Law Cases and Questions

Question 1:

– Mandy, a university student, made bad investment and consequently suffered a loss. The reason she made bad investment is because she relied too much reasonably or unreasonably on the advices of Mr. Cool. The following paragraphs are responsibilities of an adviser and Mandy’s legal rights under common law and regulatory law which help us to see whether Mandy is able to sue for the recovery of her initial capital which was invested on her behalf.

– Negligence is the duty of care arising outside of the contract. In the context of Financial Service Product, the adviser has to take a reasonable care to avoid risk, loss and damage which are foreseeable to the investor. Even though there is no contractual relationship between two parties, the rules of negligence apply. Four requirements must be proven:

– The adviser owns the duty of care to his client.

– The duty of care is breached by the adviser.

– The breach of duty of care causes the loss and damage to the client.

– The loss and damage is foreseeable, not too promote.

Duty of care is the duty imposed in the person to take a reasonable care for his actions that may result in harm to the others. This duty is imposed by law and it stems from the “neighbour principle”, case Donoghue v Stevenson.

General test, which developed in case of Hedley Byrne v Heller1 and later cases, is used to determine the liability. Apply to the case; since this is a financial service company, Mr. Cool ought to know that the purpose of the investor coming to this company is to obtain financial service from them. The financial service provided by company is in business or serious nature and trusted by the customer. In this case, Mandy requested the company assist her on investment, thus the company can not deny that Mandy intended to act and rely on the advice. Since the company holds itself as a professional in providing financial advice, it is reasonable for her to believe that Mr. Cool has enough knowledge to give her a reasonable, suitable, appropriate advice. Furthermore, Mr. Cool and Mandy has a neighbour relationship because she is directly affected by his advice. Therefore, Mr. Cools owed the duty of care to Mandy.

In addition, he breached that duty as he did not have reasonable ground to ensure Mandy to invest. Also, he did not provide any written advice and explain the risk of the investment to Mandy, based on the case of Newman v Financial Wisdom Ltd2. Consequently, Mandy suffered a big loss, her initial investment $200,000 is now only worth $1000. This loss is probably out of what she can accept.

In general case, advisor would not be liable for losses an investor suffers in a fluctuating market, if the advisor complied with the regulatory rule. Refer to the Case of Field v Barber Asia Ltd, “Foreseeable” is not used to determine in our case because he did not comply with the regulatory in the first place, he is ,therefore, liable to her loss, no matter the market fluctuates or not.

And Fiduciary duty is a reasonable diligence, care and skill to act on other’s interest, not to gain secret profits – there is no conflict of interest. Fiduciary duty arises from Trust relationship. Case of Daly v Sydney Stock Exchange Ltd, Gibbs CJ made it clear that fiduciary duties applied to financial advisers, stating that: “In those circumstances, the firm had a duty to disclose to Dr Daly the information in its possession which would have revealed that the transaction was likely to be the most disadvantageous one from his point of view. Normally, the relation between a stockbroker and his client will be one of a fiduciary nature and such as to place on the broker an obligation to make to the client full and accurate disclosure of the broker’s own interest in the transaction”.

Apply to our case; it seems there is a presence of conflict of interest. Mr. Cool asked Mandy to invest half of the investment into a company which he has relationship with that company’s director, his brother. Mr. Cool must disclose this conflict of interest to Mandy, but he failed to do so. Therefore, he breached the fiduciary duty. The duty of an adviser to use reasonable care and skill is embodied in tort of negligence, fiduciary duties and under consumer protection legislation.

Furthermore, according to the “Conduct of Business” rule in Ch 7 of the Corporation Act2001, investment advisers are required to comply with the disclosure obligations when providing financial product advice to retail client. The disclosure requirements are designed to promote informed decision-making by both advisers and investors, so that investors are able to compare and make informed choices relating to financial products.

