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Investments, Life Insurance & Superannuation Case Studies

Investments, Life Insurance & Superannuation Case Studies Index

1    Stockbroking  Added December 2009
2    Superannuation
3    Stockbroking
4    Life Insurance


Stockbroking – need for up to date assessment of clients’ needs and appropriate diversification

Mr and Mrs C received advice from their stockbroker to participate in an Initial Public Offer of units in scheme Y and purchased a number of units in scheme Y.

Within days of scheme Y’s debut on the Australian Stock Exchange, the value of its units decreased significantly. Shortly afterwards, Mr and Mrs C sold all their units in scheme Y and incurred a loss of around $4,000.

Mr and Mrs C complained to the Financial Ombudsman Service, arguing that the advice was inappropriate for a number of reasons. These included arguments that the stockbroker failed to:

  • take into account their tolerance to risk, and
  • research the scheme properly before it advised them to invest.

Mr and Mrs C also pointed out that a company related to the stockbroker was one of the main underwriters of the scheme, giving rise to a conflict of interest, and that the stockbroker never told them about this.

Following an investigation, the Financial Ombudsman Service reached the view that the stockbroker did not have a reasonable basis for its advice to the consumers to invest in the scheme. In particular, it found that:

  • there was no information to show that the stockbroker obtained up-to-date information about Mr and Mrs C’s personal circumstances and risk profile before it provided the advice
  • when the stockbroker provided the advice, it failed to ensure that Mr and Mrs C’s overall investment portfolio was properly diversified
  • the stockbroker had simply relied on information from the operator of the scheme when providing the advice, and had failed to undertake its own independent research or have regard to independent research about the scheme.

We also noted that the stockbroker was required to provide its advice to the consumers in the form of a Statement of Advice, but had failed to do so.

Finally, we found that the stockbroker should have given Mr and Mrs C enough information to allow them to decide how the role of the related party in the float may have affected the advice the stockbroker provided. It found that the financial services provider had failed to do so.

Based on these findings, the financial services provider reimbursed the consumers for their loss, together with interest.

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Superannuation and how far the obligation to advise extends

This dispute arose following Mr and Mrs D’s contributions to a superannuation fund on the recommendation of the member’s employee, a superannuation consultant. The Mr and Mrs D were both in their early forties and still working, so the fund was in its accumulation phase. The superannuation rules at the time permitted them to withdraw their contributions without taxation provided they met a condition of release. For this reason, Mr and Mrs D were treating the fund as a short term investment vehicle rather than strictly for retirement income purposes.

Mr D alleged that the consultant agreed to advise the consumers into the future and for an indefinite period of changes to the superannuation rules which would prevent them withdrawing their contributions without incurring tax or other penalties. He alleged that the agreement arose by reason of his facsimile to the consultant containing a request to that effect and the consultant’s email reply the same day. The consultant’s reply addressed Mr D’s individual queries of which the request was one and yet was silent as to the undertaking sought. Mr D also alleged that the member’s consultant provided the requested undertaking verbally during a telephone conversation around the time Mr D’s facsimile was sent. However, there was no written confirmation by the member.

Eight years later, changes to superannuation rules meant that a component of Mr and Mrs D’s superannuation contributions would be taxed substantially if it were withdrawn. Mr and Mrs D complained that the member breached its contractual obligation to warn them of such changes ahead of their operation, and claimed compensation.

The Financial Ombudsman Service found that no agreement to advise arose as a result of the exchange of facsimiles and or the alleged verbal undertaking. It observed that the member’s silence in its email reply was neither indicative of its acceptance or rejection of Mr and Mrs D’s request, and that no legal obligation will be attributed to a person who has not clearly given their assent. The Financial Ombudsman Service found that there was no ongoing retainer to provide financial advice, Mr and Mrs had not paid any fees for advice, and that there had been no contact between Mr and Mrs and the member during the eight year period.

The Financial Ombudsman Service did not uphold the dispute.

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This dispute arose when a retired husband and wife alleged that a stock broking firm inappropriately advised them to invest a disproportionately large amount of their assets in options trades without disclosing to them the risk associated with such trades. The options trading subsequently resulted in losses to the couple.

At the time of the advice, the consumers were retirees in their eighties. They had previously dealt with the adviser when he was acting as a representative of a different stockbroker. Prior to becoming clients of the member, the adviser had recommended the consumers sell two investment properties and obtain a $125,000 bank loan in order to fund the investments, and that the investments would generate an income of $20,000 per year.

The Panel found that the member had engaged in risky options trades on the consumers’ behalf, including the use of high risk uncovered calls. The Panel found that although the member had provided requisite documents to the consumers explaining the risks of options, such as an ASX explanatory booklet and a Product Disclosure Statement, in the circumstances the member’s duty of care meant it was required to do more to explain the risks to the consumers. These circumstances included the inexperience of the consumers; the relatively complicated nature of options and the fact the trades extended to writing options and the use of uncovered calls; the fact that the member was engaged in discretionary trading; and the fact that the consumers were funding the trades through a loan.

In addition, the Panel found that the options trades were inappropriate for the consumers’ needs and circumstances.

The Panel also found that the member had failed to provide the consumers with a Statement of Advice. Further, although the account was not a managed discretionary account, the member had failed to seek the consumers’ instructions prior to each trade.

The member argued that the consumers’ losses from options trading should be offset by profits in share trading over the same period – the Panel rejected this argument.

The Panel awarded the consumers approximately $37,000, being the amount of their losses from the options trading, plus interest. In the circumstances of the case, the Panel did not consider it appropriate to compensate the consumers for interest paid on their bank loan or brokerage charges.

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Life Insurance

A complainant’s husband held an Accidental Death Plan Policy for $80,000. The husband had a heart condition. In 2005, he lost consciousness while driving his truck. The truck left the road and drove into a dam, and the husband died. The coroner’s report stated that his cause of death was consistent with drowning in a man with a heart condition. There were no witnesses to the event.

The complainant’s claim was denied by the insurer on the basis that the complainant had suffered a heart attack while driving, and this was the effective cause of death. Heart attack was not covered under the policy as an accidental external event. The complainant’s position was that the actual cause of death was the drowning.


The Panel found that the medical evidence and findings of the Coroner and Forensic Pathologist indicated that the death was as a result of drowning, and not as a result of a heart attack. The medical evidence did not show that the husband had suffered a heart attack prior to driving into the dam and the proximate cause of death was the drowning. The complaint was upheld and the Member directed to pay the insurance benefit plus interest.

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