Financial service provider assisted another company to mislead a consumer

Anika had held term deposit-like investments with Company A for a year without any problems. She was always paid monthly interest and her capital was repaid at maturity.

In March 2020, Anika reinvested $100,000. The following month, she wanted to withdraw her investment early because her family needed financial assistance due to COVID-19.

Anika’s request to break the investment early was rejected, so she sought legal advice. She then discovered that Company A was not registered in New Zealand to provide investments to consumers.

She also discovered that another company’s bank accounts, Company B’s, had been used to handle her investment funds and to pay her monthly interest. A third company, Company C, was also involved. They had communicated with her about the investment when she asked for her capital to be returned.

Anika asked the three companies to immediately return her capital. Company A did not initially agree to the request, but eventually agreed to this when Anika’s lawyer demanded it be returned. However, Company A would not reimburse Anika’s legal costs of around $8,500 incurred in recovering her money. Company B and Company C also declined to reimburse her legal costs.

Anika asked FSCL to investigate her complaint that Company B and Company C should reimburse her legal costs. Company A was not a FSCL scheme member and was not registered on the Financial Service Providers Register.

 

Company C

We started an investigation into Anika’s complaint that Company C had misled her about her investment. However, we discontinued our investigation at an early stage when Company C voluntarily deregistered from the Financial Service Providers Register and told us they had closed their bank accounts. We were concerned Company C would not be able to pay compensation to Anika if we were to recommend it.

 

Company B

Anika believed Company B’s actions contributed to her legal costs because they had assisted Company A to mislead her about the investment and had conducted themselves as if they had an investment agreement with her.

Company B considered themselves an innocent third party, that had done nothing wrong. They also said their contract was with Company A, not Anika.

 

Review

Although Anika was not able to absolutely prove to us that Company B had misled her, Company B had not provided sufficient evidence to refute Anika’s claims. Company B’s conduct also fell below the standards of good industry practices expected of financial service providers. For example:

  • Company B gave two conflicting accounts of their involvement with Company A and Anika’s investment. They initially told us they managed investments for Company A, which included Anika’s $100,000 investment, and that they paid interest direct to Company A’s clients. They later told us they only provided foreign exchange services to Company A, which we did not accept. 
  • Company B had failed to adequately explain the nature of the assets they were managing for Company A.
  • Company B allowed a personal bank account to be used to transfer Anika’s investment funds. They could not explain to us why a personal bank account had been used, rather than the company’s bank account.

In the absence of information from Company B to support their position that they were an innocent third party, we preferred Anika’s position that they had assisted Company A to mislead her about her investment.

 

Compensation

We concluded that Company B should pay a contribution towards Anika’s legal costs. However, we did not consider it reasonable for them to bear all the costs. Arguably, the other two companies should also have contributed to Anika’s costs.

Also, one of the fee invoices included attendances for negotiations specific to Company A and to review Anika’s correspondence with FSCL. We do not usually require a scheme member to reimburse legal costs a consumer incurs while we are considering a complaint. Our processes are designed to be easy for consumers to use and they do not need to be legally represented. If a consumer chooses to continue using a lawyer, the consumer is usually expected to pay for this.

We concluded that the fair outcome was for Company B to reimburse 25% of the balance of the legal costs, around $1,700.

We also recommended that Company B should pay Anika an additional $1,000 to recognise their part in the significant stress she had experienced.

 

Resolution

Anika accepted our recommendation, but Company B stopped communicating with us about the complaint. Unfortunately, they did not pay Anika the compensation we recommended, which meant they were in breach of FSCL’s rules, and we terminated their FSCL membership. In turn, they were deregistered from the Financial Service Providers Register because they no longer belonged to an approved dispute resolution scheme.

Anika was disappointed that she had not been paid the compensation, but was nevertheless pleased that we had found in her favour.

 

Insight for consumers

It is important for investors to check that companies offering investments are registered. Investors can check this on the Financial Service Providers Register.

Investors should also research the investment and company offering it to satisfy themselves that the investment is legitimate, and to ensure they understand the nature of the investment and the risk involved. Investors may also want to obtain independent advice from a financial adviser. 

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