In our case, Mandy was so confused to what financial product she invested and she tried to approach Mr. Cool for more information. However, he refused to explain to her but merely promising her that her investments are safe. Therefore, it can be believed Mandy was unable to compare and make informed choices on her investments due to insufficient knowledge and understanding on the financial products. Mr. Cool, as a financial adviser, is expected to act with integrity and ensure there is adequate disclosure in the financial service provided and the products advised to Mandy. However, he failed to provide any disclosure documents to Mandy which is considered as an offence under criminal (s952C) and civil liability.

There are three disclosure documents required to provide by Mr. Cool to Mandy under Chapter 7 of the Corporations Act:

1. Financial Service Guide (FSG) – Pt7.7 of the Act -“Financial Services Disclosure”

FAs that provide financial services to retail clients are required to provide them FSG. This obligation applies to all financial service, including personal and general financial advice, s941A and s941B.Providing FSG is to allow retail clients to make an informed decision as to whether to obtain financial services from a particular provider. FSGs must include certain statements and information to the level which the retail client would be able to make a decision whether to acquire financial services from the providing entity, ss942B(3) and 942C(3). The FSG must be given to the client before the financial service is provided, s941D.

Mr. Cool is required to provide FSG to Mandy before he acted on his advice. FSG must list out the details of the service provided, Mt Cool’s contact details and any special instructions for Mandy to provide instructions to him. Furthermore, FSG should include information about dispute resolution system and how it can be accessed, so this can enable Mandy to seek for resolutions when she has complaints. However, Mr. Cool did not provide any FSG to Mandy which includes all the necessary information above for Mandy to decide whether to acquire the service.

2. Statement of Advice (SoA) – Pt7.7 of the Act -“Financial Services Disclosure”

SoA must be given to retail client when personal advice is provided by FAs, and this document enables them to understand why this advice was considered as appropriate and decide whether to rely on it. Mr. Cool needs to provide SoA to her at the same time as, or as soon as practicable after, the advice is provided, s946C(1). However, he never provides SoA in order to explain why he invested in those products, in those ways. He just claimed that he had complete discretion for his advice without any detailed reasons. If the advice given by Mr. Cool without reasonable grounds based on investor’s interest, he would breach the suitability rule of being a financial service provider.

FSG and SoA should include commission fee, service fee or other benefits he receives during the provision of any of the authorized service and advice respectively. Therefore, Mr. Cool has to disclose his relationship with the director of Cool Dude Investment Services as his interest conflict with Mandy is more likely to take advantage or benefit. This would be expected to be capable of influencing Mr. Cool in providing services and advice to Mandy. Since Mr. Cool didn’t provide disclosure document in the first place, he breached the disclosure rule on failure of providing disclosure document and disclosure of conflict of interests. (ss947B and 974 C)

3. Financial Product Disclosure (FDS) – Pt7.9 of the Act-“Financial Product Disclosure”

PDS must be given when personal advice includes a recommendation that the client acquire a particular financial product.s1012A. Under RG168, PDS has to be provided to consumer before investors applies for a financial product. In Mandy’s scenario, she has not pretty much idea on the financial products she acquired, because Mr. Cool never provided this document showing the product’s cost, significant risks and benefits to her. If Mandy is provided with PDS, she may disagree with Mr. Cool’s suggestion, loss might be prevented.

Since Mr. Cool breached the disclosure rule, a penalty may be imposed on Mr. Cool for breaches of Pt7.7 of the Corporations Act2001. Criminal liability and civil liability could be imposed on him and Mandy may recover the amount of the loss or damage by action against Mr. Cool under civil remedies embodied in Section 1041H of the Corporations Act 2001.

-Mr. Cool owes the Duty of care and he breached that Duty of care as well as the Fiduciary Duty under the Common Law. Under regulatory law, he breached the disclosure rule, failed to provide any disclosure documents which is considered as an offence under criminal (s952C) and civil liability. Mandy is likely able to sue Mr. Cool and recover her initial capital.

