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Many investors lose money through their financial planner, investment advisor, stock broker, fund manager, superannuation fund, bank or some other financial services provider. But despite legal mechanisms being available to help them recoup their losses, experience has shown that a significant portion of those investors either do not know how to make a claim, or are discouraged from proceeding because they do not fully understand their legal rights.
Worse still, there are the silent masses who have suffered investment losses, but who do not even realise that they actually have a legal entitlement to be compensated for those losses (often fooled by the mantra that “market downturn” were solely to blame). Ignorance of the law, in this instance, has proven to be quite costly those for those poor individuals.
Having worked as a Corporate Lawyer in the financial services industry for many years, I have personally observed these anomalies first hand. And while I have typically done so from the vantage point of a so-called “hired gun” protecting the financial institutions involved, it has always deeply troubled me to see individual investors missing the opportunity to recoup their hard-earned money simply because they did not fully understand the law, or the financial services industry.
If only they had “inside knowledge”!
Well, this is where this post comes in (hopefully). My aim here is to help change the sad state of affairs by educating some of our fellow investors on their legal position. There is obviously only so much you can write in this forum, but there should be enough here to be useful to a few people:
Tip #1. The laws in Australia are actually stacked heavily in favour of investors, as opposed to financial institutions. Those laws were often drafted with a view to protecting the interests of investors from unscrupulous or incompetent operators (of which there will never be a shortage). The real trick really is in knowing when and how your legal rights have been violated. Many investors will not bother seeking legal advice about their situation because they think they “already know” their rights – but chances are, you don’t because financial services laws are quite complicated. So avoid “self-medication” and leave it for an experienced lawyer to assess your true legal position. You will probably find that you have a lot more options than you realise.
Tip #2. Don’t believe the “personal accountability” hype. Many well-meaning people will tell you that you only have yourself to blame if your investments go down south. This is often dangerous advice. In this day and age, it is only reasonable to rely on advice from experts because the investment process has become quite complex. For example, investing in a managed fund might seem like a straightforward affair, but the reality is that the process actually requires the collective expertise of many investment professionals, such as portfolio managers, industry analysts, stock analysts, investment researchers and financial planners. If only one of those professionals neglected to do their job properly, then your “simple” manage fund can easily become a dud investment through no fault of your own.
Tip #3. Don’t be afraid to take anyone on: the size or reputation of a financial institution does not guarantee that they will do the right thing by you, or that they will not lose your money. Contrary to what they will have you believe, large financial institutions are just as prone to making mistakes as the small operators. The list of companies that provided Enforceable Undertakings to ASIC in the last couple of years alone include such venerated institutions as Commonwealth Securities Limited (CommSec), National Australia Bank, The Royal Bank of Scotland, BNP Paribas, UBS AG and Macquarie Equities Limited.
Tip #4. Don’t fall for the “market downturn is to blame” propaganda. This might be true to a certain extent, but oftentimes this is just the story sold to you as an investor to avoid your realising that there were actually other compensable reasons why your investments have declined. Your financial advisor might have incorrectly assessed your risk profile, failed to properly determine your needs and objectives, or made inappropriate recommendations. The fund manager might have invested outside their portfolio construction or asset allocation guidelines. The research analyst might have failed to conduct proper investment research on the underlying stocks. The company whose stocks you purchased might have misrepresented its financial position. These sorts of scenarios should be fully explored before resigning yourself to the supposed fact that you have no right to claim compensation.
Tip #5. Conflicts of interest are more widespread in the financial services industry than people think. That this is so is evidenced by the fact that most financial institutions are actually prohibited by the Corporations Act 2001 from using words such as “independent”, “impartial” or “unbiased”. Financial planners who receive commissions or bonuses for recommending certain products will invariably be incentivised to recommend only those products, even if there are others out there that are more appropriate for you. The same goes for mortgage brokers, insurance brokers, banks and other product-selling institutions. This leaves them all prone to making inappropriate decisions. Once you understand how your financial services provider is remunerated, you will then be able to better assess whether or not their recommendations have been unduly swayed to suit their own interest, rather than your best interest.
Tip #6. Self-representation is a fool’s game. For sure you can avoid legal costs by lodging your own complaint with the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Limited (COSL). But is it really wise to risk losing tens or hundreds of thousands of dollars for the sake of saving a few thousand on legal costs? A lawyer who specialises in your area of concern might indeed cost money, but if they are worth their salt, they will significantly increase your prospects of success. They will also likely recoup for you far more money than it costs to hire them (and in that sense, their services then actually become free). We have seen far too many “mum and dad” investors lose in their compensation case before FOS or COSL, not because they did not have a valid claim, but simply because they did not know how to prepare and structure their cases properly. Financial institutions will often defend themselves through subtle intimidation and obfuscation, so you will need to know how to get past all that and identify their Achilles heel (this requires an in-depth understanding of how the industry works).
