The ‘business judgement’ rule in section 180 subsection 2 of the Corporations Act, subject to modifications could for the basis of a statutory defence for financial advisers. This defence, which was discussed in last week’s full court of the Federal Court judgement in the case between ASIC and Fortescue Metals and Andrew Forrest, refers inaptly to the making of a business judgement. That expression is defined by reference to the business operations of a corporation. The subsection also refers to ‘proper purpose’ – an expression which is related to the complex purposes of a corporation.
The defence also sets standards by reference to the ‘reasonable belief’ and the ‘rational belief’ of the adviser in relation to informing himself of the subject matter of his judgement and whether the judgement is in the best interests of the corporation – that is, in our context, the client.
The question here is whether the prescribed standards should be set by reference to the adviser’s subjective beliefs, or an objective reasonable standard. Both the common-law approach and the existing Section 945A mandate an objective reasonable standard. The reasonable, or rational subjective belief may be an appropriate standard for the director, but the question is, is it appropriate for the financial adviser?
The common law and the framers of section 945A would answer this question in the negative.
It is extremely important, however, to note that the common law and Section 945A proceed on the footing that a plaintiff client bears the onus of establishing his case against the financial adviser, whereas the proposed statutory defence seems to proceed on the footing that the financial adviser bears the onus of establishing the elements of his defence.
“What we need is somebody, or some people, with clear minds, and a knowledge of basic English, to give thought to these problems”
It is by no means clear what the plaintiff client needs to establish in order to bring about a situation in which the financial adviser is called upon to make out the proposed defence. Perhaps it is envisaged that the plaintiff simply shows a prima facie case that the financial adviser did not put the plaintiff’s interests first. If so, the statutory duty would be separate from and in addition to the adviser’s common law and existing statutory obligations, and constitute another layer of duty.
To turn to another matter, it’s been suggested that intra-fund advice should be excepted from the proposed statutory duty. If the exception is strictly confined to the provision of information about a contributor’s existing entitlement in a fund, that is one thing. But to grant an unqualified exception for the provision of financial advice by a fund to a contributor would be to drive not only a horse and cart but a road train though the proposed statutory duty.
By way of conclusion, it is important that the new provisions be clearly drafted, and be as simple as possible, and that they clearly identify the class of persons on whom the duty is imposed – for example, AFSLs and their representatives.
The relationship between Section 12ED of ASIC and Section 945A should be spelled out. It is undesirable to have an adviser’s statutory obligations to a client set out in different statutes without any attempt to bring them together.
One of the problems, of course, is that all too often the political process ends up believing that the way to solve a problem is simply to fling some legislative provisions, sometimes not well thought out, at the problem. What we need is somebody, or some people, with clear minds, and a knowledge of basic English, to give thought to these problems and to craft a solution which is a practical and sensible solution – in other words, a coherent and precise solution to a problem that is an exceedingly important problem.
Sir Anthony Mason, AC, KBE, is a former Chief Justice of the High Court of Australia. His is the Patron of the Self Managed Super Fund Professionals’ Association of Australia (SPAA). This is an edited transcript of a presentation to the 2011 SPAA National Conference in Brisbane.
