The following dates - 2 February 2006, 16 July 2008, 15 January 2009, 23 April 2009 and 16 May 2009 - represent dark days for Australia's financial services industry.
On these dates, external advisers and/or administrators and receivers were appointed to Westpoint Corporation, Basis Capital Funds Management (BCFM), Storm Financial and agribusiness firms Timbercorp and Great Southern.
Since May 2005, ASIC has left a paper trail of its involvement in the fallout from Westpoint's demise.
The trail offered a mixed disciplinary approach of banning and criminal proceedings against Westpoint directors.
Yet it was not until November 2007 when the corporate regulator chose to bare its teeth and take action against financial planning firms, setting six Australian financial services licensees (AFSL) in its sights.
ASIC commenced the actions under section 50 of the ASIC Act, which enables it to begin and carry on civil proceedings for damages for investors where it appears to ASIC that such proceedings are in the public interest. Despite five years passing since Westpoint's collapse, these actions are expected to be resolved later this year.
In July 2007, hedge fund manager BCFM informed the market it was in default on margin calls and had appointed accounting firm Grant Thornton to conduct an asset sale.
At the time it was reported Australian investors had close to $700 million in two of Basis Capital's funds.
A string of leading financial institutions then confirmed thousands of Australian clients were exposed to two funds managed by Basis Capital. The institutions include the wealth management arms of Westpac, St George, Macquarie Bank and Commonwealth Bank of Australia.
In June 2008, a Supreme Court ruling found in favour of BT Financial Group's arguments that units in Basis Capital funds in June 2007 were never properly part of the funds. The ruling meant more than $23 million of June application money needed to be returned to investors.
On 18 December 2008, ASIC began investigations into mid-tier financial advisory dealer group Storm Financial.
Many Storm insiders believe ASIC's investigation included a gagging order on the dealer group's financial advisers that led to a domino effect that has led to staggering investor losses, reputational damage, numerous litigation cases and industry investigations, including last year's Parliamentary Joint Committee (PJC) inquiry into Australia's financial services industry.
Less than six months on from Storm's collapse, Australia's agribusiness sector was shaken to the core with financial concerns over two of its majors, Timbercorp and Great Southern.
The collapse of those firms wiped out more than 50 per cent of the market, with preliminary data suggesting almost no investor intended to reinvest in the agribusiness sector, Labor MP and PJC chair Bernie Ripoll said at the time.
Despite each of the corporate collapses representing a different sector of the industry, the failures have prompted many within the industry to demand answers on how much blame financial planners really need to take in corporate collapses where product failure is the key, and what are their legal rights?
Townsends Business and Corporate Lawyers principal Peter Townsend says whether a corporate collapse is based on product failure or not is irrelevant to financial advisers.
"What you're really looking at is what the planner did at the time to understand his client and then understand the client and then understand that the two should be put together," Townsend says.
"The problem I guess is that once a collapse occurs there is a prima facie suggestion that the product was inappropriate at the time and/or that the planner didn't monitor the product effectively when he promised to do so."
He says the general guideline of what a financial adviser needs to do is set out in black and white in Section 945A of the Corporations Act 2001.
Alexis Insurance Broking principal Christina Kalantzis says there are three limbs to Section 945A.
The first is client enquiries through fact finds; the second is know the product; and the third is giving appropriate advice.
While Kalantzis understands the law has to be broad, to what extent do financial advisers need to know the accounting and financials of a product?
"Although I recognise that the law has to be broad, when it comes to defending advice, it is extremely difficult because what we've witnessed in the past, as products fail, clients are putting complaints under FOS (Financial Ombudsman Service) under the guise of inappropriate advice when, in my mind, I can clearly relate that back to product failure," she says.
"My understanding of FOS requirements is they are not allowed to accept complaints that are a product failure, and PI insurance isn't there to remedy product failures. It's under the pretence of inappropriate advice. But how do we actually find out what inappropriate advice is when it's so broad."
In regard to client enquiries, she says questions need to be asked about the role of the regulator.
"When we talk about the second limb, which was the level of client enquiries, when we review Westpoint and the product failure around there, the question is should it have been a PDS (product disclosure statement) or should it have been an information memorandum in terms of disclosure? So whose role is to identify what that product should have been issued as?
"We've got to bring in some responsibilities, whether they be contractual responsibilities from research houses who give us the research or whether it be the regulator's responsibilities under their provision of consumer protection.
"It's so easy to put a claim on advisers because it stems from 945a, when it's more difficult to put a claim on the product manufacturer."
Accountability is something financial services associations are all too aware of.
The FPA, Association of Financial Advisers (AFA) and Investment and Financial Services Association (IFSA) have each been involved in the clean-up process of corporate collapses. Behind the scenes, the associations do what they can to help members, though only where appropriate.
