Court's ruling seen as test case for financial advisers

The companies figuring in the case included Bridgecorp. Photo / Martin Sykes

A High Court ruling that found a financial adviser breached her duty by recommending an investor have too great an exposure to finance companies is being seen as a test case and a possible sign of things to come when tighter financial advisory legislation comes into force on July 1.

The case is being seen as an early examination of the care, diligence and skill required of financial advisers under the new legislation.

The court found that the adviser, Carey Church, breached her duty to provide competent advice by recommending her clients Neil Armitage and his family trust have an "imprudent concentration" of funds in finance companies, and because she failed to offer any alternatives that would have created options for less risky interest investments.

Church was also found to have been negligent to recommend the ING's credit opportunities fund (COF) as a component of the fixed-interest part of the portfolios.

Justice Robert Dobson found that the COF was not a fixed-interest investment, even though the relevant document, including independent research, specifically stated that it was. Church believed she was entitled to rely on that material.

Church's lawyer, Brian Henry, said she would lodge an appeal against both these aspects of the judgment. The court found that the balance of Church's advice was not negligent and that she could not be held liable for what he said was Armitage's "cash flow crisis".

Armitage sought about $450,000 in damages but was awarded $60,000 instead.

The judge held Armitage himself responsible for the decision to invest in finance companies which caused the trust's losses. The judgment raised issues about the concentration of risk with 24 per cent in finance companies, nearly 27 per cent in ING fixed interest funds, and 47 per cent in ING's private portfolio services funds.

The companies involved were Bridgecorp, MFS Pacific Finance, Strategic Finance and North South Finance, all of which failed in the aftermath of the finance company meltdown of 2006-9.

Craig Simpson of Dentice Simpson Consulting, a financial adviser familiar with the judgment, said it was likely to result in far more responsibility being placed back on to the advisers.

Simpson said he thought the judge was looking forward, in terms of the new regulation, and "saying that all the advisers have to disclose the potential for loss, and to try and quantify that loss, when you get black swan events like the global financial crisis is almost impossible".

He added: "So I think there will be some advisers running for the hills, because they would have been in exactly the same sort of boat."

He said much of the judgment showed the benefit of hindsight, and that was acknowledged in some of the experts' opinions.

Henry said it would probably be seen as a test case for the new regime for advisers.

"It is a very confusing judgment and there are aspects there where Carey has been cleared, but it will have a huge impact on other financial advisers because I can tell you that there are many out there who were not up [to] the standards that she had," Henry said.

The Financial Advisers Act, which comes into effect on July 1, will require advisers to fully disclose whether they will benefit from the sale of a financial product they are giving advice on.