High Court judgment to shake advice world

The High Court in Wellington found Church and Moneyworks had breached their duty of care by recommending investor Neil Armitage have too large an exposure to finance companies.

Armitage had completed a risk profile which found him to have a 'conservative' risk profile and the Court ruled Church had failed to provide competent advice after an "imprudent concentration" of funds in four finance companies.

Church was also found to be negligent in recommending the ING credit opportunities fund (COF) as a fixed interest component of the investment after Justice Dobson found the COF was not a fixed interest investment, despite documentation to suggest it was.

Church's advisers said they would appeal the ruling on the grounds that her advice met industry standards at that time and that she was entitled to rely on material provided by ING about the fund.

The case is being seen as a test ahead of new financial adviser regulations, and Institute of Financial Advisers (IFA) president Nigel Tate said that while the case was not a cause for worry among advisers, it would be studied seriously.

"I don't know that its a cause for concern. I think it's a good indicator as to what the courts will look at going forward."

He said he had spoken to Church and she considered her actions had been appropriate for the time, and that the Judge had based his determination on a hindsight view that the COF was a riskier investment than first thought.

"I think the Judge made a determination based on retrospective knowledge of the risks involved in the COF. The Judge has applied his current knowledge to a previous situation and said these funds created some problems and now, when I look at them, they actually look more like an equity type fund than a fixed interest fund."

Tate described Church as an capable adviser and said she believed she would win her appeal.

"She's very confident she's done the right thing and is very confident of winning the appeal."

Armitage originally sought around $450,000 in damages but was awarded $60,000 after Justice Dobson said he had also been at fault, pulling money out of some of his ING Investments before investors were paid out.

Describing the case as difficult, with both Church and Armitage apportioned some blame for the losses, Tate said the Institute would keep a watching brief on what he called a ground breaking case in New Zealand.

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

Comments from our readers

On 3 June 2011 at 8:32 pm Forthright said:

My first observation is about consistency in reporting, the Dominion Post said the plaintiff was assessed as an investor being at least at the high end of balanced and Good Returns reports Armitage (the plaintiff) having a 'conservative' risk profile, a big difference between the too.

IFA President Tate has got his head firmly buried in the Waikato turf if he holds the belief this case will not worry advisers. This case is a major seismic event for the advisory profession. The judgement, if it stands, will open the flood gates for aggrieved investors who have lost money on any investment during the last 6 years. It won’t matter how compliant you are today, you will be judged on everything you did over the last 6 years on today’s compliance standards.

We have a High Court Judge who is prepared to judge early to mid 2000’s portfolio events against today’s best practice methodology. We have the historical fact of the IFA best practice workshop at the 2005 annual Christchurch conference supporting a portfolio exposure for a conservative investors fixed interest, made up of Provincial Finance, Strategic Finance , South Canterbury, Hanover Finance and ING Credit funds. We also had the famous commentary from the IFA 2006 CEO, reminding all IFA advisers they had a responsibility to support and help maintain a vibrant and successful finance company sector in NZ.

I also wonder if the SFO will follow up on Judge Dobson finding that the INGCOF was not a fixed interest investment, even though the ING documents specially stated that it was.

I would also question if Judge Dobson had the necessary care diligence and skill to act as the arbitrating expert in determining that historical events should be judged in terms of today’s best practice.

On 4 June 2011 at 8:59 am traveller said:

I think Nigel Tate might be a bit optimistic. If I was an investor in similar circumstances, I would be on the phone to my lawyer requesting we have a go at my adviser in the light of this ruling

On 4 June 2011 at 1:31 pm Craig Simpson (Dentice Simpson Consulting Ltd) said:

One thing the article above omits is that in para's 12 to 15 of the judgement it addresses the client as having completed a further risk profile "which placed him in a somewhat different category" to that originally assessed. The client was assessed as being "Balanced/Growth". The client's Trust was assessed as being "Moderately Aggressive".

This makes you wonder how effective and accurate risk profiling tools are. It also highlights that risk profiling results should not be used in isolation and other factors should be given weight as well.

On 5 June 2011 at 7:40 pm Byron said:

About time. For years we've watched other Advisers put people into finance companies. The risk/return analysis has never stacked up (may as well buy shares for that level of risk) and certainly not for a conservative investor. When properly informed of the risks no conservative investor would ever want to go into them. I hope this results in a clean-out of all the industry cowboys as they fail to justify their placement of clients into such investments and get their butts sued.

On 6 June 2011 at 11:12 am Majella said:

Go, Carey!Best with the appeal. I know this is not about money (or you'd just pay the complainant the $60K), but about how the courts view our work. Surely the Judge should be examining the PROCESS, not the result?

