Question 1 (30 marks)

The financial services and securities markets in Australia are primarily regulated under Ch 7 of the Corporations Act 2001 (Cth) and administered by the Australian Securities and Investments Commission (ASIC). For instance, Part 7.6 of the Corporations Act 2001 sets out a general rule that a person who carries on a financial services business in Australia must obtain an ‘Australian financial services licence’: s 911A.

Answer (a), (b), (c) and (d):

(a) Explain the rationales of the effective licensing system in Ch 7 of the Corporations Act 2001 (Cth) (5 marks)

(b) Do financial services licensees owe any legal obligations to their clients under the general law? If so, what are these duties? (5 marks)

(c) Analyse in detail relevant statutory requirements and regulatory guidelines to be complied with by a financial services licensee under the Corporations Act 2001 (Cth) (10 marks)

(d) What are criminal and civil liabilities of financial services licensees for a contravention of the conduct and disclosure requirements under Parts 7.7 and 7.9 of the Corporations Act 2001 (Cth)? (10 marks)

Question 2 (20 marks)

a) Mr Smith has a savings account with chequing privileges at an Eastpac bank branch in Armidale. While Mr Smith is out at work, Mrs Smith locates his blank cheque book. She forges her husband’s signature and makes the cheque payable to John, an innocent jeweller, in payment of a diamond ring he sold to her. The cheque is crossed with two parallel lines and the words ‘not negotiable’. John deposits the cheque into his own account at the Commonwealth Prudential Bank.

Discuss whether Mr Smith has any rights against either the Eastpac Bank or the Commonwealth Prudential Bank to return the money paid out of his account to John’s account. (10 marks)

In your answer, you need to cite all relevant legal principles of the general law and statutory provisions which may be applicable.

b) Alan has a cheque account with the Australian Bank (AB) branch in Sydney. On one Sunday afternoon, he draws a cheque in favour of Mary as a payment for a second-hand motor scooter she sold to Alan. The cheque is made out to Mary’s name or bearer. When Alan arrives home, he discovers a serious mechanical problem with the scooter. On the following Monday, he rings an employee of the AB branch to place a stop order on the cheque. However, due to an error of the AB employee, neither the branch manager nor any officer of the AB has been notified of Alan’s telephone message. The cheque is presented and paid.

Discuss whether Mr Alan has any rights against the AB to return the money paid out of his account to Mary. (10 marks)

In your answer, you need to cite all relevant legal principles of the general law and statutory provisions which may be applicable.

Marking criteria:

The assignments, which are set out above, will be assessed on the following criteria:

  • Does the answer adequately address the issues raised by the question? This does not mean you should ‘repeat’ the facts that have already been stated in the question. Rather it means you should thoroughly ‘analyse’ the facts of the assignment by pointing out the main issues that need to be dealt with so as to answer the question posed. For example, if the question seeks a critical assessment of a particular issue then a merely descriptive answer will not be awarded high marks.
  • Does it identify and state the relevant law, both case law and statutory provisions, applicable to the issues you have already analysed in point (1)? In stating the relevant law, try not to rely on the quotations from secondary sources such as textbooks or journal articles, but you should attempt to make reference to the primary materials such as law reports and statues.
  • Does it demonstrate analytical and critical skills? This is assessed by the way you analyse the issues in point (1) and in identifying the law in point (2). Obviously, this will not be demonstrated merely by a repetition of what appears in the textbooks or journal articles. In other words, your answer must demonstrate your ability to analyse, assess and state the issues and the law in your own words.
  • The degree of research undertaken and demonstrated in the answer. It will not be adequate to rely on a standard text in the area. You should read more widely and attempt to develop a critical approach to the problems which are set out in the assignment.
  • In the case of problem questions, the answer must attempt to provide a reasonable solution to the problem and to formulate different strategies to deal with the problem by looking at possible legal arguments which could be advanced to support your answer.
  • Answers should be typed and doubled spaced in a well-organised format. It must fall within the word limit which is stipulated. Assignments, which substantially exceed the word limit, may be returned unmarked.


