The Corporations Act 2001 (Cth) imposes a liability on financial advisers who engage in misleading and deceptive conduct to compensate a person who suffers loss by that conduct. However, the Act also contains a provision allowing financial advisers to reduce that liability by identifying conduct of the claimant or a third party that contributed to the loss. This is known as apportionment of liability.

There has been a recent legal controversy surrounding whether claims against financial advisers that are based on breaches of other duties, in addition to the duty not to engage in misleading or deceptive conduct, are subject to the apportionment regime in the Corporations Act 2001 (Cth).

There had been two decisions of the Full Federal Court that had reached different conclusions on this question, leaving the law in a state of confusion. On 13 May 2015, the High Court delivered its decision in Selig v Wealthsure Pty Ltd [2015] HCA 18, which resolved the confusion by limiting the application of the apportionment regime to claims of misleading and deceptive conduct only.

Background

The plaintiffs, Mr and Mrs Selig, received advice from Mr Bertram, who was an authorised representative of Wealthsure. Wealthsure was the holder of an Australian financial services licence and was a provider of financial services.

Justice Lander, after a trial in the Federal Court of Australia, found that the financial advice provided by Mr Bertram breached a number of obligations of financial advisers because:

  • Mr Bertram recommended that Mr and Mrs Selig (who had never previously invested in shares) invest in shares in a company that was not listed, had no secondary market and had no proven track record of delivering returns;
  • Mr Bertram failed to carry out due diligence of any kind in relation to the investment that he had recommended to Mr and Mrs Selig; and
  • Mr and Mrs Selig were wrongly advised regarding the appropriateness of the investment, the implementation of a negative gearing strategy, the retirement fund and retirement income, and the financial viability of the investment options.

As a result, Justice Lander found that Mr Bertram had breached his common law duty of care, his contractual obligations under his retainer, a number of statutory provisions under the Corporations Act 2001 (Cth) and theAustralian Securities and Investments Commission Act 2001 (Cth), and that therefore, both Mr Bertram and Wealthsure were liable for the loss suffered by Mr and Mrs Selig.

The apportionment regime

Crucially, one of the statutory provisions that Justice Lander found to have been contravened was section 1041H of the Corporations Act 2001 (Cth), which prohibits misleading and deceptive conduct in connection with a financial product or financial service.

Section 1041H of the Corporations Act 2001 (Cth) is subject to Division 2A of Part 7.10 of the Corporations Act 2001 (Cth), which allows defendants who have contravened Section 1041H to reduce their liability by showing that the claimant’s own negligence contributed to their loss, or that the wrongdoing of a third party had contributed to the loss.

The earlier judgments

Justice Lander dismissed the argument from Wealthsure, holding that Division 2A of Part 7.10 applied only to the claim for misleading and deceptive conduct, and that because the other claims were not apportionable, Mr and Mrs Selig could rely on the non-apportionable claims to recover the entire amount of their loss from Wealthsure.

Wealthsure appealed that decision and the Full Court, in a split 2-1 decision, found that Wealthsure could rely on the apportionment regime to reduce its liability under the claims which did not rely on section 1041H because each of the claims led to a single instance of loss, and because that single loss was apportionable for one claim, it must be apportionable for all claims.

However, only a matter of months after this Full Court decision, a different grouping of judges sitting as the Full Court of the Federal Court heard a case involving the same issue and disagreed with the previous decision of the Full Court. In that case (ABN AMRO Bank NV v Bathurst Regional Council (2014) 309 ALR 445), Justices Jacobson, Gilmour and Gordon unanimously decided that only the claim for misleading and deceptive conduct was apportionable, and allowed the plaintiffs in that case to recover the entirety of their losses from a single defendant.

These conflicting authorities could not be reconciled with one another and Mr and Mrs Selig appealed to the High Court to settle the controversy.

The High Court’s decision

The High Court, in a unanimous 5-0 decision, restored Justice Lander’s original decision, and agreed with the Full Court’s judgment in ABN AMRO Bank NV v Bathurst Regional Council.

The High Court held that the focus of Division 2A of Part 7.10 was on whether a ‘claim’ was apportionable, rather than whether the ‘loss’ was apportionable. Therefore, an analysis of whether there was a single, indivisible loss was irrelevant. There was no doubt that there were separate claims, regardless of whether there was a separate loss, and the apportionability of each separate claim had to be considered independently of one another.

Comment

The result reached in this case was the only sensible interpretation of the proportionate liability regime. If the Full Court’s decision had been allowed to stand, it would have resulted in the unseemly spectacle of defendants seeking to prove that their own conduct was misleading and deceptive so that they could access the proportionate liability regime.

However, this decision significantly limits the scope of financial advisers to reduce their liability under the proportionate liability regime in Division 2A of Part 7.10 of the Corporations Act 2001 (Cth) and arguably renders the regime almost entirely ineffectual.

From a claimant’s perspective, all that needs to be done to defeat an attempt to apportion liability is to show that the loss caused by misleading and deceptive conduct was also caused by conduct giving rise to a different, non-apportionable claim. There would be very few, if any, claims for misleading and deceptive conduct that could not also be framed as a breach of contract or a common law duty of care or some other statutory provision.

From a financial adviser’s perspective, this case highlights the risks and financial consequences of not having adequate risk-management systems and processes in place to ensure that the prospect of any claim is minimised.