Question 2

Monetary Authority of Singapore (MAS) is the central banking in Singapore, plays two roles in financial sector. As a regulator, MAS safeguards financial sector to systemic risk and ensures that financial institutions are sound. Another role is supervisor, MAS ensures compliance with laws and guidelines. Currently, unlisted investment products are regulated under Securities and Future Act (SFA) and the Financial Adviser Act (FAA). In the light of the impact of global financial crisis, MAS proposed enhancements to the regulatory framework for unlisted products to better achieve its supervisory objectives. On 12 March 2009, MAS outlined their overall approach in the consultation paper on the Review of the Regulatory Regime Governing the Sale and Marketing of Unlisted Investment Products. This aims to safeguard consumers’ interest and promote higher industry standard.

MAS, as a regulator, set out the Prudential Rules and Guidelines for financial entity to comply. FAA and SFA are the two regulatory regimes governing the unlisted investment product.

Under the SFA, the financial adviser must provide adequate disclosure to customer. Prospectus is common to be given which includes all the information that an investor would consider to make a proper assessment of the securities being offered. In addition, the issuer and its advisers are responsible for ensuring the prospectus complies with the law and the prospectus discloses the risks and characteristics of an investment product and there are no false or misleading statements.

Under the FFA, it controls the sale and advisory process for financial products .It requires FAs must have a reasonable ground when recommending investments and having considered the key information of an investor. Financial institutions bear the primary responsibility for ensuring that they comply with all these requirements.

On the other hand, MAS acts as supervisor to ensure all the regulated entities comply with the rules by using varies of supervisory tools, for instance, reviewing financial accounts, conducting offsite reviews and thematic inspections. MAS will take firm and appropriate regulatory action when they notice there are breaches of law.

MAS came out with a proposal to promote more effective disclosure by improving the quality the flow of information about investment product to consumer to help consumer make investment decision.

In general view of investors, the current disclosure document, the prospectus, is found as difficult to read and understand. Considering the obligation of disclosure all information, this would lead to lengthy and complex documents which discourage investors from reading it .Therefore, MAS’s approach is to have another kind of product disclosure which is simpler and more effective as possible to retail clients .In the proposal, MAS proposes to develop a Product Highlights Sheet (PHS) to supplement prospectus and they are given together before the investors making their investment decisions. Prospectus is to provide all required information for investor to make investment decision, whereas PHS is to provide highlight key information such as the additional information and specific features of unlisted investment products. The PHS must be clear, concise and easy for the investors to understand. Besides, it is prepared by the product issuers and required to be within 4 pages in a “Question & Answer format.

Issuers and advisers have to meet the regulatory requirement of the PHS, otherwise it is considered as the breach of law. MAS functions as a supervisor in this aspect to make sure the information provided are complying with the regulatory requirements. MAS would take regulatory actions, such as issuing a stop order and preventing further issues of securities, when they notice there is violation of the law.

Another issue arises is investors experiencing losses and defaults due to no updated information provided regarding to their investments. Thus, the investors are unable to make informed decision to protect their interest and minimize their losses. To solve this, MAS considers that the investors should receive timely and meaningful ongoing disclosure about their investment products which is semi-annual or annual updated reports. Besides that, MAS proposes to require the issuers to make available, publicly, and regularly, bid or redemption prices of each products which will be included in PHS to ensure that the investors have the transparent valuation of their investment.

With the purpose of building consumer’s confidence on purchase of investment product and receiving financial advice, MAS has outlined their plans in the proposal so as to promote fair dealing in the sale and advisory process.

Currently, FAs have obligation to conduct a reasonable and sufficient investigation of new investment products before making a recommendation to the clients under FAA. However, deviations might exist in understanding of the nature and risks of the same products between the distributors as the extent of due diligence conducted by them differ. Therefore, consumers might be unable to make appropriate decisions based on inconsistent information. To compensate this, MAS proposes to require distributors to implement formal written policies and procedures to assess the nature of a new product and access its appropriateness to the customers. This can strengthen consumer’s confidence on the product advised.

In addition, distributors would like to base on the information provided by the product provider to make assessment and recommendation for the customers. However, this act is inappropriate due to the breach of diligence process. MAS will set out the key due diligence questions on new products which the distributor must cover and it needs formal approval from the senior management. MAS also requires distributor to keep records of the approvals and the documents which supports their assessment.

