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Issue 28 - February 2017

Case studies

 

Case study one:
The applicants alleged that the financial advice they received from a representative of the FSP was not adequate in that it did not explain to them the risks associated with the recommendations. The applicants were in their mid-50s, in poor health, English was their second language, and they were unlikely to work again. One of the applicants was in receipt of a Workcover compensation payment and this was the first significant sum of the money that the applicant had ever received. 

FOS found in favour of the applicants. The advisor did not adequately disclose the risk of capital loss in terms the applicants were likely to understand. The advice was not appropriate because it didn’t meet the applicant’s primary concern to preserve capital. The applicant’s income already exceeded their expenditure so there was no need for more income than they would have earned by keeping their funds in a cash management account. The breach by the advisor caused the loss as the applicants would not have invested in the managed funds had the risks been explained to them in terms they were likely to understand. 

The breach was a cause of the applicant’s loss. The applicants would not have accepted the advice if the representative of the FSP had disclosed to them the risk to their investment capital and had informed them that they didn’t need to take any risk to achieve their primary goal of security of capital.
 

Case study two
The applicants received advice from the FSP to roll over their existing superannuation policies. They also received advice to purchase two residential investment properties borrowing in excess of 100% of the cost. The FSP’s assessment of their risk profile was reasonable and the superannuation and life insurance advice was appropriate. The applicants were classified as ‘assertive investors’ who could tolerate a negative return one in three years and whose minimum investment timeframe was six years or more. The FSP advised the applicants to purchase direct property to the value of $1,000,000 for rental income, however the FSP’s real estate company was responsible for the choice of property. 

The applicants considered that the advice was inappropriate and the FSP’s conflict of interest were inadequately disclosed and they incurred losses as a result. They alleged that the FSP breached their duty of care to the applicants. 

FOS found substantially in favour of the applicants. While the superannuation advice was appropriate, the FSP’s negative gearing and property advice was inappropriate and breached the FSP’s duty of care to the applicants. The FSP was required to compensate the applicant. The FSP’s recommended strategy and explanation of the consequent risks did not meet the standard of care a reasonable person would expect from the FSP. Affordability was not adequately considered as the FSP’s recommended strategy meant the applicants incurred a level of debt that magnified their risk and threatened their objective of reducing their home mortgage. The FSP was ordered to pay the applicants the amount of their financial loss.

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