Notesco Pty Ltd v Australian Financial Complaints Authority Ltd

1. [1]

   The first defendant, the Australian Financial Complaints Authority Ltd (“AFCA”), is a company limited by guarantee and the operator of the AFCA Scheme. [1] The AFCA Scheme is a financial services external dispute resolution system authorised under the Corporations Act 2001 (Cth) (the “Act”). [2]

2. [2]

   AFCA is the single authorised operator of the AFCA Scheme. [3] There were a number of predecessor schemes that existed prior to AFCA, including the Financial Ombudsman Service Ltd. [4]

3. [3]

   The plaintiff, Notesco Pty Ltd was, until 30 August 2021, the holder of an Australian Financial Services Licence. Notesco’s parent company is Notesco Financial Services Ltd, a company incorporated in Cyprus.

4. [4]

   As a financial services licensee, Notesco was required to be a member of the AFCA Scheme. [5]

5. [5]

   Notesco operates a trading platform, known as Metaquotes MetaTrader 4 (the “Trading Platform”), through which customers can access an online market to trade in complex foreign exchange products, including “contracts for difference” or “CFDs”.

6. [6]

   Ms Loukia Kanarini, the Chief Legal and Compliance Officer of Notesco Financial Services Ltd, described CFDs as follows:

7. [7]

   Notesco deals with customers on an “execution only” basis. It facilitates the placement of trades through the Trading Platform and permits customers to monitor, manage and execute their market positions by supplying them with the software required to access the Trading Platform.

8. [8]

   The second defendant is Mr Jean Pasquier, a resident of France. On 28 July 2020, Mr Pasquier made a complaint to AFCA about financial services allegedly supplied to him by Notesco that, he says, caused him trading losses of more than €300,000. Those trades were executed on Mr Pasquier’s behalf by a third party, Nextrade Pty Ltd, trading under the name “La Maison Du Placement”.

9. [9]

   Nextrade is not related to Notesco. Nextrade did not conduct any of the trades pursuant to any authority conferred on it by Notesco.

10. [10]

    Mr Pasquier has been served, but has not appeared.

11. [11]

    On 19 March 2021, AFCA made a determination that Notesco had not adequately assessed Mr Pasquier’s suitability to trade in foreign exchange products and that Notesco should compensate Mr Pasquier’s entire trading loss (the “First Determination”).

12. [12]

    On 17 March 2022, Rees J set aside the First Determination on the basis of a denial by AFCA of the rules of procedural fairness. [6]

13. [13]

    Rees J remitted Mr Pasquier’s complaint to AFCA for reconsideration.

14. [14]

    On 9 December 2022 AFCA issued a further determination (the “Second Determination”) in respect of Mr Pasquier’s complaint. AFCA again concluded that Notesco was responsible for Mr Pasquier’s trading losses, but concluded that Mr Pasquier had “contributed to his losses by engaging [Nextrade] to trade on his behalf” and determined that Notesco should compensate Mr Pasquier for 75% of his loss: €230,175.

15. [15]

    AFCA rejected Notesco’s submission that, as Nextrade effected the CFD trading that caused Mr Pasquier to lose his money, it should be seen as totally or primarily responsible for that loss and that Notesco’s responsibility should be limited accordingly.

16. [16]

    Notesco contends that there is no “evident and intelligible justification” [7] in the Second Determination for that conclusion and that it was therefore “legally unreasonable and therefore beyond AFCA’s contractual authority, jurisdiction or power”. [8]

17. [17]

    Notesco seeks a declaration to that effect and an injunction restraining AFCA from enforcing the Second Determination.

Decision

1. [18]

   I decline to make the declaration or grant the injunction sought by Notesco.

2. [19]

   The proceedings should be dismissed.

The AFCA Rules

1. [20]

   The AFCA Scheme commenced operation on 1 November 2018.

2. [21]

   Although, as I have said, financial service licensees who provide services to retail clients are required to obtain AFCA membership as a condition of their financial services licence, AFCA:

   1. (1)

      is not a “public body” and does not perform “government functions”; [9]

   2. (2)

      is not exercising a public duty; [10]

   3. (3)

      is an administrative body that does not exercise judicial power. [11]

3. [22]

   The AFCA Complaint Resolution Scheme Rules (“AFCA Rules”) form a binding contract between each member, AFCA and any complainant, [12] such that AFCA decisions on complaints have contractual, not statutory, force. [13]

4. [23]

   Under the AFCA Rules, AFCA agrees to consider complaints submitted to it in a way that is “independent, impartial and fair” [14] and “must do what the AFCA Decision Maker considers is fair in all the circumstances having regard to”, amongst other things, “legal principles” and “previous relevant Determinations of AFCA or Predecessor Schemes”. [15]

5. [24]

   The AFCA “Operational Guidelines to the Rules” state that:

6. [25]

   AFCA can implement a variety of remedies against financial service licensees including, relevantly, monetary compensation.