Tip #7. Involve your lawyer right from the beginning. Don’t make the mistake of trying to negotiate your claim yourself first, and only hiring a lawyer if the attempt is unsuccessful or the situation proves to be too difficult for you to handle. You are only doing yourself a great disservice because, more often than not, you are probably not putting your best (legal) foot forward in doing so. Even worse, your lawyer may also be prevented from exploring other potential grounds for compensation if you have unwittingly limited the scope of your claim at an early stage. You only have one shot at this so give yourself every advantage at your disposal. Keep in mind that your end goal is to recover your money, and not to minimise costs.
Tip #8. Making a compensation claim does not have to cost you the proverbial “arm and a leg”, so don’t let the prospect of a hefty legal bill put you off. There are actually many law firms out there who will be prepared to act for you on a “no win, no pay” basis if your case is strong enough. This means that the law firm bears the lion’s share of the financial risk if your claim was to be unsuccessful. You just need to make sure that they do actually have the expertise or experience in the subject matter of your claim, even within the financial services industry. For example, a lawyer who has considerable experience in superannuation disputes will not necessarily have experience in banking, financial planning or insurance disputes. You should generally prefer those who have experience acting for both the institutions and the individual investors.
Tip #9. Don’t let the 6-year time limitation rule put you off. We have seen quite a lot of people discouraged from making a claim because they incorrectly thought that their claim was statute-barred. The calculation of the 6-year time limitation period is not as simple and straight forward as non-lawyers might think. There is case law which suggests, for instance, that the limitation period for a loss of superannuation claim does not even begin to run until the investor becomes legally eligible to access their superannuation benefits (ie. retirement age). So leave it for the professionals to let you know whether or not your claim can still be pursued.
Tip #10. If the prospect of having to go to a trial scares you, then you should understand that the great majority of cases do not actually go to a trial. They generally settle out-of-court. Of course, you won’t hear about that because they normally end up being resolved on the basis that the parties keep the terms of settlement confidential. So unless you are being completely unrealistic about your prospects of success or as to the size of your claim – and your trusted lawyer will definitely tell you if this is the case - then there should be no reason why the parties to a dispute cannot reach a compromise instead of going to court. It usually works out better for both parties to do so. You need to understand that financial institutions are just as reluctant to go to trial as you are – perhaps even more so, because the reputational risks for them are usually much higher (win or lose).
Hope this helps!
Worse still, there are the silent masses who have suffered investment losses, but who do not even realise that they actually have a legal entitlement to be compensated for those losses (often fooled by the mantra that “market downturn” were solely to blame). Ignorance of the law, in this instance, has proven to be quite costly those for those poor individuals.
Having worked as a Corporate Lawyer in the financial services industry for many years, I have personally observed these anomalies first hand. And while I have typically done so from the vantage point of a so-called “hired gun” protecting the financial institutions involved, it has always deeply troubled me to see individual investors missing the opportunity to recoup their hard-earned money simply because they did not fully understand the law, or the financial services industry.
If only they had “inside knowledge”!
Well, this is where this post comes in (hopefully). My aim here is to help change the sad state of affairs by educating some of our fellow investors on their legal position. There is obviously only so much you can write in this forum, but there should be enough here to be useful to a few people:
Tip #1. The laws in Australia are actually stacked heavily in favour of investors, as opposed to financial institutions. Those laws were often drafted with a view to protecting the interests of investors from unscrupulous or incompetent operators (of which there will never be a shortage). The real trick really is in knowing when and how your legal rights have been violated. Many investors will not bother seeking legal advice about their situation because they think they “already know” their rights – but chances are, you don’t because financial services laws are quite complicated. So avoid “self-medication” and leave it for an experienced lawyer to assess your true legal position. You will probably find that you have a lot more options than you realise.
Tip #2. Don’t believe the “personal accountability” hype. Many well-meaning people will tell you that you only have yourself to blame if your investments go down south. This is often dangerous advice. In this day and age, it is only reasonable to rely on advice from experts because the investment process has become quite complex. For example, investing in a managed fund might seem like a straightforward affair, but the reality is that the process actually requires the collective expertise of many investment professionals, such as portfolio managers, industry analysts, stock analysts, investment researchers and financial planners. If only one of those professionals neglected to do their job properly, then your “simple” manage fund can easily become a dud investment through no fault of your own.
