Breach of ASIC Act Provisions and Common Law

Subject Code LAW2485 Subject Name Law of Investment and Financial Markets Location Campus HN Campus Friday 3p m tutorial Student name Tran Khanh Linh Student Number s3877161 Lecturer’s name Nguyen A. Subject Code LAW2485 Subject Name Law of Investment and Financial Markets Location Campus HN Campus Friday 3p.m. tutorial Student name Tran Khanh Linh Student Number s3877161 Lecturer’s name Nguyen Anh Thu Word Count (excluding footnotes and bibliography) 3518   Table of contents Issues 3 Rules and application 4 First issue Breach of ASIC Act Provisions and Common Law 4 Unconscionable conduct 4 Misleading and Deceptive Conduct 5 Implied Warranties and Common Law Implied Term of Due Care and Negligent Misstatement 7 Remedies 8 Second issue Breach of Fiduciary and Statutory Duties 8 Duty to act in the best interest and provide suitable advice 9 Duty to prioritise Client’s Interests in the Event of a Conflict of Interest 10 Conflicted remuneration 11 Disclosure documents 11 Licensee Obligations 12 Remedies: 13 C. Conclusion: 13 Bibliography 15   A. Issues The first issue is whether Thomas, an authorised representative of Ricca Pty Ltd, as well as its licensee, breached provisions under the ASIC Act 2001 and related common law: ● Unconscionable conduct under s12CA, s12CB, and s12CC (1) and common law; ● Misleading and deceptive conduct under s12DA(1) and s12DB(1) and common law; ● Due care, skill, and terms under s12ED(1) and common law, negligent misstatement under common law; when Thomas exploits Morgan’s mental health issues and financial condition with a lack of financial knowledge to demand her to invest in Technologia Ltd, Thomas also causes Morgan to have the wrong belief in her misleading statement about the corporation, ignoring Morgan’s condition. The suggestion of investing in Technologia Ltd and investing the superannuation in Incentivised Management Systems Ltd (IMS) was also lacking due care and diligence as Thomas did not take notice of Morgan’s situation. The second issue is whether Thomas and Ricca Pty Ltd breached their duties under CA 2001 and related common law: ● Fiduciary duty to act in Morgans best interest under s961B and statutory duty of providing useful advice under s961G, s961H; ● Fiduciary duty to report any conflicts of interest, as required by statutory law of s961J; ● Conflicted remuneration under s963A; ● Statutory duty to provide a Product Disclosure Statement (PDS) under s1012C, and nondefective Statement of Advice (SOA) and Financial Service Guide (FSG) under s952D and s952E; ● Licensee obligations in s912A(1), s917A(1) s917E; when Thomas only preferred his own interest over Morgan’s interest to invest in Technologia Ltd without considering her circumstances, which does not meet the clients requirements to benefit himself and the company. The given disclosure materials were flawed and did not contain enough essential information for the client to make her own decision. According to the licensee, Ricca Pty Ltd did not guarantee its representatives deliver suitable suggestions to customers and failed to be in charge of conflicts of interests and disputes. B. Rules and application 1. First issue Breach of ASIC Act Provisions and Common Law According to s12BC , Morgan can be considered a ‘consumer’ as the service she engaged was for her financial personal use and purpose. Other clients will also be considered as ‘consumers’ even if the service acquired was less than 40,000, or if it was used for domestic use and business purposes regarding small businesses. a. Unconscionable conduct Thomas breached s12CA as he was involved in unconscionable conduct with the meaning of unwritten law. The unconscionable conduct is explained in the case of Commercial Bank of Australia v Amadio (1983) when there is an imbalance between parties, in which one party has suffered from a disadvantage while the other takes unfair advantage of the created opportunity. The bank, in Amadio’s case, was held unconsciously when misleading the elderly migrants into ensuring their son’s business loan. Even though the bank knew their poor English speaking, they still benefited from guiding them inappropriately and did not recommend them to have independent legal advice. Like Amadios case, Morgan lacks financial information in knowing how to invest in her own suitable product. She can be known as a weaker party due to her financial knowledge and her serious stress because of the responsibility of looking after her deteriorating mother. Similar to the bank above, Thomas knew and was aware of it; however, he still convinced Morgan to invest in Technologia and buy motor vehicle insurance by using false statements. It is reported in the case that Thomas had unconscionable conduct on Morgan by manipulating the weaker party (Morgan) to receive the undisclosed commissions. Since Thomas is involved in unconscionable conduct concerning financial services, some factors of s12CC(1) are breached: ● s12CC(1)(a) : Thomas has a stronger dealing power than Morgan at the beginning because he is an authorised representative of the company, which means he will understand the financial products more than Morgan. As a result, Morgan just only depended on Thomas’s statement, with adverse financial consequences. ● s12CC(1)(d) : Thomas had undue impact and demand on Morgan. Taking his own benefit from his situation of being a financial adviser, he controlled Morgan by convincing her investment with false statements about Technologia. Moreover, he demanded Morgan by taking his own benefit from Morgan’s financial condition. Thus, Thomas can be determined to be involved in unconscionable conduct under both common and statutory law. b. Misleading and Deceptive Conduct There is a high possibility that Thomas breached s12DB(1) for involving in misleading and deceptive conduct due to the below subsections: ● s12DB(1)(a) : Thomas falsely introduced that the service he provided was high quality when he appeared to care about Morgan’s condition by taking some notes while Morgan talked. Yet, in reality, he did not care about her needs when giving the advice. ● s12DB(1)(c) and s12DB(d) : Thomas made false representations regarding the development and suitability of investing in Technologia which purports to be his own research about its profit since these oral statements were made while the official appointment occurred which Morgan wanted to have personal advice. To be more specific, Thomas falsely introduced that investing in Technologia is ‘a great opportunity’ and can be a ‘longterm growth project’ due to its possible profitability. ● s12DB(1)(e) : Thomas illustrated how investing in Technologia might gain benefits and its positive characteristics while it did not actually guarantee, such as ‘longterm growth’ during her retirement. ● s12DB(1)(h) : Thomas also misled Morgan into his belief that she needed to switch to his company and buy another company’s insurance, by claiming that it would be a better match. In particular, Thomas convinced Morgan to roll over her superannuation fund to IMS and buy vehicle insurance from Insurance Ltd by manipulating her to be the better option. In the case of ASIC v Dover Financial Advisers Pty Ltd (2019) , Dover was involved in misleading and deceptive conduct when they announced to give the best advice and protection to clients in the ‘Client Protection Policy’, while the disclaimer claims to disregard consumer protections and deprive clients. Similarly to the case, Thomas convinced Morgan that switching her vehicle insurance and investing in Techonologia will help her to gain profit, while in reality, his suggestions were made to make his own benefit with the disclosure commissions. Moreover, Thomas’s advertisement on IMS to Morgan was a safe product to switch, but in fact, this switching leads to the superannuation benefits for Morgan and makes her breach the legal appropriation. Thus, Dover and Thomas even seemed to help the customers to gain profit, but actually, were merely thinking about themselves.