(a)    The financial system of a country provides the platform over which the entire economic system of a country depends. It is the trust which the public places in the financial system of a country often helps them to carry out investments on which the economic development of the market depends. It is imperative that the trust of the public is not a misplaced one and in order to ensure the same there has to be some sort of regulation which needs to be in place despite (Mallesons Stephen Jaques 2007) this being an era of deregulation.  By resorting to the licensing procedure prescribed under chapter 7 of the Corporations Act, 2001 (Cth), this regulatory framework is created whereby the financial service providers can be held responsible in case of breach of their duties towards the public and the regulator. It is further submitted that the single licensing procedure helps ensure that the financial service providers in Australia are well trained in dealing with financial matters and further they can also be made to comply with the mandatory disclosure while providing financial services.
It is submitted in this regard that the licensing of financial service providers also helps in making them accountable, thus creating further pressure to maintain orderly and professional code of conduct. The object and rationale (Tomasic, bottomley and McQueen 2002)behind such procedure is to ensure that the public can make informed investment decisions and there is fairness and honesty amongst the financial service providers and the markets as well and moreover the Chapter also provides for the manner in which dispute, if any has to be settled.
(b)    There are a number of obligations which are placed on the shoulders of the financial service providers who are licensees or the market licensees as they are referred to as commonly. It is a very important duty on part of the financial service licensees to ensure that there is no conflict of interest between the service providers and the clients and they always must act in good faith, keeping the best interests of the customers in mind. It is submitted in this regard that since the clients or customers depend heavily on the advice given by the financial service licensees in order to make their investments which entail certain amount of risk as well, it is accordingly mandated that the financial service licensees take adequate care in order to ensure that there advice is based on accurate information and they must not be negligent in regard to their duties because there exists a duty of care,  on their part and in case of breach of the same on part of the person who gave advice, which in such types of cases would be the financial service licensees. The law of professional negligence has evolved to such an extent that even silence or concealment of information on part of the defendant makes the defendant liable in such cases.
(C)    It is submitted in this regard that there are certain statutory duties and obligations which have to be performed by the financial licensees at all times and without any failure in this regard. It is submitted that the first and foremost common law as well as statutory duty of a financial service licensee is to act in good faith (Serpel 2008 Vol 5) and in fairness at all times. The first and foremost requirement is provided in section 911A of the Corporations Act, 2001 (Cth) which provides for that the service provider must have a license and a failure to so carries 200 penalty points or imprisonment for 5 years and sometimes even both. The financial service licensees have an obligation to ensure that they only have authorised representatives who are properly trained and notify the ASIC about the same as per section 916 (f) of the aforementioned statute. The financial service licensees are obligated to ensure that accurate and proper information is provided to the client and in case of failure regarding the same; it must be notified to the client in case the advice is based on incomplete information. The financial service licensees also need to inform the retail clients that the advice does not take into account the objectives, financial position and the needs of the retail clients. The financial service licensees are mandated by section 760 (A) of the Corporations Act, 2001 (Cth) to ensure that the business is operated in a fair and honest manner at all times and to take reasonable practicable steps to ensure that the markets operate in a transparent and honest manner so that the trust of the public in the financial market is not a misplaced one. It is further submitted that the financial service licensees are obligated to ensure that the representatives which are operating in their business are well trained to comply with the conditions of the license and at the same time to ensure that there is no conflict of interest between the licensees’ interests and the object of chapter 7 as envisaged and encapsulated vide section 760 A of the Corporations Act, 2001 (Cth) and it is further submitted in this context that as per section 792 A of the aforementioned statute, it is an obligation of the financial service licensee in case the licensee is a corporate entity to ensure that no disqualified individual is allowed to be an authorised representative in the financial service providing because this would put the interests of the aforementioned chapter and that of the clients, both in jeopardy.It is further submitted that the statutory duties of the financial service licensees are of immense importance because their violation makes the licensees liable to face criminal prosecution and imprisonment which may extend up to five years depending on the gravity of the case. It is submitted that the duties of the financial service licensees can be summarised as to ensure that there is accurate and full disclosure, to ensure that there is fairness and the business is operated through well trained and authorised representatives only and to warn the client in case of any discrepancies.
