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The authorised financial adviser and the un-authorised disclosure

The plan

In October 2012 Tom and Mel met with Joe, an authorised financial adviser (AFA), seeking financial planning advice. In the financial plan he provided, Joe advised Tom and Mel to invest in real property and introduced them to a building company, Solid Builders Limited.

In February 2013, Tom and Mel entered into a contract with Solid Builders to build a rental property on, and subdivide, an existing property they owned. By October 2013, Tom and Mel were in a position to go ahead with the build. However, there were considerable delays in the build and by 2015 the work was still not completed. In May 2015, Solid Builders went into liquidation, and Tom and Mel’s build was not completed.


The complaint

Tom and Mel said Joe’s advice had caused them financial loss because he:

a) Failed to disclose that a key employee (employee X) was a former bankrupt. Tom and Mel considered that employee X made major decisions and was in charge of Solid Builders. If Tom and Mel had known about the bankruptcy they would have carried out more due diligence, and may not have engaged with Solid Builders.

b) Disclosed information about Tom’s change in income to Solid Builders without Tom’s authority, putting Tom and Mel at a disadvantage in negotiating with Solid Builders.


To resolve their complaint, Tom and Mel sought:

a) A refund of Joe’s advice fees.

b) The $33,200 deposit they had paid to Solid Builders in November 2013.

c) Around $2,800 in interest they had paid on the borrowed deposit.

d) Legal fees they had incurred in dealing with Solid Builders – around $1,500.


Joe’s view

Joe said that:

a) He had a number of clients who had been affected by Solid Builders’ shortcomings, however, he assisted clients in having their homes completed by another builder for the same cost as that originally quoted by Solid Builders. Joe said by not taking up this option, Tom and Mel had failed to mitigate their loss.

b) He based his decision to refer Tom and Mel to Solid Builders on the fact that the company’s director was a chartered accountant, and he knew of good track records for the builders and other contractors involved with Solid Builders.

c) At the time he first referred Tom and Mel to Solid Builders, he knew of employee X’s bankruptcy. However, because X was only an employee, Joe understood X would have no authority to affect the relationship between Solid Builders and Tom and Mel.

d) He was not exclusively referring clients, investing in real property, to Solid Builders.

e) He thought if he told Solid Builders about Tom’s salary decrease, it would give priority to completing Tom and Mel’s home. Joe also said Tom and Mel signed an authority giving permission for Tom to disclose information about them to third parties.


Tom and Mel’s response

Tom and Mel were not happy with Joe’s response and complained to FSCL.


Our review

Our overall view was that Joe was not responsible for Tom and Mel’s financial loss; Solid Builders caused the loss. However, we said Joe should not have disclosed the information about Tom’s salary decrease, and he did not manage Tom and Mel’s relationship with Solid Builders effectively.


Joe’s referral to Solid Builders

In the original plan there was no mention of Solid Builders, however it would have been prudent for Joe to suggest another two or three other building companies. Ultimately, it was Tom and Mel’s decision to proceed with Solid Builders. Also, it could not be determined that Tom and Mel would not have proceeded with Solid Builders if other builder options had been provided.


Joe’s service

We thought Joe could have assisted Tom and Mel by providing them with more information about, and encouraged them to engage with, the other building company which offered to complete Solid Builders’ projects. Joe did not have a duty to do this, but in the circumstances he could have provided Tom and Mel with a better service to alleviate their stress. There was a sense that Tom and Mel ‘fell through the cracks’ while Joe was trying to assist a number of clients dealing with Solid Builders issues.

Joe could also have met with Tom and Mel at the time Tom’s salary decreased, to reassess their financial position and provide them with further advice. This would have been in line with AFA Code Standard 8, which states:

“…An AFA must make reasonable enquiries to ensure the AFA has an up-to-date understanding of the client’s financial situation, financial needs, financial goals, and risk profile, having regard to the nature of the personalised service being provided.”


Employee X’s bankruptcy status

It was reasonable for Joe to have relied on Solid Builders’ director being a chartered accountant, and the contractors’ track records, when referring Tom and Mel to Solid Builders.

Joe could not have anticipated that Solid Builders would delay the completion of his clients’ building projects or that it would be placed into liquidation.


Disclosure of Tom’s salary decrease

Joe should not have disclosed Tom’s salary decrease. We had no doubt Joe did this because he thought it would assist Tom and Mel in getting their build completed. However, considering the strained relationship between Tom and Mel, Joe and Solid Builders, Joe should have discussed disclosure with Tom and Mel first.

In addition, Tom and Mel had not authorised Joe to disclose the salary decrease. Joe only had authority to disclose information to third parties in the ordinary course of seeking finance or implementing a plan (such as disclosure of salary information to a lender).

Although we could not be sure whether the disclosure of Tom’s salary decrease actually affected the way Solid Builders dealt with Tom and Mel, the disclosure caused Tom and Mel a significant amount of stress.


Suggested resolution

We suggested the complaint be resolved by Joe paying Tom and Mel $2,000 for stress and inconvenience, based on our findings that Joe:

  • should not have disclosed Tom’s salary decrease.
  • could have done more to assist Tom and Mel in their relationship with Solid Builders and could have provided them with more information about the other builder which offered to complete their build.
  • could have provided a better service to Tom and Mel by reviewing their financial situation particularly when Tom’s salary decreased.


Resolution reached

Although disappointed, Tom and Mel accepted our decision and proposed resolution of their complaint. Joe also accepted the decision.

Tom and Mel wanted to preserve their right to take their complaint further to the regulator, the FMA, and the disclosure issue to the Privacy Commissioner. Joe agreed to including a clause in the settlement agreement stating that Tom and Mel retained these rights.


Our insight

Service is key. Although we found Joe was not responsible for Tom and Mel’s financial loss, he may have avoided a complaint if he had provided them with a better service when they encountered problems with the builder he referred them to.