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Which case won?

”I suffered a loss because of bad investment advice, so the financial advisor should compensate me.” Which case won?
15 Oct | Which Case Won

”I suffered a loss because of bad investment advice, so the financial advisor should compensate me.” Which case won?

by Geoff Roberson, Parramatta

The Facts

Investment in mortgage fund for fixed rate of return

An investor was a long-term client and personal friend of the director of a financial firm. 

The financial firm was the responsible entity of a mortgage fund, and the investor was a long-term investor in the fund. 

The fund invited investors to invest in mortgages secured over real property and earn a fixed rate of return over a fixed investment term. 

The investor and his self-managed superannuation fund (SMSF) invested a total of $172,000 in a second contributory mortgage in the fund.

No return to investor after property sold at loss

The corporate borrower defaulted on that mortgage and the property was sold at a loss. This resulted in only a partial return to the first mortgagee and no return to the second mortgagees, including the investor and his SMSF. 

The investor complained to the Australian Financial Complaints Authority (AFCA), which assigned a case manager to investigate the complaint.

casea
The case for the investor
  • My financial firm misled me about the creditworthiness of the borrower and the existence of a third mortgage over the property.
  • If I had known about these factors I would not have invested and would not have suffered a loss.
  • Therefore I am entitled to recover my losses from the financial firm.
caseb
The case for the financial firm
  • Our role as financial advisor was to provide general advice only, which we did. In doing so, we disclosed all required information to the investor.
  • Given the investor’s investment history, even if we had provided advice about the creditworthiness of the borrower and the existence of a third party mortgage over the property, the investor would have invested anyway and he would have still suffered the loss.
  • Therefore, we are not required to compensate the investor for his loss.

So, which case won?

Cast your judgment below to find out
Case A Case B

Case A won. You were right!

How people voted
a43%
b57%

Expert commentary on the court's decision

“If as a consumer or small business owner you have a concern regarding a financial firm, you may wish to contact AFCA.

AFCA is Australia’s financial industry ombudsman and provides an alternative forum to tribunals and courts for resolving financial disputes related to banking, credit, general insurance, financial advice, investments, life insurance or superannuation.”
Investor contributed to loss but still entitled to award with 40% reduction

AFCA found in favour of the investor, but adjusted the award down by 40% because the investor had contributed to his own losses.

The financial firm was required to pay the investor $97,500 plus interest, as well as paying the investor’s SMSF a settlement amount of $6,000 plus interest.

Failure to disclose existence of third mortgage was misleading by omission

AFCA found that there had been issues with late payments, and the existence of a third mortgage should have been disclosed to the investor in the relevant product disclosure statement.

By not disclosing the required information, the advisor had misled the investor by omission and the investor had suffered loss.

AFCA accepted that the investor would have continued to invest in similar sub-schemes anyway.

When to contact AFCA

If as a consumer or small business owner you have a concern regarding a financial firm, you may wish to contact AFCA.  

AFCA is Australia’s financial industry ombudsman and provides an alternative forum to tribunals and courts for resolving financial disputes related to banking, credit, general insurance, financial advice, investments, life insurance or superannuation. 

Bear in mind, however, that an umpire like AFCA will scrutinise not only the shortcomings of the financial institution at the centre of your complaint, but also the extent to which your own actions contributed to the situation in dispute. 

You cannot rely on a regulator alone. Instead, you must take responsibility for conducting your due diligence properly to protect your own interests. 

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.
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