Furthermore, FAs are required to make reasonable enquires to obtain key information from customer under current regime [FAA-N01]. MAS notices the importance of knowing customers’ ability to bear potential losses arising from the proposed investment, therefore MAS’s approach to enhance quality of information obtained by FAs by adding required information on customer’s income, financial commitment and proportions of money invested and customer’s asset.

Currently, cooling off periods is applied to unit trusts and life policies. Its functions are to provide investors a chance to reconsider their investment decisions and investors are able to exit the investment without incurring sales charges or commissions. MAS propose a 7-days cooling off period for unlisted debenture in order to protect the interests of investors.

The recommendations in the proposals are combinations of new legal obligations and enhancements of existing requirements. It enhances the regulation of the sale and marketing of unlisted investment products which strengthen MAS regulatory power to monitor the financial market. MAS has requested feedbacks and comments on the proposal, and MAS may expect the regulated entities take necessary precaution before the legislative changes are implemented.

Question 3:

Financial Adviser Act is the current regulatory regime which governs the provision of financial advisory services in relation to investments products. It points out certain business conduct requirements which licensed financial advisers are required to comply with. These requirements can be found in Part III of the FAA. However, the inconsistencies of standards across the industry are observed by MAS, and therefore Information Paper on Good Practices for Licensed and Exempt Financial Advisers is published to address this problem. This paper outlines the good practices exercised by some FAs, as a guidance, to enhance FAs advisory and sales process, internal compliance systems and controls. FAs are encouraged to work out the good practices in order to meet the professional industry standards. Some of them are highlighted in the following paragraphs.

Section 25 states that the licensed financial advisers have to disclose all material information that relates to the investment products to every client who are recommended that investment product. Under the Subsection (1), it lists out certain information must be disclosed to the clients, they are: terms and conditions of this investment products, the benefits that the investors may receive, the risks that may arise and the loss that investors may suffer. Besides that, the costs, expenses, fees or other charges that may be imposed are also needed to disclose. For certain requirements For Subsection (3), it stated that this disclosure must be in written form in English.

The purpose of providing disclosure of information is to help the investors to have thorough understanding about the financial product they invested in order to make suitable and wise decision on their investment. In order to maintain the standard of advisory service, the financial advisers are recommended to provide checklist to their representatives to ensure that the investors understand about the requirement for disclosure of remuneration, as what information has to be disclosed, when this disclosure information is given to the investors.

Subsection (5) states that: the penalties will be given to any licensee who

(a) contravenes subsection (1), do not provide the disclosure information to investors

(b) fails to comply with a requirement imposed by the Authority under subsection (3),

(c) fails to comply with a direction of the Authority under subsection (4),

shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $25,000 or to imprisonment for a term not exceeding 12 months or to both.

That is how MAS control the financial adviser to follow the business conduct requirements.

Section 26 states that it will be an offence if the financial adviser makes certain false or misleading statements or material omissions; regarding a contract or proposed contract in respect of any investment product.

“Any licensee who contravenes subsection (1) shall, notwithstanding that a contract does not come into being, be guilty of an offence and shall be liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding 12 months or to both.”

FAs are under the obligation to have a reasonable basis for their recommendation which can fulfill the needs of the customers under Section 27 of FAA. In other words, FAs have to exercise their due care in their dealing with customers by which to follow the steps set out in FAA N01 when giving advice. First, FAs must collect relevant, updated and sufficient information from the customer, which may include customer’s investment objectives, financial situation, current investment portfolio, employment, status, risk tolerance, and other relevant details. Second, thorough analysis must be conducted on that information in order to provide suitable recommendation which cater the customer’s needs. Lastly, the basis of the recommendations should be properly documented and explained to the customers by FAs. In the information sheet, MAS has suggested some additional safeguards in the advisory and sales process which FAs can adopt so as to protect the interests of customers. FAs are recommended to suggest the customer be accompanied by a person who is able to explain what is being presented or recommender by the FAs. Besides, supervisors are required to be present during the sales presentations by the FAs; the role of the supervisor is to make sure the customer understand fully all the information provided by the FAs. Furthermore, FAs are allowed to execute transactions only when there is an approval by the supervisor.

