Individual Investment Law - Nguyen Thi Nhat Anh s3757073 PDF

Preview

Summary

Download Individual Investment Law - Nguyen Thi Nhat Anh s3757073 PDF

Description

ASSIGNMENT 3 FINAL INDIVIDUAL ASSESSMENT

Lecturer: Dr. Ing Hoe Loh Student name: Nguyen Thi Nhat Anh Student ID: s3757073 Course: LAW2485 - Law of Investments and Financial Markets Class: Tuesday 3.00 Tutorial

A. COMMON LAW Negligent Misstatement Legal Issue Whether Trevor, a client of Financial Services Pty Ltd (FS Pty Ltd), can successfully sue Ron, an authorised representative (AR) of the company for violating common law duty of care (DOC) under negligent misstatement when Ron offered untrue statement for Trevor, his client, to invest in newly established superannuation fund (SF) with the purpose of investing into property development companies (PPC).

Legal Rules For proving the occurrence of negligent misstatement, the Court would consider three elements included in the legal test which was established in Hedley v Heller in case if the speaker owns the recipient a DOC. (1) recipient relied on speaker’s competence and decision. (2) speaker realised or should have realised that dependence. (3) that dependence must also be reasonable under situations. Additionally, analysing the elements created in Hedley's case should be considered in terms of proving that breach of DOC1 leads to the suffered damage of recipient: (1) The recipient depended on the speaker in a serious context. (2) The advice given to the recipient must be relied on the knowledge and skill of the speaker. (3) The speaker failed to meet the reasonable Standard of Care (SOC) (4) The recipient received economic loss from speaker’s action. Regarding this case, The Court in Mutual Life and Citizens v Evatt 2 claimed that DOC was not limited to professional advisors and when the advisor gave advice, he was required to show his expertise in that area. Meanwhile, Shaddock v Parramatta City Council3 claimed that if the client showed reliance on the advisor's statement, thus the advisor would be liable, the advisor’s expertise did not need to be taken into account.

1 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. 2 Mutual Life and Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 MLC. 3 Shaddock v Parramatta City Council (1981) ALR 385.

Furthermore, this circumstance is further reflected in the case of Ali v Hartley Poynton Ltd 4. In this situation, the speaker falsely made representation on the future outcome of the financial product provider and failed to disclose adequate information about considerable risks of investing in SF. Consequently, the Court held that the speaker did not meet his SOC, hence, liable for negligent misstatement.

Application As Trevor called Ron honestly show his circumstances, following its representative recommendation to make investment in SF, indicating that he relied on his advisor’s statement, also Ron recognised Trevor’s situation and he convinced Trevor to invest in SF, revealing that Ron knew Trevor depended on him. Moreover, Ron created a significant impression of an experienced advisor when he asked Ron general questions before giving advice, Trevor’s reliance was reasonable to trust Ron’s judgement. Implementing Heldley case, Ron owed a DOC to Trevor. Concerning judgement in the MLC and Shaddock case, as giving recommendations related to one’s expertise, a reasonable person must guarantee the statement’s accuracy. Similar to Ali case, Ron performed a false representation about the financial product’s outcome and failed to directly indicate the associated risks with it, making Trevor suffer economic loss. Therefore, Ron, like Ali, did not meet his standard of care.

Conclusion Trevor can completely sue Ron for negligent misstatement under common law as the recipient had violated his SOC. Similar to Ali, Trevor can ask for compensatory loss caused by his dependence on Ron’s misstatement.

Contractual Liability & Fiduciary duty Legal Issue Whether Ron, an AR of Financial Services Pty Ltd, breaching the: a. Common law implied terms included in a contract: working with reasonable care, skill and diligence. b. Fiduciary duty to act in the best interest of the client, require full disclosure of interest’s conflict. 4 Ali v Hartley Poynton Ltd (2002) 20 ACLC 1006.

When Ron advised Trevor to make investment in SF in PPC which had connection with Ron and suggested him to lend money from his SF to Ron’s personal business without concerning Trevor’s personal circumstances, along with slow loan repayment which later resulted in considerable financial loss for Trevor.