7. [26]

   Any determination made by AFCA is, if accepted by a complainant, final and binding. [17] The financial services licensee does not have a discretion as to whether to accept a determination of AFCA. Once a determination is made and accepted by the complainant, the licensee is bound with no right to appeal within the AFCA Scheme.

8. [27]

   If a financial service provider does not comply with a determination made by AFCA, it may be expelled as a member of AFCA. This would result in a breach of the financial services licensee’s licence.

Review of AFCA’s decisions

1. [28]

   Decisions of AFCA are not susceptible to review on administrative law grounds. [18]

2. [29]

   AFCA decisions may, however, be reviewable as a matter of contract if affected by legal unreasonableness.

3. [30]

   Thus:

4. [31]

   The basis for the Court’s power to intervene, notwithstanding the parties’ agreement that the decision will be final, is:

5. [32]

   Judicial intervention requires demonstration of reasoning that is “irrational”, “absurd”, “perverse”, [21] or “which lacks an evident and intelligible justification”. [22]

Mr Pasquier’s complaint

1. [33]

   Mr Pasquier is a French national. In May 2019, he was 83 years of age.

2. [34]

   According to Mr Pasquier’s Attorney, Mr Konstantine Mikov, of the Bulgarian Law Firm “Mikov and Attorneys”:

3. [35]

   On 6 May 2019, Notesco received an “Account Registration Form”, purportedly from Mr Pasquier that Nextrade had evidently completed on Mr Pasquier’s behalf. A copy of that document is set out below:

4. [36]

   Mr Mikov has stated that his instructions are that Mr Pasquier did not complete this document and that it was completed by Mr Brun from Nextrade.

5. [37]

   The document set out what appear to be genuine “Personal Details” concerning Mr Pasquier, including his birth date, email address, home address and telephone numbers. I have redacted those details.

6. [38]

   It also accurately stated that Mr Pasquier’s “Employment Status” was “Retired” and that his “Source of Funds” was “Savings/Investment”.

7. [39]

   The document stated that Mr Pasquier’s “Estimated Annual Income” and his “Estimated Net Worth” were both “$250,000 or more”.

8. [40]

   The document also set out what purported to be details of Mr Pasquier’s “Trading Experience, Forex and CFDs”.

9. [41]

   In their submissions, Mr Sulan SC and Mr Pietriche, who appeared for Notesco, stated:

10. [42]

    That is one reading of the document.

11. [43]

    Another is that described by AFCA in the Second Determination as follows:

12. [44]

    Further, under the heading “Trading Account Setting”, the form stated that the proposed “Leverage” will be “200”, suggesting an appetite for risk difficult to accept given that Mr Pasquier is an elderly retired person who, as AFCA observed, was evidently “trading his entire net worth in an individual transaction”.

13. [45]

    In the passage I have set out from AFCA’s Second Determination, AFCA referred to Mr Pasquier’s “Power of Attorney” who “completed the questionnaire”.

14. [46]

    Ms Kanarini deposed that on 7 May 2019, Notesco received a “Power of Attorney executed by Mr Pasquier in favour of Nextrade … dated 7 May 2019”, and that on 11 June 2019, Notesco received a “further Power of Attorney from Mr Pasquier in favour of Nextrade dated 11 June 2019”.

15. [47]

    In the Second Determination, AFCA found on 7 May 2019, Mr Pasquier had granted Nextrade the first of those Powers of Attorney. AFCA did not refer to the second Power of Attorney.

16. [48]

    Before me, Mr Hyde, who appeared for AFCA, submitted that there was no evidence that, in fact, Mr Pasquier had executed any Powers of Attorney. Mr Hyde pointed to the fact that the only copies of the purported Powers of Attorney in evidence did not appear to be executed.

17. [49]

    However, this submission is inconsistent with the findings that AFCA made in the Second Determination. These proceedings should be resolved on a basis consistent with AFCA’s determination, including that at least the 7 May 2019 Power of Attorney was executed.

18. [50]

    On 6 May 2019, Notesco opened the foreign trading accounts in Mr Pasquier’s name, being the accounts to which Mr Mikov referred.

19. [51]

    There is no dispute that between May and November 2019, Nextrade caused trading to be effected on Mr Pasquier’s behalf through those accounts. Mr Pasquier’s money was lost by November 2019.

