Early 2016 saw the failure of the first class action brought against an Australian regulator (in this case ASIC). The 2009 collapse of Townsville based Storm Financial Limited spawned several class actions against banks, most of which have been settled. In Lock v Australian Securities and Investments Commission [2016] FCA 31 a group of Storm investors sued ASIC alleging breach of a duty of care and misfeasance in public office. The investors alleged that ASIC knew, or ought to have known, that Storm was failing to comply with its obligations under the Corporations Act and that ASIC should have warned investors of the risks, or taken regulatory action against Storm, in order to protect investors from the losses they suffered arising from their Storm investments. 

The Court found that the plaintiffs’ pleading was deficient and failed to disclose any reasonable cause of action and therefore struck out the pleading in its entirety. In striking out the pleading, the Court refused leave for the plaintiffs to amend their pleading. The proceedings were subsequently dismissed by consent (with the plaintiffs ordered to pay ASIC’s costs of the proceedings). The case confirmed that ASIC does not owe a duty of care to investors whose interests it exists to protect.

The result is also notable because very few class actions have been struck out in their entirety.

In delivering its judgment, the Court considered in detail the principles that will apply in determining whether a statutory authority (like ASIC) will owe a party a duty of care. The general rule is that a statutory authority that is under no positive legislative obligation to exercise a power will not have a duty of care to third parties, unless by its conduct the authority places itself in a position that attracts a duty of care, and consequently calls for the exercise of that power.

The Court found that the plaintiffs in the proceedings had failed to disclose a reasonable cause of action against ASIC in respect of the alleged duty. The alleged duty was to avoid causing economic harm to the plaintiffs as investors, by ASIC exercising its powers with reasonable care to disclose risks to investors and/or by requiring Storm to minimise and avoid the risks. The Court held that it would be neither reasonable nor justifiable for investors to have relied upon ASIC’s regulation of Storm as a basis for acting on Storm’s advice, and that in any event the pleadings wholly failed to explain how the alleged negligence caused the plaintiffs’ losses (or what those losses were). Similarly, the plaintiffs failed to adequately plead the elements necessary to make out the tort of misfeasance in public office.

Comments made by the Court regarding the personal responsibility of investors are interesting in the context of investor class actions. The Court noted that all class members were aware that they were entering a “risk-laden field of endeavour”, and that they were acting in their own-self interest in taking advice from Storm with the hope of a return on their investment. Such an activity is not one that is inherently safe.

The case is also a timely reminder that while regulatory bodies play a significant role in maintaining an efficient market and handling of enforcement in appropriate circumstances, investors will face a difficult battle should they attempt to sue such a regulator when things do go wrong.