The recent court case between Hartley Poynton and a disgruntled investor in which the stockbroking firm was ordered to pay $1 million for reckless sharetrading could well be a watershed case with implications not just for stockbrokers, but all financial services intermediaries.
What makes the case unique is that Hartley Poynton was ordered to pay far more than investor Rahmat Ali’s initial losses of $300,000. If Judge Thomas Smith’s findings survive a possible appeal from Hartley Poynton, then the commonly held notion of a planner being liable for no more than losses incurred is blown clean out of the water.
Hartley Poynton was ordered by the Victorian Supreme Court to pay $1 million in total to Ali. Half of this was for the selling of Telstra shares contrary to instructions, while a further $246,000 accounted for negligent trading. The balance of $260,000 was awarded for exemplary damages.
According to Resnik Consulting founder Paul Resnik, this clearly has implications for financial planners.
“Up until now, we’d always assumed that the only liability financial planners had was for the actual losses incurred,” he says.
But Resnik also warns against complacency in thinking that the case is specific only to stockbrokers, or that the circumstances arising in the Ali case were peculiar to the pre-Financial Services Regulation Act (FSRA) legislative framework of the late 1990s.
“Here is a broker using a brand to sell the business and the brand, which is not altogether different from other dealer groups that use licences of convenience, with planners using enough freedom that the dealers have given them,” Resnik says.
“The parallels are quite clear. Whether the planners or stockbrokers’ ‘licences of convenience’ are similar or not, the regulation is almost identical.”
Resnik says even conceding that the laws governing intermediaries’ duties to clients have been tightened up under FSRA since the time of the case, the regulatory landscape of the late 90s was still based on similar principles designed to prevent negligent losses of a client’s money.
These principles are: how well do you know your client; how well do you know your products; how well does your client understand the risks; and how much consent have you got from your client.
“I’m confident none of these four [principles] were reached,” Resnik says of the Ali case.
Resnik believes a precedent has been set that raises interesting questions about a financial planner’s responsibility for the performance of their clients’ portfolios, for example, does a reverse situation of the Ali case hold?
“If a planner puts a client’s money into a cash investment, but 10 years down the track the client argues that it should have been invested in something more aggressive, then is the planner liable for losses of opportunity?”
“Historically, these sort of cases were cut off before they even got to court, but it could be very different now. There will be a huge pressure on indemnity insurance premiums, which are already going northward at some rate.”
Resnik says he has heard of many lawyers with hundreds of similar cases to the Ali one in the pipeline threatening to spill into the courts on the back of the precedent set by Judge Smith.
But the Financial Planning Association (FPA) head of professional standards council, June Smith, says the key aspect of the Ali case that rarely applies to financial planners is the discretionary trading powers granted to stockbrokers, meaning the ability to make multiple trades without the consent of the client for each individual trade.
“In the [Ali] case, the adviser had authority to buy and sell shares; there were documents that allowed him to keep trading,” Smith says.
“But there are very stringent obligations on planners to prevent this. A financial planner must advise on each execution.”
But she agrees with Resnik that here was a clear case where the axiom ‘know your client’ was ignored, with alarming consequences.
She does argue, however, that the regulative regime has been tightened up since the circumstances of this case arose.
Smith doubts that there will be an avalanche of similar cases against financial planners because of the expense involved, plus the length of time it takes for such cases to be completed.