FPA chief executive Jo-Anne Bloch says the FPA as a professional body sets, maintains and enforces professional standards.
"If one of our members is involved in a potential corporate collapse, we have to be very careful because we're a professional body that needs to look at whether they've breached our standards about what we do," Bloch says.
"So it's not a question of whether we rush to the support of a member or whether we commence a review. We have to just really very clearly and carefully understand the circumstances of the situation and we do that by engaging with the member to try and understand more about what's happened and where the issues are."
She says the association has a professional accountability and conduct team that is available to consult members about any issues in complete confidentially.
"We've also launched an FPA Confidential line, which is managed by a third party again to give everyone comfort that we're running a process with strict process in strict confidence but also at arms-length to take those sorts of enquiries and to help members understand what those issues are," she says.
"Now, FPA Confidential is more around poor practices or really big problems. If it's just simply a concern about the employer or dealer group or a colleague that would probably want to call us first and just establish whether in fact it is a problem or not, and we're always available to all members to confidentially discuss issues and to help them to determine if there is a problem and what to do about it.
"We have on some occasions had to conduct confidential surveys of our members to understand some of the issues relating to any particular circumstance or issue, and that is much as to support our members as to understand what their exposure is because, as you well know, financial planners are often blamed for things that stockbrokers, accountants do or unlicensed advisers."
Unlike the FPA, AFA chief executive Richard Klipin says the association does not support a whistleblowing service.
"The AFA membership historically has been obviously more superannuation; it's now very much holistic in its nature. We don't have and we're not thinking of launching a whistleblower kind of service," Klipin says.
"Our view is that the regulator has that capability in-house and if there's malpractice out there, again the people to call are obviously the regulator as the enforcer."
He says the AFA has not experienced a lot of activity in the area of complaints or businesses being severely affected by corporate collapses. However, the association does provide legal referrals.
"We've negotiated an arrangement with a couple of legal firms and that's the basis on which that operates," he says.
"They offer legal advice. What they offer at an initial level is a sounding board offer. So for an adviser who's never been through the legal process, they'll counsel them, if you like.
"So the legal support that we offer our members is not legal support per se; it's more a referral service."
The FPA does not offer a legal referral or legal channel to its members as the majority of them have their own legal support service.
"We prefer to keep that in the member's bucket if you like, because potentially there may be a conflict. If on the one hand we're enforcing our code and on the other hand we're offering legal advice or legal referral, that could be seen to be a conflict," Bloch says.
"And frankly I don't understand how the AFA's able to both act as a professional body and offer legal support or referral, not quite sure how that works, but anyway."
While IFSA was unavailable for comment, it is understood the association does not act as a corporate policeman to its members.
As IFSA is not a professional standards body, its members are corporate entities, however, its members are required to abide by the association's standards.
In September last year, the accountability of financial advisers found itself squarely under the microscope when FOS delivered its determination on BCFM.
It found that one particular financial planner gave inappropriate advice and misrepresented the true nature of the investment and subsequently ordered the planner to repay the former client about $103,000 plus interest.
Townsend and Kalantzis cite FOS's BCFM determination case as a clear indication, where FOS is concerned, that advisers cannot simply rely on the fact the product is on the dealer's APL, but that advisers have a personal obligation to understand the product.
"In the particular case, FOS pointed to the fact that the planner apparently did not fully appreciate that the product was capable of considerable gearing, which eventually led to its downfall, so if a product fails the planner would need to show that at the time he gave the advice he did all that was required to research the product and understand it as outlined in the Basis Capital decision at least," Townsend says.
"In the Basis Capital decision, the planner offered to 'continuously monitor' the investments and what they in fact did was a quarterly review. Now FOS held in its determination that a quarterly review was 'not continually monitoring' and the planner submitted that continually monitoring was impossible, and FOS's reply to that was twofold. In the first case they said 'if it was impossible then why did you offer it' and on the second case they said 'we don't think it's impossible'."
FOS believes commonsense should prevail.
"If they [advisers] have done the planning process correctly, they are home scot-free, but if they haven't, then the corporations law provides that they have certain responsibilities and if they haven't carried out those obligations to their clients, they will be caught," FOS investments, life insurance and superannuation ombudsman Alison Maynard said.
"If we have received a dispute that involves one of the planner's clients, we will be contacting them. If they have done everything correctly, then they will be able to defend themselves against the claim."
In September last year, FOS recorded a 33 per cent increase in new disputes across the financial services sector during the 2009 financial year.
"Overall we have seen a 68 per cent increase in investment disputes, a 36 per cent increase in credit disputes, a 34 per cent increase in general/domestic insurance, and a 28 per cent increase in life insurance disputes, compared to the 2007 to 2008 financial year," FOS chief Colin Neave said at the time.