Subject Code LAW2485

Subject Name Law of Investment and Financial Markets

Location & Campus

HN Campus Friday 3p.m tutorial

Word Count (excluding footnotes

and bibliography) 3518

Table of contents

Implied Warranties and Common Law Implied Term of Due Care and Negligent

Duty to prioritise Client’s Interests in the Event of a Conflict of Interest 10

A Issues

The first issue is whether Thomas, an authorised representative of Ricca Pty Ltd, as well as its licensee, breached provisions under the ASIC Act 2001 and related common law:

● Unconscionable conduct - under s12CA, s12CB, and s12CC (1) and common law;

● Misleading and deceptive conduct - under s12DA(1) and s12DB(1) and common law;

● Due care, skill, and terms under s12ED(1) and common law, negligent misstatement under common law;

when Thomas exploits Morgan’s mental health issues and financial condition with a lack of financial knowledge to demand her to invest in Technologia Ltd, Thomas also causes Morgan

to have the wrong belief in her misleading statement about the corporation, ignoring Morgan’s condition The suggestion of investing in Technologia Ltd and investing the superannuation in Incentivised Management Systems Ltd (IMS) was also lacking due care and diligence as Thomas did not take notice of Morgan’s situation

The second issue is whether Thomas and Ricca Pty Ltd breached their duties under CA 2001 and related common law:

● Fiduciary duty to act in Morgan's best interest under s961B and statutory duty of providing useful advice under s961G, s961H;

● Fiduciary duty to report any conflicts of interest, as required by statutory law of s961J;

● Conflicted remuneration under s963A;

● Statutory duty to provide a Product Disclosure Statement (PDS) under s1012C, and non-defective Statement of Advice (SOA) and Financial Service Guide (FSG) under s952D and s952E;

