30/04/2013

The Federal Court holds that the Financial Ombudsman Service (FOS) was correct in determining that a complainant had multiple claims, each one subject to the FOS compensation cap.

The Financial Ombudsman Service Limited is a not-for-profit company limited by guarantee which provides a dispute resolution service to consumers who are unable to resolve disputes with financial advisers that are members of FOS.  

All holders of an Australian Financial Services Licence are required to belong to an independent dispute resolution service and FOS is by far the largest and most often used.

Currently FOS has a jurisdictional limit (that is, cannot award damages to a consumer) exceeding $280,000 per claim against financial planners as specified in the FOS Terms of Reference.  At the time of the case in point the cap was $150,000 for any one claim. The case deals with the issue of what exactly is a claim and can a consumer have a number of claims arising out of the same dealings with their financial adviser.

On 4 April the Federal Court handed down a decision in Wealthsure Pty Ltd v Financial Ombudsman Service Ltd.

The Court was asked to consider if FOS had correctly determined that a dispute lodged with FOS by a husband and wife was correctly viewed by FOS as being three distinct “claims” with each claim being subject to a separate $150,000 compensation cap (in accordance with the FOS Terms of Reference).

FOS’s determination had an obvious consequence for the financial adviser as it could increase the potential liability to the complainants from $150,000 to a maximum $450,000 (three times the cap).

Without going into all the details and background of the case, it is important to note the following:

• the complainants received three Statements of Advice in November 2005 (SoA 1), June 2006 (SoA 2) and March 2007 (SoA 3) from the same financial adviser;
• each Statement of Advice made recommendations on different investments;
• the complainants allege the advice in each case did not properly explain the risks and recommended investments involving inappropriate risks and which were illiquid and limited in diversity;
• the complainants allege losses of $70,489 (SoA 1), $69,928 (SoA 2) and $197,376 (SoA 3); and
• the adviser submitted that FOS should not “split” the claims and any splitting would be an abuse of process.

The adviser’s reasons included that if the complainants’ allegation was that the adviser made an error in a risk assessment profile in SoA 1 then that “error infected the subsequent two SoAs” and therefore there is only one claim.

The Court held that:

“the critical question is whether, in the particular instance, a plaintiff has “divided” a single claim or cause of action.”

To answer the question the Court considered five general principles:

1.    the rule is not contravened by two complaints that arise out of distinct and independent transactions;
2.    the rule is contravened where the action is “one and entire”;
3.    the rule is not contravened where the second cause of action can be maintained without effect on the first;
4.    the rule is not contravened simply because the same causes of action can be joined in one court proceeding; and
5.    the rule may or may not be contravened in a “running account” depending on the parties intention and obligations.

In applying the principles to this case, the Court held that FOS had correctly determined that this was not a case of a joint claim in contract or tort being ‘split’ but rather that there were separate claims, each subject to the separate $150,000 compensation cap.  

The Court stated:

“upon providing each separate SoA, [FSP] owed a discrete duty to the [clients].  It was obliged to satisfy the requirements of s945A …. and … s947D of the Corporations Act.  Each SoA recommended a particular investment course of action.…..

Before providing each of the three separate SoAs, [financial adviser] met with the [clients] in order to consider …. investment profile….. in effect, that in respect of each SoA, they were given the wrong profile.

Whether or not there was a breach of each separate contractual or tortious duty of care or statutory duty would be measured in relation to each separate investment recommendation.”

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.