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Case studies copied from Financial Ombudsman Service Australia
Statements of Advice (SOA)
The Applicant received a significant legacy from her sister’s estate. This was the first time she had received a large sum of money. She had previously obtained financial advice about her annuity from a financial adviser, but she was otherwise inexperienced in financial matters.
The Applicant sought financial advice from her regular adviser. She told the adviser that she wanted to top up her annuity with $100,000 and sought her advice about how to invest the balance of the inheritance.
During her discussions with her adviser, the Applicant said she wanted to invest a small amount in her granddaughter’s name, but later she changed her mind because she was concerned about how other family members would view the investment when she passed away and they were dealing with her estate.
The adviser recommended that the Applicant invest the balance of the inheritance in a managed growth fund. The SOA prepared by the adviser stated the investment in the managed growth fund was “not capital guaranteed”, “the balance may fluctuate daily due to changes in unit prices” and there was a risk of capital loss if the Applicant withdrew from the investment early.
The Applicant accepted the advice and made the recommended investment. The investment performed badly and suffered significant losses. The Applicant lodged a dispute with FOS, claiming she did not understand the advice provided to her and the managed growth fund was not an appropriate investment in her circumstances.
We noted that an SOA is a disclosure document that is intended to help a retail client understand advice and decide whether to rely on it. Client understanding of the advice is a critical part of the advice process.
After investigating the case, we drew the following conclusions:
- The Applicant was inexperienced in financial matters and had very limited knowledge of financial markets and products (as shown by her uncomplicated financial arrangements prior to receiving the inheritance).
- The Applicant’s primary objective was to leave a legacy for her sons and grandchildren and therefore she wanted to place the money into a secure, capital-protected investment (as shown by her concern about how a proposed investment in a granddaughter’s name would be perceived).
- The information in the SOA about capital volatility associated with the managed growth fund was generic in nature and was not likely to alert the Applicant to the potential for capital loss. It would have been prudent to put these warnings in language the Applicant was likely to understand.
We found that if the SOA had been expressed in language the Applicant was likely to understand, she would not have made the investment. We ordered the adviser to pay compensation to her.
Unclear intention expressed
The consumer failed to pay a premium instalment on 1 July 2014.
The FSP sent a letter on 17 July 2014 stating the following:
“As your instalment has not been paid by its due date, under the terms and conditions of your policy, it will be cancelled effective from 1 August 2014.
However, you can still make a payment up until 1 August 2014 to continue this policy cover.”
The FSP relied upon this letter, particularly the first paragraph, as evidence of it exercising its right to cancel the policy.
However, when reviewing the contents of the entire letter, FOS did not accept it contained a clear and unequivocal intention to cancel the contract. This is because the second paragraph contradicted the first paragraph because it stated that the policy would not be cancelled if the premium was paid before 1 August 2014.
FOS’s view was that the contents of the whole letter expressed an intention by the FSP to refrain from exercising any right under the policy until 1 August 2014 passed.
Therefore, the FSP could not rely upon this letter as evidence of an effective cancellation notice.