(d)    Part 7.7 and 7.9 of the Corporations Act, 2001(Cth) provide for various criminal and civil liabilities which the financial service licensees might be held liable for and the same have been discussed hereunder in brief. Before proceeding further, it is imperative to understand that while Part 7.7 of the Corporations Act, 2001 (Cth) deals with financial service market and the regulation of their licensees, the other part i.e., Part 7.9 of the Corporations Act, 2001 (Cth)deals with regulation of financial products and the financial product licensees as such. It is submitted that the nature of the duties imposed on such licensees is quite similar and the nature of the liability incurred by them are also similar. It is submitted that full and appropriate disclosure of information is an absolute necessity and the same cannot be breached by the financial service and products licensees and in case of failure to do the same, both would be held strictly liable and the corresponding sections in this regard are section 952 C and 1021 C for the financial service licensees and the financial product licensees respectively. It is pertinent to note that the defendants shoulder the evidentiary burden to prove their innocence or lack of culpability in the aforementioned sections. Apart from the aforementioned sections, there is a series of corresponding sections which talk primarily about giving out a disclosure statement with the knowledge of it being defective and in case of not knowing whether it is defective or not, offence of giving out financial service and product disclosure material with the knowledge of it being defective and without knowledge about its accuracy. Similar provisions have been made in case of giving out defective financial service and product guides to the customers as well. Sections 952 D to 952 M and sections 1021 D to 1021 P of the Corporations Act, 2001 (Cth) deal with the offences in relation to Part 7.7 and 7.9of the Act, respectively. It is submitted that the aforementioned provisions again underline the importance of full, timely and accurate disclosure, especially in the field of financial service market. The civil liability provisions have been discussed in this regard as hereunder:
Regarding the civil liability provision as per section 953 B of the Corporations Act, 2001 (Cth) which deals with financial service licensee’s obligations, it is submitted that there is a strong adherence to the disclosure requirements as established under the aforementioned statute and it is submitted in this context that in case of the commission of aforementioned offences,, if the person or client relying upon the disclosure statements or material, they can recover the economic losses suffered by such clients from the responsible person or entity as maybe the case. It is submitted that this is an excellent provision because in addition to the punitive measures under the statute which do not really have any economic or pecuniary effect on the clients who have suffered a loss, this section comes to their aid and moreover, in one sense, the section also makes the remedy available under the Law of Torts, a statutory one.
Regarding the civil liability in case Part 7.9, it is submitted that in addition to the aforementioned discussed disclosure materials, it is worthwhile to note that a defective, offer or invitation which has been based on incomplete, or defective disclosure also gives birth to a right to be compensated on part of the person who suffered such loss because of reliance on such disclosure material or in case of defective offer or invitation, if the person gave his consent or accepted the same; then such a person can recover the losses from the person responsible vide a civil action for recovery of loss of damages and this provision as well points towards codification of common law remedies under the Law of Contracts and Law of Torts as a part of the Corporate statutory Law as in vogue in the Commonwealth of Australia and this is laudable attempt.
(a) There are a number of factors which need to be considered in order to ascertain whether or not Mr. Smith hasrecourse against East Pac and can the Bank take the money back from account of Mr. John and give him back the money. It is submitted that the first thing which needs to be discussed here is the nature of the relationship between a bank and its customer.It has been often debated as to whether the bank acts as a trustee to the customer or the bank acts as a bailee for the customer or whether there is some other kind of relationship between the bank and its customers. It is submitted in this regardthat it has been fairly well established that the nature of relationship between a bank and its customer is that of a debtor and creditor relationship. The definition of a debtor creditor relationship has been in vogue for over one and a half centuries now and as such it can be said that the position of Law on this point is quite well settled.
The next issue which arises is as to what is a cheque. It can be stated that a cheque is an unconditional order by the drawer (account holder) to the bank (drawee) to make payment of the specified amount to the beneficiary and it has to have the signature of the customer or account holder in question. Accordingly the bank can honour a cheque only in case it has received a cheque with the signature of the authorised account holder and the same cannot be done otherwise.  It is submitted that there also exists a relationship of trust between the customer and the bank because the stakes are very high in such cases and the bank owes a duty of care to its customers in order to ensure that there is no undue loss to the customers of the bank and this is a general lawduty as well. In the present case as well, the bank was not diligent enough to ensure that the signature on the cheque was a genuine one,  and thus there was a breach of duty of care and accordingly, it is submitted that the bank would be held liable to reimburse,  Mr. Smith for the money wrongly deducted from his account as there was a breach of duty of care which resulted in loss to the plaintiff.
(b)    The facts of the present case disclose that there was a clear instruction on part of Alan towards the bank which was not followed properly by the bank employee and which ultimately resulted in pecuniary loss to Alan. Prima facie, it appears to be a case of professional negligence on part of the AB employee and it is pertinent to note that the principle of vicarious liability would also come into picture in the present scenario.  A bank owes a duty of care towards its customers is a well established doctrine of law and it is submitted in this regard that the fact that the bank owed a duty of care towards Alan  is a non controvertible fact and applying but for test in this regard would disclose that but for the error on bank employee,  Alan would not have suffered the consequential loss,  and accordingly, there has been professional negligence which has resulted in loss to Alan and as such the causation as well was not too remote (Overseas Tankship (UK) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound) 1961).
Apart from statutory provisions of Banking Act, 1959 (Cth) and Competition and Consumer Act, 2010 (Cth) as well, when there is a clear case of negligence then the bank is going to be held liable for negligence as the bank would be held vicariously liable for the fault of the bank employee because but for the negligence on part of the bank employee,  Alan would not have suffered the pecuniary loss and as such the bank would definitely be held liable to make good the loss suffered by Alan. It is further submitted that the provisions of Part 7 of the Corporations Act, 2001 (Cth) are also applicable on the financial institutions and in the instant case Alan is liable to be compensated for his loss.