Tip #3. Don’t be afraid to take anyone on: the size or reputation of a financial institution does not guarantee that they will do the right thing by you, or that they will not lose your money. Contrary to what they will have you believe, large financial institutions are just as prone to making mistakes as the small operators. The list of companies that provided Enforceable Undertakings to ASIC in the last couple of years alone include such venerated institutions as Commonwealth Securities Limited (CommSec), National Australia Bank, The Royal Bank of Scotland, BNP Paribas, UBS AG and Macquarie Equities Limited.
Tip #4. Don’t fall for the “market downturn is to blame” propaganda. This might be true to a certain extent, but oftentimes this is just the story sold to you as an investor to avoid your realising that there were actually other compensable reasons why your investments have declined. Your financial advisor might have incorrectly assessed your risk profile, failed to properly determine your needs and objectives, or made inappropriate recommendations. The fund manager might have invested outside their portfolio construction or asset allocation guidelines. The research analyst might have failed to conduct proper investment research on the underlying stocks. The company whose stocks you purchased might have misrepresented its financial position. These sorts of scenarios should be fully explored before resigning yourself to the supposed fact that you have no right to claim compensation.
Tip #5. Conflicts of interest are more widespread in the financial services industry than people think. That this is so is evidenced by the fact that most financial institutions are actually prohibited by the Corporations Act 2001 from using words such as “independent”, “impartial” or “unbiased”. Financial planners who receive commissions or bonuses for recommending certain products will invariably be incentivised to recommend only those products, even if there are others out there that are more appropriate for you. The same goes for mortgage brokers, insurance brokers, banks and other product-selling institutions. This leaves them all prone to making inappropriate decisions. Once you understand how your financial services provider is remunerated, you will then be able to better assess whether or not their recommendations have been unduly swayed to suit their own interest, rather than your best interest.
Tip #6. Self-representation is a fool’s game. For sure you can avoid legal costs by lodging your own complaint with the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Limited (COSL). But is it really wise to risk losing tens or hundreds of thousands of dollars for the sake of saving a few thousand on legal costs? A lawyer who specialises in your area of concern might indeed cost money, but if they are worth their salt, they will significantly increase your prospects of success. They will also likely recoup for you far more money than it costs to hire them (and in that sense, their services then actually become free). We have seen far too many “mum and dad” investors lose in their compensation case before FOS or COSL, not because they did not have a valid claim, but simply because they did not know how to prepare and structure their cases properly. Financial institutions will often defend themselves through subtle intimidation and obfuscation, so you will need to know how to get past all that and identify their Achilles heel (this requires an in-depth understanding of how the industry works).
Tip #7. Involve your lawyer right from the beginning. Don’t make the mistake of trying to negotiate your claim yourself first, and only hiring a lawyer if the attempt is unsuccessful or the situation proves to be too difficult for you to handle. You are only doing yourself a great disservice because, more often than not, you are probably not putting your best (legal) foot forward in doing so. Even worse, your lawyer may also be prevented from exploring other potential grounds for compensation if you have unwittingly limited the scope of your claim at an early stage. You only have one shot at this so give yourself every advantage at your disposal. Keep in mind that your end goal is to recover your money, and not to minimise costs.
Tip #8. Making a compensation claim does not have to cost you the proverbial “arm and a leg”, so don’t let the prospect of a hefty legal bill put you off. There are actually many law firms out there who will be prepared to act for you on a “no win, no pay” basis if your case is strong enough. This means that the law firm bears the lion’s share of the financial risk if your claim was to be unsuccessful. You just need to make sure that they do actually have the expertise or experience in the subject matter of your claim, even within the financial services industry. For example, a lawyer who has considerable experience in superannuation disputes will not necessarily have experience in banking, financial planning or insurance disputes. You should generally prefer those who have experience acting for both the institutions and the individual investors.
Tip #9. Don’t let the 6-year time limitation rule put you off. We have seen quite a lot of people discouraged from making a claim because they incorrectly thought that their claim was statute-barred. The calculation of the 6-year time limitation period is not as simple and straight forward as non-lawyers might think. There is case law which suggests, for instance, that the limitation period for a loss of superannuation claim does not even begin to run until the investor becomes legally eligible to access their superannuation benefits (ie. retirement age). So leave it for the professionals to let you know whether or not your claim can still be pursued.
Tip #10. If the prospect of having to go to a trial scares you, then you should understand that the great majority of cases do not actually go to a trial. They generally settle out-of-court. Of course, you won’t hear about that because they normally end up being resolved on the basis that the parties keep the terms of settlement confidential. So unless you are being completely unrealistic about your prospects of success or as to the size of your claim – and your trusted lawyer will definitely tell you if this is the case - then there should be no reason why the parties to a dispute cannot reach a compromise instead of going to court. It usually works out better for both parties to do so. You need to understand that financial institutions are just as reluctant to go to trial as you are – perhaps even more so, because the reputational risks for them are usually much higher (win or lose).
Hope this helps!
