Townsends Business & Corporate Lawyer principal Peter Townsend said that the financial services industry needs to be aware that product ratings do not always translate into comparative risk profiles.
“If ratings are discussed, then it is vital that the adviser make the client fully aware of what the ratings actually mean and how they can be used in assessing the product,” Mr Townsend said.
Mr Townsend was referring to court findings on Wingecarribee Shire Councils vs Lehman Brothers Australia Ltd (in liquidation) 2012, where Wingecarribee Shire Council experienced losses after investing in synthetic collateralised debt obligations (SCDOs).
The council took a class action against its adviser, Grange Securities, whose owner, Lehman Brothers Australia, argued that the ratings agencies were proportionately liable for giving the products high ratings.
“In this case, Grange used the ratings to suggest that the products with similar ratings had similar risk profiles,” Mr Townsend said.
“Grange did not put the ratings, and the use to which they could be put, into context or explain to the client the limitations of the ratings in respect to identifying material risks of the product or its risk profile.”
In the case, Lehman Brothers argued that the ratings were effectively a representation that the SCDOs were equivalent, as regards to risk profile, to other types of financial products carrying the same rating from the same ratings agency.
“The court would have none of it,” Mr Townsend said.
“It held that the ratings did not convey that message. Rather, it was how the adviser used the ratings that was the real concern.”
