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Financial Advice and Planning

LOSS CALCULATION

The approach to calculating loss in Financial Advice Disputes


This article sets out FOS’s approach to calculating loss in Financial Advice Disputes.

Financial Advice Disputes include claims about financial planning, stockbroking, managed investments, securities and derivatives.


Introduction

Losses suffered and claimed by Applicants potentially include:

  • direct losses;
  • consequential losses; and
  • losses that are too remote to result in compensation.

 

FOS can only award compensation for losses in accordance with its Terms of Reference.  In Disputes lodged on or after 1 January 2010, FOS may award up to $150,000 compensation per claim1 to an Applicant for “direct financial loss”2 and up to $3,000 for “consequential financial loss”.3 From 1 January 2012, the compensation cap for direct financial loss will increase to $280,000.4

However, FOS may not award more than a total of $150,000 or $280,000 per claim (as the case may be) for direct and consequential financial loss combined.


How FOS will identify loss in Financial Advice Disputes

When considering a Financial Advice Dispute, FOS will: 

  • Ask the Applicant to identify the amount of the loss claimed and to provide particulars of each item of loss that forms part of the overall loss claimed;
  • Where the FSP has breached a duty and/or contract (but has not engaged in misleading or deceptive conduct) – identify which items of loss are too remote by applying a “foreseeability” test;
    • Where there has been a breach of duty, a loss is said to be foreseeable if it is one that was reasonably foreseeable by an ordinary person in the same position as the FSP possessing the FSP’s knowledge and experience at the time of the breach.
    • Where there has been a breach of contract, a foreseeable loss is of the type a reasonable person in the FSP’s position would have realised was likely to result from the breach of contract in light of the information available to the FSP at the time the contract was entered into

A loss that was not foreseeable is too remote.  FOS cannot award any compensation for a loss that is too remote. 

  • Identify whether items of compensable loss are direct or consequential;  
    FOS considers a “direct” financial loss to be a loss that naturally flows in the usual course of things as a result of the FSP’s breach of duty and/or contract.  The Terms of Reference define “consequential financial loss” as “indirect financial loss or damage.”5 FOS considers an indirect financial loss to be a loss that does not naturally flow in the usual course of things as a result of the FSP’s breach.
  • Where the FSP has engaged in misleading or deceptive conduct – assess whether the conduct materially contributed to each item of loss claimed. 
    • If the misleading or deceptive conduct did not materially contribute to the loss claimed, FOS cannot award compensation for the loss. 
    • If the misleading or deceptive conduct did materially contribute to the loss claimed, it is a direct loss for which FOS can award compensation.

 

The purpose of compensation

The objective of compensation where there has been a breach of duty (including misleading or deceptive conduct) is to place the Applicant in the position they would have been in if there had been no breach of duty.  Loss is therefore measured by comparing the Applicant’s position after suffering the breach of duty with the Applicant’s position if the breach had not occurred (subject to the compensation caps).

Where there has been a breach of contract, the objective of compensation is to place the Applicant in the same position they would have been in if the contract had been performed.  The loss will usually be the difference between the Applicant’s position following the breach of contract and the position the Applicant would have been in had the contract been performed (subject to the compensation caps).


Ascertaining what the Applicant’s position would have been if a breach of duty had not occurred

Where there has been a breach of duty, to calculate the Applicant’s loss, FOS has to ascertain what the Applicant’s position would have been if the breach had not occurred.  
This will be a relatively simple matter in some types of claims, for example where an Applicant had received inappropriate advice causing them to acquire an unsuitable portfolio of investments.  In claims of this kind, FOS will usually consider the Applicant would have acquired a suitable portfolio of investments but for the FSP’s breach.

In claims where it is not clear what position the Applicant would have been in but for the FSP’s breach of duty, FOS may consider factors including the following to determine the issue:

  • how the Applicant’s capital was invested immediately prior to the disputed investment;6
  • whether the Applicant was satisfied with the investments held immediately before the disputed investments;7
  • whether the Applicant actively sought the FSP’s advice or responded to an unsolicited invitation to obtain advice;
  • if the Applicant sought the FSP’s advice – the reason why the advice was sought;
  • whether the Applicant had communicated an investment preference to the FSP.


Loss calculation guidance in “inappropriate advice”8 claims


The direct loss in an inappropriate advice claim is typically calculated by comparing the performance of the unsuitable investments with the performance of the suitable investments.

If the unsuitable investments performed worse than the suitable investments would have, then the difference (after an offsetting of income paid by the disputed investments with income that would have been received from the suitable investments) is the direct loss suffered by the Applicant.

On the other hand, if the suitable investments performed worse than the unsuitable investments, then the Applicant has not suffered a loss.  In fact, the Applicant has received a benefit.

