Supreme Court New South Wales Medium Neutral Citation: Yang v Westpac [2011] NSWSC 180 Hearing dates: 28 February 2011, 1, 2 March 2011 Decision date: 24 March 2011 Before: Gzell J Decision: Statement of claim struck out. Judgment for defendant. Catchwords: TRADE PRACTICES - Consumer Protection - Australian Securities & Investments Commission Act 2001, s 12GM and s 12GF - relief dependent upon alleged representations - no representations found - No principle involved Legislation Cited: Australian Securities & Investments Commission Act 2001 (Cth) Category: Principal judgment Parties: Michael Kar Yiu Yang (Plaintiff) Westpac Banking Corporation (Defendant) Representation: Counsel: C Birch SC (Plaintiff) G Lucarelli (Defendant) Solicitors: Raymond Lee & Co Solicitor (Plaintiff) Sparke Helmore Solicitors (Defendant) File Number(s): 2009/289197 Judgment 1Michael Kar Yiu Yang, the Plaintiff, invested $2.5 M in a Protected Equity Loan product (PEL) of Westpac Banking Corporation, the Defendant. 2Mr Yang borrowed $2.5 M from Westpac interest only for five years. The interest rate was fixed. On 14 August 2007 he purchased a portfolio of approved shares for that amount. On maturity of the loan the shares will be sold and the loan repaid. If a parcel of shares is sold at a higher price than the purchase price, Mr Yang will retain the profit. The equity protection feature arises if a parcel of shares is sold at less than the purchase price. The Bank is obliged to buy the shares from Mr Yang at their purchase price. 3Westpac manages this risk by going into the market and buying put options with respect to each parcel of shares at their purchase price. This leads to a higher rate of interest as the cost of the options is factored into the interest charged, most of which is said to be tax deductible. 4The issues in the proceedings are twofold. First, it is alleged that prior to entering the loan agreement Westpac represented to Mr Yang that the interest rate on the loan would be a variable interest rate. Secondly, it is alleged that in October 2007 Mr Yang requested Westpac to sell the shares and terminate the PEL but Westpac represented that it was not possible to terminate the facility before the expiry of the term. 5Both issues depend in large measure upon findings of credit with respect to Mr Yang on the one hand and Debbie Wong, the financial planner employed by Westpac who advised Mr Yang to invest in the PEL product on the other hand. First representation - variable interest 6Stephen Kwok Kan Yu was Mr Yang's accountant. He told Mr Yang that Westpac had a financial product that he should consider. Mr Yu arranged for Ms Wong to meet Mr Yang at Mr Yu's office. 7The meeting took place in July 2007. Mr Yang said that at the meeting he asked whether the rate of interest was variable, saying he only wanted a variable rate. He only dealt with variable rates. He said Ms Wong responded: "Yes you can have a variable rate. I will arrange for you to have a variable rate on the loan." 8Ms Wong denied that any mention was made of variable interest rates at the meeting. 9Mr Yu swore an affidavit in which he said that Mr Yang asked whether the interest rate was variable as he only dealt with variable interest rates to which he said Ms Wong responded: "Yes you can have a variable interest rate. It is available. I will arrange for you to have a variable interest rate on the loan." 10In cross-examination, however, Mr Yu agreed that the meeting was unimportant to him. He was in attendance as a courtesy to introduce Mr Yang to Ms Wong. His only real or actual recollection was confirmation by Ms Wong that the interest payments were tax deductible and the product included a capital guarantee. 11Submissions on behalf of Mr Yang pointed to the conflict between Ms Wong's evidence and the terms of the Product Disclosure Statement (PDS) and the PEL Application Form. 12Ms Wong said that interest had to be fixed and if Mr Yang had raised variable interest with her she would have said that it was not possible. 13Much later, when Mr Yang complained that he should have a variable interest rate, a meeting was held in Mr Yu's office on 23 October 2008. Present were Mr Yang and Mr Yu, Ms Wong and another representative of Westpac, Mr Leung. In her diary note of this meeting, Ms Wong recorded Mr Leung as saying that the PEL product was designed for a fixed rate. 14But while Ms Wong and Mr Leung regarded the PEL as a fixed interest product, Westpac documentation made provision for an annual re-setting of the interest rate, which it described as a variable interest rate. 15In discussing interest rates, the PDS referred to a "Fixed Interest Rate - fixed for the term" and a "Variable Interest Rate - reset annually". Clause 7.3 stated that the rate of interest applicable to the loan over the term would be a Fixed Interest Rate or a Variable Interest Rate and the term "Variable Interest Rate" was defined in the terms and conditions as the interest rate specified in the initial statement of the loan and thereafter the interest rate as reset and advised by Westpac annually for each interest period. 