Final Assignment Course Code: LAW 2485
The legal issue is whether Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, had breached his financial advisor’s duty according to Section 961(B)(G)(J) of the Corporation Act 2001 and also fiduciary law when Rick failed to give a suitable recommendation of financial product to Morgan despite knowing about Morgan’s difficult childhood and his gambling addiction?
To determine whether section 961 of the Corporation Act 20011 is breached, it must be proved that the advisor was giving personal advice and that advice recipient was considered ‘retail client’.
“Personal advice” occurs in 1:1 conversation or within a small group of people. According to Section 766B (3)2, advice related to specific customers is personal, which indicates a reasonable person shall expect the advisor to have considered the financial situation, one or more of the objectives, and the needs of the clients.
Wholesale or retail clients are determined according to their products. It is considered ‘retail client’ if the price is below $500,000 and the client is not a professional investor.
Under section 961(B)3 and 961(G)4, an advisor is obliged to act in the best interest of the client and give appropriate advice.
Under section 961(J) of the Corporation Act 20015, the advisor must prioritize customers when there are conflicts of interest.
The fiduciary law is stated as below:
Firstly, the financial advisors are liable to act in good faith in the best interests of the beneficiary. The term ‘good faith’ indicates advisers are required to push client’s interest before their own.
Secondly, the financial advisors are also liable to avoid undisclosed conflict of interests’ situation. The conflict rule and the profit rule are applied. Under the conflict rule, adviser must avoid putting themselves in the situations where they will be tempted to prefer their own interests, or someone else’s interests, over those of customers. Under the profit rule, the financial advisor is accountable to the company for the profits gained by using company information or his or her position.
The case of Daly v Sydney Stock Exchange 6 is applied. Dr. Daly intended to invest in Patrick Partners and sought direct counsel from the firm. Patrick Partners was in a bad financial state, and Dr. Daly was encouraged not to invest but rather to place the money on deposit with the business until the appropriate time came. He was persuaded that ‘the firm was as safe as a bank,’ so he gave money to Patrick Partners at a high interest rate. A few months later, the firm declared bankruptcy and was unable to repay Dr. Daly. As a result, because Patrick Partners was a member of the Sydney Stock Exchange, Dr Daly attempted to claim from the Sydney Stock Exchange fund, which is available to any stockbroker if they go bankrupt in order to assist investors. The court ruled that Partrick Partners violated implicit conditions of the contract for service by neglecting to inform Daly of the firm’s financial situation. The stockbrokers also violated fiduciary obligations by failing to “act in the best interests of the client” and failing to “disclose any conflict of interest.”
Rick’s advice to Morgan is classified as ‘personal advice’ for two reasons. Firstly, it is not stated that any outsiders were present at the meeting. Morgan phoned Rick and scheduled a meeting with him, indicating that it was a one-on-one conversation. Secondly, under Section 766B(3), advice related to specific customers is personal. Morgan had told Rick about his gambling addiction and stated a desire to acquire guidance on low-risk investing option during the appointment. Therefore, Brandon’s advice was considered personal advice.
Morgan was a retail client because he wanted to invest his inheritance, which was only $50,000 and it is not stated as a fact that Morgan was a professional investor.
According to section 961(B)(G)(J) and fiduciary law, Rick had failed to act in the best interest of the client and give appropriate advice. Despite knowing that Rick is a stressful gambling addict with the fear of gambling away the inheritance, Rick took advantage of Morgan’s poor circumstances to manipulate him into investing in Ependysi Ltd. Rick forced Morgan by using the words such as ‘investing in Ependysi would change his life and make him wealthy’ because he knew that Rick was not emotionally stable and all he wanted was to save his money from his addiction.
Investing in Ependysi Ltd was not in Morgan’s best interests because the firm was in serious financial trouble. Rick did not provide suitable advice since he did not offer a financial instrument that was fair given Morgan’s interest in low-risk investments. Instead, he suggested other items that might be beneficial to her. It has been established that Ependysi offered to pay substantial commissions to their consultant, which was not revealed to Morgan when he made an investment, implying that Rick put her personal interests ahead of Morgan’s.
Rick and his licensee, Wealth Pty Ltd had breached their duty according to Section 961(B)(G)(J) of the Corporation Act 2001 and also fiduciary law when Rick failed to give reasonable advice given Rick’s circumstances and put his interests over his client’s, hence, Rick and Wealth Pty Ltd would be liable for civil penalty and compensation under Section 961(M)7(Q)8
The legal issue is whether Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, had breached his financial advisor duties according to Section 961(H) of the Corporation Act 2001 and Section 12DB of the ASIC ACT 2001 when he told Morgan that Ependysi’s outstanding financial status and growth prospect but it is later revealed that the information was not true.
