case study

Case Study: Mrs X versus FSP

Part 1 - Consumer Complaint

Consumer: Mrs X

Financial Services Provider: FSP - an Australian Financial Services Licensee

Complaint: FSP representative provided inappropriate financial advice leading to significant

financial loss for the complainant

Background to the complaint

1. Prior to the events the subject of the complaint, the consumer and her then- husband each

held superannuation investments within a joint self-managed superannuation fund (SMSF).

2. Following her separation from her then-husband, in September 2012 the consumer met with

the Financial Service Provider's (FSP) representative (the Representative) for the purpose

of receiving advice relatingto her share of the SMSF.

3. In the Statement of Advice (SoA) dated 24 September 2012 (2012 SoA), the Representative

recommended that the consumer:

a. Rollover her share of the SMSF, totalling approximately $106,000, into a new

XYZwealth Superannuation Master Fund (XYZwealth) account;and

b. Invest these monies in five managed investment schemes within the XYZwealth

account.

4. In February2013, the consumer again met with the Representative for the purpose of obtaining

advice relating to the investment of a further $250,000, which the consumer had obtained

from the sale of her property.

5. In the Statement of Additional Advice dated 21 February 2013 (2013 SoA), the

Representative recommended that the consumer invest these funds, in her own name, in a

further six managed investment schemes and cash management trusts.

6. In January 2014, the consumer again met with the Representative for the purpose of obtaining

advice in relation to her XYZwealth superannuation account.

7. In the SoA dated 10 January 2014 (2014 SoA), the Representative recommended that the

consumer make a "switch" of the investments within her XYZwealth superannuation account,

investing $10,000 of cash into the MFS Premium Income Fund (MFS).

8. The consumer chose not to invest $50,000 into the cash management trust recommended

by the Representative in the 2013 SoA, and instead chose to keep these funds within her own bank

account. However, the consumer otherwise accepted the advice provided in each of the above

documents, and made each of the investments recommended within them.79d53ab3-eb20-45ee-9ff2-a87cfc45c191

Subsequent events

8. Many of the investments recommended by the Representative have subsequently suffered

losses or become frozen, with the consumer being unable to redeem them.

10. On 31 January 2014, the consumer made a complaint to the FSP in relation to the advice

provided by the Representative.

To date the parties have been unable to resolve the complaint.

The consumer's claims and preferred outcomes

11. The consumer claims that:

a. the investments recommended by the Representative were unsuitable for her personal

circumstances - specifically, that they were inconsistent with her risk profile;

b. the risks associated with many of the recommended investments were not disclosed

to her;

c. the investments recommended by the Representative were poorly diversified,

resulting in her portfolio being over-exposedto particular asset classes;

d. she was not provided with a Product Disclosure Statement (PDS) for the:

i. Torus Land DevelopmentFund (Torus); and

ii. Capital Partners Income Fund (CAPIF);

e. no product research or other information was provided in the 2012 SoA in relation to

the:

i) Torus; and

ii) IP-OM Five (IP-OM) investments;

f. the research relied upon by the Representative in relation to the:

i) Prime Retirement and Aged Care Property Trust (Prime); and

ii) Newbury Property Fund (Newbury) was out of date;

g. The Representative did not disclose all of the commissions or payments received as a

result of her investment in the recommended products; and

h. The Representative had commercial interests in several of the investments which were

not disclosed.

12. In settlement of the complaint, the consumer is seeking compensationfor:

a) The capital losses she has suffered, which she calculates as being $181,000; and

b) The loss of potential investment returns she claims she would have earned, had

appropriate advice been provided (opportunity cost), which she calculates as

being $72,000.79d53ab3-eb20-45ee-9ff2-a87cfc45c191

Part 2 - FSP Response

The FSP has denied any liability in relation to the consumer's claims, and states that the advice

providedby the Representative was appropriate.

The FSP's position is set out in a letter to the consumer dated 11 February 2014.

The FSP alsomakes the followingstatements:

The proposed asset allocation differed from the benchmark exposure due to the complainant's

need for the higher level of income traditionally generated by the property asset class.

The asset allocation and investments were normal for a person with the complainant's risk profile.

The 2012 SoA included information on all of the investment manager's recommendations.

The recommended investments included growth assets and were ideally suited to the

complainant's long investment term. Further ... the asset allocation was reasonably consistent

with industry standards.

The consolidated financial position recommended by the Representative was:

conservative, with a 38% allocation to defensive assets;

diversified across all major asset classes;

diversified across investment managers; and

appropriate for an investor with a minimum investment term of eight years and a

requirement for both income and growth.

Numerous warnings relating to the risks associated with the recommended investments were

disclosed in the statements of advice provided to the complainant.

In December 2014, the Australian government announced that it would guarantee all deposits of

Australian banks, building societies, credit unions. However, this guarantee did not cover funds

invested in unlisted property trusts.

Investors began moving their assets into Government guaranteed accounts, following the

announcement.

Due to the large volumes of redemptions, managers of unlisted property trusts placed a freeze on

all redemptions. It was unforeseeable that the Government would offer this guarantee and create

market distortion.

Question-

a.What evidence you would require the complainant to provide to support her claim?

b.In your opinion does the FSP have any grounds for denying the complaint? Support your opinion with reference to laws, codes of practice, etc.

c.What evidence you would require the FSP to provide to support their denying of the claim?

d.How should the evidence provided by both parties be assessed?, and

e.Provide an opinion if a breach of any regulation has occurred, and if so, describe the most likely next step in the complaint process