Added risks if Financial Planners operate out of a company? Consider ASIC v Cassimatis (Storm Financial)

Financial Planners operate out of a company. But is it wise?

Directors make mistakes. ASIC punishes them. Fair enough. However, the court goes further when Financial Planners operate out of a company structure.

Financial Planners operate out of a company

Financial Planners operate out of a company. But they suffer higher risks if directors as Storm's Cassimatiss found out.

Because Storm Financial held an Australian Financial Services (AFS) license it suffered twice. This is an alarming attack. It is a breach of double jeopardy. Financial Planners operate out of a company often. But it may not be the best structure.

Emmanuel Cassimatis and his wife Julie Cassimatis set up Storm Financial. They were the only directors of Storm. They held all of the shares in Storm. Financial Planners operate out of a company all the time, but for this case (the 8th case in the series of despair) it was Storm's undoing.

Seven other Business Structures available to Financial Planners

1. Family Trust
2. Partnership of Family Trusts
3. Partnership
4. Company as Trustee of a Family Trust
5. Unit Trust
6. Service Trust Agreement
7. Independent Contractors Agreement

Only Directors are liable. If you are not a Director you are safe

ASIC started proceedings in the Federal Court of Australia against Mr and Mrs Cassimatis. ASIC claimed that they committed a single breach of their duty of care and diligence under s 180(1) Corporations Act 2001 (Cth). Section 180(1) is a civil penalty (not criminal). It operates only if you are a Director. You are only a Director if you operate out of a company:

“A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

1. were a director or officer of a corporation in the corporation's circumstances; and

2. occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

ASIC v Cassimatis (No 8)

In ASIC v Cassimatis (No 8) the Court asked whether directors are liable for contraventions of the Corporations Act where they are the only shareholders of a solvent company. Financial Planners operate out of a company and now they have this additional burden.

The Court said that Storm Financial breached sections of the Corporations Act regarding the suitability of advice. Of greatest concern was the 'double gearing model' offered to older clients in retirement. Clients borrowed against the security of their homes to acquire managed funds. And then obtained a margin loan secured by those funds. This created a 'cash dam'. It was used to make additional investments, and, of course, to pay Storm’s fees.

'Double gearing' provides a 'cash dam'

During the financial crisis, many of Storm’s retiree clients saw the value of their investments fall. Many could not repay the debt.

However, the alleged 'double gearing model' breaches occurred while Storm was:

1. a solvent company; and

2. while Emmanuel and Julie Cassimatis were the only directors and shareholders.

Until now we thought that sole directors and shareholders of a solvent company could not breach Section 180(1). The Cassimatises argued this point. They lost.

But Storm only breaches the Corporations Act because they are Directors

The Court found that Storm did breach the Corporations Act. This is because it advised older clients with limited income and few assets. The Storm model was applied to financially vulnerable people.

Consider sections 945A(1)(b), 945A(1)(c) and 1041E(1) Corporations Act. Together they require that the advice is reasonable in the circumstances based on the investor’s personal situation.

According to the Court, Storm's financial planning advice was not appropriate for some investors. The breaches had 'devastating consequences' for many investors.

What the Court said

The court found that the Cassimatises would have been aware that the model was applied to financially vulnerable clients.

The Court said:

'A reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, would have realised that the application of the model to people in the pleaded circumstances was likely to involve inappropriate advice.'

'The reasonable director would have taken some alleviating precautions to prevent the giving of that advice.'

What should Financial Planners do?

Financial planners tell me, and I think that they are correct, that directors must think beyond the financial consequences of a particular act by the company. They must consider all of the possible harm that might arise. This accords with the Court case:

'The broad terms of the legislation do not confine the relevant interests of the corporation which fall for consideration. Further, Section 180(1) does not require any proof of actual loss to the company. Harm to its interests including reputation might also occur without prospective loss.'

'The scope of possible harm to the corporation might extend to unlawful conduct, which can cause non-pecuniary consequences. A corporation has a real and substantial interest in the lawful or legitimate conduct of its activity.'

This case is only because Storm was in a Company structure

My concern, however, is the double attack. If the Storm owners had operated, say, out of a trust, or anything other than a company, then ASIC could not have brought this action, as they did.

It is a worry to Dealer Groups that require financial planners to operate via a company. Talk with your Dealer Group as to other ways of structuring your practice. Here are 7 suggestions to whet your appetite:

Seven other Business Structures available to Financial Planners

1. Family Trust
2. Partnership of Family Trusts
3. Partnership
4. Company as Trustee of a Family Trust
5. Unit Trust
6. Service Trust Agreement
7. Independent Contractors Agreement

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australian wide law firm
Mobile: 0477 796 959
Direct: 08 6389 0400
National: 1800 141 612
Reception: 08 6389 0100
Email: brett@legalconsolidated.com
Skype: brettkennethdavies
Documents:https://www.legalconsolidated.com.au/

Leave a Reply