Legal Rules There are contractual implied terms between the customer and his advisor under common law which the advisor must provide conduct with reasonable care, skill and diligence to deliver the best advice, indicating any personal interest and financial situation of providers for clients. Moreover, the advisor also had the fiduciary duty arising from the contract to act in the best interest of the client, avoid and must have disclosure of conflict of interest. The case Daly v Sydney Stock Exchange5 is implementable. The Court held that the advisor had duties deriving from the contract to offer all specific knowledge of important details, including related risks the client might face when making investment as well as personal interest of the advisor, aiming to give the proper advice for the client. Furthermore, the advisor must obey the fiduciary duties stemming from the contract to offer the best investment advice which is in the interest of the client, along with disclosure of associated information about the transaction that might be more disadvantageous to the client. If fail to comply, defendants contravened the contract of services and fiduciary obligations.

Application Reasonable care, skill and diligence responsibility Ron, like Daly, failed to utilise his knowledge and expertise to sufficiently indicate Trevor particular information, including considerable risks when suggesting his client to make investment in SF as well as he did not reveal the financial circumstance of the financial provider or relevant background. Additionally, Ron did not show his personal interest (relationship) before Trevor agreed to invest as facts revealed Trevor did not acknowledge due to his confusion caused by Ron’s conduct after signing the FSG. These details are essential since it would influence Trevor’s investment option in SF and might potentially prevent his unexpected loss. It is implied that Ron did not show his reasonable care, skill and diligence to give recommendations to his client. 5 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371.

Fiduciary duty As Ron did not disclose his personal connection with PDC and still advised his client, who has suffered poor mentality to make investment in the company’s financial product mainly owing to the relationship, it is evident that Ron failed to act in the beneficiary’s best interest. Furthermore, Daly case is applicable since Trevor having no awareness of the relationship between Ron and PDC, Ron did not comply with the fiduciary duty to disclose conflict of interest to his client. Moreover, Ron had fiduciary duty towards Trevor which means he is not allowed to put his interest ahead of client’s interest. Without properly considering the client's circumstances to give the appropriate recommendation, Ron’s suggestion for Trevor to lend money to his personal business leading to the failure of giving independent advice, along with the slow loan repayment, causing financial loss for Trevor due to his advisor’s act that did not prioritize his client’s interest.

Conclusion Trevor can successfully sue Ron for contravening contractual implied terms of working with reasonable care, skill and diligence and fiduciary responsibility to act in the best interest of the beneficiary, avoiding undisclosed conflict of interest when he failed to reveal financial product’s relevant information and the relationship between him and PDC. Additionally, as Trevor signed a contract with FS Pty Ltd, the firm also failed to comply with the implied contractual terms to work with reasonable care, skill and diligence. Consequently, both the firm and Ron, its AR might be obliged to make compensation for the client’s loss deriving from their duty violation.

B. STATUTORY LAW I. Corporations Act 2001 (Cth) Best Interest Obligation & Related Responsibilities Legal issue Whether Trevor, who has been diagnosed with bipolar disorder and felt overwhelmed of constantly taking care of his disabled wife, can sue Ron, the AR of Financial Services Pty Ltd, for contravening the duty to: a. act in the best interest of client under s961B. b. provide proper advice under s961G.

c. clients best interest priority if there is conflict of interest under s961J(1) of the Corporations Act. when Ron convinced his client to invest in SF for the purpose of investing into PDC; along with making Trevor confusion derived from the his use of ‘layered advice strategy’, also suggested Trevor allowed his SF to lend money to Ron’s personal business, leading to his considerable financial loss and he lost his life insurance.

Legal Rules The plaintiff must be considered as retail client sector for section under division 961 and the provided advice is required to be personal advice under s961(1) 6. A person is categorized as retail client unless he purchases superannuation or retirement saving product under s761G(6)7. Under s766B(3)(b)8, a personal advice is concerned in the circumstance of when a reasonable person in client’s position would expect the advisor to recognize their conditions, objectives and needs. Once all above mentioned requirements are satisfied, the advisor must obey the duty of offering proper advice based on the best interest of clients under s961B(1) 9. When all duties under s961B(2)10 are fulfilled by the advisor, he is considered to have acted in the best interest of the customer. Following s961B, the advisor must give recommendation only after reasonably recapitulating that recommendation is suitable for the customer’s overall background under s961G11. Under s963A(a), conflicted remuneration as advantages offered to AR that potentially influenced the product option in advice they provided. When conflict of interest is derived from the conflicted remuneration, complying with s961J(1) the advisor has the responsibility to disclose and provide the best interest priority for the customer.