16And the PEL Application Form provided a choice between two boxes entitled "Fixed for the term of the loan ("Fully flexible")" and "Variable, reset annually ("Four or more") - this option requires a portfolio of at lease four Securities, none of which may have a weighting of more than 25%". Ms Wong checked the box for the fixed interest rate. 17In my view, little turns on this conflict. When Ms Wong said that had Mr Yang said he wanted a variable interest rate at their first meeting she would have said that a variable rate was not possible for PEL products. By a variable rate she meant one that moved in accordance with the official cash rate. 18And when Mr Yang said he insisted upon a variable interest rate he did not have in mind the rate reset annually but rather a rate that moved with movements in the official cash rate. 19Neither Mr Yang nor Ms Wong would have regarded the interest rate reset annually as a variable interest rate. What is described as a variable rate in the documentation is a fixed rate for each twelve month period. 20It was submitted on behalf of Mr Yang that in checking the fixed interest box without having sought Mr Yang's instructions and without having explained the other interest rate to him, Ms Wong acted without a mandate. 21But that is not the burden of the complaint. The complaint is that Mr Yang says he asked for a variable interest rate in the sense that it varied directly with the official cash rate and Ms Wong said he would have such a variable interest rate. Her choice of the fixed interest rate box had nothing to do with the alleged representation that the PEL product would be subject to a variable interest rate in the sense set out above. 22It was submitted that I should prefer Mr Yang's evidence to that of Ms Wong because it would be natural to have discussed whether the interest rate should be fixed or variable and for instruction to have been given. 23I do not accept that submission. The initial meeting was a courtesy call in which Mr Yang was impressed by the level of taxation deduction he could obtain. There was no reason for Mr Yang to request a variable interest rate. 24The meeting was opened by Mr Yu explaining to Ms Wong that Mr Yang had a tax issue and he had asked her to talk about the product that Westpac had that might help Mr Yang reduce his tax. The emphasis for Mr Yang was on the high rate of interest as an effective tax deduction. 25Ms Wong said that at the conclusion of her introduction of the PEL product Mr Yang said he really liked it and asked Mr Yu how much he should invest mentioning a figure like $3 M or $5 M. Mr Yu said probably $2.5 M to start with. This evidence was not challenged. 26There is far more reason to accept the evidence of Ms Wong in preference to that of Mr Yang. Ms Wong understood that the interest rate comprised various components at a particular date and that precluded variations according to changes in the official cash rate. So that if Mr Yang had requested a variable rate she would have said it was not possible. 27Ms Wong gave a detailed account of the conversation she had with Mr Yang at their first meeting, with most of which Mr Yang agreed. Ms Wong was a careful witness. Later, in October 2007 when Mr Yang sought to break the investment she said she told him that it would cost a lot to sell. 28It was put to her that she had no basis for knowing whether it would cost a lot or a little. She accepted that. It was put to her that was something she had made up during the course of the conversation. She agreed. 29After the meeting on 23 October 2008 Ms Wong prepared a typed diary note. In it she said that it was clearly written in the PDS that the interest is fixed for the term. It was put to her that that was wrong and she candidly admitted her mistake. She said that was not exactly what she meant. 30After the initial meeting, Mr Yang attended two meetings in Ms Wong's office when information was gathered from Mr Yang and documents were signed. At the second meeting he was handed a bundle of documents. 31No mention was made of a variable interest rate at either of these meetings. Mr Yang knew that both meetings were important formal meetings unlike the introductory meeting. The two meetings were at the Westpac branch and he knew he was there for the purpose of disclosing to Ms Wong everything potentially relevant to her assessment of the appropriateness of the PEL product for him. He knew he was paying for her professional advice about the suitability of the PEL product. Detailed personal, financial and taxation information was obtained about Mr Yang's sophisticated corporate and unit trust structure together with details of his acceptance of risk, investment horizon and tax objectives. 