Question 1 - Short Answer Questions (20 marks)

1. Discuss the benefits ad disadvantages of managed investment schemes.

2. When are managed schemes required to be registered and what is required?
3. Explain what is meant by best interest duties in terms of financial provider
and client relationships
4. Explain the different legal relationships that arise out of financial provider
and client relationships
5. What should a statement of advice provided to a client by a financial advisor
include
6. What obligations do financial service providers have with regard to
minimising money laundering

Question 2 - Problem Question (30 marks)

Scarlett has just been promoted to the position of Junior Associate at her firm and
has received a raise. Scarlett has decided that she can live comfortably on her old
wage and decided to invest the difference in the hope of accumulating enough
fund to purchase her first home. She approaches Logan at Pear Financial Ltd and
inquires about getting some advice appointment and they set an appointment for
the following Tuesday. Logan is an experienced financial provider.

On Tuesday Scarlet explains to Logan her situation and says “I have a bit of money
and need to invest it well. I want a house. I have no financial knowledge other than
a simple bank account, so I will be relying on you.”

Logan is pleased “Beginner investors are my speciality. We will do fine I think,

there are a lot of good investment opportunities on the market.”

Scarlett indicates to Logan that her main concerns are that the investment grows at
a reliable and steady rate, and that she does not want to take any unnecessary
risks. Logan recommends that Scarlet invest 80% of her money in JP Morgan.

Logan does not provide Scarlet with a product disclosure statement or any other
written information about her investment. Scarlett invests her $25,000 in JP
Morgan. Logan has been offered a substantial commission for selling units in a
managed investment scheme – JP Morgan is a property trust that invests in high
risk, speculative real estate. JP Morgan has been operating for 18 months. It has
been extremely profitable and returned high short term profits to investors.
Logan recommends Scarlett invests the remain 20% of her cash in KL Bit Ltd and
purchase shared in their latest share issue. He tells Scarlett I’ve got a great
opportunity right now. KL Bit Ltd is fundraising and just did an issue of shares. The
price is good and has strong market promise. It can only go up from here.”

KL Bit Ltd is a new tech venture selling virtual money, a very young company with
a brief history of strong performance on the stock exchange. Scarlett, knowing
very little about the virtual money market is hesitant, so Logan says, “These shares
are some serious opportunities. My cousin invested in the company from the
outset and it has has had so much growth that now he drives a Ferrari. Trust me on
this.” Logan does not mention that he has no cousins. “In my opinion, you won’t
regret it.”

Logan is very pleased. All the financial brokers at Pear Financial Ltd had been called
to a meeting only an hour before Scarlett had walked in for her meeting. In the
meeting Logan and his colleagues were informed by managing director Tate that
he had just had a meeting with KL Bit Ltd and that company was having a bit of
financial trouble. Not only were they experiencing cash flow problems, but their
biggest competitor in Victoria, Bitinote Ltd, was preparing to go international and
it was expected that this would have a negative impact on KL Bit Ltd. Tate’s ex-
wife is a director at Bitinote Ltd which is how he knew this information. All the
financial brokers at KL Bit Ltd were instructed to try and ‘push’ shares in KL Bit Ltd
in order to give them a bit more capital to work with and hopefully help the
company out of a pretty bad position.

Tate finished the meeting by saying, “This is very important to me as I am a silent

director and major investor in KL Bit Ltd and if business does not pick up, this
could be pretty embarrassing for KL Bit Ltd.” Logan knows he will receive a small
bonus for being the first one to bring in the business and goes to tell Tate. Tate
congratulates him but offer to bonus.

Logan goes back to his office. He is very unhappy and feels he compromised his
ethics but got nothing in return. He calls his  brother Luke and tells him what
happened. Luke asks if he should buy shares in Bitinote Ltd and Logan agrees it
would be a good investment. Both Logan and Luke invest in Bitinote Ltd knowing
that once they go international, the value of their shares will go up.

It has now been four months since Scarlet visiting Logan. JP Morgan is declared
insolvent after losing millions in the Spanish real estate market crash. With a little
of her investment in KL Bit Ltd, Scarlett is horrified to see share prices dropping
when Bitinote Ltd announces it is going international. Scarleets friend Sam has
informed her that Logan is now very wealthy after investing in Bitinote Ltd.

Scarlet has come to to you for advice. Advise Scarlet as to her possible causes of
action against Logan. A friend of Luke’s has told him that his and Logan’s actions
weren’t exactly legal and Luke has come to you for advice.