On 4 April 2013, the Federal Court in Perth handed down its judgment in Wealthsure Pty Ltd v Financial Ombudsman Service Ltd [2013] FCA 292. The judgment is a major victory for the Financial Ombudsman Service ("FOS") because it provides judicial support for the FOS procedures by which FOS has been allowing complainants multiple claims (multiple monetary limits) in a single dispute.
Most financial services professionals are aware that FOS has a jurisdictional limit in dealing with "disputes" based on a monetary cap in relation to "claims" that are brought before it. That limit provides that FOS may consider claims of up to $500,000 in value, and may make an award for compensation by way of a remedy of up to $280,000 per claim (excluding compensation for costs and interest payments).
The words "disputes" and "claims" are highlighted in the previous paragraph because they have specific meanings within FOS policies and procedures. Clause 14.1 of the current FOS Terms of Reference (1 January 2010 as amended 1 July 2010) (the "TOR") defines a "dispute" as:
...an expression of dissatisfaction with a financial services provider.
The word "claim" is not defined under the FOS TOR. The definition of "claim" appears in paragraph 9.7 of the FOS Operational Guidelines and provides:
The meaning of claim
FOS takes the view that, for the purpose of the TOR, the expression "claim" refers to the set of facts that, put together, give an applicant [a complainant] the right to ask for a remedy. This means a set of separate events or separate facts that lead to the alleged losses.
FOS does not aggregate a number of claims into one claim just because the claims all arose from an ongoing relationship between the FSP [Financial Services Provider] and an Applicant [complainant]...
Using those definitions, FOS maintains that a single dispute can be made up of multiple claims. The monetary limit jurisdiction is tied to the concept of claims rather than a dispute. As a consequence, FOS' position is that a single dispute can have multiple claims with multiple monetary limits – e.g. a dispute with 5 claims can involve an alleged detriment to the value of up to $2.5 million, and can result in remedial awards of up to $1.4 million (awards for costs and interest would be additional).
Background of the case
An authorised representative of an AFS licensee provided financial planning advice to the complainants. The advice was in the form of three statements of advice ("SOAs") provided between 3 November 2005 and 29 March 2007. The complainants suffered financial losses on the financial products they acquired, and they lodged a complaint with FOS seeking compensation.
At the time the complainants' dispute was lodged with FOS, the FOS TOR had a monetary limit of $150,000. On that basis, the AFS licensee sought to have the dispute removed from FOS because the dispute exceeded the monetary limit jurisdiction of FOS.
FOS considered and rejected the AFS licensee's submission. FOS considered these to be the subject of not one, but three claims arising in respect of each separate SOA provided to the complainants. As a consequence, the monetary limit was raised from $150,000 to a potential $450,000.
The AFS licensee put forward two arguments against the application of FOS procedures in this matter. Firstly, the AFS licensee claimed that the "splitting of the claim" constitutes an abuse of process. Secondly, in terms of the FOS determination in finding fault against the AFS licensee, the AFS licensee contended that if the financial adviser's assessment of the complainants' risk profile for the purpose of the original SOA (November 2005) was negligent, then this error infected the subsequent 2 SOAs (June 2006 and March 2007). That is to say, if the financial adviser made an error as to the complainants' appropriateness risk profile, then it was one error by the financial adviser from the outset and each SOA was based upon that erroneous risk profile, meaning there would only be one claim – i.e. the negligent act in relation to the original risk profiling process.
The matter was referred to the Federal Court.
The Court's decision
The Federal Court found for FOS in respect of both issues.
The Court identified that the issue of "claim splitting" usually arises in inferior Courts which have a monetary jurisdictional limit. Typically, legislation or rules relating to Courts of limited financial jurisdiction include a prohibition on a litigant dividing or splitting a claim into two, commencing two proceedings in the one Court, each for a part of the claim, and thereby avoiding the jurisdictional limit of the Court.
However, general legal principles provide that a complainant does not contravene the rule relating to claim splitting by bringing two complaints where the claims arise out of distinct and independent transactions. In addition, the complainant does not contravene the rule if a second course of action can be maintained without depriving the complainant of the remedy in the first cause of action.
The court held that, in the current circumstances, there was no unlawful claim splitting.
In terms of determining whether there was one or more "claims" on the basis of the AFS licensee's arguments, the Court held that since section 945A of the Corporations Act 2001 prescribed that a financial adviser must only provide advice to a client if:
then accordingly, when providing each separate SOA, the AFS licensee owed a separate statutory duty to the complainants.
The Federal Court expressed the position in the following words:
If there was negligence in the attribution of an inappropriate risk profile at the outset, then the generic error was repeated on two further occasions. That it was an error in each case requires to be adjudged upon the personal circumstances of the … [complainants] … at those different times. There would then have been not one but three errors, albeit the same generic error on each occasion.
That the duty of care or statutory duty might be similar in each instance does not alter the position that the giving of each SOA, and the related circumstances, constituted a discrete set of facts that gave the … [complainants] … the right to ask for a remedy which is the language of a claim as expressed in the [FOS] Operational Guidelines.
Implications
There are very significant implications arising from this Court decision for AFS licensees and their representatives who provide financial services to clients through an ongoing relationship.
The Court has clearly spelt out the specific obligations for persons who provide financial advice to clients, and that those obligations can be triggered on each and every occasion that advice is provided.
It also appears clear in circumstances where advice is provided to a client and the client acts upon the advice, that those circumstances will independently give rise to a separate potential claim within the meaning of FOS' policies and procedures. In this Court decision, 3 separate claims and 3 separate monetary limits arose because 3 separate instances of advice (as evidenced by 3 separate SOAs) were provided.
There is currently some debate in the financial advisory industry about the commercial advantages or disadvantages of providing clients with a single comprehensive financial strategy set out in one comprehensive SOA document, or alternatively providing multiple, simpler and more regular SOA documents, during the course of an ongoing service arrangement. This recent case adds a strong potential liability and risk management dimension to this commercial debate. Advisers who choose to use multiple SOA's in situations where one SOA could have been suitable may be creating needless increased liability for themselves and their licensees.
Many AFS licensees have separate endorsements to their professional indemnity insurance policies that provide specific and separate terms of cover for FOS matters. Often, these endorsements seem to have been drafted with a view to dealing with individual disputes based on an understanding that the concept of a "dispute" and a "claim" are somehow identical. While this has not been the case since 2010, this recent Federal Court case has come to highlight the potential problems with such an approach. There are potentially difficult practical issues in respect of excesses, and claim limits. For instance, where FOS splits a dispute into 3 separate claims, does the insured licensee have to pay 3 separate excesses? AFS licensees should carefully review the terms of their current professional indemnity insurance cover in order to determine whether it is still appropriate in light of the current case.