Professional Liability – Financial Services
Recently I attended a session of four seminars, each of one hour, focused on the professional liability of financial service providers (FSPs)...
Professional Liability – Financial Services
Recently I attended a session of four seminars, each of one hour, focused on the professional liability of financial service providers (FSPs).
The seminars were hosted by the UNSW Faculty of Law. They were presented by experts in their areas of speciality, and in the case of the seminar about the Financial Ombudsman Service (FOS), the presenter was the Lead Ombudsman – Investments and Advice.
So, what is the scope of the potential liability of FSPs, at law, and what defences are available? What does FOS look for when assessing disputes?
Claims and remedies set up by legislation for the benefit of clients
This essentially is about the existence of disclosure obligations (that is, those set out in the mandated disclosure documents that all FSPs will be familiar with), the prohibition against misleading and deceptive conduct, and the remedies available for breach of those obligations and duties and loss consequently suffered by the affected client.
Those remedies are claims seeking damages based on the tort, or civil wrong, of negligence, and for claims enabled by the legislation, the Corporations Act and the ASIC Act.
Relevant to the latter is the relatively new “best interests” obligations, arguably a glorified expansion of the previous legislation mandated duty. Contravention of these obligations gives a successful claiming party, who has suffered loss, a right to damages and recovery of monies paid to an adviser.
Then there are contractual warranties – including warranties implied by the legislation – and the prohibition on unconscionable conduct and the rules around the striking down of unfair contract terms. The remedies for breaches are the usual types of legislation enabled claims for damages, and in the case of unfair terms, a court may order that an unfair term cannot be enforced.
Liability of FSPs to third parties
FSPs may be liable to third parties – not just clients – in relatively limited circumstances, under the laws relating to negligence and misleading conduct.
Negligence as a tort effectively commenced in the early 1930’s with the famous snail in the bottle case. In this case a person purchased a bottle of soft drink in a cafe. There was a decomposed snail in the bottle causing the purchaser to become ill. She successfully sued the manufacturer of the soft drink, even though there was no contractual relationship between them. A central principle of the decision in that case is that in particular circumstances, where there is foreseeable harm to another from one’s actions, there need not be a contractual, client type relationship between the litigating parties, for there to be a duty of care owed.
If a FSP provides information or advice that a third party relies on, then there may be circumstances where there is liability when the third party acts on that advice and suffers loss or damage as a result.
This would especially be the case where the FSP makes representations on which it knows or should know the third party claimant would rely.
A relevant recent example of this was the 2014 ABN AMRO case, where Bathurst Council suffered loss as a result of acquiring financial products rated by S & P and promoted by ABN AMRO.
Appropriate disclaimers may be able to control or limit liability, but they need to be tightly and relevantly drafted.
The second potential limb of liability for FSPs on a third party basis is the legislated prohibition against misleading and deceptive conduct, with remedies being claims for damages.
There are a number of cases relating to this form of liability. Again, one of the more prominent cases is the ABN AMRO case mentioned above.
Defending claims against FSPs
Many if not most claims will be based at least in part in negligence, with the claim being that there has been a breach by a FSP of a duty of care, resulting in loss by the claimant.
Under the relevant NSW legislation a claimant has to show that the negligence was a necessary condition of the loss occurring, and that it is appropriate for the claimed liability to extend to the loss.
This then brings in considerations of reliance, causation, remoteness of damage and the amount of the claim.
In other words, by way of example, would the claimant have entered into a transaction, or otherwise acted on the FSP’s advice to his or her detriment, in any case? To what extent if any, did the FSP contribute to the loss?
In assessing reliance on the FSP’s advice, issues such as the sophistication and vulnerability of the claimant will be considered.
Additionally matters to be weighed up would be whether the claimant received advice from another professional, were there a number of transactions which led to the loss (and what role did the FSP play in these transactions as a whole), and what was the claimant’s own conduct.
The above considerations may well mean that the concept of “proportionate liability” has application for negligence and misleading and deceptive conduct claims, the latter relating to the NSW legislation.
That is, if there two or more defendants, a court may, after consideration of the facts, apportion liability, on a percentage basis, if the claim or claims are proven.
If a claim is made under Commonwealth legislation in relation to misleading conduct regarding a financial product a proportionate liability scheme is applicable.
So, in summary, a claim might be defended on the basis that there is an insufficient link between the advice provided and the loss suffered, or that other players are proportionately liable to a greater or lesser extent.
The Financial Ombudsman Service (FOS)
FSPs would be well aware that they are much more likely to encounter a claim made through FOS than a claim made through the conventional court process. In determining a claim FOS of course has regard to the legal considerations described above, however its terms of reference are wider than that of the courts. In terms of “accepted disputes by product line”, to use the FOS description, more than 80% of disputes relate to general insurance, loans, and deposit taking. A mere 5.49% relate to “Investments”. Of that proportion, most relate to superannuation and the various advice businesses, such as financial advisers and stockbrokers. Of those businesses by far the greater proportion of disputes relate to financial advisers rather than stockbrokers. The FOS presentation outlined “top ten tips for advisers”. Space does not permit discussion of all of them, but if I had to mention the top two they would be – document everything, including client discussions, by way of detailed and contemporaneous file notes, and, know the client, their goals and strategy, and link that to the advice, in terms that the client will understand. It was evident that FOS, in assessing a dispute about advice, and whether the best interests duty has been complied with, will have regard to the relevant terms of the Financial Planning Association Practice Standards, particularly standards 2-4 and 7. The FOS Lead Ombudsman’s parting message was – “exercise professional judgment”.
Conclusion
This article outlines, in a relatively brief fashion, the types of civil claims, including FOS applications, that could be brought against FSPs, together with the defences that might be available.
It does not touch on any regulatory action that might be brought by ASIC in connection with breaches of the financial services law, or any related compensation that might be obtained as part of the outcome of that action. Suffice to say though, that the types of behaviour, or lapses in conduct and judgment, or even errors of process, that might lead to regulatory action may also result in civil claims, or at the least an application to FOS.