ASIC Regulatory Guide 227

1. [52]

   Much of AFCA’s reasoning in the Second Determination is focused on Notesco’s obligations under ASIC Regulatory Guide 227 “Over-the-counter contracts for difference: improving disclosure for retail investors” (“RG 227”), issued by the Australian Securities and Investments Commission in August 2011.

2. [53]

   RG 227 commences by making the following observations concerning CFDs:

3. [54]

   RG 227 establishes what it describes as a “benchmark disclosure model” comprising of “seven disclosure benchmarks”.

4. [55]

   Under the heading “Improving disclosure on OTC [25] CFDs”, RG 227 states:

5. [56]

   In their submissions, Mr Sulan and Mr Pietriche placed emphasis on the first of the two emphasised passages in this extract from RG 227 and submitted that this showed the purpose of RG 227 was not to stop persons such as Mr Pasquier from taking investment risks with instruments like CFDs, but rather to “ensure that retail investors are provided with documents which are of a ‘high quality’ and which contain all the information that investors require to make an informed decision whether to trade in such products”.

6. [57]

   However, the second emphasised passage shows that such disclosure is also intended, in an appropriate case, to lead to an investor deciding not to trade in CFDs.

7. [58]

   Under the heading “The disclosure benchmarks”, RG 227 stated:

8. [59]

   It is against that background that Notesco’s contention that the Second Determination was one that no reasonable body in AFCA’s position could have properly come to on the evidence must be considered.

The Second Determination

1. [60]

   Mr Pasquier’s first contention was that Notesco was responsible for Nextrade’s conduct.

2. [61]

   In the Second Determination, AFCA rejected that contention. [28]

3. [62]

   There is no dispute about that conclusion. It can be put to one side.

4. [63]

   Mr Pasquier’s second contention was that Notesco had failed to test his suitability to trade adequately and that, had it done so, Mr Pasquier should not have been allowed to open the account.

5. [64]

   This contention directs attention to RG 227. Almost two of the five pages of the Second Determination are directed to the question of whether Notesco complied with its obligations under RG 227.

6. [65]

   AFCA concluded that Notesco did not comply with its obligations because “there were anomalies in the answers provided [by or on behalf of Mr Pasquier] to the questionnaire that should have prompted [Notesco] to make further inquiries of [Mr Pasquier]”.

7. [66]

   Under the heading “Issues and Key Findings”, AFCA summarised its conclusion this way:

8. [67]

   AFCA identified the “anomalies” in the questionnaire in the passage I have set out at [43] above.

9. [68]

   AFCA concluded that:

10. [69]

    In its submissions to AFCA, Notesco argued that had it made inquiries of Mr Pasquier, it is likely that he would have nonetheless expressed his faith in Nextrade and proceeded to instruct Nextrade to trade on his behalf.

11. [70]

    AFCA did not deal directly with that submission, although it is implicit in the finding set out at [68] that it did not accept it.

12. [71]

    What AFCA did say was that:

13. [72]

    Notesco had also submitted that, had it made inquiries of Mr Pasquier, it is likely that Nextrade would have managed Mr Pasquier’s response to those inquiries on his behalf.

14. [73]

    AFCA rejected that contention, stating:

15. [74]

    Each of these findings may be contestable but I cannot see how it could be concluded that they are findings that no reasonable body, particularly one in AFCA’s position, could have arrived at.

16. [75]

    In their submissions, Mr Sulan and Mr Pietriche paid particular attention to the manner in which AFCA had dealt with the question of causation in the Second Determination.

17. [76]

    In the Second Determination, AFCA stated, correctly, that the onus was on Mr Pasquier to establish that Notesco had breached its duty, that he had suffered a loss and that the breach caused the loss.

18. [77]

    AFCA’s first statement on causation was:

19. [78]

    However, AFCA went on to state:

20. [79]

    In oral submissions, Mr Sulan accepted that this reflected the “orthodox position” concerning causation, namely that a complainant did not just need to show that the other party’s breach was the “only, or even most significant,” cause of the loss, but it must show that its actions were a “sufficient” cause of the loss. I read the statement in the Second Determination that “it must, however, be a decisive consideration” to mean that in this case, it was necessary to show that Notesco’s alleged breach was a “substantive cause” of the loss; to adopt language AFCA had used earlier in the Second Determination.

21. [80]

    It was Notesco’s position before AFCA that “it was plainly the case that Nextrade’s trading on Mr Pasquier’s behalf was materially and substantially causative of his loss”. Notesco’s case before AFCA, and before me, was that it was merely a provider of the Trading Platform and played no role in advising Mr Pasquier how to trade on the platform.