32Mr Yang was well trained. Not only did he have first hand commercial experience he also had tertiary qualifications as a CPA. If a variable interest rate was so important to him as he claimed, he would have insisted upon a variable interest rate at one or both of those meetings. This was not a small investment. It was a substantial one. 33Ms Wong prepared an indicative cash flow analysis that Mr Yang initially acknowledged was given to him at the third meeting with Ms Wong. It stated that the interest rate type was fixed term. He received it, but he said he did not see the rate type as fixed term. 34Then Mr Yang said that he was not shown the document at the third meeting. He received it in the mail afterwards and he said he did not read it but just put it away. 35Then Mr Yang said the document was not sent to him until after he had commenced these proceedings. 36Ms Wong said that on 8 August 2007 or 9 August 2007 she had a telephone conversation with Mr Yang in which she asked whether he was ready to execute the investment. He said he was not sure. The market was up and down. She said it was difficult to time the market but this was a long term investment and Mr Yang should not focus on trying to time the market. If he was satisfied with the investment as a long term one he should go ahead and Mr Yang gave instructions to do so. 37On 15 August 2007 Ms Wong sent an email to Mr Yang in Shanghai. Attached to it was a trade notification. Under loan details it described the interest type as "FIXED". Mr Yang said he did not look at the interest part. But if he was so concerned about variable interest that is the first item to which he was likely to refer. He made no complaint on receipt of this information. 38On 16 August 2007 details of his PEL investment were sent to him. It contained a list of the shares that had been purchased together with details of the loan on the third page as follows: "The Loan Loan Amount $2,494,313.16 Draw Down Date 14-Aug-2007 Maturity Date 10-Aug-2012 The Interest Interest Type Fixed interest rate, paid monthly in arrears Interest Payment Dates On or about day 14 of each month Convention previous business date Payment Instructions Direct Debit Account Name Michael Kar Yiu Yang Bank Name Westpac Banking Corporation BSB XXXXXX Account number XXXXXX" 39Mr Yang said he recalled receiving the letter but he didn't see the fixed interest rate part. He said he didn't see the third page and did not notice the reference to fixed interest. 40I do not accept that evidence. If Mr Yang was so insistent on variable interest rates the third page details of his loan would have been scrutinised by him. There was no complaint to Ms Wong that contrary to his instructions the interest rate on his loan was fixed. 41Ms Wong said that on 21 November 2007 Mr Yang came to the bank to obtain a bank cheque for $100,000 to invest in BT shares. While at the bank Ms Wong said that he asked why the interest payments varied from month to month when he thought they should be the same. Ms Wong said she was surprised as she thought fixed interest was the same each month. She made inquires and found that the interest varied with the number of days in the month. Ms Wong telephoned him to explain. 42Mr Yang denied he made such an inquiry. I accept Ms Wong's evidence. She had a diary note of 21 November 2007 confirming the inquiry. 43The inquiry undermines Mr Yang's assertion that a representation as to variable interest was made at the first meeting. If he expected that his PEL investment was at a variable interest rate he would not have expected the interest payments to be the same each month. That he did have that expectation is consistent only with a fixed interest rate. 44Mr Yang received a letter of 2 September 2008, a PEL annual statement. It clearly stated that the interest details were "Fixed interest rate, interest paid monthly in arrears". Mr Yang remembered receiving the statement. He noticed that the loan term was for five years but he did not notice the next line which contained the above reference to a fixed interest rate. Again, I do not accept Mr Yang's selective evidence of what he saw. 45Mr Yang raised the complaint that interest on his PEL investment was not variable in October 2008. Ms Wong said that Mr Yang telephoned her and said he had cash flow problems. He could not service the interest repayment and that since interest rates had dropped he wanted the rates to drop on his loan. He thought it was a variable rate. 46Ms Wong said she told Mr Yang that it was not a variable rate. That was not how the PEL product worked and the only reason interest payments changed from month to month was the number of days. 47At the meeting on 23 October 2008 both Ms Wong and Mr Leung said the interest rate was fixed and the product was designed for a fixed interest rate. Mr Yang denied that he told Ms Wong that he was having cash flow difficulties. 48Mr Yang knew in September 2008 when he received the annual statement, if not earlier, that as at 30 June 2008 there had been a substantial deterioration in the value of his portfolio. It was in his interests, then, to make the complaint that he did in October 2008 but he denied that he had cash flow difficulties. 