On 29 September 2022, the Federal Court (Anderson J) dismissed ASIC’s proceedings against the Commonwealth Bank of Australia (CBA) and Colonial First State Investments Limited (CFSIL), finding that neither breached conflicted remuneration laws as part of their administration and distribution arrangements for Essential Super.
Background
Essential Super was jointly developed by the Retail Banking Services (RBS) and Wealth Management (Wealth Management) business units of CBA.
CFSIL was the issuer of Essential Super, which was launched for distribution in CBA’s retail bank branches and online channels on 1 July 2013. CBA trained its retail branch staff to distribute Essential Super in accordance with ASIC’s Regulatory Guide 146 Licensing: Training of financial product advisers. A cohort of individuals also became members of Essential Super due to the transfer of “accrued default amounts” from the Colonial First State FirstChoice Superannuation Trust to Essential Super.
CBA and CFSIL entered into a written agreement on 27 June 2013 (2013 Distribution Agreement) with respect to Essential Super, for an initial five year term. Under the 2013 Distribution Agreement, CBA was obliged to provide services to CFSIL; and in return CBA was entitled to fees of 30% of the total net revenue derived by CFSIL from Essential Super in each financial year. Depending on the year, the fees were paid by cash or journal entry.
CBA and CFSIL subsequently entered into two further written agreements, on 2 June 2015 (2015 Distribution Agreement) and on 26 February 2018 (2018 Distribution Agreement) (collectively, Distribution Agreements).
ASIC’s case
ASIC commenced civil penalty proceedings against CBA and CFSIL on 22 June 2020 as a result of a referral by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The arrangement between CFSIL and CBA regarding the distribution of Essential Super was the subject of a Royal Commission case study.
ASIC alleged that, during the period 1 July 2013 to 30 June 2019 (Relevant Period), CFSIL gave, and CBA accepted, monetary and/or non-monetary benefits which could reasonably be expected to influence financial product advice provided by CBA when distributing Essential Super. These benefits were alleged to be:
- choses in action pursuant to the Distribution Agreements between CBA and CFSIL ie the promises to pay the fees set out in the Distribution Agreements (the Promises)
- cash transfers from CFSIL to CBA (the Cash Transfers)
- journal entries, totalling $55,723,946.65 in respect of Essential Super in the management accounts of the CBA Group (the Journal Entries),
(each an Impugned Benefit).
Therefore, ASIC alleged that:
- CBA contravened the prohibition against a financial services licensee accepting conflicted remuneration pursuant to s 963E of the Corporations Act 2001 (Cth) (Act); and
- CFSIL breached the prohibition on product issuers or sellers giving conflicted remuneration pursuant to s 963K of the Act.
The Federal Court’s decision and considerations
General remarks
Anderson J made a number of introductory remarks about the conflicted remuneration definition:
- ‘benefit’ takes on the definition in section 9 of the Act, as expanded upon by section 963A
- to establish a benefit requires a consideration of the nature of the benefits and / or the circumstances in which they are given. Those matters must be capable of altering the choice of financial product that might otherwise be recommended or the financial product advice that might otherwise be given
- both limbs of section 963A(a) cannot be enlivened unless there is a choice of different financial products to recommend that creates a situation of potential conflict
- the focus is on the nature of the benefit and the circumstances in which it is given, showing an intention to give effect to substance over form. The Court should ask whether a real commercial advantage exists after an assessment of any net benefits that may arise
- the element of influence is an objective reasonable standard of “could reasonably be expected to influence”, which is to be assessed by reference to the nature of the benefit or the circumstances in which it is given
- there must be a causal nexus between the benefit and the influence
- the relevant time to assess the benefit is when it was provided
- ‘influence’ requires a benefit which has the capacity to have a ‘real and tangible effect’ on either the choice between different financial products which are recommended, or the financial advice given to retail clients and so is something beyond the mere possibility of influence
- there must exist a real and genuine conflict of interest or the provision has no application. Conflicted remuneration is not concerned with situations where there is no genuine conflict of interest having regard to matters such as the benefit of a recipient; the environment in which the benefit is given, and how direct or indirect the link is between the benefit and the value of a financial product that is recommended.
The Impugned Benefits are not ‘benefits’
Anderson J found that ASIC had failed to establish that there was a relevant benefit for the purposes of the definition of ‘conflicted remuneration’ in section 963A of the Act.
Anderson J noted that Essential Super was a CBA-branded product that was jointly initiated, and thereafter jointly supported, by two business units within the CBA Group. His Honour found that the ban on conflicted remuneration contained in Division 4 of Part 7.7A of the Act (Conflicted Remuneration Provisions) was never intended to operate between business units / entities in the same group of companies. The Conflicted Remuneration Provisions are directed to benefits that exist between arms-length entities that are not part of a single consolidated group, as well as legal entities which have separate and distinct ownership.
Anderson J concluded that this “pivotal circumstance is terminal to ASIC’s case”.
In particular, Anderson J made the following conclusions.
- The Journal Entries
These were no more than standard intragroup accounting allocations to reflect the sharing of costs and revenues between business units and the associated legal entities that were responsible for Essential Super.
From a financial accounting perspective for the CBA Group, any transfer of value from CFSIL to CBA simply “cancels out” upon consolidation of the accounts. Such an arrangement cannot be said to confer any real or commercial benefit or advantage upon either CBA or CFSIL.
- The Promises and Cash Transfers
Neither the Promises nor the Cash Transfers were benefits for the purpose of section 963A of the Act as they do not confer any real commercial value or advantage, given they are arrangements between two entities within the single CBA Group.
