Litigation – The Ultimate Reality Check

Tim Nethercote & Grant Holley

Compact – Compliance & Corporate Training

November 2006

Some background to

our story

Scene 1: The interview

The Fact Find 3 children – 2 months, 4 & 8 – want private school

secondary education Brooke 33, physiotherapist. Not working and plans to

stay at home Cess 35, plumber, now self-employed Both plan to retire at 60 Brooke risk averse. Cess has more aggressive risk

profile Brooke has $100,000 in term deposit for children’s

education Cess likes mountain bike riding Repayments on loan of $350,000 = $2,350/month Neither have wills

Fact Find

Because Cess now self-employed, no more employer super payments but has super in an industry fund

Cess’s income in new job approximately $120,000 pa

Net assets worth $230,000

Income surplus of $16,749 pa

Both want to retire at age 60 on net annual income of $50,000

The SoA Recommendations Use equity in their home to borrow $250,000 via an

Equity Access loan for investment purposes

Place borrowed funds and the $100,000 term deposit into the Avantguard Premium Service High Growth Portfolio

Roll over funds from the industry superannuation fund to the Avantguard Retail Superannuation Fund

Purchase $600,000 Avantguard term life cover on Cess’s life so as to discharge the mortgage and investment loan in the event of Cess’s death

THE SUPREME COURT OF VICTORIA

AT MELBOURNE No. 2006 No. 123456

 

COMMON LAW DIVISION 

B E T W E E N:-

 

BROOKE POOLE Plaintiff

(in her own capacity and as executrix of the will of Cecil Poole)

 -and-

 SUREFIRE FINANCIAL SOLUTIONS PTY LTD First Defendant 

-and- 

IAN SURE Second Defendant

-and- 

SAFEGUARD FINANCIAL GROUP PTY LTD Third Defendant

SCENE 2 - IN COURT

Ms Money Penny

Term deposit low risk with fair returns;

Avantguard Premium Service High Growth Portfolio greater risk;

Advisers should explain the nature of such risks to the client;

Ms Money Penny

The Growth Portfolio was suitable for Cess’s profile but not Brooke’s;

Over last 2 years, terms deposits returns were 5.5%, Growth Fund 1.3%-2%; and

Financial Plan did not properly consider the education goal.

Mr Life B. Init

Income protection and/or trauma cover should have been considered.

Sufficient funds for the children’s education and a fund to provide an income in the event of Cess’s death should have been considered.

Term insurance on Brooke’s life should also have been considered.

The superannuation switch was not justified.

Mr Jimmy Doright

Gave evidence of procedures, manuals, training, compliance reviews, approved products lists, etc that Safeguard had in place

SCENE 2 - IN COURT

SCENE 3 THE JUDGMENT

Judgment on causes of action

Corporations Act

Negligence

Breach of retainer

Misrepresentation – ASIC Act

Corporations Act s945A

A provider of financial product advice must only provide the advice to the client if:(a) the provider:

(i) determines the relevant personal circumstances in relation to giving

the advice; and

(ii) makes reasonable inquiries in relation to those personal circumstances;

and

Corporations Act s945A (continued)

(b) having regard to the information obtained from the client in relation to those personal circumstances, the provider has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all the circumstances;

and

(c) the advice is appropriate to the client, having regard to that consideration and investigation.

Common Law Negligence

Duty of Care(arises from the professional relationship)

Breach of Duty of Care(failing to act as a reasonable adviser in the circumstances)

Damage(a reasonably foreseeable consequence)

QUESTIONS & COMMENTS

Court adjourned