It might not exactly be the Muhammad Ali-George Foreman “Rumble in the Jungle”, but two heavyweights that operate in the field of conflict resolution in the financial advice industry are doing battle over the right venue for consumers to recover losses from the Westpoint debacle.
In the blue corner is IMF, the litigation-funder that, through a specialist class-action law firm, is trying to convince consumers to join its class action against a number of financial planners and their Australian financial services (AFS) licensees who provided advice to their clients about investing in Westpoint.
In the red corner is the Financial Industry Complaints Service (FICS), which provides a dispute resolution service for consumers with complaints against financial planners (and others in the finance world) and which many AFS licensees have joined as part of their obligation to be part of an external complaints resolution scheme.
With losses from the Westpoint failure estimated at $600 million, there is plenty at stake. But from the licensees’ viewpoint there may be more at stake than just money. There may be a very serious threat to their reputation if the whole story about their involvement with Westpoint were to be the subject of public revelation and discussion.
Late last year, FICS won the first round of this heavyweight battle when the Federal Court refused a request for FICS to be told they have no jurisdiction to deal with Westpoint matters. Deakin Financial Services (DFS) challenged FICS’ jurisdiction to act on complaints made by former clients who acquired promissory notes issued by mezzanine finance companies related to Westpoint.
DFS argued it only joined FICS because it was required to under a section of the Corporations Act (s912A(2)(b)) that dealt with financial services as defined by the act. The relevant definition of financial service required the existence of a financial product. The promissory notes were not financial products and therefore there was no financial service and the act did not apply, and therefore the FICS involvement likewise did not apply.
The Federal Court was unimpressed with this argument on several fronts. Firstly, Justice Ray Finkelstein held that although the Corporations Act might have been the reason DFS joined FICS, the act did not regulate all the rights of the parties. He referred to the contract between FICS and DFS as set out in the FICS rules. In his view, the source of FICS’ power to handle the Westpoint complaints came from that contract. Promissory notes were financial products within the meaning of that contract (that is, the FICS rules) and accordingly FICS could handle complaints made in respect of them.
In any case, he went on, he did not accept the argument that promissory notes were not financial products under the act. He believed they were caught by the general definition of a financial product in s763A and were, in addition, interests in a managed investment scheme that fell within a specific inclusion to the definition of a financial product in s764A. So DFS was wrong on both counts.
There was, however, one area where Finkelstein agreed with DFS and that was in relation to a FICS practice note that said where FICS received joint complaints the monetary jurisdictional limit would be applied to the individual beneficial interest rather than the total joint amount claimed. In other words, it was going to apply its jurisdictional $100,000 limit to each person in a joint claim rather than the claim itself. This would have led, for example, to a $200,000 limit in respect of a super fund with two members who invested at least that amount with Westpoint.
The court held, however, that joint claims could not be split between beneficiaries or joint holders and that accordingly FICS should not act on its practice note. The result is that FICS has jurisdiction to handle Westpoint complaints provided they fall within the monetary limit of $100,000, or the licensee agrees to waive that jurisdictional limit and allows FICS to determine the matter despite it being over the limit.
This has raised the prospect that licensees may prefer to have the complaints handled privately by FICS than publicly in open court. They may therefore prefer to waive the limit. Any licensee contemplating that step would do well to ensure the agreement of their professional indemnity insurer before doing so if they intend to claim on that insurance in respect of any determination made by FICS in favour of the complaining client.
In addition, the court’s characterisation of the promissory notes as financial products under the Corporations Act may enable claimants to rely on various causes of action set out in the Corporations Act that relate to the provision of financial product advice. To that extent, the IMF team may have unwittingly benefited from their rival’s court case with DFS.
So round 1 to FICS but the fight goes on between the two heavyweights. IMF jabs away by pointing out that FICS still has a limit of only $100,000 without the licensee’s consent (minimum investment in Westpoint notes was $50,000). FICS uppercuts by reminding consumers of IMF’s success fee (up to 40 per cent). IMF lands a blow to the body by saying that licensees may try to divest themselves of assets and only a court can prevent that. FICS tries a left hook by pointing out it has employed new staff to streamline Westpoint complaints handling.
Meanwhile consumers are no doubt totally confused. But they are probably able to have the best of both worlds by using FICS first and if they don’t get the result they want they can go to IMF. The FPA could endear itself to consumers by helping them understand their choices and the relevant issues, but that might draw the ire of some of its members who are the subject of complaints that they believe are unfounded. It’s a bit hard for the FPA to act as the referee in this fight given its connections with some of the parties involved.