The Promises, and any resulting Cash Transfers, did not confer any real profit, advantage or gain; nor did they result in a change in overall value for CBA. They merely promised, and at times resulted in, the movement of funds from one subsidiary to its parent entity.
The Promises were given in exchange for CBA’s agreement to provide valuable services to CFSIL, which included marketing, distribution and resourcing, IT, services and access to NetBank services and functionality. CBA incurred substantial expenses in providing these services, and it did so before it received any payment from CFSIL. Both the Promises and any resulting Cash Transfers represented consideration/compensation for those Services.
In addition, CBA incurred substantial expenses on product development, for which it was not recompensed under the Distribution Agreements.
It was also on this basis that Anderson J conflicted that the presumption in section 963L did not apply.
Impugned Benefits not capable of influencing advice
ASIC sought to characterise the arrangements between CFSIL and CBA in respect of Essential Super as one involving careful, serious, cautious governance as well as an arrangement between companies at arm’s length. Anderson J rejected this assertion, stating that such a “characterisation ignores the commercial reality and circumstances of the arrangement between CBA and CFSIL” for the following reasons:
- CFSIL did not employ any employees. It instead relied on employees from other entities within the CBA group. “This touchpoint shows the artificial nature of the way in which ASIC has constructed the relationship between CFSIL and CBA.”
- The frontline staff of CBA that were involved in the distribution of Essential Super had no knowledge of the internal accounting or allocation arrangements between CBA and CFSIL. This demonstrates that there was no reasonable basis for any expectation that those internal arrangements would influence either the choice of product recommended by CBA staff to retail clients, or the financial product advice they gave to retail clients. Therefore, the circumstances that ASIC relies upon cannot be said to be reasonably expected to influence the advice that frontline staff would give with respect to Essential Super over other superannuation products
- In addition, the finance teams that recorded Journal Entries in respect of Essential Super had no knowledge of the existence of the Distribution Agreements or their terms until September 2017, and therefore any transactions between CFSIL and RBS in respect of Essential Super until that time had no regard to the Promises. When that discrepancy was identified, no rectification attempts were made to account for the three years of unfulfilled Promises
- Similarly, in relation to the Journal Entries and Cash Transfers there was nothing other than management account journal entries in the 2015, 2016 and 2017 financial years. No Cash Transfers were made and nor were there any entries recording that amounts were payable or receivable between the CFSIL and CBA legal entities
- Also, the quantum of those Impugned Benefits was de minimis to CBA as it only amounted to almost $23 million, which is immaterial when compared with the net profit after tax which was generated by the RBS business unit of CBA which was in excess of $26 billion over the Relevant Period.
The above showed that the Impugned Benefits asserted by ASIC could not be reasonably expected to influence any advice provided by CBA to retail clients.
No evidence of influence
ASIC was required to establish that the Impugned Benefits could reasonably be expected to influence either:
- the choice of financial product recommended; or
- the financial product advice provided,
as set out in section 963A of the Act. Anderson J determined that both limbs operate in the context of a choice between financial products, where a conflict may potentially arise because the advisor is recommending one product over another.
In the current case, Essential Super was the sole superannuation product distributed by CBA. Anderson J concluded that section 963A cannot be intended to operate where no other financial product is available, as this would eliminate the requirement that a choice could be made between two options that creates a situation of potential conflict.
Also, as this was a civil penalty proceeding, section 1332 of the Act was enlivened and ASIC was required to establish all elements of the alleged contravention on the balance of probabilities.
Anderson J concluded that ASIC had failed to discharge its burden in this case. ASIC’s case proceeded on the basis that every single instance in which a customer established a MySuper account was the result of financial product advice. ASIC did not adduce any evidence of any recommendation or statement of opinion actually provided by CBA’s branch staff to a single retail customer, nor to every, or almost every, branch customer. Rather, ASIC had done no more than refer to training manuals and processes that CBA set in place to infer that, in respect of branch sales, authorised staff would have provided a recommendation or a statement of opinion to a retail client.
Grandfathering provisions apply
Anderson J also considered, if the Impugned Benefits were conflicted remuneration within the meaning of section 963A of the Act, whether they were grandfathered such that the Conflicted Remuneration Provisions do not apply to them.
Anderson J concluded that grandfathering would apply for the following reasons:
- the arrangements between CBA and CFSIL were entered into prior to the 1 July 2013 application date for the Conflicted Remuneration Provisions. The 2013 Distribution Agreement was entered on 27 June 2013, and the 2015 Distribution Agreement and the 2018 Distribution Agreement were a continuation of the same arrangement originally entered between the parties on 27 June 2013. The grandfathering provisions operate in respect of “arrangements”. Under section 761A of the Act, the expression “arrangement” includes any contract, agreement, arrangement or understanding, whether it is formal or informal, written or oral or enforceable or not enforceable. The wide meaning of the expression “arrangement” under section 761 of the Act is consistent with the three Distribution Agreements being seen as successive iterations of the same basic arrangement
- CFSIL was a platform operator, but was not acting in the capacity of a platform operator in relation to the Impugned Benefits. This is because they do not relate to the acquisition of a financial product by CFSIL as a result of instructions from members making a certain choice of investment option with respect to Essential Super.
Where to from here?
ASIC has 28 days to lodge an appeal. ASIC has said that it will “carefully consider the judgment” but has not otherwise commented about its intentions in relation to the decision.