If FA does not have a reasonable basis for making the recommendation and the customer suffer a loss or damage due to reliance on it, the FA would be breaching the rule in section 27 and he is liable to pay damages to that customer in respect of that loss or damage.

According to Section 29, a financial adviser necessary to provide information about any matter related to its business carried on in Singapore or elsewhere and any licensed representative to furnish it with information about any matter related to the business of the financial adviser of which he is a representative, whether carried in Singapore or elsewhere to the MAS when requested.

Any person is without reasonable excuse, breaches Section 29,” shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $25,000 or to imprisonment for a term not exceeding 12 months or to both. In the case of a continuing offence, a fine not exceeding $2,500 can apply for every day or part there of during which the offence continues after conviction.”

Section 33 prohibits a financial adviser from negotiating any contract of insurance with an insurer, which can be either directly or indirectly, except with a registered insurer. The contract of insure does not apply in reinsurance, business risk at the outside of Singapore or the other risks stated. But the reason of the exceptional nature of the risk or other exceptional circumstances, it is not reasonably practicable to comply with the section and the Authority may permit any licensee to negotiate the contract of insurance with such insurer as the licensee sees fit.

“If any person who breaks the Section 33 shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $25,000 or to imprisonment for a term not exceeding 3 years or to both.”

With the purpose of ensuring high quality and professional advisory services provided by FAs, there is a need of compliance of business conduct requirement by regulated entities. FAs are encouraged to take information paper as their guidance when they are carrying out their duties. It is necessary for them to meet the requirements, so that this can help maintain consistent professional standards across the industry

REFERENCES:

Publications

Law of investments, 2008, 2nd edn, John McLaren, Melissa Simpson & Mary Toohey, Australia

Consultation paper on review of the regulatory regime, March 2009, Governing the sale and marketing of unlisted investment products, Monetary Authority of Singapore

Financial advisers act (cap. 110), Information paper on good practices for licensed and exempt financial advisers Information Paper, No: FAA – IP01, Issue Date: 17 November 2004, Monetary Authority of Singapore

Financial advisers act (chapter 110), Frequently asked questions, Monetary Authority of Singapore

Websites

Singapore Statues Online, Financial Advisers Act (Chapter 110), viewed 28th March 2010, http://www.mas.gov.sg/index.html

Tanner De Witt Solicitors, Leading Case of Negligence by an Investment Adviser Sets Standard of Care, Business Law in Asia, viewed 2nd March 2010, http://www.tannerdewitt.com/media/publications/field-v-barber-asia.php

APPENDIX:

1. The general test used to determine liability, which were developed by Hedley Byrne and later cases, are:

– The speaker should have realised that he was trusted by the recipient

– Information was of a business or serious nature

– The speaker ought to have realised that the recipient intended to act on the information or advice.

– It was reasonable for the recipient to rely on the speaker.

2. In the case of Newman v Financial Wisdom Ltd, claims were made against a financial adviser on the basic of negligence advice and breaches of the precursor to Ch 7, s 819 of the Corporation law. Mandie J stated:

“I am therefore satisfied that Quarrell and Schimana, by recommending the investment, acted in breach of a duty of care which they owed to Mr Newman in the circumstances. In my opinion, the recommendation of the investment itself constituted negligence. In addition, there was negligence in the failure to ensure that there were reasonable grounds for recommending the investment, in the failure to make any proper inquiries or investigations concerning the investment and the person involved in it and in the failure to explain the risk involved and to ensure that they were within the risks which Mr Newman was prepared to accept”.

RMIT University

Bachelor of Business

ECONOMICS AND FINANCE

7th Intake, Semester 4

LAW 2460 LAW OF INVESTMENTS AND FINANCIAL MARKETS

Prepare by:

DAO THI DIEU THU – 3270858

MA NWE NWE WIN –

MAK CHEUK YING – 3271118

Prepare for:

Mr. SK YEO

Date of submission: 15th April 2010