The blame game – Who is responsible for poor investment decisions?

Of more immediate relevance is that the case sounds a warning to trustees to take greater care in relation to statements made in communications to members generally. Trustees should now take immediate action to review afresh statements made in their disclosure statements and on their websites in relation to the default arrangements of their funds, particularly statements made in relation to default investment options where the trustee offers investment choice.

If the trustee has any doubt as to the clarity of the statements, they should immediately clarify them.  This could include sending a clarification to all members in some cases.  In other cases, a prominent clarification on the trustee's website may be sufficient.  Each case will need to be reviewed to determine what, if anything, needs to be done.

Facts

A member was transferred from the corporate division to the personal division of a superannuation fund following the cessation of his employment with his employer. The member’s benefit was invested in cash in accordance with the trustee’s default investment policy for the personal division, pending the receipt of instructions from the member.

At the time of the transfer, the trustee informed the member, 'At this time there is no action required by you, however you should read the information outlined below and enclosed with this letter’ (the Statement). The trustee also informed the member that he had been given a new member number and that a new member PIN would be mailed to him separately. 

The PIN was not provided immediately and was provided some four months later.  The member complained about the delay in receiving the PIN and the fact that he was invested in a cash option.  The member then transferred his funds out of cash and into three alternative investment options.

The claim

The member claimed the difference in the rate of return between his chosen investment options and cash, that is, an average return of 15.38 per cent in his chosen investment options and 2.7 per cent return on the default strategy. He said that he was unaware that his funds would be allocated to cash on transfer to the personal division and that he was misled by the Statement with the result that he took no steps to pursue the status of his fund and specifically to change his investments. He also claimed that the delay in the provision of the PIN exacerbated the effect of the Statement.

The defence

The trustee contended that it had disclosed to the member that his funds would be invested in cash in a booklet that was provided to the member around the time of the transfer to the personal division.

The trustee also disputed the significance of the member’s loss of his PIN and asserted that the member could have obtained a new PIN or information about the status of his funds prior to the issue of his PIN and through various means. 

Findings

The SCT found that the trustee’s complete rejection of the member’s claim was not fair and reasonable because:

• The Statement was liable to create a misleading impression which could have encouraged the member to take no action to ascertain the status of his superannuation fund.
• Given the difference between the rate of return under the cash option and other options, the trustee should not have created the impression that inaction was an appropriate course of action but should have alerted the member to the need to review his asset allocation.
• The difficulties in obtaining the PIN delayed and therefore impeded the member from adequately dealing with his superannuation funds.
• The booklet provided by the trustee did not give prominence to the default option, nor the financial consequences of funds being retained in the cash option. The letter advised that the member should ‘read the information provided below and enclosed with this letter’. It did not, for example, state that the member should ‘consult a financial advisor and review the present investment selections’. Given the disparity between the cash default option and general market performance, the SCT found that this was a significant shortcoming and was satisfied that it contributed to a delay in providing instructions to the trustee. 

The SCT therefore found that it would have been fair and reasonable for the trustee to have accepted some responsibility for the loss sustained by the member and, as a corollary, the trustee’s rejection of the claim was not fair and reasonable.

The SCT therefore considered it appropriate to compromise the claim, taking into account several countervailing factors. The SCT accordingly ordered an amount based on a compromised rate of return be credited to the member’s account.

Decision not unanimous

The decision of the SCT was not unanimous. The presiding member expressed a dissenting view, namely, that the Statement that no action was required by the member was qualified by the statement that the member should read other information in the letter and in the enclosed documents, including the Product Disclosure Statement (PDS). 

The presiding member found that the trustee could reasonably have argued that the member should have known that the investment was made in accordance with the rules of the fund and that it had drawn his attention to these rules. Also, the member could have dealt with the Fund through means other than the internet. The member accessed his account on 31 January 2006 but, even though being aware it was invested in cash since at least that time, did not change investments until 4 March 2006. 

Comment

One can legitimately question whether the SCT was correct in allowing a member to rely on and, arguably, to take out of context a ‘headline’ statement – ‘at this time no action is required by you’ – without troubling to read the PDS or the other information which the trustee advised the member to read.

However, trustees can’t afford to ignore the trend to protect members from themselves. The trend will only get worse if we experience a sustained market downturn.

While we are not yet at the stage of needing American-style coffee cup warnings, trustees have little choice but to assume that any time a member suffers a significant loss on their superannuation investments, what the trustee has said or not said will be closely scrutinised to see whether the member can deflect the loss onto the trustee. 

This update was written by Terry Brigden, Partner, and Paul Cleary, Senior Associate, from the Corporate group.

For more information please contact

Name : Terry Brigden
Title : Partner
Office : Sydney
Phone : +61 2 9225 5535
Fax : +61 2 9322 4000
Email : terry.brigden@freehills.com