Throw out ‘bad apples’: FPA

Financial planning groups have been warned to keep a close watch on their advisers and to take firm action against “bad apples”, or risk future litigation by disgruntled clients.

In a statement to its members last week, the Financial Planning Association (FPA) claimed the recent Victorian Supreme Court decision against the Financial Wisdom dealer group is a major wake-up call and “will have implications for all licensees”.

The FPA warned all planning groups “have a clear and unequivocal duty to ensure those who represent them provide appropriate advice” and that they “will be ultimately held liable for their representatives’ actions, regardless of whether the licensee was aware that the representatives were acting outside their authority”.

The Commonwealth Bank (CBA) owned Financial Wisdom was found by the Victorian Supreme Court to be responsible for losses stemming from negligent advice provided by its financial planners, even though the advice given was not approved by the dealer group.

CBA executive general manager of financial planning Brett Himbury told Money Management last week that the bank had lodged a formal appeal to the ruling.

However, he applauded the FPA’s move, saying the financial planning industry had largely ignored the implications of the case.

“What we have consistently said is that there are major implications for the rest of the industry,” he says.

The FPA’s statement called on members to “implement strict risk management systems and to strictly screen and check bona fides, experience, qualifications and suitability when employing representatives”.

It also urged dealer groups to “reconsider policies about cross or multiple endorsements” and “objectively review monitoring and supervision systems and prevent bad apples from being managed out of one dealership and recycled through the industry”.

Hugh McLernon, managing director of IMF, a group that funds litigations, and which financed the action against Financial Wisdom, says financial planning groups had been slow to heed the message from the case.

“The broad implications of this trial are enormous and I don’t think that has filtered through yet,” he says.

“These days with more litigation funding, there is no doubt that people will use it.”