, Mr Pasquier signed powers of attorney (copies of which were attached), authorising Nextrade to effect trades on his behalf. Notesco stated that it was “permitted to accept, without any inquiry or investigation, any orders or instructions for the purchase and sale of Financial Instruments from the Client’s trading accounts from Nextrade.”

68. As to the suggestion that Notesco had breached European law, Notesco advised that, when its website was accessed by an IP address from within the European Union, a prospective client received an automatic message informing them that the website was not directed to European Union residents and giving them the option to redirect to Notesco’s EU regulated website. Notesco suggested that any issues which Mr Pasquier had regarding the performance of his trading accounts should be addressed to Nextrade.

69. On 31 August 2020, AFCA advised Notesco that it was progressing the complaint to the Case Management stage. The complaint would be allocated to a member of staff who would review the complaint and contact Notesco. The complaint was allocated to Case Manager, Ms Chng.

70. On 23 October 2020, Ms Chng sent Ms Kanarini an initial case management letter advising that, as the complaint was not resolved, it had moved to the next stage of AFCA’s process. Ms Chng gave Notesco and Mr Pasquier 21 days to supply information needed, “I will review all the information and provide a preliminary assessment. If you or Mr Mikov do not accept the preliminary assessment, we will issue a final decision.” Ms Chng set out her understanding of the complaint and Notesco’s position. Ms Chng identified the issues which AFCA would investigate, being whether Notesco was responsible for the conduct of Nextrade, whether Notesco adequately assessed Mr Pasquier’s suitability to trade and, if there was a breach, what was the appropriate compensation to Mr Pasquier. Notesco was requested to provide a detailed response to these issues by 13 November 2020 including the reasons for Notesco’s position, together with copies of supporting information (a list of documents was provided) and answers to specific questions, including as to any relationship between Notesco and Nextrade.

71. On 4 November 2020, Mr Pasquier’s attorney provided the information requested by AFCA. AFCA provided this to Notesco. Mr Pasquier claimed that he was not aware of the risk of trading until he had lost his entire deposit. Rather, he was misled as Nextrade assured him that the risk was insignificant (5% risk exposure) in view of the profits that he could achieve. Mr Pasquier’s attorney maintained that there was a relationship between Notesco and Nextrade. Further, the power of attorney “signed by our Client” was said to be null and void as it breached EU law by permitting an unauthorised financial provider to provide investment services. (Elsewhere, Mr Pasquier’s attorney referred to the power of attorney “signed by our Client”, that is, it was not suggested that Mr Pasquier had not signed the powers of attorney.) However:

Mr Pasquier did not establish his account with [Notesco] by himself. … his account manager [with Nextrade] created and operated the accounts. … As an old retired person, who was not fluent in English and had basic computer skills, it is obvious that our client did not fill in the information in the Account Registration Form/KYC and he could not have understood the text of the T&C and the … policies of [Notesco] since they are available only in English on Notesco’s website. For this reason, we suppose that the document was filled in by his account manager [at Nextrade].

72. The due date for Notesco’s detailed response came and went. AFCA sent a follow up email on 16 November 2020. An extension was sought and given to 25 November 2020. On 25 November 2020, Notesco provided the information requested by AFCA. Notesco repeated the information disclosed on the Account Application Form in respect of Mr Pasquier’s suitability to trade. All new account emails were sent to him in the French language, “Thus, there can be no confusion on the part of the Client regarding the establishment of his accounts with the Company.” As to the suggestion that a representative from Nextrade had completed the account registration for Mr Pasquier, “we note that it is not the burden of the Company to ensure that the Client has not provided their own personal information to a third party”. However, to establish an account online, the client must register using their individual email address, to which is sent unique login credentials to use when accessing their accounts. The client actively participated in establishing his account and continued to make deposits from May 2019 on. “[I]t is also worth mentioning that the Client had access to view his trading account statements and trading activity at all times.”

73. Notesco advised that it strictly provided execution-only services for the Client, whilst any trading decisions were made by Nextrade. As such, Mr Pasquier’s complaint should be directed to Nextrade. Further:

We also note again that the Client had access to his accounts at all times to view his transactions and balances, and continued actively making deposits into his account, with no complaints made by the Client to the Company regarding his trading activity or Nextrade during this time. The Client was fully capable to revoke the [power of attorney] he had in place with Nextrade at any time, but instead chose to continue the relationship and file a complaint only in June 2020.

74. On 9 December 2020, Mr Pasquier’s attorney submitted its response to Notesco’s position. In particular, it was said that Nextrade had completed the Account Registration Form/KYC; the information contained as to Mr Pasquier’s experience in these financial products was incorrect. Nor was Mr Pasquier in a position to understand Notesco’s PDS or Terms and Conditions as the documents were not available in the French language.

75. AFCA provided Mr Pasquier’s response to Notesco on 10 December 2020. On 23 December 2020, AFCA advised Notesco that Mr Pasquier’s complaint was progressing to the next step. Ms Chng would now review the information provided by Notesco and Mr Pasquier and provide a preliminary assessment of the complaint.

Consulting colleagues

76. By 18 January 2021, Ms Chng had prepared a draft recommendation and sought quality assurance (QA) from another member of staff, Andrew Do. In the draft recommendation, Ms Chng noted the complainant’s allegations regarding Nextrade, including that Nextrade was not authorised to provide services in the European markets “and hence the Power of Attorney he signed was null and void”. (Thus, Ms Chng proceeded on the basis that Mr Pasquier had signed the powers of attorney.) Ms Chng concluded that Notesco was not responsible for the conduct of Nextrade, including because the powers of attorney indicated that Nextrade was Mr Pasquier’s agent to operate his account with Notesco. However, Notesco did not adequately address Mr Pasquier’s suitability to trade at the time the account was open and, having regard to RG 227, Notesco’s PDS was deficient as it did not explain why the PDS did not meet the benchmark in respect of non-Australian residents.