Maynard attributes the increase in complaints to the financial crisis.
"Clearly we have got a number that involves some result collapses like Great Southern and Timbercorp, but there is a lot more variety to the disputes than that," she says.
"When you have a significant downturn it sort of exposes the advice. And we must remember that even though our dispute numbers have gone up dramatically for the amount of activity the industry has held up quite well.
"Some of the disputes when we investigate them we find that we can't make a finding in favour of the consumer, the advice has been correct all the way along."
At present, FOS is researching ways to reduce complaints and disputes on both the consumer and financial services front. Greater education may be the key, Maynard says.
"A big focus this year will be bringing in the new terms of reference and getting the financial services providers familiar with the changes, and also working on the large number of disputes that are in our organisation at the moment," she says.
ASIC is also looking to bump up its industry involvement this year in the wake of proposed changes to its powers.
Last month, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced a move to strengthen ASIC's investigative powers and increase penalties for market-related offences.
"These changes will ensure that ASIC is properly equipped to investigate and prosecute serious corporate misconduct which has the potential to cause significant harm to the economy and investors," Bowen said.
"The increased penalty provisions send a clear message to those who seek to profit from these types of market offences that behaviour that undermines the proper functioning of our financial markets will not be tolerated."
The changes will increase the pecuniary penalties for individuals to $500,000 or three times the profit made or loss avoided, whichever is greater.
For corporations, the penalty will be the greater of $5 million, three times the profit made or loss avoided, or 10 per cent of the corporation's annual turnover during the period the breach occurred.
To ensure compliance and increase deterrence, the maximum term of imprisonment for these offences will be increased from five years to 10 years.
As part of the proposals, ASIC will be able to access telecommunications interception material collected by the Australian Federal Police under a court-issued warrant. The regulator's search warrant powers will also be improved to dispense with the need to issue a notice to produce before a warrant is enforced.
"Importantly, these reforms will bring ASIC's investigative powers into line with other regulators, such as the Australian Competition and Consumer Commission," Bowen said.
"The proposed change to ASIC's search warrant power will significantly reduce the potential for evidence to be destroyed before a warrant is executed."
The government intends to release an exposure draft of the proposed changes later this year.
It is Townsend's belief that the existing law regulating Australia's advice industry is just and no additional regulation is needed.
"It's not helpful to an honest bloke. What is helpful to an honest bloke is education. If you are a fair dinkum planner you just need to [do] what you need to do, you need to educate your client about what you need to do and both of you need to agree on a price for all of that, a fair price," he says.
"Our political masters like to feel that action is the important thing. When they are put under pressure they are need to be seen to be doing something because it plays well in a constituency. We had the Storm Financial problem, and they felt the need to be seen to be doing something so we ended up with the Ripoll inquiry and so on."
He says while the Ripoll inquiry fostered a much-needed debate, its results should not necessarily boil down to more regulation.
"It will make life a lot harder for the honest blokes and won't stop the dishonest blokes," he says.
"If they [government] and the courts believe that ASIC need more pre-emptive power then I'm in favour of it, as long as it's handled in an investigatory and quiet way."
Kalantzis says in the absence of the law explaining what appropriate advice is, in the absence of ASIC giving guidance on what appropriate advice is as well, advisers need to look at what the AFSL has in terms of risk management parameters to ensure the adviser gives appropriate advice.
"The way you do that is clearly you could say unless the client directed the adviser to put 100 per cent of their FUM (funds under management) into a product, you would question whether that was appropriate," she says.
"If an adviser put 100 per cent of someone's life savings into Westpoint without the direction of the client, you have to question things.
"But if Westpoint or Basis Capital represents less than 10 per cent of the clients portfolio in a product and was put into a product because of the statements that came from the research houses, the AFSLs due diligence and what was written in the product disclosure documents, to what extent, from a liability point of view, is it the fault of the advisers?"
This question is quite possibly the industry's million-dollar question, she says.
"The solution is that advisers should steer away from recommending or promoting product and more about advice structures. This is a difficult solution seeing that chapter seven of corps [corporations] law is already written on what a financial product is," she says.
She says she believes the industry as a whole should be talking about advice and the focus on product should be immaterial.
"I think advisers should never talk about product performance. I think they should be talking about advice structures. So there should be a clear distinction between product manufacturing and providing advice," she says.
"I think there are advisers out there who are already adopting that strategy, and they are the advisers when there is a FOS complaint can get themselves out of a complaint, because they adopt principles where they say 40 per cent of your portfolio will be invested in fixed interest and they talk in asset allocation terms as opposed to product-specific terms."
As the outcomes of a number of the industry's corporate collapses only now begin to filter through, financial planners will no doubt need to step up their vigilance on meeting their professional guidelines.
