CMFAS RES5 Securities Dealing & Market Conduct question: reasonably relies on the recommendation and suffers a loss

CMFAS RES5Securities Dealing & Market Conduct

A licensed FA recommends a complex product to a client without giving reasonable consideration to the client's objectives, financial situation and needs; the client reasonably relies on the recommendation and suffers a loss. Under s36 FAA, the consequence is that:

A the FA is liable to pay the client damages, having recommended without a reasonable basis
B the client bears the loss alone, since he made the final decision to invest the money
C the FA is liable only if it also charged the client a separate fee for the advice given
D the FA's only exposure is an internal warning to the representative who gave that advice to the client

Show the answer and explanation

Answer: A. the FA is liable to pay the client damages, having recommended without a reasonable basis

Section 36 FAA prohibits a licensed FA from making a recommendation without a reasonable basis (reasonable consideration and investigation given the client's objectives, financial situation and needs). Where the client reasonably relies and suffers loss or damage, the FA is liable to pay damages, without prejudice to any other remedy.

Common mistake

An unsuitable recommendation shifts the loss back to the FA via statutory damages liability — it is not simply the client's risk.

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Original study material mapped to the public CMFAS RES5 syllabus. Unofficial, not endorsed by MAS or SCI. Verify figures and rules against current guidance before relying on them.