● Licensee obligations in s912A(1), s917A(1) & s917E;

when Thomas only preferred his own interest over Morgan’s interest to invest in Technologia Ltd without considering her circumstances, which does not meet the client's requirements to benefit himself and the company The given disclosure materials were flawed and did not contain enough essential information for the client to make her own decision According to

the licensee, Ricca Pty Ltd did not guarantee its representatives deliver suitable suggestions

to customers and failed to be in charge of conflicts of interests and disputes

B Rules and application

1 First issue - Breach of ASIC Act Provisions and Common Law

According to s12BC1, Morgan can be considered a ‘consumer’ as the service she engaged was for her financial personal use and purpose Other clients will also be considered as

‘consumers’ even if the service acquired was less than $40,000, or if it was used for domestic use and business purposes regarding small businesses

a Unconscionable conduct

Thomas breached s12CA2 as he was involved in unconscionable conduct with the meaning of unwritten law The unconscionable conduct is explained in the case of Commercial Bank of Australia v Amadio (1983)3 when there is an imbalance between parties, in which one party has suffered from a disadvantage while the other takes unfair advantage of the created opportunity The bank, in Amadio’s case, was held unconsciously when misleading the elderly migrants into ensuring their son’s business loan Even though the bank knew their poor English speaking, they still benefited from guiding them inappropriately and did not recommend them to have independent legal advice

Like Amadio's case, Morgan lacks financial information in knowing how to invest in her own suitable product She can be known as a weaker party due to her financial knowledge and her serious stress because of the responsibility of looking after her deteriorating mother Similar

to the bank above, Thomas knew and was aware of it; however, he still convinced Morgan to invest in Technologia and buy motor vehicle insurance by using false statements It is reported in the case that Thomas had unconscionable conduct on Morgan by manipulating the weaker party (Morgan) to receive the undisclosed commissions

Since Thomas is involved in unconscionable conduct concerning financial services, some factors of s12CC(1)4 are breached:

1 ASIC Act 2001 (Cth)s 12BC

2 ASIC Act 2001 (Cth)s 12CA

3 Commercial Bank of Australia v Amadio (1983)151CLR 447

4 ASIC Act 2001 (Cth)s 12CC(1)

● s12CC(1)(a)5: Thomas has a stronger dealing power than Morgan at the beginning because he is an authorised representative of the company, which means he will understand the financial products more than Morgan As a result, Morgan just only depended on Thomas’s statement, with adverse financial consequences

● s12CC(1)(d)6: Thomas had undue impact and demand on Morgan Taking his own benefit from his situation of being a financial adviser, he controlled Morgan by convincing her investment with false statements about Technologia Moreover, he demanded Morgan by taking his own benefit from Morgan’s financial condition

Thus, Thomas can be determined to be involved in unconscionable conduct under both common and statutory law

b Misleading and Deceptive Conduct

There is a high possibility that Thomas breached s12DB(1)7 for involving in misleading and deceptive conduct due to the below subsections:

● s12DB(1)(a)8: Thomas falsely introduced that the service he provided was high quality when he appeared to care about Morgan’s condition by taking some notes while Morgan talked Yet, in reality, he did not care about her needs when giving the advice

● s12DB(1)(c)9 and s12DB(d)10: Thomas made false representations regarding the development and suitability of investing in Technologia which purports to be his own research about its profit since these oral statements were made while the official appointment occurred which Morgan wanted to have personal advice To be more specific, Thomas falsely introduced that investing in Technologia is ‘a great opportunity’ and can be a ‘long-term growth project’ due to its possible profitability

● s12DB(1)(e)11: Thomas illustrated how investing in Technologia might gain benefits and its positive characteristics while it did not actually guarantee, such as ‘long-term growth’ during her retirement

5 ASIC Act 2001 (Cth)s 12CC(1)(a)

6 ASIC Act 2001 (Cth)s 12CC(1)(d)

7 ASIC Act 2001 (Cth)s 12DB(1)

8 ASIC Act 2001 (Cth)s 12DB(1)(a)

9 ASIC Act 2001 (Cth)s 12DB(1)(c)

10 ASIC Act 2001 (Cth)s 12DB(1)(d)

11 ASIC Act 2001 (Cth)s 12DB(1)(e)

● s12DB(1)(h)12: Thomas also misled Morgan into his belief that she needed to switch

to his company and buy another company’s insurance, by claiming that it would be a better match In particular, Thomas convinced Morgan to roll over her superannuation fund to IMS and buy vehicle insurance from Insurance Ltd by manipulating her to be the better option

In the case of ASIC v Dover Financial Advisers Pty Ltd (2019)13, Dover was involved in misleading and deceptive conduct when they announced to give the best advice and protection to clients in the ‘Client Protection Policy’, while the disclaimer claims to disregard consumer protections and deprive clients Similarly to the case, Thomas convinced Morgan that switching her vehicle insurance and investing in Techonologia will help her to gain profit, while in reality, his suggestions were made to make his own benefit with the disclosure commissions Moreover, Thomas’s advertisement on IMS to Morgan was a safe product to switch, but in fact, this switching leads to the superannuation benefits for Morgan and makes her breach the legal appropriation Thus, Dover and Thomas even seemed to help the customers to gain profit, but actually, were merely thinking about themselves