On 6 June 2011 at 12:36 pm Mike said:

It will be interesting to hear the IFA's take on this case. From what I understand of the details of the case, under the IFA rules/code , Carey would likely be exonerated!

On 7 June 2011 at 11:14 am regan said:

The judge appears to have been quite errant, and I hope the appeal succeeds, for the reasons already put up by Forthright. Not only would it be a miscarriage of justice for the adviser involved, it would have huge unintended consequences.

We all know that in rising markets risk profiling has a different outcome than in a depressed climate, and we all know that the ING funds were promoted... enthusiastically... to advisers. The judge has acknowledged that the COF looks different NOW, and then ruled the wrong way in spite of that.

I thought the test was to compare the actions and process of the adviser involved against an industry standard, and what a prudent/competent adviser would have done in the circumstances. Judged that way, Carey should have been OK. The circumstances are much different today than 6 years ago, and to ignore that and find in favour of the plaintiff is a big worry for all of us. The appeal must be successful for everyone's sake; I thank Carey for pursuing it.

On 7 June 2011 at 1:16 pm Lindsay said:

For the Judge to have determined Church and Moneyworks had breached their duty of care by recommending investor Neil Armitage have too large an exposure to finance companies, the Judge must surely need to be an AFA

On 8 June 2011 at 10:09 am btw said:

The court didn't actually address the full range of applicable duties. It acknowledged the fiduciary relationship between the two parties, but then found the advisor had breached a lower tortious duty, and didn't address the higher fiduciary duty the advisor owed the client. Hopefully, for reasons of clarification, on appeal the client's lawyer will also argue breach of the fiduciary duty (which, if awarded, will mean the advisor is unable to plead contribution from the client so will be liable for the whole amount and not just the $60K). Strange, and lucky for the advisor, that it wasn't argued the first time. She might be wise to accept the $60K.

On 8 June 2011 at 10:36 am Life's too short said:

Several things are surprising:
1. the judge dismisses Rapid Ratings, yet they were a perfectly reputable ratings provider. Perhaps S&P who rated AIG AAA would have been better?
2. If no reliance can be placed on issuer documents, what is the point of all the legislation requiring issuers to have them? The SFO seem to think they should be relied on. Does this mean investors are also not able to rely on a prospectus?
3. The judge recommends listed bonds. I think he would find rated bonds were yielding less than short term cash at the time. No doubt the client wanted a higher than cash return. What about liquidity and price volatility for bonds when markets are nervous?
In essence, this judgement says it doesn't matter what your process is, if it goes wrong, you are liable. How could an adviser possibly know what is actually going on inside a private company, when even the auditor, trustee and chairman were in the dark?

On 9 June 2011 at 11:49 am David Whyte said:

It appears to me that the judge is holding the adviser responsible for the alleged criminal actions of others at Bridgecorp and Blue Chip, etc. This is unreasonable. After all, the entire machinery of the state failed to prevent the alleged criminal activities from taking place, so what chance would a private adviser or advisory firm have in this regard?

On 10 June 2011 at 3:07 pm Compliance said:

David - of course the judge is holding the adviser up against other criminal actions. This is how law is looked at. To say it is unreasonable is neither here nor there. Again it seems like too many advisers here have their heads buried in the sand.

Advisers may think they have a compliant process but how many have had these checked off against their DRS or the FMA. Hopefully any Commission Club out there which is offering compliant processes have got it fully signed off - I suspect not.

On 13 June 2011 at 10:58 am David Whyte said:

In response to Compliance or whoeveryouare - I don't diasgree with the observation about advisers not being aware of the potential impact of regulation - been there, done that. But to be so dismissive of reason in regard to any law is foolish. From time to time , the law is an ass. Anyone accepts that law - and thereby endorses by default - is also an ass.
However, to follow your logic of acceptance, and with new regulations in place now for public figures lending their names and reputations to product endorsements, can we expect Messrs Banks and Brash to be prosecuted over the Huljich fund manipulation issue? If Carey Church is held to be responsible for the behaviour of the Directors of Bridgecorp, Bluechip, etc., Banks and Brash should be regarded as responsible for the behaviour of their CEO.
Incidentally, "Club" is a collective noun - the correct verb is "has" not "have".

High Court judgment to shake advice world

A court case involving Moneyworks adviser Carey Church has raised “a number of questions of general interest as to the competent conduct of financial planners and advisers,” according to Justice Robert Dodson.

Friday, June 3rd 2011, 1:43PM 14 Comments

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