49I accept the evidence of Ms Wong on this matter. Her diary note confirms that Mr Yang complained that he had cash flow problems in servicing the loan. 50Also of concern was Mr Yang's evidence that his portfolio of shares was presented to him as a fait accompli and he had no participation in the selection process. He also denied that Ms Wong completed the Risk Profile in his presence. Notwithstanding that the responses to the questionnaire must have come from him unless Ms Wong concocted it. 51Mr Yang denied that Ms Wong completed the Client Profile in his presence with all its financial information. In that respect he was correct. 52The original Client Profile was in evidence. It has an authorisation page with the words "very high" inserted into the risk profile box. In the box for the fee to be charged was inserted $660, which was changed to $1,000. Mr Yang's signature appeared in the Client 1 Signature box and in the date box for the signature "24/7/07" was entered. Ms Wong's signature appeared in the Financial Planner Signature box and the same numerals appeared in the date box for her signature. 53Also in evidence was a copy of that authorisation page with nothing in the risk profile box, $660 in the fee box, Mr Yang's signature in the client box with no date and no signature of Ms Wong or date in the second date box. 54Ms Wong said she did not understand, but said the most important thing was the Risk Profile and the signature on that which she had and this page was mainly for the acknowledgement of the fee. 55It is clear that Ms Wong obtained Mr Yang's signature to the document before the authorisation page was complete. It is also clear that most of the other information, apart from financial details, was inserted in the document when signed by Mr Yang. 56The absence of the financial details is consistent with Mr Yang's request that Ms Wong obtain precise financial details from Mr Yu. 57The most likely explanation is that Ms Wong got Mr Yang to sign before those details were obtained and, an agreement having been reached that the fee would be a $1,000, she changed the $660, added the dates and signed having obtained the information from Mr Yu. 58While that course of events is not desirable, it does not cause me to alter my view of the credibility of Ms Wong. 59Ms Wong maintained that the PDS revealed that the interest was fixed for the term. It clearly does not. But both she and Mr Leung insisted that the product was designed for a fixed interest rate. That was the way in which they administered the product. 60At the same time as Mr Yang says he had serious concerns that the market would fall and he wanted to pull out of the entire PEL investment he took up $100,000 worth of BT shares. That undermines his assertion. 61For all these reasons I prefer the evidence of Ms Wong to that of Mr Yang. I find that the representation alleged to have been made at the first meeting in July 2007 to the effect that variable interest rates were available with PEL products was not made. Second representation - locked in 62Ms Wong explained that with respect to the PEL investment, corporate actions are described in the PDS. They are events that occur outside the control of the client or Westpac which require a change in the portfolio. A takeover is an example. 63Ms Wong said that in October 2007 in the context of a corporate action, Mr Yang said that maybe he should sell some parcels of shares that were up. He was not sure about the market to which Ms Wong said she responded: "You shouldn't sell. This is a long-term investment strategy, shares will rise and fall and you have capital guarantee. It will cost a lot to sell and end any investments this early". It was the fact that some of the shares had gone up. 64Mr Yang's evidence was that he telephoned Ms Wong and said he wanted to pull out. 65Mr Yu said that at the meeting on 23 October 2008 Mr Yang complained that he had wanted to sell some of the shares the previous year and Ms Wong said he was not allowed to do so. That evidence corroborates Ms Wong's version of the conversation in October 2007. There was no request to sell the entire portfolio. 66The statement of claim alleges that in October 2007 Mr Yang requested Westpac to sell the shares and terminate the PEL investment. In response it is alleged that Westpac represented to Mr Yang that it was not possible to sell the shares and terminate the PEL investment before the expiry of the term of the facility. Mr Yang's evidence was that having told Ms Wong in October 2007 that he wanted to pull out. She said: "No. You are locked in for five years. You cannot pull out." 67In the diary note of Ms Wong following the 23 October 2008 meeting Ms Wong recorded: "He also argued that he wanted to sell some of the share last year, I told him that he wasn't allow to do so. I told him that I didn't say that he wasn't allowed, but it's not advisable to do due to the high breaking costs." 68That note supports Ms Wong's evidence that she did not say Mr Yang was locked in but rather that it would cost a lot to sell and end any investment so early. 69I do not accept the implication arising from the submission that Ms Wong was concerned that there might be a complaint against her when she recorded what had transpired at the 23 October 2008 meeting and fabricated this entry. 