CONSUMER CLAIMS AGAINST FINANCIAL ADVISERS: TWO IMPORTANT LESSONS

Five years after the GFC, and after handling hundreds of consumer complaints on behalf of financial advisers, we would like to highlight two important issues when faced with a consumer compensation claim.

Advisers should always have their own lawyers - lawyers who owe their primary duty to the adviser

Financial advisers faced with consumer disputes and demands for compensation often face a significant dilemma.  When the adviser notifies their professional indemnity ("PI") insurer, they are often faced with a situation in which the PI insurer nominates a firm of lawyers from the PI insurer's approved panel to handle the dispute.  This can happen before the insurer has made a decision in respect of indemnity.  Generally, one of the first tasks faced by the insurer's lawyer is to advise the insurer as to indemnity.

Lawyers appointed on this basis face a significant potential conflict-of-interest.  The insurer's lawyers generally have an ongoing relationship with the PI insurer.  One of their key roles is to advise the insurer as to whether to grant or deny insurance coverage for the financial adviser under the terms of the insurance policy.  Generally the insurer's lawyer will send a reservation of rights letter which often contains a term that allows the lawyer to continue acting for the insurer against the adviser, if there is a dispute between the insurer and the adviser.

The more sophisticated financial advisers recognise this potential conflict-of-interest.  Where consumer disputes arise, these advisers retain their own separate lawyers during the initial stages of the dispute in order to protect the adviser's interests.  Once the decision is made by the PI insurer's lawyer to grant indemnity (cover) under the PI insurance policy, then one expects the insurer's lawyer to actually take over the running of the dispute.  We have recently seen a situation where the insurer's lawyer demanded to take over conduct of the matter prior to granting indemnity, however, this is quite unusual.

Importantly, even when the insurer's lawyer takes over conduct of the dispute, the adviser should not lose interest in the matter.  The adviser should ensure that he or she is regularly informed as to the conduct of the matter.

Maintain common interest privilege

Where the adviser and the insurer each have separate lawyers working in relation to the dispute, it is important to ensure proper procedures are in place to maintain the claim of legal professional privilege. 

A person can claim legal professional privilege over confidential communications or documents between themselves and their lawyers which have been made or prepared for the dominant purpose of obtaining legal advice or in relation to proceedings or anticipated proceedings.  Communications that are the subject of a valid claim of legal professional privilege do not have to be provided under the process of discovery and cannot be used in evidence in litigation, do not have to be provided to ASIC-approved EDR Schemes during disputes (such as FOS and COSL), and do not have to be provided to ASIC when ASIC issues notices.  As you can imagine, this is a very valuable right that needs to be protected.

However, in the circumstances where the adviser has their own lawyer, what happens when that adviser is required to disclose the confidential communication to a third party with similar interests?  For example, if the lawyer acting for the adviser produces legal advice on liability arising from an SOA produced by the adviser and sent to a complainant client, and the PI insurer requests a copy of that advice in order to determine whether it will extend cover to the adviser.  Will the adviser be able to maintain a claim for privilege if that legal advice is provided to the insurer?

If the insurer has not been joined to the proceedings, it could be considered a third party to the lawyer-client relationship between the adviser and the adviser's lawyer.  Accordingly, any claim for privilege could be lost unless the insurer and adviser have a sufficiently common interest in the proceedings.

If the adviser has made a notification or claim under its PI insurance policy for indemnity in relation to the dispute, this may suffice for the adviser and the insurer to have a common interest in the legal advice on liability.  In those circumstances the adviser may be able to maintain its claim for legal professional privilege over the legal advice on the basis that it shares that claim with its insurer. There is a "common interest privilege" (Guinness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027).

The typical test used by the courts in determining common interest privilege is whether there was a sufficiently common interest at the time the document was disclosed, as opposed to when proceedings were actually commenced.  A claim for common interest privilege will not succeed when the parties' interests are selfish and potentially adverse to each other (Farrow Mortgage Services Pty Ltd (in liq) v Webb (1996) 39 NSWLR 601 at 612).

Some of the principles of common interest privilege appear to be as follows:  The parties do not necessarily have to share the same solicitors to claim the privilege.  Neither does the identity of the interests between the parties have to be so close that they could have used the same lawyer (Network Ten Ltd v Capital Television Holdings Ltd (1995) 36 NSWLR 275).

Under common law, common interest privilege does not appear to be restricted to advice obtained in anticipated or actual litigation (South Australia v Peat Marwick Mitchell (1995) 65 SASR 72).  However, a claim for common interest privilege under the Commonwealth Evidence Act appears to require existing or anticipated legal proceedings and that the parties have a common interest in the proceedings.

Common interest privilege has been taken to apply to disclosure of privileged communications between an insured's lawyer (e.g. a financial adviser's lawyer) and the adviser's insurer.

Having said that, it is important to note that common interest privilege will no longer exists between parties once they fall into dispute or if their interests are adverse to each other. For example, if the insurer was to later deny indemnity to the adviser in respect of the dispute, their interests will then become adverse and the adviser will be unable to maintain a claim for common interest privilege over any privileged documents provided to its insurer in relation to the proceedings.  However, the insured adviser should be able to maintain a claim for common interest in relation to the provision of privileged documents to the insurer prior to the denial of indemnity.

How do parties with a sufficiently common interest maintain common interest privilege in documents or communications?

  1. Identify clearly the purpose for which a document or communication is created – for the purpose of obtaining legal advice.
  2. Avoid mixing legal advice with any non-legal matters or administrative tasks.
  3. Avoid identifying the existence of the legal advice in internal reports and records, minutes of meetings etc.
  4. Do not refer to legal advice in non-legal documents or public statements – including a summary of the advice or the conclusion reached.
  5. Where an external consultant or expert needs to be retained, consider whether the external consultant can be retained by the lawyers and the external consultant's report be consolidated into the protected legal advice.
  6. Clearly identify and determine the existence of common interest privilege before sharing a privileged document with another party.

This is a complex area in which professional legal advice is typically required early in the process.  If privilege, which is a very valuable right, is lost in respect of a document or communication it cannot be reinstated or recovered.