The following illustrates the above principles:

  • If an Applicant lost $20,000 as a result of unsuitable investments, but would have only lost $10,000 with suitable investments, the direct loss would be $10,000.
  • If an Applicant lost $20,000 as a result of unsuitable investments, but would have gained $5,000 with suitable investments, the direct loss would be $25,000.
  • If an Applicant gained $10,000 as a result of unsuitable investments, but would have gained $15,000 with suitable investments, the direct loss would be $5,000.
  • If an Applicant lost $20,000 as a result of unsuitable investments, but would have lost $25,000 with suitable investments, the Applicant has not suffered any loss.
  • If an Applicant gained $10,000 as a result of unsuitable investments, but would have only gained $5,000 with suitable investments, the Applicant has not suffered any loss.


Loss calculation guidance in misleading or deceptive conduct claims9

The amount of the loss will depend on whether the claim is a “no transaction” or a “different transaction” claim.

A “no transaction” claim arises where it appears the Applicant would not have entered into the disputed investments or any other investment if they had not been led into error by the FSP’s conduct.

This means the direct loss in a “no transaction” claim, where the investment capital was sourced from cash, is the difference between the price paid for the disputed investments and their “end value”.  If the disputed investments were the result of advice to switch from existing investments, the direct loss will be the result of a comparison between the performance of the original investments and the performance of the disputed investments.

A “different transaction” claim arises where it appears the Applicant would have entered into different investments than the disputed investments if they had not been led into error by the FSP’s conduct.  The direct loss will usually be the difference between how the alternative investments performed in comparison with the performance of the disputed investments.

A “different transaction” claim may also arise where the Applicant would still have acquired the disputed investments but less of them had they not been led into error by the FSP’s conduct.  The calculation of the direct loss in such a claim would usually require a comparison between the performance of the disputed investments acquired and the performance of a lesser quantity of the disputed investments.


How does FOS determine the “suitable investments”?

As seen above, the direct loss is calculated by reference to the performance of suitable investments in comparison with the performance of the unsuitable (disputed) investments.

There are a number of possible methods FOS can use to identify suitable investments, including:

  • suitable investments the Applicant has switched to (where the Applicant has switched from the unsuitable investments);
  • the suitable benchmark asset allocation used by the FSP;
  • the suitable industry benchmark asset allocation;
  • suitable investments that were actually recommended by the FSP to the Applicant; or,
  • other investments or indices that represent the suitable investments.

 

In every Dispute, the party submitting that FOS should take into account the performance of suitable investments when assessing the amount of loss must provide evidence in support of the submission.


Contributory negligence and mitigation of loss

Applicants who fail to take reasonable care of their own interests may be regarded by FOS as contributing to their own loss.  If FOS considers an Applicant has failed to take care of his or her own interests and that failure is a cause of the loss suffered, it will reduce the amount of compensation it will award.  The extent of the reduction will depend on how far the Applicant had deviated from the standard of care a reasonable person in the Applicant’s position would have taken.

Applicants also have a duty to act reasonably to avoid or minimise losses caused by the FSP’s breach of duty or contract.  FOS considers the Applicant’s obligation to mitigate will arise after the FSP has breached its duty or contract and the Applicant was either aware of the FSP’s breach or should reasonably have been aware of the breach.

When deciding whether or not an Applicant has suffered a loss they should have avoided or minimised, FOS will look at:

  • when the FSP’s breach of duty or contract occurred;
  • when the Applicant became aware of the FSP’s breach or should have become aware;
  • whether there was any action(s) the Applicant could have taken to avoid or minimise the consequences of the FSP’s breach;
  • whether the action(s) was one a reasonable person in the Applicant’s position would have taken.

 

 

1. A Dispute may contain more than one claim: see “Monetary Limits & Caps” in Issue 4 of the Circular.
2. Paragraphs 9.2 and 9.7 of the FOS Terms of Reference.
3. Paragraph 9.3 a) of the Terms of Reference.
4. Paragraphs 3.3, 9.7 and Schedule 2 of the Terms of Reference.
5. Paragraph 14.1 of the Terms of Reference
6. If FOS has reason to believe the Applicant would have continued to hold the original investments, we may compare the performance of the original investments with the performance of the disputed investments as the means to calculate the direct loss suffered.
7. If FOS has reason to believe the Applicant was satisfied with the original investments, we may compare the performance of the original investments with the performance of the disputed investments as the means to calculate the direct loss suffered.
8. Breach of subsection 945A(1) of the Corporations Act
9. Subsection 12DA(1) of the Australian Securities and Investments Commission Act and section 1041H of the Corporations Act