Applying the case law of Butcher v Lachlan Elder Realty Pty Ltd (2004)14 in this case, in using the objectivity test, it can be shown that any ordinary person, like Morgan’s circumstances - under tremendous mental and lack of financial condition, will find Thomas’s oral statements were misleading and deceptive This is due to the manipulative language Thomas was made to convince Morgan to buy the insurance and invest in the company to gain high endowments and income streams in the upcoming years Moreover, Thomas’s advice and his failure to reveal the results of switching superannuation resulted in the error outcome for his clients

Since the false introduction of Thomas to Morgan, it can be said that Thomas was involved in misleading and deceptive conduct

12 ASIC Act 2001 (Cth)s 12DB(1)(h)

13 ASIC v Dover Financial Advisers Pty Ltd [2019] FCA 1932; 140 ACSR 561

14 Butcher v Lachlan Elder Realty Pty Ltd (2004) HCA 60

c Implied Warranties and Common Law Implied Term of Due Care and Negligent Misstatement

In terms of statutory law, it is possible that Thomas breached s12ED(1)15 when he failed to conduct a suitable needs assessment and give the most appropriate products for customers According to Morgan’s conditions and her need for a comfortable retirement in the following years, any reasonable advisor would recommend her a low-risk investment for a safer situation However, Thomas advised Morgan to invest in Technologia, which is determined

as a high-risk investment Moreover, he did not warn Morgan of the potential risks of losing her money and assets, which is in contrast to what a reasonable advisor would have done to their clients And, although he had researched and had several options for Morgan, he still chose to only recommend Technologia to Morgan Moreover, for skill, Ricca also failed to act with due care, as any reasonable licensee must be responsible for training their representatives to have appropriate advice to meet the client's demands Evident that there is

no risk management system and no internal dispute resolution, the-customers-will-not-know where to complain if some unfair circumstances happen Thus, under s12ED(1), it would be unreasonable that Ricca has completed their conduct in the level of care and diligence

In terms of the common law, Thomas also breached his due care for negligent misstatement

In the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)16, Hedley Byrne enlarged credit to Easipower, because Heller provided the beneficial reference However, Heller was sued for negligent misstatement as soon as Easipower defaulted Applying the legal test in the above case, Thomas was also trusted by clients due to being a financial advisor Given that Morgan paid for his provided service, Thomas-must-have-understood-that his customers would follow his suggestions Thus, it was absolutely appropriate that clients would rely on Thomas and trust his recommendations to advance their financial circumstances Hence, Thomas owed Morgan a duty of care He breached it when he provided inappropriate recommendations without concern about his clients’ conditions, and ignored the-consequences-of-switching-to other products

Based on the case of Shaddock & Associates Pty Ltd & Anor v Parramatta City Council (1981)17, the court stated that a person providing information to whom relies upon must have

15 ASIC Act 2001 (Cth)s 12ED(1)

16 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

17 Shaddock & Associates Pty Ltd & Anor v Parramatta City Council (1981) ALR 385

the duty of care to ensure the correction of the information Applying this to the case, Thomas was misrepresenting to introduce to Morgan that Technologia’s shares profit would increase

by at least 30% that financial year, but the information was incorrect as later the company was insolvent and this information impacted Morgan’s investment decision Additionally, according to the case of Ali v Hartley Poynton Ltd (2002)18, Poynton was careless in giving incorrect recommendations without thinking about the customers’ situation and the risks Thus, Morgan suffered from investing in a high-risk investment company, which was opposite to her purpose at first; and Thomas was also negligent of the risk and his non-disclose commissions Hence, Thomas breached the duty of care Due to his negligence, Morgan might suffer from her loss of personal assets and breach the restrictions on superannuation benefits

And Ricca, they also breached their duty-of-care-under-common-law for Thomas’s misconduct and negligence whose responsibility is to make sure to provide the-best-service

-to-their clients

d Remedies

For the breaches under the statutory law of ASIC Act 2001, Morgan can obtain her loss and seek penalization from s12GF19 and s12GBB20 Restriction may be instructed from s12GD21 For the breaches in misleading and deceptive conduct, damages can be retrieved from s1041H22 and s1041I23 For breaches under common law, customers may be qualified for a variety of remedies, such as reimbursement, accounts for profit, and rescission of contracts

