The legal basis for two changes announced last month by the Financial Industry Complaints Service (FICS) about the way it interprets its monetary limits on consumer compensation has been questioned by some legal experts.
The changes could in some cases effectively scrap the previous $100,000 consumer compensation cap from April 2 this year, potentially leaving planners uncovered for unlimited claims if PIinsurers refuse to embrace the changes (see “Planners face ‘massive’ PI shortfall”, MM, April 26).
FICS, for its part, insists the new changes were “forced” on it by a judgement of the Federal Court on December 21 last year in a test case it brought against now defunct dealer group Deakin Financial Services over its jurisdiction to hear consumer complaints related to the failed Westpoint property group.
FICS launched the case against Deakin to counter an argument by a number of affected members (Australian Financial Services (AFS) licensees) that FICS had no jurisdiction to hear Westpoint complaints because promissory notes are not ‘financial products’ as defined in the Corporations Act.
However, legal experts approached by MoneyManagement have expressed reservations over the overall validity of FICS interpretation of Justice Finkelstein’s judgement in the Deakin Case, and also about its practical application.
In its FICSBulletin (Issue 46) FICS said it “had to change the way monetary limits are applied to complaints (because of the Finkelstein judgement), and (the changes) are not changes to FICS rules regarding monetary limits”.
The first change, which FICS says requires that “joint claims no longer be split between the claimants for the purposes of applying the monetary limits”, is not controversial among the legal experts.
This change means complaints to FICS by joint owners of investments are to be treated as a single complaint as from April 2, rather than, as previously, by applying the monetary limits to the loss suffered by each individual investor.
Using an example in the FICSBulletin, a complaint cannot be split over a joint investment by two people who have lost $180,000, and so falls above FICS compensation cap of $100,000, and therefore cannot be heard by the FICS panel.
The second change — requiring “monetary limits to be applied separately to each claim rather than to a complaint as a whole where there are separate instances of advice/transactions occurring during an ongoing relationship” — is at the core of legal concerns.
In other words, as from April 2, FICS will apply a monetary limit of $100,000 in compensation for losses suffered from “separate instances of advice/transactions which were part of an ongoing client relationship or a documented financial strategy”.
Under the new interpretation, FICS would accept and deal with the whole of the complaint as a series of complaints based on each instance of advice and transaction, even though the combined losses were in excess of $100,000.
Previously, FICS “aggregated claims relating to ‘separate instances of advice/ transactions’ where these occurred during the course of an ongoing relationship, capping compensation at $100,000”.
In the FICSBulletin, FICS claims specifically that the changes have come about as a result of the Finkelstein judgement requiring it to apply differently ASIC’s Policy Statement 139.37.
According to FICS, PS 139 states: monetary claims limit will apply on a per claims basis, meaning that “separate claims by the same complainant cannot be aggregated by FICS for the purpose of determining a maximum claim”.
Accordingly, FICS has applied the “monetary limit to each claim or ‘cause of action’ raised by a complaint, even if those claims all arise out of an ongoing working relationship between a financial services provider and their client”.
The FICSBulletin went on to carry an example of the impact of the new PS 139 interpretation, which revealed that planners could face liability of up to $300,000, in effect a 200 per cent increase on the previous limit.
Using this example, a client (‘Mr B’) given advice totalling $180,000 that was communicated in three instalments (a statement of advice, followed by two records of advice) over 18 months can now be dealt with by FICS.
This is possible because under the new changes the monetary limit for ‘Mr B’ was deemed to be $300,000 — comprising three separate claims of $100,000 — as opposed to the capped limit of $100,000 prior to the changes.
However, lawyers Jonathan Winter and Stephen Hughes, both professional services advisers at Perth-based insurance broking firm Strathearn Insurance Brokers, have offered their own example based on the changes, which puts planner liability at up to $1 million.
Winter and Hughes told Money Management there were both “legal and insurance issues” emerging out of the FICS changes, as manifest in the hypothetical case of ‘Mr B’ in the FICSBulletin.
“Basically, the legal issue is whether it’s appropriate to assess the three separate transactions of ‘Mr B’ as three separate claims, or, alternatively whether these should be interpreted as one claim interrelated with each other.”
“In our view, where a planner has provided advice in very distinct and separate transactions then it is certainly open to argue that the planner has committed three separate breaches.
“However, the FICS statement is perhaps a bit too broad on what would constitutes separate acts, and, as a result, it needs to provide more clarification on this.”
The two lawyers said there could also be “inconsistencies from an insurance point of view as to whether ‘Mr B’s transactions are all separate acts”.
“FICS could make determinations on each separate act and an insurer could say ‘no’, they are all inter-related in that they all relate to the original recommendation that was made.
“For example, if you have an original recommendation to buy shares or buy into a managed fund, and a client has seen an SOA and seen a FSG and signed off on each of these.
“Then, the review in six months time could well not constitute a separate act, because it could be argued (by the insurers) that it’s related to the original act.”
Perth-based financial services-specialist lawyer Mark Halsey, of Halsey Legal Services, said that while the ‘Mr B’ example reveals member liability of $300,000, what happens if there were, say, five advice/transactions” in terms of an ‘ongoing relationship’.
“Are we talking about a potential liability of $500,000 if you have been servicing someone over a five-year period and you had five instances of advice/transactions with them?”
Halsey added that since liability on advice relating to life insurance is $250,000, potential planner liability could be $750,000 using ‘Mr B’ as an example if a complaint to FICS relates to life insurance and there are three instances of advice.
Describing the changes as a “dramatic expansion of FICS’ monetary limits by the back door”, Halsey said he was “surprised” by FICS’ interpretation of Finkelstein’s judgement, and had “serious questions about the overall validity” of its new position.
“I can’t find anything in the judgement that would require FICS to re-interpret their application of monetary limits in a way in which it claims is necessary in the FICSBulletin,” he said.
Halsey also found it “disturbing” and is “extremely disappointed” that no industry consultation on the changes had occurred.
“Because of the very gravity of the changes, I believe it would have been reasonable that some level of broad industry consultation occurred, whether or not the system’s documented procedures required them.
“After all, this is only FICS’ interpretation, and we are not aware of all the details of the changes or the implementation of the changes, and there may be serious questions about the legal validity of FICS’ approach once the details are better understood.
He said the changes “highlight the deficiencies of the current system and also the need for an independent appeal mechanism in relation to FICS decisions — a right of appeal based on a question of law”.
By contrast, Michael D’Argaville, legal counsel for FICS, told Money Management that “the changes to how FICS is applying its current rules are clearly required by Justice Finkelstein’s judgment”.
“FICS rules 12 and 13 apply monetary limits to the amount of a claim, and the judgment defines ‘claim’ in those rules to mean ‘cause of action’, which is a set of facts or circumstances that gives rise to a legally enforceable claim.”
D’Argaville said “both changes outlined in the FICSBulletin in fact derive from this principle (of ‘cause of action’), which will be familiar to PI insurers and those in the legal profession”.
“Although FICS did not take such a legalistic approach to the interpretation of its rules, [it] is now obliged to take the current approach based on the Court’s decision.”
He said FICS anticipates that the “net result of this approach will be that less rather than more claims will be accepted”.
“As a result of no longer splitting joint claims, FICS has rejected a significant number of complaints now considered outside the monetary limits, including approximately 27 complaints involving advice to enter into Westpoint investments.
“Few complaints are expected to be accepted as a result of no longer aggregating the amount of complaints containing multiple claims,” D’Argaville said.
