In May/June 2012 Kirsten met with Simon, an authorised financial adviser (AFA), about putting in place a financial plan. Among other things, the plan recommended that Kirsten build an investment property. In July 2012, Simon referred Kirsten to a building company (On Time Builders) who Kirsten signed a building contract with. Kirsten obtained loan finance for the build.
There were significant delays in On Time Builders completing the build, and in it reimbursing Kirsten’s mortgage interest (which On Time Builders had contracted to pay). On Time Builders was eventually placed into liquidation in May 2015, leaving Kirsten with an unfinished property. The build was finally completed in November 2015 after Kirsten engaged another building company.
Kirsten’s complaint
Kirsten complained about Simon’s advice. Kirsten said in relying on Simon’s advice she had suffered a financial loss because of the delays and eventual liquidation of On Time Builders. Kirsten said Simon should not have advised her to have the investment property built with On Time Builders. In particular Kirsten said Simon should have:
a) Advised her that On Time Builders’ manager (who she considered actually had full control of the company) was an undischarged bankrupt.
b) Recommended some alternative builders and not only On Time Builders.
c) Disclosed the commissions he earned in referring his clients to On Time Builders.
d) Disclosed On Time Builders’ financial position.
e) Told her to walk away from On Time Builders earlier.
Kirsten said she had suffered financial losses totalling $191,000 including lost rental income, interest reimbursement, legal and accounting costs, and additional costs to complete the build.
Simon’s view
Simon said that he had not disclosed the bankruptcy status of On Time Builders’ manager at the time he provided Kirsten with the advice in 2012, because he had looked into the background of the company’s director who was a chartered accountant. Simon was of the view this met his due diligence requirements in relation to the viability of On Time Builders. Simon also considered that the manager was indeed no more than a manager in 2012, and did not have effective control of the company.
Simon also said that:
a) His disclosure statement disclosed the commission he would earn from referring Kirsten to On Time Builders.
b) He considered Kirsten had not suffered a loss, because even taking into account the $191,000 in alleged losses, the value of the property increased quickly after it was completed, leaving Kirsten with an overall net gain.
c) There was no specific recommendation that Kirsten work with On Time Builders in the original financial plan. Simon said he simply introduced Kirsten to On Time Builders when she decided to implement the plan and build an investment property, but Kirsten could have engaged any company she chose.
d) He had originally been led to believe that On Time Builders was in a stable financial position, and that it would be able to complete the build. However, in 2014, when he began to have doubts, he tried to assist Kirsten by liaising with On Time Builders about getting the build completed.
Kirsten referred her complaint to FSCL.
Our review
The referral to On Time Builders
There was no evidence that Simon referred Kirsten to any other builders. It would have been prudent for Simon to refer Kirsten to another two or three building companies. Simon had relationships with other building companies who would have paid him commissions had he referred Kirsten to them. However, this did not affect our overall view on the complaint because it could not be known which company Kirsten would have engaged, and she may have engaged On Time Builders in any event.
In addition, it was not wrong for Simon to refer Kirsten to On Time Builders. There was no way Simon could have known in 2012 that the company would eventually be placed into liquidation.
Commission
We found that Simon had inadequately disclosed the commission he would receive as a result of referring Kirsten to On Time Builders. Although it was noted on Simon’s disclosure statement that he would receive commission from the referral, the commission was noted as being paid by a company related to On Time Builders, but with a different name. There was no way for Kirsten to know that the reference to that company was in fact a reference to On Time Builders.
However, this did not affect our overall view, because even if Simon had referred Kirsten to another building company, he would have received a similar commission in any event.
Bankruptcy status of the manager and the viability of the company
We also said it was reasonable for Simon to rely on the fact that On Time Builders’ director in 2012 (at the time he provided the advice to Kirsten), was an accountant. We said Simon had not been required to disclose the manager’s bankruptcy status in 2012 to Kirsten.
Should Simon have advised Kirsten to move away from the company sooner?
However, we thought that once Simon became aware of the problems with On Time Builders he should have advised Kirsten to engage another builder much sooner than he did.
By early 2014 Simon was concerned enough about On Time Builders that he was asking it for financial information because he was uncomfortable about his clients remaining engaged with the company. Moreover, we considered that the information provided by On Time Builders, which Simon accepted as adequate in showing financial stability, was insufficient.
It also became evident to Simon from early 2014 that the manager effectively controlled the company, and he should have then disclosed to Kirsten that the manager was an undischarged bankrupt.
We thought that if Simon had told Kirsten all of this information and kept her informed of all the discussions he was having with On Time Builders, she would have walked away from the company much sooner than she did.
Our decision
Ultimately, we found that Kirsten’s losses were caused by On Time Builders and were not a result of Simon’s financial advice. However, we thought that Simon could have told Kirsten earlier to walk away from the company and because he had not, this caused her stress. We suggested Simon pay Kirsten $2,000 for the stress caused. Kirsten accepted this in full and final settlement of her complaint.
