[Weekly wrap] A new precedent

This week featured a handful of interesting yet very different court cases, with one case in particular likely to send a few shivers down the spines of some advisers.

Friday, August 10th 2012, 8:48AM 1 Comment

by Niko Kloeten

Two of the cases are those of Hamilton AFA Rodney Hartles, who was sued by a former client who lost money in Bridgecorp, and Jacqui Bradley, a former financial adviser who has begun her trial on charges brought by the SFO, which alleges she and her late husband ran a multi-million dollar Ponzi scheme.

But despite the vastly different sums involved ($90,000 compared to $15 million), it is the Hartles case that is more relevant to most advisers going about their day-to-day business. The High Court's decision in the Hartles case, following appeals from both sides against the District Court's judgment, contains some interesting findings.

Justice Mark Woolford, who is well-regarded in the business community, ruled that in certain circumstances advisers can be personally liable for advice even when operating under a limited liability company structure. This will be of particular relevance to one-man-band advisers.

Another key finding was that this case was different to the Armitage v Church because the client in this instance had less knowledge about finance companies and didn't have a view on them, therefore was more reliant on the adviser's advice. The damages award was increased based on this.

The Bradley trial, on the other hand, is a reminder that most advisers don't live a lavish lifestyle, and those that do are likely to be looked at with suspicion.

The Bradleys' house was sold for $4 million; there probably aren't many advisers around living in houses like that.

As IFA president Nigel Tate said to me recently, "most advisers aren't millionaires". The best example of this principle was former ASB adviser Stephen Versalko, who stole nearly $18 million from clients. His $3 million house raised suspicions given he was only on a salary of about $140,000. Contrary to what some people seem to think, there usually isn't a lot of money in financial advice.

The third major financial court case of the week was the Supreme Court's decision in the long-running Blue Chip saga. The result is a victory for the Blue Chip investors, as it gives them the right to void contracts forcing them to buy apartments. The point many advisers will like is the ruling that Blue Chip-type schemes come under securities law, not property law.

The court ruled that Blue Chip had been effectively selling debt securities without registering a prospectus or appointing a trustee, both of which are illegal. This confirms what many critics have been saying, which was that Blue Chip exploited a grey area in the law to operate like a finance company without the required oversight.

Advisers could be in trouble if they fail to change their business models in the next few years, according to Heathcote's Clayton Coplestone. When he returned to New Zealand four years ago after time running fund managers in Australia and Asia, Coplestone felt like he was in a "time warp" with regard to financial industry practices here.

He said the next 10 years would be good like the last 20 or 30 years but with different rules. In other words, there will be opportunities for advisers who build their businesses the right way and aren't reliant on trail commissions and other third-party payments for income. As a non-adviser and having had experience in overseas markets, his view is a useful one.

Also this week, the AAA (formerly the Axa Advisers Association) has reached an agreement with AMP ending a stand-off between the two over AMP's contracts for advisers. However, the exact nature of the agreement won't be known until the AAA presents to its members at un upcoming series of road shows.

AAA president John Wood hopes the solution found will generate an "interesting debate" in the industry. The AAA has previously raised concerns about product providers trying to "contract out" of their responsibilities under the Financial Advisers Act.

Meanwhile, the FMA has issued a warning to AFAs who fail to renew their adviser business statements: they risk being suspended. From the comments there appears to be some disquiet about the FMA's power in this regard, but advisers don't have a choice but to comply with the regulations as prescribed.

There were a couple of stories in the political space around superannuation this week, with Retirement Commissioner Diana Crossan announcing her retirement from the role and the Financial Services Council coming under attack from New Zealand First leader Winston Peters.

Crossan has been a strong advocate of much-needed changes to New Zealand's superannuation system, but unfortunately the National government has boxed itself into a corner over the issue and is looking more and more ridiculous for its failure to confront reality. At least Peters has an excuse, given his heavy reliance on the vote of fearful elderly who probably won't even be alive when Crossan's proposed increases in the NZ Super entitlement age kick in.

For those who can still stomach reading about the situation in Europe, Harbour has some interesting observations.

Lots of People news this week which you can read all about here.

Also the IFA is looking for a new chief executive - read the ad here

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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