22. [81]

    AFCA recorded that Notesco had argued that:

23. [82]

    The Second Determination continued:

24. [83]

    In the first sentence of this passage, AFCA appears to be saying that because Nextrade was not a member of AFCA, AFCA could not effect an apportionment that would result in the imposition of an obligation on Nextrade.

25. [84]

    However, in the second sentence, AFCA appears to be stating that although it could not apportion loss in a way that would impose an obligation on Nextrade, it could reduce the amount to be paid by Notesco to Mr Pasquier if a requirement that Notesco bear all of Mr Pasquier’s loss “would result in an unfair outcome”.

26. [85]

    It seems to me that what AFCA was doing here was accepting Notesco’s submission that it could reduce liability to take into account Nextrade’s role, notwithstanding that Nextrade was not a member of AFCA and therefore not amenable to AFCA’s powers, but only if it would be unfair to attribute all responsibility to Notesco.

27. [86]

    AFCA then stated why it considered it would not be unfair to attribute 100% responsibility to Notesco, stating:

28. [87]

    I do not see this passage as showing that AFCA there adopted a position on causation contradictory to the “orthodox” position that it recited in the passage at [79] above.

29. [88]

    Rather, it appears to me that what AFCA is doing is making an evaluative assessment as to what would be a “fair” outcome in all the circumstances.

30. [89]

    It is true that the AFCA Rules required AFCA to have regard to legal principles when considering what is fair, but I can see nothing in the AFCA Rules requiring AFCA strictly to apply legal principles.

31. [90]

    Indeed, as I have set out above, AFCA’s Operational Guidelines state that it is required to decide a complaint “based on what is fair in all the circumstances”, having regard to, amongst other things, legal principles, but not required strictly to apply legal principles. The Guidelines stated that AFCA would explain any departure from the application of strict legal principles.

32. [91]

    It appears to me that, in the passage I have set out at [86], AFCA was providing such an explanation.

33. [92]

    It may be that AFCA’s conclusion about that matter is contestable.

34. [93]

    But I am not persuaded that it is a conclusion that no reasonable body, particularly in AFCA’s position, could arrive at. It is not a conclusion that is “irrational”, “absurd”, “perverse” or lacking “an evident and intelligible justification”. [29]

35. [94]

    AFCA then went on to consider Mr Pasquier’s position and concluded:

36. [95]

    I agree with Mr Sulan and Mr Pietriche that there is a tension between a conclusion that but for Notesco’s breach of RG 227, Mr Pasquier would not have been given access to the Trading Platform and for that reason not suffered any trading loss, and a conclusion that Mr Pasquier has contributed to that trading loss by his own want of care concerning oversight of Nextrade’s trading on the Trading Platform. If Mr Pasquier had not been given access to the Trading Platform, there would have been no trading for him to oversee. To this extent, the Second Determination does lack “intelligible justification”.

37. [96]

    But the outcome of any such tension redounds in Notesco’s favour as it led AFCA to conclude that the amount Notesco should pay Mr Pasquier should be reduced by 25%: from €306,900 to €230,175.

38. [97]

    In any event, AFCA was looking at the question more broadly in the context of its obligation to achieve fairness in its determinations.

The determination in the matter of International Capital Markets Pty Limited

1. [98]

   Finally, Mr Sulan and Mr Pietriche submitted that AFCA’s treatment of the circumstances of this case departed “substantively from its determination of complaints against similar CFD users and platform operators in materially analogous circumstances”, reference being made to the statement in the AFCA Rules that AFCA will “support consistency of decision-making”. [30]

2. [99]

   Mr Sulan and Mr Pietriche referred to AFCA’s decision in the matter of International Capital Markets Pty Ltd. [31]

3. [100]

   There are some similarities between the facts here and the facts in that case. However, a significant and decisive difference is that AFCA concluded in the matter of International Capital Markets Pty Ltd that:

4. [101]

   It is true that that passage continued:

5. [102]

   However, it was a combination of those circumstances that AFCA found decisive in that case, thus distinguishing it from the facts here.

6. [103]

   In any event, as I am not able to conclude that the decision AFCA reached in this case was one that no reasonable body could have reached, I cannot see how even a directly contradictory decision in another case could, without more, lead to a conclusion of legal unreasonableness.

Conclusion

1. [104]

   I decline to grant Notesco the relief it seeks.

2. [105]

   The proceedings should be dismissed with costs.

3. [106]

   In those circumstances, it is not necessary for me to deal with Notesco’s application for an order dispensing with its obligation to comply with r 11.7 of the Uniform Civil Procedure Rules 2005 (NSW). [32]