77. Ms Chng noted that Notesco relied on the information provided on the application to form the view that Mr Pasquier was suitable to trade. Mr Pasquier said that the application was filled out by Nextrade and (perhaps erroneously) Ms Chng concluded that, based on the Power of Attorney, “I accept that the application was not completed by the complainant”. (The conclusion was certainly available but, as the Power of Attorney was dated the day after the account was opened, the reasoning may not have been sound; there was some confusion amongst AFCA officers as to the date format of the documents). Nonetheless, Ms Chng considered, “In the absence of other suitability assessments taken by the financial firm”, the questions on the application form fell short of the requirements of RG 227 as they did not adequately assess the complainant’s understanding of, and experience with, the product.

78. As to whether the complainant was entitled to compensation, Ms Chng’s draft recommendation considered that Mr Pasquier was entitled to compensation but considered it fair and reasonable in the circumstances to reduce his compensation by 20% for his failure to take reasonable care when dealing with Nextrade. To this, Mr Do commented (and his comment is only partially reproduced in the printed document in evidence),

Have you considered any level of contribution; it looks like [Mr Pasquier] wanted [Nextrade] to ‘invest’ his money, and it really appears that the trading decisions were ….

Presumably, Mr Do was suggesting that Ms Chng turn her mind to whether a further deduction of the compensation payable by Notesco should be made by reason of Nextrade’s involvement. To this comment, Ms Chng replied, “I am considering 10-20% contributory loss – subject to my discussion with Luke [McCoy, Team Manager]”.

79. On 21 January 2021, Mr Do provided his comments, together with a detailed explanatory email to Ms Chng, suggesting that he did not consider the recommendation was “ready to issue just yet and you will need to investigate some issues further.” Further:

The loss issue appears quite severe for the breach. While the [Financial Firm] arguably should not have opened a trading account for [Mr Pasquier], the losses came about by trading decisions, performed by [Mr Pasquier] or his agent. Have you considered any element of contribution? I had a look at some of the correspondence to see if [Mr Pasquier] could have been aware of his losses at an earlier time, but it is in French. You will need to get those documents translated.

One issue I believe you should turn your mind to is whether the [Financial Firm] has complied with its obligations to act efficiently, honestly and fairly. [Mr Pasquier] is an EU resident and while it is unclear on my reading of the facts when [Mr Pasquier] applied for the account, the trading activity was in the midst of the ASIC notice about [the Financial Firm] needing to comply with foreign jurisdictions. …

Next steps – I suggest you book yourself in with an ombudsman to go through your reasoning. Given the significance of your award, I want you to make sure you have covered off all angles.

You will also need to get the French documents translated. Even if the complaint does not turn on those documents, we need to demonstrate how we have fairly reviewed and considered all parties’ submissions.

80. According to AFCA’s internal records, Ms Chng discussed Mr Do’s comments with him and made a file note recording matters for attention:

1.   consider the contribution on part of [Mr Pasquier] (i.e. the validity of the [power of attorney] and the trading activity prior to the application i.e. June 2019)

2.   consider contribution on part of [Nextrade] (as the agent)

3.   consider ‘honestly, efficiently and fairly’ re compliance or non-compliance of the local law by [Notesco] in the foreign jurisdiction (OPTIONAL).

Part of the bracketed text to item 1 related to the confusion regarding the date format of documents, that is, whether trading had taken place before the powers of attorney were provided.

81. On 22 January 2021, Ms Chng contacted Ms Kanarini by email, advising that she had completed the review of the complaint and wished to discuss the matter. They spoke on 28 January 2021. According to Ms Chng’s internal note following the telephone call, Ms Chng advised that she considered that Notesco had failed to adequately assess Mr Pasquier’s suitability to trade, including having regard to RG 227, and liability would follow. “In terms of any contributory loss, I am currently thinking 10-20% by the complainant, but I have yet [to confirm] with the Ombudsman.”

82. According to Ms Kanarini’s recollection of the telephone call, Ms Chng said she would seek further guidance about the discount for Mr Pasquier’s contribution to his own loss “from the Ombudsman who is responsible for this Complaint.” According to Notesco’s contemporaneous email reporting on the telephone call:

In any case, she did state that AFCA also takes into account the client’s role in assessing how much of the responsibility for the loss falls with the client in determining their recommended compensation. For example, the length of business relationship and how far into the relationship the losses occurred.

In our case, the client’s trading activity/losses were incurred over a 9 month period. Even taking into account the fact that the client made a number of deposits over this period, AFCA still places most of the burden on us on the argument that if we had assessed the client’s suitability correctly to begin with he wouldn’t have invested/lost.

She suggested we agree to compensate the total loss amount at a 10-20% discount. She originally suggested 10%, but when pushed she indicated maybe AFCA could agree to 15%, but definitely nothing over 20%.

If Mikov agrees as well then the case is closed and we pay the agreed amount. If he rejects then this would go to the ombudsman for final determination who can always decide that we are responsible for the full amount.

83. Following the telephone call, Ms Chng forwarded her draft recommendation to Mr McCoy “for our discussion tomorrow on [Mr Pasquier’s] contributory loss”. Ms Chng provided a recent determination made by Mr Crowhurst on another Notesco complaint (the Kakouridis determination), advising that she had followed the same approach as the complaints had similar facts. “I am currently considering 10-20% as contributory loss. Your thoughts would be appreciated.”

