Recent failures highlight why compliance is important


Recent failures by stockbrokers Opes Prime and Lift Capital highlight why compliance in a financial planning practice is so important.
Good compliance systems are like seatbelts:  normally they are tedious and pointless but when you’re involved in an accident they can save your life.  So it is with good compliance systems. It is when things go wrong that your compliance systems prove their worth.
Bob is a client of ours who had recommended Lift Capital.  Needless to say he is now pretty worried and upset both for his clients and of course for his own potential liability.  When he came to see us we had to get passed the emotion and look carefully at what his liability might be.
The place to start had to be with his compliance program and systems.
Research on Lift Capital – Had he done his homework on Lift Capital?  Why did he believe that they were a viable manager of his clients’ money?  Knowing now what we do about them, was there any reasonable investigation that could have been done to reveal their possible financial fragility?
Research on the service - Had he investigated the service itself?  Did he understand what the risks of the service were and what would happen in certain negative contingencies?  Did the PDS issued by Lift Capital cover all these?  Was he relying on anything said to him by the people at Lift Capital that was not covered in their PDS?
Appropriateness – had he done his homework in relation to his clients?  In particular had he assessed their risk profile and assured himself that what Lift Capital had to offer was appropriate for those clients?  Had he fully explained the service to the clients so that they had a basic understanding of how the investment worked and what the risks were?
Documentation – Did his Statement of Advice contain all that it needed to (noting that simply obtaining a loan from a margin lender may not be a financial product and therefore absolutely require a Statement of Advice)? 
If all of this stacked up then did he really have anything to fear?  Unfortunately we had to advise Bob that no matter how well he had done all of these things and therefore no matter how unlikely it was that he could be found guilty of negligence or a breach of the Corporations Act, we couldn’t guarantee him that he wouldn’t be involved in court cases that the big ‘class-action’ law firms or litigation funders might put together.
Whether you see these firms as the white knight fighting for the downtrodden and oppressed or as the jackals coming in to strip the corporate carcass depends very much on which side of the claim you’re on.  The fact is that in cases such as this the plaintiff claims against as many defendants as possible in order to ensure that there is no chance that a party even minutely likely to be responsible for the loss could slip through the net. 
Lawyers for the plaintiffs don’t even know, when they start the case, how much evidence there might be either against a party or available in its defence.  Better to join them to the proceedings and see how it all washes up as the litigation rolls out.  With the potential for settlement in these large complex cases being very high, there is little likelihood that a plaintiff will be penalised by a costs order in favour of a defendant who should really never have been included in the claim in the first place.
Some States have legislation requiring the plaintiff’s solicitors to certify that they have investigated their client’s claim and believe that the claim has real prospects of success.  We’re not aware of any lawyer ever having been disciplined for providing this certificate when the case was lost.
So Bob will likely be a defendant even though he appears to have done everything according to the book.  Now he’s either very happy or very sad depending on whether he has in place any professional indemnity insurance (and to a lesser extent what that insurance covers – for example a full indemnity on legal costs).
Of course the insurer’s lawyers will most likely conduct Bob’s defence because their client is the one who’ll pay any judgement.  This means that Bob doesn’t have to worry about personally organising for (and paying) lawyers to defend the claim.  The downside though is that the insurer’s lawyers are often much keener to reach a settlement, even in cases where the insured has no real case to answer.  Cheaper to settle quickly than take any risk.  And of course Bob has to pay the excess so the first part of the claim is covered anyway.
Bob agreed that no matter what happened in the legal arena, his main focus had to be on helping and supporting his clients and bolstering his business and his reputation.  That was where his future lay. If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.