Under Section 961(H)9 of the Corporation Act 2001, the advisor must warn the client if the recommendation is based on incomplete or inaccurate information after reasonable attempts to get the information.
Under Section 12(DB) 10of the ASIC Act 2001, A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services, specifically falsely represent that services are of a particular standard, quality, value or grade.
Section 961(H) and 12(DB) is applied since it is proven that Morgan was a retail client and Rick’s counsel was personal. In this case, it is stated as a fact that Rick had examined the report and profit results of Ependysi, indicating his attempts to get the information and was well aware of the company’s terrible status. He should not have advised Morgan based on inaccurate information as a reasonable counselor. Instead, he lied about the company’s profitability in order to persuade Morgan to invest in it. He said that Ependisy’s profit would soar by more than 30 percent this fiscal year. Moreover, he also convinced Morgan to mortgage his house to borrow more money to invest, which worsened the situation for him as Ependisy’s soon was placed in liquidation. It was later stated as fact that to attract investors, the firm guaranteed licensees and their advisers commissions and non-monetary incentives. Potential investors were not given any of this information and the firm was seeing a monthly drop in profits, which proved that Brandon had given misleading information to Morgan.
Rick violated his financial adviser obligations under section 961(H) of the Corporation Act 2001 and section 12(DB) of the ASIC ACT 2001 when he lied about Ependisy’s financial facts to Morgan in order to convince him to make an investment.
The legal issue is whether Wealth Pty Ltd, the licensee of Rick, who is Morgan’s advisor, had breached their licensee obligations according to Section 912(A) and 961(L) of the Corporation Act 2001 when they failed to train their representatives, did not have a dispute resolution system in place, did not maintain organizational competence or the resources required to provide financial service covered by its license; as well as make misleading representation to sell its products.
According to Section 961(L)11 of the Corporate Act 2001, a financial service licensee must ensure that their representatives comply with best interest duty and other obligations, which are included in Section 961(B),(G),(H),(J) (which are mentioned in issue 2).
According to Section 912(A) 12of the Corporate Act 2001, a financial service licensee must
- do all necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly; and
- have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and
- comply with the conditions on the licence; and
- comply with the financial services laws; and
- a. take reasonable steps to ensure that its representatives comply with the financial services laws; and
d.unless the licensee is a body regulated by APRA–have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements;
- maintain the competence to provide those financial services; and
- ensure that its representatives are adequately trained, and are competent, to provide those financial services
- if those financial services are provided to persons as retail clients–have a dispute resolution system
- unless the licensee is a body regulated by APRA–have adequate risk management systems; and j. comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.
Wealth Pty Ltd had breached its duty under Section 912(A) and Section 961 (L) for several reasons. Firstly, it is stated as fact that Wealth Pty Ltd had never trained its representatives and advised them to use high pressure sales tactic and manipulations, which resulted in clients’ unreasonable choice of products and might lead to financial loss. Wealth Pty Ltd’s advisors failed to conduct reasonable inquiries into customers’ relevant personal circumstances and did not take any actions that might fairly be viewed as being in the best interests of the clients, and they frequently misinterpreted the advice’s real subject matter. They didn’t believe that a client’s risk tolerance and risk profiles were important factors to examine. Evidence showed that their clients were treated as balanced investors, despite the fact that their profiles were conservative and risk-averse. Rick did not consider Morgan’s personal circumstances and manipulate him into investing in Ependisy by telling lie, as well as failed to keep adequate records and gave Morgan non-compliant Statement of Advice by not including information about the basis of his advice, which implies that they had failed to ensure that the financial services covered by the license are provided efficiently, honestly and fairly and did not take reasonable steps to ensure that its representatives comply with the financial services laws. Secondly, the company also did not have a dispute resolution system in place and did not maintain organizational competence or the resources required to provide the financial services covered by its license.
Wealth Pty Ltd, the licensee of Brandon, who is Rick’s advisor, had breached their licensee obligations according to Section 912(A) of the Corporation Act 2001 and is liable for any loss or damage suffered by Rick as a result of the conduct of the representative under Section 917(E)13.
The legal issue is whether Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, had engaged in unconscionable conduct according to Section 12(CA)(CC) of the Corporation Act 2001 when Rick failed to give a suitable recommendation of financial product to Morgan despite knowing about Morgan’s difficult childhood and his gambling addiction.
According to Section 12(CA) 14of the ASIC ACT 2001, person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law.