84. Mr McCoy provided his initial thoughts later that day: given Mr Pasquier’s age, it was difficult to see how he failed to exercise reasonable care of his life savings as, on the face of it, he appeared to be a victim of the conduct of Nextrade. “Does the failure of [Mr Pasquier] to take reasonable care in engaging the services of [Nextrade] impact the loss which flows from the conduct of [Notesco] failing to assess suitability?” It did not appear that Mr Pasquier had any understanding of the financial instruments that would be traded or the heightened risks of leveraged instruments, “Personally, I am not convinced the complainant has contributed to the loss incurred due to the conduct of Notesco … if [Mr Do] & yourself are of a different view that is fine. We can discuss tomorrow.”

85. On 29 January 2021, Mr McCoy sent an email to Mr Crowhurst, copied to Ms Chng, attaching the Kakouridis determination. Mr McCoy asked whether he could “pick your brains on whether it is appropriate to attribute contributory negligence to the complainant” in Mr Pasquier’s case. Mr McCoy noted that Ms Chng had followed Mr Crowhurst’s earlier Kakouridis determination, which did not find contributory negligence on the part of the complainant. Mr McCoy advised, “I am no expert in contributory loss and given the quantum of loss in this case, I wanted to seek out your specialist input.” Mr McCoy repeated his initial thoughts and asked whether it was necessary to book a consultation with Mr Crowhurst or whether the answer was straightforward given the recent determination.

86. Mr Crowhurst replied promptly, copied to Ms Chng, “I don’t see contribution in this case either.” Whilst Mr Pasquier appeared to have been a victim of Nextrade, Notesco had an obligation to assess his suitability, “Had it done so properly, it would not have permitted him to trade, irrespective of his agent. That’s not something [Mr Pasquier] contributed to. Hope this helps.”

87. On 29 January 2021, Ms Chng wrote to Notesco advising, on the issue of contributory loss by Mr Pasquier, “I have sought further guidance from the Ombudsman since our conversation yesterday. While I initially proposed a 10-20% contributory loss by the complainant, the recent guidance provided to me is that there is no contributory loss in this case.” Obviously enough, the ‘”recent guidance” was that provided by Mr Crowhurst, although Ms Chng set out the substance of the guidance rather than the (informal) guidance in full.

88. On 1 February 2021, Ms Chng again requested Mr Do to provide quality assurance on her revised recommendation:

I have consulted with my TM (Luke) and the Ombudsman who both agree that there is no contributory loss in this case. The approach is in line with the [Kakouridis] case …

With the correspondences in French, they appear to be related to welcome letter from [Notesco] to [Mr Pasquier] for registering the 6 accounts. I do not think the decision will turn on those documentations. Getting the documentations translated may take up more time which will affect us providing a timely service to the parties.

By email, Ms Chng also provided Mr Crowhurst’s email regarding contributory loss and attached the Kakouridis determination. Ms Chng advised that she and Mr McCoy were happy to follow the same approach.

89. Ms Chng also prepared a “Possible systemic issue or serious contravention memo”, noting that AFCA had received an increasing number of complaints involving claims that French citizens had been led to trade by Nextrade on Notesco’s platform without being properly assessed for their suitability to trade as required by RG 227. (Mr Pasquier’s complaint was one of ten made by Mr Milov in respect of users located in France that had been approached by Nextrade.) AFCA rule A.17.1 anticipates that AFCA will investigate systemic issues, being an issue likely to have an effect on consumers in addition to the Complainant.

Preliminary assessment

90. On 3 February 2021, Mr Do provided his further comments on Ms Chng’s draft recommendation. Later that day, Ms Chng issued her recommendation to Notesco. Ms Chng concluded that Mr Pasquier had been misled by Nextrade but Notesco was not responsible for Nextrade’s conduct. However, Notesco did not adequately assess Mr Pasquier’s suitability to trade at the time of the account opening, which failure caused his loss. The complainant should be put in the position as if he had not been able to trade on Notesco’s platform and was entitled to a full refund.

91. As for compensation, Ms Chng noted that the onus was on the complainant to establish, on the balance of probabilities, that the financial firm breached its duty, the complainant suffered a loss, and the breach caused the loss.

The complainant does not need to show that the breach was the only, or even most significant, cause of the loss. It must, however, be a decisive consideration. In general, the application of the ‘but for’ test is sufficient to prove the necessary causal connection.

As to the suggestion that Notesco was operating unlawfully in the European Union, Ms Chng advised that it was not necessary for her to make a finding as the compensation award did not turn on this issue.

92. AFCA advised that, if Notesco wished to reject the recommendation, it must write within 30 days setting out its reasons for rejecting the recommendation and providing any new and relevant information. “If you reject the recommendation, and there is no new information, then a determination will be issued based on the information already on file. I [Ms Chng] will assist the Ombudsman with their investigation. When I am satisfied all information is available to decide the complaint, it would be referred to the Ombudsman for a determination. The Ombudsman will review all of the evidence on the file and make their own decision … the determination may be more or less favourable to you than the recommendation.”

Notesco’s response

93. On 5 March 2021, Notesco advised that it did not accept AFCA’s recommendation. Whilst accepting AFCA’s conclusions in respect of Notesco’s lack of affiliation with Nextrade, Notesco advanced three reasons why it did not accept AFCA’s recommendation. First, Notesco was not legally obliged to assess Mr Pasquier’s ability to trade; ASIC RG 227 was not legally enforceable and Notesco’s PDS was not defective. Second, Notesco’s assessment of Mr Pasquier’s suitability to trade was adequate in the circumstances and, further, Notesco did not accept that, if it had undertaken a different assessment, a different result would have followed.