Application Since Trevor satisfied all requirements imposed in s761G(6), he is categorised as a retail client. As Ron asked general questions about specific circumstances and recommended him to make investment in SF, it is reasonable for Trevor to trust his advisor that he had taken all 6 Corporations Act 2001(Cth) s961(1). 7 Corporations Act 2001(Cth) s761G(6). 8 Corporations Act 2001(Cth) s766B(3)(b). 9 Corporations Act 2001(Cth) s961B (1). 10 Corporations Act 2001(Cth) s961B (2). 11 Corporations Act 2001(Cth) s961G.

these matters into consideration. Hence, the advice which Ron delivered is a personal one and division 961 is applicable. As Ron suggested Trevor invest in SF which can affect Trevor’s retirement saving and not suitable for Trevor’s current condition, Ron had failed to appropriately concern his client’s relevant situations in suggesting proper product under s961B(2)(e)12. Since Trevor is confusing about the advice given by his advisor, a reasonable advisor should provide the client more time before deciding or making the process less complicated for the client to fully understand. Ron failed to perform and had not taken additional steps for acting in the best interest of Trevor, provided the client's particular circumstance under s961B(2) (g)13. Additionally, the process Ron delivered caused Trevor confusion, he took advantage of that confusion to recommend his client investing in SF which benefited himself. In a similar situation, facts showed that Ron offered various statements of advice and improperly switched them to obtain benefits for his own gain which he did not consider his client’s interest, including Trevor. As Ron failed to comply with all requirements that consisted of s961B(2), he violated s961B(1). It is concluded that he had not offered the proper advice for his client under s961G. The relationship with PDC can reasonably be anticipated to affect Ron’s product option for delivering advice. As Ron convinced Trevor to make investment in SF though it reasonably is not relevant for his situation. Therefore, under s961J(1) of the Corporations Act, Ron failed to prioritize his customer’s interest above his own benefit.

Conclusion Trevor can sue Ron for breaching statutory obligations to act in the best interest of client under s961B, offer proper advice under s961G, and prioritize interest of client under s961J (1) of the Corporations Act 2001 when he gave recommendation Trevor investing in SF derived from his relationship with its provider and for his business from borrowing money from Trevor’s SF. Moreover, due to the failure of complying with statutory duties from its representative under s961B, s961G and s961J, FS Pty Ltd was in contravention of s961L14 for failing to guarantee the action of Ron. Consequently, the company also held obligations for Ron’s action and

12 Corporations Act 2001(Cth) s961B(2)(e). 13 Corporations Act 2001(Cth) s961B(2)(g). 14 Corporations Act 2001(Cth) s961L.

Trevor’s loss under s917A(1)15 and s917E16. Ron might not successfully defence because under s961H17 as he failed to warn his client about his given statement is incomplete or based on limited information. Regarding remedies claim, both Ron and FS Pty Ltd must jointly provide compensation for Trevor’s life insurance cover under s961M 18. Additionally, FS Pty Ltd might also be imposed a banning order from ASIC regarding s920A(1) 19 as failed to fulfil obligations according to s912A.

Disclosure Through Documents (FSG, SOA, PDS) Legal Issue Whether Trevor, a customer, can completely sue FS Pty Ltd and its AR, Ron, for violating the disclosure of document requirement under s942B(f), s946C, s1012A, s1012B when Ron offered him FSG without including relationship information; failed to offer SOA before Trevor signed the contract and PDS after advising him to make investment in SF. Legal Rules FSG According to s941B20, an AR who offers a financial service to a retail customer must provide FSG. Following s942B(f)21, FSG must comprise information about any associations or relationships between the providing entity and the financial products’ issuer. Under s952D 22, it is a criminal offence for providing a defective FSG which does not comply with the disclosure obligations according to s942B. SOA SOA must be given to a retail client by the AR and licensee in case giving his personal advice regarding s946A23 and if fail to provide, this is considered an offence according to s952C24. PDS

15 Corporations Act 2001(Cth) s917A(1). 16 Corporations Act 2001(Cth) s917E. 17 Corporations Act 2001(Cth) s961H 18 Corporations Act 2001(Cth) s961M. 19 Corporations Act 2001(Cth) s920A(1). 20 Corporations Act 2001(Cth) s941B. 21 Corporations Act 2001(Cth) s941B(f). 22 Corporations Act 2001(Cth) s952D. 23 Corporations Act 2001(Cth) s946A. 24 Corporations Act 2001(Cth) s952C.