The case of Commercial Bank of Australia v Amadio (1983)151CLR 44715 is applied to determine ‘Unconscionability’, due to Section 12(CA). The Amadios, a family of elderly migrants, insured their son’s commercial bank loan. They were under the wrong belief that the responsibility was limited to $50,000 and that the guarantee term was only six months. They didn’t have access to independent legal counsel and spoke little English. The bank refused to urge the Amadios to seek independent legal guidance or accept the son’s financial situation was precarious. The bank claimed to be enforcing the guarantee contract after the son’s business collapsed. The bank acted in an unconscionable manner, according to the court, rendering the contract invalid. Three elements of unconscionability are:The weaker party must have been under a special disability so that there was no real equity between the parties; the stronger must have been aware of that special disability; it must have been unfair or “unconscientious” for the stronger to procure agreement in the circumstances in which it was procured.
According to Section 12(CC)16 of the ASIC ACT 2001, to determine if there is unconscionable conduct in relation to the financial services that are ordinarily acquired for personal, domestic or household use, the court may have regard to consider whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the services.
According to Section 12(CA) and the case of Commercial Bank of Australia v Amadio (1983)151CLR 447, three factors of unconscionability has been proven in this case. First, it is stated as fact that Morgan was a stressful gambling addict with rough childhood and he feared that his addiction would be out of control and lead to the loss of his inheritance, which indicated that he was under a special disability. Second, in the meeting with Rick, he himself confessed about his addiction, implying that Rick was aware of that disability. Third, Rick took advantage of Morgan’s disadvantages and used sales tactics to manipulate him into investing in Ependisy with words such as ‘investing in Ependysi would change his life and make him wealthy’ and ‘that the offer was limited time only’. Morgan felt overwhelmed by Rick’s emotional manipulations and pressure, and he followed the advice. It was later revealed that Wealth Pty Ltd advised their representatives to ‘use high-pressure sales tactics and manipulations to sell financial products’ and not conduct reasonable investigations into clients’ relevant personal circumstances, which also breached Section 12(CC) of the ASIC ACT.
Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, had breached Section 12(CC) (CA) and Morgan may take action against Rick and his licensee under Section 12(GF)17 of the ASIC ACT.
The legal issue is whether Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, breached his financial advisor obligations when he failed to provide Mary compliant Statement of Advice and Product Disclosure Statement under Section 947(B), RG175 and Section 1012(A) of the the Corporation Act 2001
According to Section 947(B) 18of the Corporation Act 2001, Statement of Advice must contain info about client’s circumstances, description of the range of the products considered, statement setting out the advice, and reasons why advice is appropriate, information about fees, commissions or associations that might have affected the advice.
According to Section 1012(A) 19of the Corporate Act, a Product Disclosure Statement is provided in a recommendation situation where personal advice about a particular financial product is given.
It is stated as a fact that ‘Rick failed to keep adequate records and gave Morgan non-compliant Statement of Advice by not including information about the basis of his advice’, and his commission from Ependysi was also kept secret, which indicates the breach of Section 947(B). It is not mentioned that Rick had given Morgan a PDS, therefore, Rick might have forgotten his obligations to provide Morgan this document, which meant he had breached Section 1012(A).
Rick had breached his duties under Section 947(B) and 1012(A) of the Corporation Act 2001 when he failed to provide compliant documents need when Morgan, his client, made an investment based on his advice and therefore, Rick and his licensee would be under criminal liability for not providing PDS under Section 1012(C)20 and providing defective SOA under ss 952D, 952E; as well as civil liability under ss953(B)21, 1022(B)22
The legal issue is whether Rick, an authorized representative of Wealth Pty Ltd and also Morgan’s advisor, breached his financial advisor obligations when he failed to exercise due care and skill as expected from a reasonable financial advisor under Section 12(ED) of the ASIC ACT 2001
According to Section 12(ED) of the ASIC Act 200123, In every contract for the supply of financial services by a person to a consumer in the course of a business, there is an implied warranty that the services will be rendered with due care and skill.
It is stated as fact that Morgan and Wealth Pty Ltd had a service contract since Morgan had signed it after reading the Financial Service Guide. Rick was an approved representative of Wealth Pty Ltd, and when the contract was signed, he became Mary’s adviser; as a result, Rick was liable under the contract. Rick failed to apply the reasonable care, skill, and diligence anticipated of a reasonable financial advisor in this circumstance. Specifically, in terms of due care, he failed to consider Morgan’s relevant circumstances, which was the fact that he is a stressful gambling addict with fear of losing his inheritance money into gambling and his preference of risk adverse investment. Rick manipulated Morgan into investing in a terrible company by lying about its profitable returns, which is untrue. He also convinced Morgan to mortgage his house to borrow more money for investment, which created devastating consequences for Morgan, who may lose his house. In terms of skill. It is mentioned as fact that most of the authorized representatives of Wealth Pty Ltd, including Rick, were not adequately trained or competent to provide financial services. Indeed, Rick had failed to provide Morgan compliant document based on financial service laws.
Rick had breached his duties under Section 12(ED) of the ASIC Act 2001 when he failed to provide the service with due care and skill.