2.8   In making an assessment, an issuer should be able to assume, in the absence of any reason to doubt, that representations made to it are true. Notesco had no reason to believe that the information provided to it concerning the complainant was not true or had not been provided by the complainant. Notesco sent the login information used to access the account opening to an email provided as that of the complainant and which appeared to belong to the complainant. The person opening the account had access to the complainant’s passport so it may be inferred they were the complainant or at least a person acting on the complainant’s behalf which the complainant in his own discretion had entrusted to do so.

2.9   Even if [Nextrade] completed the account opening information in respect of the complainant, having used the login in the email sent to the complainant’s email address, it is reasonable to infer that [Nextrade] was authorised to do so by and on behalf of the complainant. Notesco acted reasonably and properly in conducting the assessment on the basis the representations that were made on behalf of the complainant had been made by the complainant and were true. Fairness does not demand investigating whether representations apparently made by the complainant were true, and it would be inefficient to do so.

94. Notesco again pointed to the information provided in the Account Registration Form/KYC, which suggested that Mr Pasquier had significant and relevant experience. Notesco did not accept that his age should give rise to concerns about his understanding.

95. Third, Notesco made submissions on causation. Notesco suggested that the absence of more extensive checks on the client’s knowledge and experience did not cause the loss as, given the existing questions were answered incorrectly according to the client, there was no basis to think any additional questions would have been answered truthfully so as to change the outcome of Notesco’s assessment. If Mr Pasquier had been asked to complete a detailed quiz, then presumably Nextrade would have completed the quiz and demonstrated the required understanding.

96. Notesco’s submission did not address the absence of any discount to the compensation by reason of Mr Pasquier or Nextrade’s contribution to what had occurred. Nor did Notesco expressly request that the complaint proceed to Determination under rule A.12.3(b)(ii). However, it was apparent from AFCA’s letter of 4 February 2021 that, if Notesco rejected AFCA’s recommendation, then the matter would proceed to Determination and, in any event, the complaint would proceed down that path as Notesco failed to accept AFCA’s preliminary assessment within the time frame specified: Rule A.12.3(b)(i). Notesco provided reasons for disagreeing with the preliminary assessment which, assuming Notesco’s response activated the pathway described in rule A.12.3(b)(ii), the AFCA Decision Maker was obliged to consider: rule A.12.5. (I do suggest, however, that AFCA review its template for the letter sent in respect of Mr Pasquier’s complaint on 3 February 2021 to make the pathways described in rule A.12.3 clearer, not only to the complainant and the Financial Firm, but to the AFCA Decision Maker as to how they are obliged to approach their task.)

Moving to a determination

97. On 8 March 2021, Ms Chng informed Ms Kanarini that the complaint would now be referred to an Ombudsman for a determination. A copy of Notesco’s reasons for rejecting the recommendation had been provided to Mr Pasquier, who had been invited to respond. “If there is anything else you wish to add at this stage, you should contact me immediately … Any further submissions received before the final decision is issued will be considered by the decision-maker.”

98. On 11 March 2021, Mr Pasquier’s attorney provided comments on Notesco’s submission. Mr Pasquier challenged Notesco’s position that it was not obliged to assess his suitability to trade, or that Notesco did so. Reliance was placed on RG 227. Mr Pasquier was offered leverage which was then unavailable to EU residents; this was said to be a breach of Notesco’s obligation under Australian law to act efficiently, honestly and fairly. Mr Pasquier submitted that Notesco acted in violation of EU law, French law and consequently Australian law by making its products available to French clients without being authorised in the EU and allowing Mr Pasquier to trade at significantly higher leverage than permissible under French law.

99. On 12 March 2021, Mr Pasquier’s response was provided by AFCA to Notesco, who was advised that the case had been referred to the Ombudsman for a final determination. If Notesco wished to make further submissions, it should do so within two business days.

Further consultation

100. On 16 March 2021, Notesco advised that it would provide its response by 18 March 2021. Ms Chng asked Mr Crowhurst to await Notesco’s response. Mr Crowhurst agreed. He had, by then, finished a draft and asked Ms Chng what she thought about it. Ms Chng responded:

Re Causation of loss – on reflection, I think [Notesco’s] liability should [be] limited to a certain percentage of the complainant’s loss, not the total loss, given the extent of the responsibility of [Nextrade] whose acts or omissions also caused that loss. But for [Notesco’s] breach, [Mr Pasquier] still would have entrusted [Nextrade] with his savings to invest. It may not be fair and equitable for [Notesco] to bear the total cost of [Mr Pasquier] given the [Nextrade’s] liability. What do you think?

101. Mr Crowhurst replied, “I’ve been wrestling with contribution.” He identified two problems:

1.   There is no evidence [Nextrade] is engaging in this manner with any other service provider and their documentation is set up for Iron FX. As a result, there is nothing to base the assumption [Mr Pasquier] and [Nextrade] would have just found another provider and

2.   [Nextrade] isn’t a member so we can’t assess any liability. If I reduce the award by 50%, the complainant (who is otherwise blameless) loses out, unless he goes and sues [Nextrade] directly. By attributing 100% of the award to the failure to prevent the accounts being opened, the [Notesco] will put the complainant back in the position he should have been in but for the ability to trade. If they wish to make the case that [Nextrade] has liability, they can do so through legal action contributing to their loss due to [Nextrade’s] actions.