1.    Allen Arthur Robinson, Banking & Finance. (June 21, 2002)
2.    AUSTLII, Corporations Act, 2001. (2012)
3. Edwards, Robin. ‘Same Bank, Different Capacities: Knowledge, Remoteness and Measure of Damages.’ (Bond Law Review, 2002) 372-390.
4. Mallesons Stephen Jaques, ‘Australian Finance Law’ (Asia Pacific: Thomson Legal & Regulatory, 2007)
6. Tomasic, R, S bottomley, and R McQueen, Corporations law in Australia. (Sydney: The Federation Press, 2002)

France v. Gaudet. L.R. 9 Ex. 125. (1874).
Gilies, Peter, ‘Business Law’ (Sydney: The Federation Press, 12th Ed.) 2004.
Gorris v. Scott. L.R. 9 Ex. 125. (1874).
Hedley Byrne v. Heller . AC 465 (House of Lords, 1964).
Henville v. Walker . HCA 52 (High Court of Australia, 2001).
National Australia Bank Ltd v Nemur Varity Pty Ltd. VSCA 18 (Victoria Supreme Court, 2002).
Overseas Tankship (UK) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound). UKPC 1 (1961).
Palmer Bruyn & Parker Pty. Ltd. v. Parsons . HCA 69 (High Court of Australia, 2001 ).
San Sebastian Pty Ltd v The Minister. . 162 CLR 340 (High Court of Australia, 1986 ).
Shaddock V Parramatta City Council . ALR 385 (High Court of Australia, 1981).


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