In the course of what remains one of the most turbulent economic periods experienced, providers of financial services must remain vigilant when discussing, dissecting and analysing available market information and providing financial advice to clients.
The recent decision of Australian Securities and Investments Commission v Camelot Derivatives Pty Limited (In Liquidation)  FCA 414 highlights the potential for allegations of misleading or deceptive conduct to be raised against financial service providers.
Justice Foster's judgment focused upon the key provisions that govern misleading or deceptive conduct in financial services, namely those contained within the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
Underwriters should bear these matters in mind when considering policy coverage issues or assessing the adequacy of the risk management strategies implemented by an insured.
Camelot Derivatives Pty Limited (In Liquidation) (Camelot) was the holder of an Australian Financial Services Licence and was in the business of providing financial product advice for certain classes of financial products, including derivatives.
Between March 2008 and October 2010, the primary business conducted by Camelot was advising, recommending and engaging in options trading investments on behalf of clients. Camelot promoted the trading on the basis that it used a strategy known as a 'condor' or an 'iron condor' in respect of the options available for trading. Camelot's managing director was heavily involved in the promotion of the trading scheme. He was involved in making statements that indicated that clients had earned, and could expect to earn, significant returns from options trading and that Camelot had experience implementing a successful strategy that generated significant returns from investments in an options trading market.
Unfortunately, during the March 2008 to October 2010 period, Camelot's clients suffered significant losses as a result of Camelot's trading activities. The clients complained to the Financial Ombudsman Service and to ASIC.
The complaints lodged with ASIC escalated, and examinations were conducted pursuant to section 19 of the ASIC Act. The investigations culminated in ASIC commencing proceedings against Camelot and its managing director, in which it was alleged that Camelot, under the direction of its managing director, induced its clients to trade in options so that excessive brokerage commissions could be charged. The commissions were allegedly excessive because they were unjustifiable if Camelot and its managing director had paid due regard to their clients' interests.
ASIC sought declarations that:
- Camelot and its managing director had both engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, in contravention of section 1041H of the Corporations Act and in contravention of section 12DA of the ASIC Act;
- they both contravened section 912A(1)(a) of the Corporations Act by failing to do all things necessary to ensure that they provided the financial services efficiently, honestly and fairly; and
- Camelot's managing director was liable as an accessory in respect of Camelot's contravening conduct.
Misleading or deceptive conduct
Whether conduct was likely to mislead or deceive was a question of fact, and Justice Foster explained that the conduct would be so characterised if it:
- led a person into error or induced or was capable of inducing error or leading to an erroneous assumption or misconception; and
- caused, or was likely to cause, a person to misinterpret, or be deluded as to, the relevant facts.
Conduct was likely to mislead or deceive if there was a real, but not remote, possibility of it doing so. It was not necessary, however, for the purposes of establishing liability under section 1041H(1) of the Corporations Act or section 12DA(1) of the ASIC Act to prove that the conduct in question actually deceived or misled anyone. Having said that, it was necessary to examine the course of conduct as a whole, taking into account relevant surrounding facts and circumstances and the context in which representations were made. The attributes of the target audience were also relevant and needed to be considered.
Justice Foster held that Camelot had engaged in misleading or deceptive conduct in contravention of section 1041H of the Corporations Act and section 12DA of the ASIC Act. His Honour was satisfied that Camelot's clients were induced by representations to the effect that they would make significant profits through options trading by taking the advice proffered by Camelot and using its 'condor' strategies.
Camelot's inducements and blandishments were misleading or deceptive or likely to mislead or deceive because they did not adequately explain the risks involved and did not make clear to prospective clients the potential for Camelot to make significant profits while its clients made significant losses.
Acting efficiently, honestly and fairly
As to the alleged contravention of section 912A(1)(A) of the Corporations Act, Justice Foster advised that the words 'efficiently, honestly and fairly', as used in the section, imposed a requirement of competence when providing advice and complying with relevant statutory obligations. The words also connoted an element of even handedness in dealing with clients and of sound ethical values and judgment in matters relevant to a client's affairs.
Further, the use of the word 'efficient' in the section indicated that a licensee's performance must produce the desired effect and be capable, competent and adequate. His Honour noted that inefficiency could be established by demonstrating that the performance of a licensee's functions fell short of the reasonable standard of performance that the public was entitled to expect.
Ultimately, Justice Foster held that the strategy adopted by Camelot and its managing director was not honest, in a commercial sense, and did not constitute the fair provision of financial services in accordance with section 912(1)(a) of the Corporations Act. Camelot was found to have failed to do all things necessary to ensure that the financial services it provided were provided efficiently, honestly and fairly.
Managing Director's liability
As to whether Camelot's managing director was liable as an accessory, Justice Foster noted that the mere making of representations on behalf of Camelot, without knowledge of their false or their misleading or deceptive qualities could not constitute the necessary involvement for the purposes of accessorial liability. Nothing less than actual knowledge of the essential facts constituting the contravention would suffice for a finding of liability against a person alleged to have been involved in the contravention.
However, because Camelot's managing director made all of the representations at the client seminars and drafted Camelot's promotional material, he was held liable as an accessory pursuant to section 1324 of the Corporations Act.
This decision reminds us that, regardless of the type of financial advice engagement that is established, the holder of an Australian Financial Services Licence must ensure that a representative's statements of fact or opinion are not motivated by a desire to maintain clients, increase trading volume or cause the value of a particular security to increase. Failure to do so could result in a claim being made, or trigger ASIC's interests.
From an insurance perspective, underwriters should ensure, particularly in these uncertain economic times, that an insured's programs are regularly reviewed so that responsible officers and representatives meet the designated standards of competency and relevant education qualifications and experience. Risk management strategies should also be updated to ensure that any statements made can be appropriately qualified or that there is clear disclosure of a lack of any reasonable grounds for any advice given.
Winner - EOWA Employer of Choice for Women Citation 2009, 2010
Winner - Australasian Law Awards Gold Employer of Choice 2011
Finalist - ALB Australasian Law Awards 2008, 2010 and 2011 (Best Brisbane Firm)
Winner - BRW Client Choice Awards 2009 and 2010 - Best Australian Law Firm (revenue less than $50m)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.