102. Ms Chng replied, asking whether she could “come back to you tomorrow re contribution? I am not too comfortable with the ‘direct loss’ in this case. Given the implication this case may have on the batch, I wanted to have a further look into the file.”

103. Later on 17 March 2021, Notesco provided its response to Mr Pasquier’s comments, limited to the suggestion that Notesco was breaching European law by offering leveraged investments not available to EU residents.

104. On 18 March 2021, deliberations continued within AFCA in respect of causation and loss. Ms Chng emailed Mr Crowhurst, advising that she agreed with his analysis that Mr Pasquier could have invested with another investment company. Further, “I think there isn’t enough fact/information for us to say that the loss was partly caused by [Nextrade] … and therefore [Notesco’s] liability should be apportioned on fairness grounds … At this stage, we just don’t have enough”. Further, an affiliate agreement between Notesco and Nextrade included a clause which may entitle Notesco to sue Nextrade for breach, “That probably makes determining 100% liability on [Notesco] more plausible.” Mr Crowhurst queried the second comment, where Notesco denied any association with Nextrade and said there was no affiliate agreement, which Ms Chng acknowledged.

Determination

105. On 19 March 2021, AFCA issued its Determination, prepared by Mr Crowhurst, who noted “Further submissions provided after the recommendation have been considered.” The Ombudsman was satisfied that the case manager’s recommendation contained an accurate summary of the complaint, the issues, applicable paragraphs of the Rules and relevant law. The Determination then summarised Notesco’s objections to the recommendation, which Mr Crowhurst proceeded to deal with in turn.

106. The first objection was that RG 227 did not impose a legal obligation to address a client’s ability to trade. The Ombudsman noted that AFCA Rule A.14.12 required a decision-maker to consider what is fair in all the circumstances having regard to inter alia good industry practice. “While not strictly legally binding in its own right, RG 227 … is a cornerstone of good industry practice. … I am satisfied that it is appropriate for me to have regard to the industry guidance contained in RG 227 to aid in informing an outcome which is fair in all the circumstances.” The Ombudsman noted that RG 227 applied on an ‘if not, why not’ basis such that the benchmark did not need to be met in the terms set out in the guide but, if not met, Notesco still needed to set out the alternative measures it had to mitigate the concern expressed in RG 227. The recommendation appropriately dealt with Notesco’s failure to do so in its PDS. Notesco had not cavilled with this analysis, apart from submitting it did not need to comply with RG 227 as the regulatory guidance was not binding.

107. Turning to Notesco’s second objection – that it was entitled to rely on the information in the application – the Ombudsman accepted that Notesco should be able to rely on the information provided in the application as being accurate:

However, the self-assessment of an applicant does not absolve the financial firm of its obligations to assess a prospective investor against qualifying criteria that address the investor’s understanding of and experience with the product. Any anomalies or defects in the application should be examined, not ignored.

108. The Ombudsman then reviewed the Account Registration Form/KYC in some detail, identifying three anomalies in the information provided by Mr Pasquier. First, the information provided regarding Mr Pasquier’s experience “does not make sense”. He declared no experience in trading more straightforward products – shares, bonds or other derivatives – but apparently had daily experience in trading high value contracts in highly complex products. It was unlikely that Mr Pasquier possessed the experienced stated on the application form; more likely “it reflected the experience of the person making the application on the complainant’s behalf”. As Notesco had Mr Pasquier’s contact information, and there was then no power of attorney on file, it would have been a simple matter to contact the complainant directly and, had Notesco done so, the Ombudsman was satisfied it was more likely than not that it would have been readily apparent that Mr Pasquier did not complete the application and the answers provided were not applicable to him.

109. Second, the application was completed through the Australian website despite the complainant being a resident in France. A ‘pop-up’ warning would have informed the applicant, “This website is not directed at EU residents. Please let us know how you would like to proceed.” Two buttons would then appear being either “Continue Anyway” or “Visit our EU Regulated Website (Recommended for EU residents)”. There was no other information provided such that the applicant was not informed that they had access to greater leverage than was permissible in the European Union, leading to greater risk and the chance of exacerbated losses. That is, while Notesco’s website expressly stated that its products were not intended for use by EU residents, the website did not clearly state the specific and practical consequence which this posed to Mr Pasquier, being his ability to access a riskier product with the chance of greater losses.

133. AFCA pointed to the PDS, which made repeated reference to financial products and supported the contention that Notesco was providing a product or service that was financial in nature. The definition contemplated that a foreign exchange contract or a derivative contract could be a Financial Service. Providing a platform to enable such trades to take place must be considered to be a product or service “in connection with” a CFD or foreign exchange contract. Whether Mr Pasquier said he was trying as seeking to make a profit could not have the effect that trading in CFDs on the platform could not be a Financial Service.

134. The chapeau to the definition of Financial Services is broad, requiring simply that a product or service be “financial in nature”, being words to be interpreted as having their everyday meaning and usage: Rule E.2.5. These products or services include some 13 products or services then listed. Rule E.2, “Interpretation of AFCA’s rules” contains general rules for interpretation including:

E.2.4   The words “including”, “such as” or “for example” when introducing an example, does not limit the meaning of the words to which the example relates, that example or examples or a similar kind.

138. As Stevenson J observed in D H Flinders, the effect of rule E.2.4 is that what follows in (in this case) subclause (b) beyond the word “including” does not limit the meaning of that which proceeds it, being “a product or service that is financial in nature”: at [84]. The authorities relied upon by Notesco concern the Latin maxim expressio unius est exclusio alterius, that is, to express one thing is to exclude others. That is not the relevant canon of construction here, particularly where it is specifically excluded by rule E.2.4.

