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Dr. Mark Sinclair
Dr. Mark Sinclair, Mentor Education

Court decision may have implications for churning

14 January 2014
Peter Bobbin

Industry lawyers have warned that a court decision made against Commonwealth Financial Planners last month may have significant implications for risk advisers and the churning debate.

On the 16 December, the NSW Court of Appeal threw out an appeal by Commonwealth Financial Planning of a negligence finding made against it, upholding a previous judge’s ruling of “misleading and deceptive” advice.

The previous judge who found an adviser who had switched a client from a Westpac Life to a CommInsure risk product was liable for negligence and industry lawyer Peter Bobbin of Rockwell Olivier commented that, ”it may have implications for accountability in cases of churning, with stakeholders other than individual advisers potentially taking greater responsibility.”

Bobbin lamented on the court ruling that, “in this case it was not the authorised representative that was at fault but the bank which may have broader ramifications for parent companies of financial advice firms and suggests that at least a part of the product churning problem lies at the feet of the vertically integrated product issuer/distributor.”

Bobbin also highlighted that the outcome of the case suggests that the court has taken the opinion that if a client is allowed to make their own mistakes and they suffer loss, the problem lies with the client…that it is the client’s problem – they are legally responsible for their choices of which Bobbin explained, “what the judge’s ruling says is that if the adviser can show that the decision was the client’s decision, they are liable for themselves and any loss.”

Sean Graham, a financial services lawyer and compliance consultant weighed into the discussion by saying that “the case is an example of why the corporate regulator has launched a surveillance campaign for the risk advice sector, with special consideration being given to instances of churning. It highlights all the things ASIC deputy chairman Peter Kell was talking about when he said ASIC is focused on risk insurance, commission churn and conflicts.” Graham said that the decision opitimised those concerns and suggested that vertical integration may have played a role in the initial insurance advice proffered by Commonwealth FP.

Graham added that because the adviser was an employee of the manufacturer and aligned to the bank “drove the transaction” and “it seems to be here that it was a transactional arrangement rather than an advice arrangement.”

Justin Brand, a practicing adviser and authorised representative of non-aligned dealer group Dover Financial Advisers, has issued a more sober reminder of the “importance of thorough training” and warned that, ”training and oversight has to be excellent otherwise you have people out there who are saying the wrong thing to clients. People go to companies like CBA and there’s a trust there; they think they can trust CBA of all companies to give them solid advice, and yet conversely they may possibly end up with one of the least properly trained advisers available.”

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