In a decision handed down on Monday 16 December, the NSW Court of Appeal threw out an appeal by Commonwealth Financial Planning, siding with a previous judge who found an adviser who had switched a client from a Westpac Life to a CommInsure risk product was liable for negligence.
Reflecting on the case, industry lawyer Peter Bobbin of Rockwell Olivier told ifa it may have implications for accountability in cases of churning, with stakeholders other than individual advisers potentially taking greater responsibility.
According to Mr Bobbin, the court ruled that in this case it was “not the [authorised representative] that was at fault but the bank” which may have broader ramifications for parent companies of financial advice firms.
“This case suggests that at least a part of the product churning problem lies at the feet of the vertically integrated product issuer/distributor,” Mr Bobbin said.
The case may also suggest the court takes the view that “a client is allowed to make their own mistakes and if they suffer loss this is their problem, they are legally responsible for their choices”, which may have implications for other litigation matters involving advisers, Mr Bobbin explained.
“What the [judge’s ruling] says is that if the adviser can show that the decision was the client’s decision, they are liable for themselves and any loss,” he said. “I have won cases on behalf of advisers on this basis.”
Fellow financial services lawyer Sean Graham, now a compliance consultant, said the case is an example of why the corporate regulator has launched a surveillance campaign for the risk advice sector, with special consideration being given to instances of churning.
“It highlights all the things [ASIC deputy chairman] Peter Kell was talking about when he said [ASIC is] focused on risk insurance, commission churn and conflicts,” Mr Graham said. “This optimises those concerns.”
Mr Graham concurred with Mr Bobbin that vertical integration may have played a role in the initial insurance advice proffered by Commonwealth FP.
“It seems to be here that it was a transactional arrangement rather than an advice arrangement,” he said. “The fact that [the adviser was an] employee of the manufacturer and aligned to the bank is what drove the transaction.”
Meanwhile, practising adviser Justin Brand, an authorised representative of non-aligned dealer group Dover Financial Advisers, told ifa the case is a reminder of the importance of thorough training.
“Training and oversight has to be excellent otherwise you have people out there who are saying the wrong thing to clients,” Mr Brand said. “People go to companies like CBA and there’s a trust there; they think they can trust CBA of all companies to give them solid advice, and yet conversely they may possibly end up with one of the least properly trained advisers available.”
Unfortunately I was involved with a risk writer who churned his clients annually, frequently seeking agent agreements with life cos that offered the best commission. What he forgot to tell his clients was that he was receiving new business commissions every year,but oddly the new policy was always a better deal than the old one.
A fee for service, rather that 120% commission could solve churning
“83The primary judge said there should have been a full explanation of the risk, rather than “just in a perfunctory manner in fine print in a disclosure document that was swamped with information”…..hmmm…looking at this case compliance teams around the nation?
You keep telling advisers to write big fat SOAs full of disclaimers and disclosures and yet here we are again…template SOA thrown out of court. A nice detailed file note would have been far more valuable, and guess what…rather than spending 8 hours doing an SOA, and adviser could spend more time explaining things to the client!!!!
Some of the major churners of life insurance are bank advisers. Through their adviser net work it is almost automatic that if a client goes to a bank adviser for advice and they have life cover the bank adviser will encourage the client to move their cover to that banks life insurance provider. This has been one of the major consequences of the banks buying up a large portion of the risk insurance sector.
I want to see vertical integration eliminated. Anyone taking bets ?
The bank clearly had a program scanning customer acoounts for PDCs for a competitors policy.
Privacy breach?
For once, there was no third line forcing from a bank – this client was not eligble for a loan. Remember, the ACCC wont act on complaints of third line forcing unless its from the client
At the advice level there were two villains. The bank adviser, under quota pressure , did not ask enough health questions.
The client non-disclosed on his health
Finally, the judge decreed that the SOA, signed by the adviser, was not the advisers SOA because that adviser relied on a templated SOA from bank paraplanners.
http://www.caselaw.nsw.gov.au/…
Do you use Licencee required templates and/or Licencee paraplanners.