139. Further, a Financial Service not only includes the 13 products and services specifically listed but a product or service, financial in nature, which is “in connection with” the 13 listed products and services. Like “relate to”, the phrase “in connection with” is capable of considerable breadth but takes its colour from its surroundings: R v Orcher (1999) 48 NSWLR 273; [1999] NSWCCA 358 at [28] (per Spigelman CJ). In Orcher, the Chief Justice quoted with apparent approval the judgment of Davies J in Hatfield v Health Insurance Commission (1987) 15 FCR 487 at 491, “Expressions such as ‘relating to’ [and] ‘in connection with’ … may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear.” See likewise Fraser v The Irish Restaurant & Bar Co Pty Ltd [2008] QCA 270 at [40], per Muir JA, with whom McMurdo P agreed.

140. As I read rule B.2.1(a) together with the definition of Financial Service, AFCA’s jurisdiction is broad indeed, not limited to the specific 13 products and services enumerated in rule E.1.1 (definition of “Financial Service”) but also a product or service “in connection with” such products or services and, more broadly again, a product or service that is not amongst the specific 13 products and services nor even “in connection with” such products or services but simply a product or service that is “financial in nature”. It is sufficient that the complaint “arises from or relates to” such a product or service. The breadth of AFCA’s jurisdiction is consistent with the legislative intention as expressed in the Revised Explanatory Memorandum, being to establish the AFCA Scheme as a “one stop shop” to resolve disputes about products and services provided by Financial Firms: see [4]-[5].

141. The CFDs and Margin FX contracts offered by Notesco via its trading platform, as more fully described in the PDS, and acquired by Mr Pasquier, meet the description in sub-clause (b)(ix) of the definition of Financial Service. Whether Mr Pasquier intended, by trading in these products, to make a profit – presumably a sentiment shared by many investors – does not alter the attributes of the product or service. If the personal objective of a complainant in acquiring a product or using a service were relevant to assessing whether the complainant received a Financial Service, then I would expect the description in sub-clause (b)(ix) to refer to “a facility under which the complainant seeks to manage financial risk …” rather than “a facility under which a person seeks to manage financial risk …”. (See likewise the description in sub-clause (b)(x)). That is, the definitions describe the objective features of the product or service and do not depend upon a complainant’s subjective intention as to what they intended to achieve by acquiring it.

142. Whether Mr Pasquier acquired these products in person, by post or using an online platform is not to the point. If it matters, I consider that Notesco’s trading platform, whether used personally or via an authorised agent, comprised a product or service “in connection with” the products described in sub-clause (b)(ix), which Notesco provided on that platform. An investor could not acquire the products without using the trading platform. The connection is direct. Mr Pasquier’s complaint arises from or relates to the provision of a Financial Service by Notesco as his core complaint is that he should never have been allowed to trade on the platform and thereby acquire the products. True it is that Mr Pasquier also complained about Nextrade. AFCA has no jurisdiction to determine that complaint as Nextrade is not a member of the AFCA Scheme. But this does not detract from the fact that AFCA does have jurisdiction over Mr Pasquier’s complaint so far as it arises from or relates to the provision of a Financial Service by Notesco.

143. For completeness, Rule A.8.3 provides that AFCA may decide that it is not appropriate to continue to consider a complaint where the complaint is without merit, the Complainant has suffered no loss or has already been appropriately compensated, or the Financial Firm committed no error. In that event, AFCA will follow the process to exclude a complaint following the procedure in Rules A.4.5 and A.4.6: Rule A.8.3. Whilst Notesco relied on Rule A.8.3 as a jurisdictional component, this is not correct: the rule permits AFCA, when considering a complaint over which it has jurisdiction, to decide not to exercise that jurisdiction by reason of the matters referred to in Rule A.8.3.

IMPARTIALITY

144. The parties agreed that a key issue for determination is whether AFCA failed to comply with its obligations of impartiality, independence and fairness. Notesco submitted that it was apparent that Mr Crowhurst's "further guidance" on contributory loss had the effect that Ms Chng was effectively directed not to afford the issue any consideration. It was further contended that failure to disclose the “further guidance” led to a lack of procedural fairness, as Notesco was deprived of the opportunity to make submissions in respect of that guidance. It was said that Mr Crowhurst had already determined the issue on the basis of nothing more than high-level, internal emails highlighting the key facts of the complaint. The absence of impartiality and independence in the decision-making process was manifest even before the complaint had reached the Determination stage.

145. In Henry, Re; JL v Secretary, Department of Family and Community Services [2015] NSWCA 89, McColl JA (with whom Meagher JA agreed) noted at:

[153]   Procedural fairness is an aspect of the obligation to ensure a fair trial. It requires “a fair hearing, not a fair outcome”. Accordingly, “the relevant question is about the [decision-maker’s] processes, not its actual decision [and] the statutory framework within which a decision-maker exercises statutory power is of critical importance when considering what procedural fairness requires, [while] the particular content to be given to the requirement to accord procedural fairness will depend upon the facts and circumstances of the particular case“: SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs [2006] HCA 63; (2006) 228 CLR 152 (at [25]–[26]) per Gleeson CJ, Kirby, Hayne, Callinan and Heydon JJ.

