Court decision has churn implications

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.”