70Mr Yang believed that the share portfolio had gone up by about $250,000 in two months. He purchased $100,000 worth of BT shares. It is implausible that he would think in terms of liquidating the entire portfolio. It is far more likely that he was considering selling some of "winners" in the portfolio. 71It was the fact that Mr Yang could sell at any time either the entire portfolio or individual parcels of shares in it upon payment of break costs. Break costs are calculated by Westpac taking into account the value of the shares, the value of the option, payments that have been made towards the option and other costs. The calculation of break costs is a complex matter requiring special expertise. 72While Ms Wong has a diary entry of the corporate action she makes no mention of the conversation with Mr Yang about selling some of the shares. But the absence of a diary note merely indicates that Ms Wong did not regard the conversation as important. If Mr Yang had given Ms Wong instructions to terminate the PEL investment or to sell some of the shares in it, one would expect that Ms Wong would have made a diary note. 73There was no suggestion that Ms Wong had any calculations or other information to hand to support her assertion that it would cost a lot to sell so early in the investment. Ms Wong conceded that she had never obtained a break quote for a client. She had approximately 10 clients in PEL investments but none had sought to terminate the facility early. Ms Wong's view was that clients should maintain the facility to maturity. 74Ms Wong had a clear financial interest in keeping Mr Yang in the investment for as long as possible. She earned commissions if she gained product for Westpac over a specified amount. It was submitted that if Ms Wong had said that there were high breaking costs it would be natural for Mr Yang to have enquired what they were and no such inquiry was made. 75Mr Yang was a man of considerable commercial experience. It would have been logical for him to accept that it would be costly to break the investment after two months. He would need no inquiry to establish that. 76Of the meeting of 23 October 2008 Ms Wong's diary note includes the statement attributed to Mr Leung that the current PEL interest rate was much more expensive than in 2007. 77Westpac called Liam Farlow an employee. His responsibilities have included product management with respect to the Westpac PEL product. In cross-examination he said it was not correct to say in 2008 that the current PEL interest was much more expensive than in the previous year. But that does not affect the credit of Ms Wong. 78I am satisfied that Ms Wong did not say anything to Mr Yang about being locked in. She knew that was not the case. She knew that the investment could be broken. Break costs would be payable. Her advice to Mr Yang was perfectly correct. It would be very costly to terminate the investment early in its life. 79I find that the second representation was not made. Reliance 80It is unnecessary to consider the question of reliance with respect to either of the alleged representations. 81With respect to the second representation, Anthony Kim Bradshaw was an expert retained by Mr Yang. Mr Farlow considered his report and adjusted Westpac's initial quotation of break costs on Mr Yang's PEL investment in October 2007 by $28,256.16 to $81,602.74. 82While Mr Bradshaw was not provided with all the formulas and data he did say that Mr Farlow had applied appropriate methodology and the break costs he calculated were within the range Mr Bradshaw would expect. 83That figure represented less than three months interest payments. It was 3.26% of capital. It was submitted that if one believed the market might drop by any significant amount it would have been better to exit and re-enter at a later time. 84On the other hand, Mr Yang believed that the portfolio had increased in value by $250,000 in but two months. In my view it was unlikely that Mr Yang would forgo any profit and pay Westpac the break costs in October 2007. 85Had it been necessary for me to deal with the question of reliance with respect to the alleged second representation I would have concluded that Mr Yang would not have terminated his PEL investment. Relief sought 86In his statement of claim Mr Yang sought an order rectifying the agreement for Mr Yang's PEL investment so as to provide that the rate of interest should be Westpac's variable rate of interest for the term of the loan. 87Further, or alternatively, Mr Yang sought an order under the Australian Securities & Investments Commission Act 2001 (Cth), s 12GM that the agreement be so rectified. 88Further, or in the alternative, damages were sought under the Australian Securities & Investments Commission Act (Cth), s 12GF. 89The relief depended upon the alleged representations or one of them being made out. They have not. 90I will make an order striking out the statement of claim and entering judgment for Westpac. I will hear the parties on costs. I direct the parties to bring in short minutes of order reflecting these reasons. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 March 2011