Gail makes the vital point on reliance. What were the local councils relying on? Advice from investment advisors, and the AAA rating from S&P.
It is true that opinion matters, and that opinion can then cause the person investing to rely upon it. In that sense, an opinion or a fact is one of those fabulously opaque areas of legal deliberation.
But we should be careful that, in so doing, we are not painting the councils involved as vulnerable and entirely at the mercy of an S&P rating.
While the entire business of ratings is shoddy, they are not, in the words of S&P’s disclaimer, “statements of fact or recommendations to buy, hold, or sell any securities or make any other investment decisions”.
There may be more to be said about the specific parties who marketed the CPDOs and gave undertakings about their reliable value. That would just be patently silly, but it does happen in the world of finance.
The assessment of investment risk is highly complex. But converting assessments into guarantees is as reliable as astrology.
We can choose to pay for those services, but we cannot hope that those predictions will come true. There are simply too many factors at stake.
The law on deceptive conduct is highly developed in Australian commercial law, but there are also instances where a person was irresponsible to be deceived in the first place.
Public bodies like local councils, using the money of ratepayers, must also be wary of the sorts of investments they seek.
The financial crisis, with its revelations of the risk in highly complex investment structures, showed how flawed government and private institutions could be in their decisions. S&P’s ratings work is but a symptom of that culture.
But were the local councils irresponsible? It is easy to say in retrospect when they lost a lot of money that they did not do the right thing.
The local councils did understand that they were investing in a product with risk. They believed they were receiving sound advice from a trusted advisor and that this advice was reliable as it was linked to a rating from one of the world’s leading bodies that rates risk in investment products.
To say they were irresponsible might be to say that we can never trust or rely on any expert of whatever kind – very hard in most contexts.
Professor Gail Pearson is a leading academic in the fields of financial services, commercial and consumer laws. She is a former Member of the Fair Trading Tribunal of New South Wales (now Consumer Trader and Tenancy Tribunal), the chief venue for resolving consumer disputes. Dr. Binoy Kampmark teaches core legal courses within the Legal and Dispute Studies program for the Bachelor of Social Science at RMIT University.
This article was originally published at The Conversation. Read the original article.
