Armitage v Church (27 May 2011) CIV 2009-485-1952 (High Court, Wellington) Dobson J
A recent decision of the High Court has shed further light on the standard of care expected of financial advisers under the Financial Advisers Act 2008 (the FAA). Although the conduct which is subject of the decision predates the FAA, the High Court's analysis of the requisite standard of care for financial advisers will provide guidance for the operation of the FAA.
The plaintiff completed risk profile questionnaires which revealed his risk profile as conservative. The defendant financial adviser advised the plaintiff to invest in fixed interest investments with four finance companies (which all subsequently failed) and ING. Later the plaintiff was advised to invest more funds in ING when a subsequent questionnaire showed that his risk profile had changed to a balanced/growth profile.
The Court held that the financial adviser breached her duty to provide competent advice by recommending that the plaintiff concentrate his investments in finance companies without advising the plaintiff of alternative, less risky fixed interest investments. However, damages were reduced by 25% because of the plaintiff's contributory negligence (the plaintiff had not followed the defendant financial adviser's recommendations relating to debt reduction). The damages were reduced by a further 40% because there was evidence that the plaintiff would still have invested in finance companies even if presented with alternative investment options.
A fundamental requirement of the FAA regime is that all financial advisers must act with the care, skill and diligence expected of a reasonable financial adviser. The FAA regime has only recently come fully into force and the Courts have yet to comment on the expected standard of care under the FAA. However, we anticipate that Justice Dobson’s comments in the case are likely to be equally applicable to the FAA regime and should be followed at least until the Courts examine the FAA regime itself. This would suggest that:
- Financial advisers should assess the level of a client’s understanding of risk and reward in investing (the so-called "duty to educate")
- Financial advisers must recommend investments that match their client’s risk profile
- Financial advisers must assess the risks relating to investment opportunities (in this case, Justice Dobson found the defendant financial adviser's reliance on statutory disclosures by finance companies was inadequate).