Court of Appeal reinforces high standard expected of professional advisersOct 2020 | Insurance
In 2002, when the plaintiff was 21 years old, she received a $2 million award of damages for serious spinal and internal injuries she suffered in a car accident. The award was to compensate her for future loss, medical expenses and associated matters.
Shortly after the award, the plaintiff engaged the defendant financial planning firm, HAP2, to provide advice on investing part of the award. Importantly, HAP2’s adviser had previously acted for the plaintiff’s father, who died in the car accident. The adviser was therefore aware of the circumstances leading to the plaintiff seeking financial advice.
After paying her mortgage and amounts to her family, the plaintiff invested $1.132 million on HAP2’s advice, primarily in managed funds and direct shares. The plaintiff’s investment objective was to generate adequate tax effective income to meet her current and projected living expenses.
From time-to-time, between 2002 and 2005, the plaintiff instructed HAP2 to withdraw various amounts totalling around $85,000 from the portfolio. During that time, she also:
- Established a surf photography business, including leasing premises, which required some international travel and does not appear to have been profitable. The adviser was consulted from time-to-time about her spending associated with the business; and
- Bought an investment property financed with a loan. She sought advice from the adviser regarding her ability to afford the investment.
In June 2006 the plaintiff’s portfolio was valued at around $1.5 million, but fell in value to around $700,000 by December 2008, which was during the global financial crisis.
The plaintiff commenced proceedings against HAP2 and was successful at first instance.1 The trial judge found that HAP2 owed a duty to warn the plaintiff about the material risks of her level of expenditure. Although some warning was given to the effect that the plaintiff’s expenditure would eat into her capital, that did not go far enough. The trial judge found that the risk which HAP2 should have but did not warn about was the resulting impact the expenditure would have on the plaintiff’s ability to fund her future medical expenses.
HAP2 raised 37 grounds of appeal, running the full gamut of the scope of the duty owed, whether it was breached, causation, contributory negligence and statutory limitation.
The focus for present purposes is whether HAP2 owed the plaintiff a duty to warn about the material risks of her expenditure.
The Court of Appeal, in a judgment delivered by Sofronoff P (with Morrison and Philippides JJA agreeing), unanimously dismissed HAP2’s appeal.
It was common ground at trial and on appeal that HAP2 owed the plaintiff a duty of care. It was the scope of the duty that was in issue.
HAP2 maintained that the duty was limited by the scope of its engagement, which it contended involved only provision of the initial financial advice and thereafter a portfolio review service and did not extend to providing the relevant warning.
That argument was rejected. Their Honours were satisfied HAP2’s engagement involved more than HAP2 suggested. The content of HAP2’s initial advice was instructive, which provided that HAP2 was to participate in an ‘ongoing business relationship … to ensure [the plaintiff’s] investment strategy continues to meet [her] needs'. It acknowledged that ‘investing is … a serious business requiring ongoing advice from a professional adviser’.2 HAP2 charged and received fees during this ongoing relationship.
The Court considered it was plain beyond argument that HAP2 undertook to advise the plaintiff about what investments she should and should not make, pursuant to a plan conceived by it, which was not static but was varied from time to time.3 The objective of the plan was to employ the plaintiff’s money in a way that would achieve the purpose of preserving an adequate sum to fund the plaintiff’s life expenses.4
The Court dismissed as a mischaracterisation HAP2’s argument that the scope of the duty found by the trial judge was in effect a duty to provide a watching brief over a client’s spending, and to provide warnings that the client may run out of money each time they propose spending too much. Their Honours said the duty was not one to oversee a client’s spending, but was one to ‘warn a client about the imminent dangers that would be caused by the client’s proposed interference in the adviser’s investment plan by the withdrawal of capital in amounts that the adviser knows will be significant in their effect'.5
In the circumstances it was found the duty extended to warning of material risks of which HAP2 was or should have been aware, but of which the plaintiff was not aware. A material risk in this context was said to be one to which a reasonable person in the plaintiff’s position would attach significance if warned of it.6
Their Honours agreed with the material risk identified by the trial judge, that the accumulation of drawings the plaintiff was asking for might result in such a depletion of her capital sum that it would no longer be adequate to support her living expenses.7
Their Honours also upheld the trial judge’s findings that HAP2 was aware of that risk, but that the plaintiff was not. The plaintiff was young, had no financial experience or expertise, and lacked a proper understanding of the real significance of the damages award she had received having regard to her position in life, the state of her health and the prospect of her future needs. While the Court accepted the plaintiff understood, in principle, that depleting her capital would reduce or eliminate her ability to fund her future needs, she did not understand that her actual expenditure would enliven that risk.8
The Court upheld the trial judge’s finding that HAP2 breached its duty by failing to warn of that risk.
The Court of Appeal’s judgment reinforces the high standard expected of professional advisers, and the extent of warnings required to ensure a client properly understands the consequences of their decisions on their investment strategy and objectives.
The warnings required in this instance went beyond the actual investments recommended by the adviser, to capture the client’s unrelated financial decisions where they had the potential to impact the adviser’s investment strategy. They were also guided by the client’s circumstances, in particular her age and financial immaturity, which required advice in the plainest of terms.
1 Bankier v HAP2 Pty Ltd  QSC 101.
2 HAP2 Pty Ltd v Bankier  QCA 152 .
3 Ibid .
4 Ibid .
5 Ibid .
6 NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270 -; ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1.
7 HAP2 Pty Ltd v Bankier  QCA 152 .
8 Ibid .
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