The term “misleading or deceptive conduct” is part of the vernacular of most people and it is arguable that the majority of the population has some understanding of its meaning.
The below list contains examples of the factors that may be considered if an allegation of misleading or deceptive conduct is made against a financial adviser:
• Whether conduct is misleading or deceptive or likely to mislead or deceive, is a question of fact to be determined in the context of the evidence and the relevant surrounding facts and circumstances and not with the benefit of hindsight;
• Whether or not it’s an expression of opinion that later turns out to be incorrect is not necessarily a contravention of the Corporations Act if the person expressing the opinion genuinely held the belief at the time; and
• Whether the representation influenced the applicant to acquire a particular financial product?
Conduct may be misleading or deceptive, even if a person has not been misled or deceived. All financial advisers have an obligation to ensure whatever claims or representations they make are able to be substantiated. ASIC has banned financial advisers who were found to have engaged in misleading or deceptive conduct.
What is misleading or deceptive conduct?
Section 1041H of the Corporations Act pertains to misleading or deceptive conduct in relation to a financial product or a financial service and states the following:
“A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or likely to mislead or deceive.”
Part of determining whether or not conduct is misleading or deceptive involves consideration on how such conduct is likely to be interpreted by the public and people of varying mental capacities and levels of education .
Representation regarding future performance
In FOS decision 22105 a financial adviser was found to have contravened the misleading or deceptive conduct provisions of the Corporations Act when he advised the complainants that an investment strategy was self-funding, when in fact it was not.
The member argued that the strategy was self-funding “until the portfolio was affected by the decline in the markets”. The Panel opined that a strategy could not be self-funding if it only self-funded when the markets perform well. The Panel also stated that the strategy could not be self-funding because of the risk of a margin call with no available assets to meet it.
The Panel found that it was reasonable to expect that the adviser would have known the strategy was not self-funding and as a result engaged in misleading or deceptive conduct. The complainants would not have entered into the investment were it not for the misleading or deceptive conduct of the member.
The complainants were awarded $58,000.
Misrepresentation by a third party
In FOS decision 21197 the Panel found that issues it identified in relation to a financing arrangement should have acted as, “red flags” to the member. The Panel did not accept that the member conducted any real research before recommending the investments in dispute.
The member said it was reasonable to rely on statements made in the PDS by reason of section 1013D(1)(c) of the Corporations Act, which require a product issuer to provide information in the PDS about the significant risks of holding an interest in the product. The member argued that a PDS did not make statements required by section 1013D(1)(c) of the Corporations Act and as a result was defective.
Although the Panel accepted that the PDS was defective, the Panel opined that the defects in the PDS would have been obvious, had the member conducted appropriate due diligence and as a result would have put the member on notice. The Panel found on balance that the complainants were induced to invest on the basis of the member’s defective advice.
The complainants were awarded $91,436 together with interest at the rate of 4% per annum compound from the date on investment till the date of payment.
Silence can be misleading or deceptive conduct
Deliberately keeping quiet or failing to provide information to a client that would have influenced their purchasing decisions has been found to be misleading or deceptive conduct. A financial adviser may contravene the misleading or deceptive conduct provisions of the Corporations Act if they distribute advertising material which contains incomplete or missing information. Silence can be found to be a contravention if a financial adviser knew a client mistakenly believed that they were entitled to certain rights or benefits and the adviser did not take steps to correct the client’s mistaken belief.
In summary
• Apply common sense when making or relying on a representation about a financial product or service;
• Ensure any claims are able to be properly substantiated even if you did not make them;
• Never remain silent if there is any indication that a client may be mistaken about their understanding of a financial product or service;
• Don’t be afraid to challenge a product or service provider if you believe the information they are distributing may be misleading or deceptive;
• If you are using template text in your advice documents, make sure you proof them and remove anything in them that is not relevant to the advice you are providing, for example the use of template advantages or benefits which do not apply to a product that you are recommending; and
• Seek advice if you are unsure or concerned that a representation may be misleading or deceptive.
