Advisers can be held responsible for not warning clients about new developments in an existing investment portfolio that may create an additional risk. In Swan & Baker Pty Limited v Marando, two investors claimed that an accounting firm and their financial adviser had engaged in misleading and deceptive conduct, unconscionable conduct and had breached their professional duty by giving them negligent advice.
The NSW Court of Appeal held that the Marandos' financial adviser's duty of care required him to avoid exposing them to an additional, but avoidable, risk of financial loss. This decision highlights the complexity surrounding claims involving financial advice where the common law duty of care extends to advice after an initial investment.
In 2008, Mr and Mrs Marando sought advice from Swan & Baker, an accounting firm, and invested $500,000 in the City Pacific Ltd Mortgage Fund for 90 days, after which the funds would be available for re-investment. The Marandos were provided a copy of the Fund Product Disclosure Statement, which included a 14 day cooling off period term for new investments.
Before the cooling off period ended, articles were published in the local media suggesting that City Pacific Ltd was in financial difficulties, which resulted in fund investors withdrawing in excess of $10 million.
Under pressure from requests to withdraw from the fund, City Pacific Ltd prevented investors from withdrawing their capital for a period of 180 days. However, notwithstanding this, the cooling off period of 14 days remained intact for all new investments.
Critically, Swan & Baker failed to advise the Marandos of the existence of the cooling off period. As a result, the Marandos were prevented from withdrawing their capital after the cooling off period expired and were consequently exposed to a significant risk of financial loss.
At first instance
The District Court awarded the Marandos $377,390 in damages to compensate for their losses sustained as a consequence of their failed investment. In considering the accounting firms' duty of care, the Court found that a director of the firm had breached this duty because he had failed to take positive steps to inform the clients that they had the right to withdraw their investment within the cooling off period and, consequently, the firm was held vicariously liable for his negligence. The primary judge accordingly found that the breach was the direct cause of the Marandos' loss.
Extended duty of care
By its findings in Hawkins v Clayton  164 CLR 539 (Hawkins), the High Court of Australia has acknowledged that the duty to take reasonable care means that advice given is accurate, does not expose a client to an unavoidable risk of financial loss and may also involve taking positive steps beyond the agreed professional task. This is particularly aimed at preventing a real and foreseeable risk of loss being sustained by a client. The implication of such a duty may be considered dependent on whether the duty to avoid economic loss involves an assumption of responsibility by the adviser and reliance by the client.
The NSW Court of Appeal acknowledged that in extending an adviser's duty of care, it needed to consider whether:
- the adviser was under a duty to volunteer information that they exclusively possessed
- the adviser was aware the recipient relied on that advice
- the adviser accepted responsibility for advising the recipient of additional developments, and
- foreseeable consequences existed if the adviser failed to disclose the relevant information.
The Court cited numerous authorities in support of an approach when determining whether a relationship gives rise to an extended duty of care to take positive action to avoid risk. Of primary consideration was the approach adopted in Hawkins where the Court stated that:
"[it may] extend to require the taking of positive steps to avoid...economic loss being sustained by the person... to whom the duty is owed... [T]he categories of cases in which a relationship of proximity gives rise to a duty of care which may...so extend are, like those in which there is a duty of care to avoid pure economic loss, commonly those involving the related elements of an assumption of responsibility and reliance."
In this case, the Court accepted evidence that:
- Swan & Baker assumed the responsibility of advising the Marandos on their investment and the further developments after their investment, and
- the Marandos relied on that advice.
As soon as Swan & Baker became aware of new developments that removed the rationale of the Marandos' investment, a real risk that financial loss could be suffered arose.
In applying Hawkins, the Court held that (among others) Swan & Baker's duty to exercise care extended beyond the investment to the additional risk encountered.
Implications for advisers
It follows that the current decision may ultimately impose extensive obligations on advisers.
Swan & Baker advanced the proposition that this extended duty may place a substantial burden on advisers to monitor the ongoing progress of all clients' investments to determine whether additional advice should be provided to minimise potential losses.
The Court concluded that the finding does not create issues of that kind submitted; rather the decision establishes that particular circumstances may exist where an adviser's common law duty to take care may incorporate an obligation to take further steps to advise a client of additional, but avoidable risk.
This judgment demonstrates that courts are willing to invoke a positive duty of care on advisers and advisers need to be diligent and on alert when giving financial advice in circumstances where a new development in an existing investment may create an additional foreseeable risk.
Swan & Baker Pty Limited v Marando  NSWCA 233
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