Financial advice is necessary when buying timeshare: the Ultiqa Lifestyle decision

The traditional timeshare sales technique of ‘You have won a Prize’ lure followed by a hard-sell is no longer legal in Australia as a result of the decision of the Federal Court of Australia in Australian Securities and Investments Commission v Ultiqa Lifestyle Promotions Limited (in iq) [2022] FCA 561 (17 May 2022) (Downes J).

From now on. timeshare sellers are classified as sellers of financial products and must comply with the financial adviser’s duties of best interests, know your client and conflict of interest disclosure.

In this article, we examine the implications of the decision.

The Ultiqa Lifestyle Timeshare Scheme

The Ultiqa Lifestyle sold timeshare in Australia. Customers purchase points to use to book and stay at holiday accommodation at various locations around Australia and around the world. An up-front payment is made to join the Scheme, and annual fees are payable.

Ultiqa Lifestyle registered the Scheme as a managed investment scheme and held an Australian Financial Services License (AFSL) (as it should). Its sales consultants were registered as authorized representatives under Ultiqa’s AFSL.

Ultiqa sales representatives were provided with a template statement of advice document, training manual and sales script. Representatives were expected to follow the process when selling interests in the Scheme.

Ultiqa did not believe that they needed to comply with the financial advice provisions of the Corporations Act 2001 (Cth). This extract from the Sales Training Manual provides an insight:

“Sometimes the hardest part of the job is simply keeping your client, not selling them. Once your client is on the Sales Deck they come to the grim realization that this is a sales environment and what is going through their mind is “How can we get out of here?”, And, if you give them the chance, they will . DO NOT GIVE THEM THE CHANCE! Do everything you can do to amuse, interest, excite, relax, humor, flatter and if necessary cajole your clients into staying. ”

It was ASIC’s case that Ultiqa’s salespersons provided personal advice under s 766B (3) and needed to comply with the financial advice provisions – ss 961B, 961G and 961J of the Corporations Act 2001 (Cth). The Court agreed.

The Court adopted the expert evidence and found that the sales representatives contravened the Act in the following ways:

s 961B Provider must act in the best interests of the client (the “best interests” duty)

The Ultiqa sales representatives failed the “best interests” duty in three ways:

  1. The Court found insufficient information was gathered from the clients to “reasonably consider recommending a financial product”.

The information that was collected was: age; employment status and occupation; living status; yearly income amount; home ownership; other holiday club memberships; and holiday preferences.

The additional information that should have been collected was: the nature of the client’s income; employment status; assets and liabilities; living and loan expenses; goals, objectives and needs (personal and financial); anticipated changes in circumstances within the 15 year time frame of Scheme membership; and the client’s risk profile.

  1. The advice given to clients was deficient for these reasons:

The objectives the advice was designed to achieve were not identified; reasonable inquiries were not made to obtain complete and accurate information; the advisor was not in a position to assess the appropriateness of the financial product to the goals, objectives and needs of the client; and did not base the recommendations on the client’s financial circumstances.

  1. It was not reasonable to recommend an interest in the Scheme to the clients because: no consideration had been given to financial products other than the Scheme, and none of the requirements of “an adviser acting with due care and consideration” had been met, such as ensuring that a goal setting and risk profile process was undertaken, providing an advice document, and giving the client sufficient time to read and understand the advice.

In fact, the client was not told and was not even aware they were receiving financial advice!

s 961G Resulting advice must be appropriate to client

ASIC tendered evidence by six clients to prove that the advice given to them to purchase Ultiqa timeshare was inappropriate for each of their personal circumstances and risk profiles, which were:

  • A registered nurse and a rig worker aged 37 and 35, with a combined income of $ 160,000 pa, from casual work (without holiday leave), mortgage payments on a home loan and 5 dependent children. They paid $ 19,992 for their interests in the Scheme.
  • A self-employed couple with an earth-moving business aged 57 and 56, with a combined income of $ 120,000 pa, and home mortgage payments. They paid $ 9,990 for their interests in the Scheme.
  • A retail supervisor and document writer aged 51 and 44, with a combined income of $ 190,000 pa, mortgage payments on a home and an investment property, a car lease and 1 dependent child. They paid $ 17,880 for their interests in the Scheme.
  • A primary school teacher and a hotel reservations clerk aged 58 and 41, with a combined income of $ 250,000 pa, home mortgage and car loan payments, and limited to taking holidays during school holidays. They paid $ 9,992 for their interests in the Scheme.
  • A television cameraman and a school teacher aged 49 & 44, with a combined income of $ 130,000 pa, mortgage payments on a home loan and 3 dependent children. They paid $ 9,990 for their interests in the Scheme.
  • An optical salesperson and a chef, both aged 52, with casual income, renting a home, personal loans and no real estate experience. They paid $ 19,992 for their interests in the Scheme.

The Court agreed that the clients were “not provided with an adequate explanation for, or warning of the risks associated with an investment in the Scheme” including:

(a) difficulties with obtaining holiday accommodation specific to each client’s present and future circumstances; and

(b) the increase in risk associated with the increased level of borrowings, such that the clients could make an informed decision to purchase interests in the Scheme.

s 961J Conflict between client’s interests and those of the provider, licensee, authorized representative or associates

There were two conflicts of interest:

  1. The commission payable to the authorized representative, of between $ 512.38 and $ 1,859.26 per ‘sale’ should have been disclosed to the client; and
  2. Ultiqa should have disclosed that the authorized representatives were recommending an in-house product which it had developed internally.

As a result, Ultiqa and the authorized representatives gave priority to their interests, not the client’s interests, when providing advice to purchase interests in the Scheme.

Finally, Ultiqa was liable under s 912A (1) for not doing “all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly”.

Outcome

Ultiqa was liable for the actions of its personal representatives because it did not take reasonable steps to ensure their compliance with ss 961B, 961G and 961J when providing advice to the six clients.

The Court made declaratory orders that Ultiqa had contravened each of the sections.

No restitution or other orders were made in relation to the six clients.

Are off-the-plan apartment sales (for investment) affected by the decision?

The Corporations Act 2001 (Cth) does not make the sale of off-the plan sales of apartments for investment a managed investment scheme because it is a direct sale and purchase of property.

To the extent it involves the sale of shares, ASIC Regulatory Guide 67 sets out ASIC’s policy for relief from the Corporations Act 2001 (Cth) for the sale and valuation of real estate shares in these companies: Company title, Stratum title (Vic), Lake title and Court title (Qld). Otherwise, they would need a prospectus or disclosure document and hold and an AFS license.

The unconscionable conduct provisions of Subdivision C of Division 2 — Unconscionable conduct and consumer protection in relation to financial services – of the Australian Securities and Investments Commission Act 2001 (Cth) do not apply because they are limited to the provision of financial services.

Similarly, section 21 – Unconscionable conduct in connection with goods or services – of the Australian Consumer Law does not extend to the sale of real estate.

Therefore, the ACCC’s arguments about “best interest” duty are not able to be transferred to the sale of real estate, and the conclusion is that off-the-plan apartment sales (for investment) are not affected by the Ultiqa decision.

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