[154]   A failure to afford procedural fairness constitutes jurisdictional error: Re Refugee Review Tribunal; Ex parte Aala [2000] HCA 57; (2000) 204 CLR 82 (at [26]–[42]) per Gaudron and Gummow JJ (Gleeson CJ agreeing (at [5]); (at [170]) per Hayne J; Spanos v Lazaris (at [16]) per Basten JA (Beazley and Bell JJA agreeing); see also Plaintiff S10/2011 v Minister for Immigration and Citizenship [2012] HCA 31; (2012) 246 CLR 636 (at [97]) per Gummow, Hayne, Crennan and Bell J.

[155]   A fair trial is, of course, one free of bias: “[i]mpartiality is an essential characteristic of courts“: British American Tobacco Australia Services Ltd v Laurie [2011] HCA 2; (2011) 242 CLR 283 (at [32]) per French CJ. Bias on the part of the primary judge would constitute jurisdictional error if established: Mark Aronson and Matthew Groves, Judicial Review of Administrative Action, 5th ed (2013) Lawbook Co (at [1.140]; [9010]).

146. The impartiality of the decision-maker – or the absence of bias – must be considered in the legal, statutory and factual context in which a decision is made: Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20 at [20] per Kiefel, Bell, Keane and Nettle JJ. A person’s involvement in the matter antecedent to the decision may be incompatible with their participation in the decision due to the possibility of bias. A decision-maker may lack impartiality where they have prejudged the matter. The real question in such matters is whether a decision-maker is impartial given their particular involvement in the matter: Isbester at [31].

147. Isbester is a helpful example. A committee of the Council decided that Ms Isbester’s dog should be destroyed. Ms Isbester had earlier been convicted of an offence, when her dog attacked a person and caused serious injury. A member of the committee, Ms Hughes, had earlier prosecuted that offence. The High Court (per Kiefel, Bell, Keane and Nettle JJ) concluded that there was an “incompatibility in roles” such that the prosecutor was disqualified from sitting on the committee as it gave rise to the possibility of deviation from the true course of decision-making. At [42]:

It is not realistic to view Ms Hughes' interest in the matter as coming to an end when the proceedings in the Magistrates' Court were completed. A line cannot be drawn at that point of her involvement so as to quarantine the Magistrates' Court proceedings from her actions as a member of the Panel. It is reasonably to be expected that her involvement in the prosecution of the charges created an interest in the final outcome of the matter.

148. The Court considered that it was “not necessary to analyse the psychological processes to which a person in such a position is subject. … it might reasonably be thought that the person’s involvement in the capacity of prosecutor will not enable them to bring the requisite impartiality to decision-making”: at [46]. The Court observed at [50]:

… This conclusion implies nothing about how Ms Hughes in fact approached the matter. It does not imply that she acted otherwise than diligently, and in accordance with her duties … or that she was not in fact impartial. Natural justice required, however, that she not participate in the decision and because that occurred, the decision must be quashed.

149. This case is perhaps unusual as, by reason of AFCA providing discovery of its internal working documents, the Court and parties have greater insight in the process undertaken by AFCA in implementing the complaint resolution process described at [11]-[20]. These documents reveal a problem in how that process was implemented in this case. A key feature of the AFCA Scheme is that AFCA is independent vis-à-vis the complainant and the Financial Firm. I consider, however, that the complaint resolution processes described in the AFCA Rules also require independence and impartiality within AFCA as the process moves from preliminary assessment to Determination.

150. According to rule A.12.1, the preliminary assessment is provided by “AFCA” and thus may be prepared by any member (or members) of staff, without specifying their level of seniority or any particular qualifications. Following a preliminary assessment, however, the complaint “proceeds to a Determination”, being a distinct stage or process. This separation is confirmed by rule A.21.2: “The Chief Ombudsman … is able to authorise an employee or contractor to AFCA to carry out any responsibility of AFCA other than making a Determination.”

151. The AFCA Rules then specify, with precision, the qualifications of the person who is to make the Determination, how that person is to be selected, and the decision making approach they must take. A Determination is to be made by an AFCA Decision Maker, being an Ombudsman, Adjudicator or AFCA Panel: rule E.1.1. A Determination is defined as “a decision made by an AFCA Decision Maker …”: Rule E.1.1 (definition of “Determination”). Further, when allocating a complaint to an Ombudsman or Adjudicator, AFCA’s Chief Ombudsman or their delegate “must” consider whether the Ombudsman or Adjudicator “will be able to determine the complaint fairly and impartially”: rule A.13.3.

152. Notably, the AFCA Decision Maker is not bound by, nor even obliged to have regard to, the preliminary assessment: rule A.14.2. If the AFCA Decision Maker is making a Determination at the request of a party, then the party’s reasons for disagreeing with the preliminary assessment must be considered, but the AFCA Decision Maker is not limited to those reasons: rule A.12.5. That is, the AFCA Decision Maker is looking at the matter afresh.

153. Whilst, in making a Determination, the Ombudsman will need to be provided with the preliminary assessment and relevant material gathered by AFCA staff in the course of preparing that assessment, together with the parties’ reasons for disagreeing with it, I consider that the AFCA Rules otherwise require that the AFCA Decision Maker will act separately when making their Determination. In particular, the rules do not envisage that the AFCA Decision Maker will have any involvement in the preliminary assessment, nor that those who made the preliminary assessment will be involved in making the Determination. Otherwise, the Determination will not be “by an AFCA Decision Maker”. Further, an Ombudsman’s involvement in the preliminary assessment may impede their ability to “determine the complaint fairly and impartially”: rule A.13.3.

