#7356 - Customer Agreements Traditional Advisory Accounts - Securities and Financial Services Regulation

The scope of an FSL’s duties to its clients depends on the terms of the contract between the licensee and client (Hawkins v Clayton).

• If it is a written contract terms may be implied under general contractual principles (Con-stan v Norwich) if:

  • It is so obvious that it goes without saying

  • It is necessary to give business efficacy to the contract

  • It is reasonable and equitable

  • It is capable of clear expression; and

  • It does not contradict the express terms

  • [For example] A simple instruction to a stockbroker by a client to execute a transaction is unlikely to satisfy requirement 2 for a term that the stockbroker is to offer investment advice.

    • Thus in Eric v Preston there was no evidence a stockbroker agreed to act also as an investment advisor because this shouldn’t be implied to give the contract business efficacy – especially where the broker’s FSL didn’t authorise him to do so

• If there is no written contract, terms may be more readily implied (Byrne v AU Airlines)

[Duties and obligations] An FSL may be s.t. duties and obligations arising from the nature of a particular role

• [Stockbrokers/futures brokers] are under an obligation to

  • Carry out their clients instructions as long as it is lawful to do so.

    • If they act in accordance with the clients instruction and their legal obligations they may be indemnified for liabilities arising out of the transaction

    • If they do not they may lose their commission and their right to their indemnity, and be liable in damages for breach of contract

  • Undertake a transaction at the best possible price for the client within the limits set by the client’s instructions.

    • It must also purchase/sell securities at a lower/higher price than the price specified by its client (Thomson v Meade)

    • The obligation to undertake a transaction lapses at the point which the market price of the securities exceeds the buying price or is lower than the selling price specified by the client

    • The broker has no general authority to initiate transactions such as sale/purchase of securities without the client’s instruction (Option Investments v Martin)

  • To make a valid and enforceable contract, act honestly and observe the rules, usages and market practices of the exchange; keep its client’s property separate from its own; keep proper accounts .

  • [They are not under]

    • A positive duty to advise its clients to close out its position if the broker considers they will suffer loss and no duty to do that themselves (Drexel v El Nasr)

    • An obligation to close out a client’s position immediately after the client fails to meet a margin call or repudiates its contract (Options Investments v Martin)

    • [But cf] A futures broker is under an obligation to act in good faith in the manner of closing out a client’s position though it will be able to discharge this by closing it out on an on-market dealing

  • In Bernadle v How Trading the VSC held that a clearing participant who was s.t. an implied obligation of good faith in exercise its rights to liquidate a trader’s portfolio breached it by failing to act reasonably in doing so

• [Insurance brokers | NZ Cases] are under an obligation to ensure that effective cover is arranged by the insurer (Cee Bee v Lombard). They must either arrange insurance within a reasonable time or advise if unable to do so (Cee Bee). They must take reasonable care in ensuring the cover they arrange is appropriate and in accordance with the insured’s instructions (Tadoran v Delaney)

An FSL may act as its clients agent in aspects of its business –

• Stockbrokers being instructed to buy/sell shares o/b/o a client acts as its agent (Christopher Barker v IRC)

  • [The scope of this agency] is modified by the fact that brokers operate in a competitive market where commodity prices are set by a large number of individual trades and their reduced ability to influence prices by negotiations. They act as an “intermediary rather than a negotiating agent” (Jones v Cameron)

• An insurance broker acts as agent either for the insurer or insured

  • They usually act on behalf of the insured in arranging insurance or setting a claim (Con-stan v Norwich)

    • [Binders exception] An exemption exists where the broker is acting under a binder (being an agreement with an insurer by which the broker is given authority to make certain decisions that would otherwise be made by the insurer – e.g. authority to grant final cover).

    • Brokers who act under a binder act as agents for the insurer instead of the insured

[Ratification of unauthorised transactions] At general law a client isn't bound by, and is unable to ratify, unauthorised transactions undertaken by a broker if the broker didn’t disclose the client as its principal at the time of the transaction (Maynegrain v Compafina Bank)

• The origin of this principle seems to be the same as the idea in Trident v McNiece that a contract cannot be made on behalf of an undisclosed principal unless the agent has the principal’s authority to make the contract

• [Exception?]In Maynegrain v Compafine Bank it was held that a client is entitled to ratify the contract in circumstances where the other party knew that the broker was acting as an agent, although it didn’t know the identity of the particular client

  • This can get complicated where the broker enters a single transaction o/b/o several clients – here it is difficult to identify which of the broker’s clients is its principal in the transaction, until the broker allocates parcels to satisfy a particular client’s order

The seminal case in this area is Daly v Sydney Stock exchange

• Facts: The appellant’s husband had placed money with a broking firm as a loan, after an employee of the firm advised him not to invest immediately in the stock market

• Held (court below): The relationship of the appellant and broking firm was that of debtor/creditor and no constructive trust arose irt the money deposited with the firm. Since the firm’s failure to repay the loan wasn’t a defalcation, the appellant couldn’t recover her loss from the fidelity fund.

• Held (Gibbs): Normally the relationship between a stockbroker and client will be of a fiduciary nature such as to place on the broker an obligation to make to the client a full and accurate disclosure of the broker’s interest in the transaction

• Held (Brennan J):

  • His honour looked more to the incidents of the particular broker/client dealings and said that if a broker holds itself out as having expertise in advising as to investments, and undertakes to give advice, they stand in a fiduciary relationship to the person they advise.

  • A broker is under a particularly demanding duty if they propose to offer a client an investment in which they have a financial interest and they are then required:

    • To furnish the client with all the relevant knowledge possessed by the broker, concealing nothing that might reasonably be regarded as relevant to the making of an investment decision

    • Reveal the identity of the buyer/seller of the investment when that identity was relevant

    • Give the best advice they could give if they didn’t have that financial interest

    • Reveal fully the financial interest; and

    • Obtain for the client the best terms which the client would obtain from a TP if the adviser were to exercise due diligence on behalf of his client in such a transaction

  • This apparently conflicts with the HC’s decision in Breen v Williams that fiduciary obligations are proscriptive rather than prescriptive and do not impose positive duties on the fiduciary to act in the interests of the person to whom the duty was owed

    • In Aequitas v Sparad these two decisions were attempted to be reconciled by treating the positive duties as arising due to implied terms of the contractual relationship instead of being fiduciary in character

The relationship between FSL and client may be fiduciary even where the licensee doesn’t act as agent for its client. This will occur where…:

The financial services licensee undertakes/agrees to act for or o/b/o or in the interests of, its client in the exercise of a power or discretion which will affect the interests of the client in a legal/practical sense, so that the FSL has a special opportunity to exercise that power or discretion to the detriment of its client, who is therefore vulnerable to abuse by the FSL of its position (Hospital Products)

• Thus it will arise between a financial adviser and client where the adviser holds itself out as an expert on financial matters and undertakes to act in the client’s interest and not solely in its own interests

  • Daly v Sydney Stock Exchange for a stockbroker

  • CBA v Smith for a trading bank

  • Aequitas v Sparad for a corporate adviser

  • But cf. Berndale Securities v How Trading – a clearing participant was not s.t. fiduciary obligations irt the liquidation of a trader’s portfolio because the power given to a clearing participant in the case of contractual default was intended to protect its own (not the client’s) interest

One should not readily infer the existence of a fiduciary relationship since that relationship arises in a business context in which customers may be expected to understand that the FSL is seeking to promote the sale of their FPs or FSs and to expect honesty rather than a lack of self-interest in context

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