2 Second issue - Breach of Fiduciary and Statutory Duties

It must be stated that Morgan was a retail client and the service she received was personal Morgan can be considered a retail client as her investment was the financial product, and the additional service provided to her is superannuation, under s761G(6)24 Moreover, under

18 Ali v Hartley Poynton Ltd ((2002) 20 ACLC 1006)

19 ASIC Act 2001 (Cth)s 12GF

20 ASIC Act 2001 (Cth)s 12GBB

21 ASIC Act 2001 (Cth)s 12GD

22 Corporation Act 2001 (Cth) s 1041H

23 Corporation Act 2001 (Cth) s 1041I

24 Corporation Act 2001 (Cth) s 761G(6)

s766B(3)25, the advice provided by Thomas was personal since Morgan had a solo appointment with him to tell him-about-her-personal-circumstances-and-her-financial

-service

a Duty to act in the best interest and provide suitable advice

Both Thomas and Ricca breached s961B26 due to their wrong actions for the best interest of the customer, understanding the client’s personal demand, researching for favorable financial products, and determining the client’s results for investing in the product Although Morgan was demanded to invest in a low-risk investment due to her financial situation, Thomas still recommended her only one high-risk option Even if he had different investment options for Morgan, he chose to ignore those and only suggested one company Therefore, he seemed to not put effort into acquiring clients’ situations and risks before giving advice A reasonable advisor would not advise the conduct which was against the best interest of clients as the unsuitable-information-and-recommendation Under s961B(2)27, the conduct breached several sessions:

● s961B(2)(b)28: Thomas did not suitably concern with the clients’ demanding advice; thus, he failed to classify the advice’s subject matter sought by the client

● s961B(2)(e)29: Examining the bad financial circumstances and the need for low-risk management of Morgan, the recommendation of investing in a high-risk company, Technologia, was unreasonable

● s961B(2)(f)30: Thomas did not consider all judgement in recommending Morgan on her situation: her mental health issue, bad financial circumstances, and investing demand

● s961B(2)(g)31: Both Thomas and Ricca failed to sufficiently understand the client’s needs and act in the best interest Both of them only cared about their interest in their own commission

25 Corporation Act 2001 (Cth) s 766B(3)

26 Corporation Act 2001 (Cth) s 961B

27 Corporation Act 2001 (Cth) s 961B(2)

28 Corporation Act 2001 (Cth) s 961B(2)(b)

29 Corporation Act 2001 (Cth) s 961B(2)(e)

30 Corporation Act 2001 (Cth) s 961B(2)(f)

31 Corporation Act 2001 (Cth) s 961B(2)(g)

Therefore, both s961B and s961G32 were breached since Thomas did not act in the best interest of-Morgan-and-he-also-gave-some-unsuitable-advice-to-her

Thomas also breached s961H33 which claimed that the provider must give a reminder to the client if the advice’s information is inaccurate after trying to get the information In this case, Thomas did not warn Morgan about the false information in the profit when investing in Techonologia and based on that-information-to-give-Morgan-recommendation

In terms of the common law, financial advisors must have a fiduciary duty to act in the best interest of the client Regarding the case of Daly v Sydney Stock Exchange Ltd (1986)34, the Patrick Partner’s stockbroker recommended Daly to put his money on deposit with the company and stated that the firm was safe while it was in an unsteady financial position The court concluded that the stockbroker breached his fiduciary duty to act in the best interest of the client Similar to the case, Thomas and Ricca breached the fiduciary duty when Thomas affirmed the safety of the companies to recommend Morgan to put her money into but only for his undisclosed benefit, and Ricca failed to make sure the recommendation of their representatives-is-appropriate-to-the-client

b Duty to prioritise Client’s Interests in the Event of a Conflict of Interest

Thomas breached s961J35 when he failed to put the client's interests first even though her interest conflicted with his As a duty of a financial advisor, he must put away his personal interest and make sure that his recommendations will first benefit his clients However, Thomas forwarded an SOA and gave advice to Morgan to earn a commission for himself, and was all conscious of the risk of losing assets and violating the restrictions of his client The fact that he caused financial losses to Morgan when the company she invested in was in liquidation although he did not research carefully about that company before giving a recommendation shows his selfishness in prioritising his own benefit over that of Morgan’s Thus, he preferred his personal advantage over his client’s disadvantage

32 Corporation Act 2001 (Cth) s 961G

33 Corporation Act 2001 (Cth) s 961H

34 Daly v Sydney Stock Exchange Ltd (1986) HCA 25.

35 Corporation Act 2001 (Cth) s 961J