154. There is nothing wrong with a case manager, entrusted with a complaint, consulting colleagues when investigating a complaint and preparing a preliminary assessment. It is apparent that Ms Chng went to considerable effort to ensure that the preliminary assessment was reasoned and reasonable, checking with more experienced colleagues for their insights and suggestions, before issuing the preliminary assessment. It is apparent that differing views were held by AFCA’s staff as to whether any compensation payable by Notesco should be reduced by reason of Mr Pasquier or Nextrade’s contribution to the loss. Ms Chng considered that the loss should be reduced by 10% to 20% by reason of Mr Pasquier’s role whilst Mr Do considered a further deduction should be made by reason of Nextrade’s role whilst Mr McCoy considered that no deduction should be made on either account. There was a free exchange of views and no-one sought to impose their view on Ms Chng.

155. It also appears that staff could confer, if needed, with an Ombudsman in relation to the complaint they were considering (“I suggest you book yourself in with an ombudsman”). There is nothing wrong with that either, unless it is the same Ombudsman who is later asked to determine the complaint. Further, the case manager appeared to consider that she needed to ensure that the Ombudsman who would be tasked with a Determination in respect of Mr Pasquier’s complaint agreed with her conclusions before issuing a preliminary assessment, including obtaining “further guidance” on a proposed discount to the compensation for contributory negligence: see [81]-[82], [87]-[88]. The team leader also considered it appropriate to contact the Ombudsman to “pick your brains” and seek his “specialist input”: at [85].

156. Involving Mr Crowhurst in the preliminary assessment in even this cursory way had the potential to undermine his independence and impartiality when later called upon to make the Determination. First impressions may be hard to shift. While the documents indicate that Mr Crowhurst put significant effort into reviewing the complaint and making the Determination, whether, in fact, his involvement in the preliminary assessment undermined his independence and impartiality is not to the point. I consider that allocating the complaint to an Ombudsman who had already expressed a view – albeit cursory – on the preliminary assessment was contrary to the AFCA Rules.

157. The fact that the Ombudsman continued to exchange his thoughts with the Case Manager whilst reaching a Determination compounds the problem. Ironically, these exchanges between Ms Chng and Mr Crowhurst, whilst he was “wrestling with contribution”, would have benefited Notesco if he had been persuaded to Ms Chng’s view. But that is also not the point. The separation between the preliminary assessment stage and the Determination stage was not observed. The Determination should be set aside on this basis alone and remitted to AFCA to be determined by another Ombudsman who had no involvement in the preliminary assessment or Determination.

RELIEF

158. The parties to the complaint are entitled, as a matter of contract, to require that AFCA proceed in accordance with the AFCA Rules: Investors Exchange Ltd v Australian Financial Complaints Authority Ltd [2020] QSC 74 at [13] per Applegarth J. The decision may be set aside if it is inconsistent with the contract upon which it depends for its authority, for example, if the decision is the result of bias or is the product of a breach of the rules of natural justice: Investors Exchange at [30]. It follows that I consider that a declaration should be made that the Determination is invalid and that the matter be remitted to AFCA to be determined by an AFCA Decision Maker who was not involved in the preliminary assessment or the Determination.

159. Accordingly, it is neither necessary nor appropriate to consider whether the Ombudsman’s conclusion in respect of compensation was unreasonable. Anything which I may say on this subject could influence the AFCA Decision Maker tasked with considering the matter fairly and impartially.

160. Nor it is necessary to decide whether AFCA otherwise failed to accord procedural fairness, where it was said that the Ombudsman relied on various matters in his Determination of which Notesco had no notice and on which their submissions should have been sought.

161. If I am wrong as to impartiality, then I do not consider that the Ombudsman’s reliance on odd features of the Account Registration Form/KYC or the powers of attorney needed to be raised with Notesco for its submission, under rule A.10.2. This is because, throughout the process, Notesco had consistently relied on these documents as supporting the appropriateness of its actions. Notesco maintained that it was entitled to rely on the information contained in the Account Registration Form/KYC, which supported a conclusion that Mr Pasquier was suitable to trade in the products available on its platform. This contention called into focus what Notesco could or should have gleaned from that information. Further, Notesco submitted that, by reason of the powers of attorney, it was “permitted to accept, without any inquiry or investigation, any orders or instructions for the purchase and sale of Financial Instruments from the Client’s trading accounts from Nextrade.” Whilst that was no doubt correct, it presupposed that Notesco was satisfied that the powers of attorney were valid. In the Determination, the Ombudsman critically examined both arguments; he did not thereby raise anything which would not obviously be open on the known material. Likewise, Notesco’s compliance with its obligations to act honestly and fairly had been the subject of Mr Pasquier’s submissions, and Notesco’s responses, throughout the process. This was nothing new. The fact that the preliminary assessment did not rely on section 912A of the Corporations Act did not preclude the Determination doing so, without requesting further submissions, where such a conclusion could not be considered unexpected or not reasonably anticipated.

158. The parties have each enjoyed a mixture of success and failure. I am minded to order that AFCA pay 50% of Notesco’s costs of the proceedings on the ordinary basis but will give the parties an opportunity to make further submissions on costs if they contend that a different order should be made. For these reasons, I make the following orders:

1. Declare that the Determination made by the first defendant on 19 March 2021 is invalid.

2. Remit the second defendant’s complaint to the first defendant to be determined by an AFCA Decision Maker who was not involved in the preliminary assessment or the Determination.

3. Order the first defendant to pay 50% of the plaintiff’s costs on a party and party basis.

4. If either party seeks a variation in Order 3:

1. Direct the party seeking the variation to provide written submissions by 31 March 2022, limited to 2 pages.

2. Direct the other party to provide submissions in reply by 14 April 2022, limited to 2 pages.

3. Order that any variation to the costs order be decided on the papers.

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Decision last updated: 17 March 2022