The AR and licensee must supply PDS to retail client before the financial product’s acquisition under s1012A25, if fail to provide, this is considered an offence under s1012C26.

Application As Trevor is a retail client, FSG is a must to disclose any details regarding the associations or connections, therefore Ron must include information about his connection with SF’s provider. Nevertheless, as Trevor did not recognize the relationship after signing the FSG revealing that information is omitted in the document, hence offering a defective FSG. According to s942B, Ron committed an offence. Since SOA and PDS being not given to client before signing the contract and possessing the financial product, the company and Ron had violated s946A and only an AR s1012A correspondingly, hence committed a criminal offence under 952C and s1012C, respectively.

Conclusion Trevor can successfully sue Ron for violating s942B(f), 946A and 1012A of the Corporations Act under the adviser’s obligation of disclosing document when he offered a defective FSG and failed to supply SOA and PDS. FS Pty Ltd failed to ensure its AR did disclose relationship created from interest’s conflict through FSG, SOA following with financial service law, contravening s912A(1). For remedies, Trevor can reasonably claim for his loss of existing superannuation (200,000250,000) by adopting actions against Ron and FS Pty Ltd under s953B 27 and s1022B28. Since the company did not comply with the responsibilities under s912A, FS Pty Ltd might face a banning order imposed from ASIC regarding s920A(1)29.

General Obligations of Licensees Legal Issue Whether Trevor can sue Ron and FS Pty Ltd for jointly liable for his loss when its AR, Ron, was not sufficiently trained or adequately competent to offer financial services; and the company failed to have a dispute resolution system (DRS), resulting in non-maintenance of organisational competence. 25 Corporations Act 2001(Cth) s1012A. 26 Corporations Act 2001(Cth) s1012C. 27 Corporations Act 2001(Cth) s952B. 28 Corporations Act 2001(Cth) s1022B. 29 Corporations Act 2001(Cth) s920A (1).

Legal Rules In financial service licensee position, under s912A(1)(f)30, licensee must make sure its representatives are sufficiently provided with training and competent to deliver financial services. Furthermore, under s912A(1)(g)31, a DRS is a must for retail clients.

Application As FS Pty Ltd allowed Ron to access their own advice files without offering adequate training to ensure their competency of providing financial services, breaching s912A(1)(f). Additionally, failing to have a DRS is considered as a breach of s912A(1)(g). Therefore, both Ron and FS Pty Ltd are jointly liable for loss suffered by Trevor.

Conclusion Trevor can sue Ron and FS Pty Ltd for violating s912A(1)(f) and s912A(1)(g) when the company cannot ensure its AR’s financial service knowledge, also failed to have a DRS, resulting in the poor organizational resources for offering financial services covered by its licence. For remedy, Trevor can take action to obtain 100% compensatory loss under s917F 32 for his loss from either Ron or the company.

II. ASIC Act - Consumer Protection Unconscionable conduct Legal issue Whether Trevor, who has suffered from serious difficult circumstance, can successfully sue Ron, his financial adviser for engaging in unconscionable conduct under ASIC Act s12CA, s12CB, s12CC when Ron realised Trevor’s circumstances but advised him to create an account in SF, resulting in loss of life insurance cover.

Legal Rules For receiving guarantee under ASIC Act, the client must be categorised as consumer under s12BC33, defining consumer as a person who acquires specific financial service with the price lower than $40,000 or if above, that service must compulsorily be acquired for personal use.

30 Corporations Act 2001(Cth) s912A(1)(f). 31 Corporations Act 2001(Cth) s912A(g). 32 Corporations Act 2001(Cth) s917F. 33 Australian Securities and Investments Commission Act 2001(Cth) s12BC.

According to s12CA34, an advisor, in trade or commerce, must not engage in a conduct that is defined as unconscionable towards the client, regarding the case of Commercial Bank of Australia v Amadio35. Hence, three critical elements of unconscionable conduct derived from Amadio case would be indicated: a. The weaker have special disadvantage; b. The stronger aware or ought to have aware that; c. It must have been unconscientious for the stronger to convince weaker to procure the agreement. Furthermore, the Court would take factors under s12CC(1)36 into consideration to adjudicate whether unconscionability emerges in this case. Subsection (c) and (d) will be adopted.

Application Since Trevor acquired the service of FS Pty Ltd to manage his pension, this is a personal purpose and hence, under s12BC, ...