Sir Anthony Mason addresses the proposal contained in the Ripoll Report to impose a statutory fiduciary duty on financial planners.
The financial adviser, like traditional professional advisers, is liable at common law to his client in tort for negligent counselling, on the broad principle that if someone possessed of a special skill undertakes quite irrespective of contract to apply that skill, a duty of care arises.
The standard of care is one of reasonable skill appropriate to the position and status of the adviser. The standard is an objective standard. The court determines what that standard requires, in the particular case.
The common-law duty extends to the provision of information as well as advice, but the distinction between seeking information and advice will be critical in some cases, particularly cases where an experienced or sophisticated investor is seeking information rather than advice, and is making his own investment judgement on the basis of the information supplied.
In such a case, if there was no negligence in the provision of the information, then the adviser cannot be held responsible if the investment proves to be a dud. Of course, in some such cases the client may claim that he relied on the adviser’s advice as well as the information.
“The disclosure of the adviser’s interest is not of itself an answer to a claim of negligence”
[In a Hong Kong case, such a] claim was rejected on the ground that the plaintiff, an experienced investor, was merely seeking information, which was correctly provided, and was making its own judgement on whether to make the investment.
The fact that an adviser is selling products to a client does not mean that the adviser is not under a duty of care. Even a salesperson may be under a duty not to recommend a high-risk product without pointing out that risk. A representation that a product is suitable to an investor, and risk-free, may well be a representation that an investor is entitled to rely on.
If a financial adviser has a conflicting interest – for example, if he recommends a product for which he is remunerated by the producer or provider – the adviser is more vulnerable to a finding of negligence, simply because the court or tribunal may conclude that the adviser puts his own financial interest ahead of the client’s.
Here it is important to appreciate that the disclosure of the adviser’s interest is not of itself an answer to a claim of negligence. Full disclosure may enable the adviser to retain the remuneration from the product provider, but it does not avoid a claim for negligence.
I come now to the statutory obligations. First, Section 12ED of the ASIC Act provides that in every contract for the supply of financial services to a retail consumer, as defined, in the course of business there is an implied warranty that the services will be rendered with due care and skill. This provision reinforces the common law duty of care. Section 12ED renders void clauses which seek to exclude or limit the liability of a financial adviser.
Second, Chapter 7 of the Corporations Act imposes various obligations on AFSL licensees and their authorised representatives, with respect to financial product advice and other matters. Section 945A(1) requires the adviser not only to determine the client’s relevant circumstances, but also to make reasonable enquiries in relation to those circumstances. The adviser is then required to give such consideration to, and conduct such investigations of, the subject matter of the advice as is reasonable in all the circumstances, and give advice that is appropriate to the client, having regard to that consideration and investigation.
It is an offence not to comply with the obligations, and a client can recover loss or damage sustained as a result of non-compliance. These obligations also cannot be excluded by contract.
Section 945B imposes an obligation on a licensee, or his authorised representative, to warn the client if the advice is based on incomplete or inaccurate information. You’ll note that the obligations imposed by these sections apply only to licensees and their authorised representatives.
