This article was written by Domenic Gatto, Matthew Spain and Nicole Parlee.
In a judgment of the Federal Court of Australia published on 6 April 2017, ASIC claimed its first scalp for breaches of the “best interests” and “appropriate advice” obligations that were incorporated into Division 2 of Part 7.7A of the Corporations Act (Act) as part of the 2012 Future of Financial Advice (FoFA) reforms. This is a liability judgment, with the penalty hearing date yet to be set.
That scalp came in the form of 20 declarations of contravention of the FoFA provisions made by the Federal Court of Australia in relation to NSG Services Pty Ltd (NSG). No individuals were pursued by ASIC.
ASIC has recently become more active in investigating companies for breaches of financial advice obligations, in line with its objective of addressing structural deficiencies within the financial advice industry. This case is demonstrative of what we have seen from ASIC recently in this area more broadly.
In short, NSG was found to have breached:
- section 961K(2) of the Act because of certain personal advice provided by its employee representatives to their retail clients in breach of their best interests and appropriate personal advice obligations; and
- section 961L of the Act because it failed to take reasonable steps to ensure compliance by its other authorised representatives with their best interests and appropriate advice obligations.
While the case highlights some plainly flagrant breaches of the FoFA provisions, it is a timely reminder for all AFSL holders to:
- regularly update their training and compliance manuals;
- conduct both internal and external training of their representatives, including ongoing training in relation to the FoFA reforms where applicable;
- when providing personal advice to retail clients ensure that their representative take an appropriate amount of time to gather client instructions, check those instructions and have them confirmed by the client prior to the personal advice being provided; and
- ensure that their sales targets and remuneration policies for representatives providing personal advice to retail clients do not emphasize sales imperatives over compliance requirements and a culture in which the best interests and appropriate advice duties are more likely overlooked.
This judgment serves as a timely reminder that even though the FoFA reforms are primarily directed at “providers”, that does not necessarily mean that ASIC will only enforce the provisions contained in the FoFA reforms against individuals. To the contrary, it appears that because of the lack of systems and procedures to the effect that NSG did not train its representatives adequately in relation their own personal obligations and did not in practice change its commission-based salary structures, ASIC elected to only pursue NSG rather than the relevant individuals. This is consistent with ASIC’s recent focus on corporate responsibility for the provision of financial advice, which is a shift away from pursuing rogue individuals and instead focuses on the responsibility of the company to ensure that its employees, advisors, representatives and corporate representatives comply with their financial advice obligations.
The FoFA reforms were introduced for voluntary compliance from 1 July 2012 and mandatory compliance from 1 July 2013 following the 2009 Inquiry into Financial Products and Services in Australia by the Parliamentary Joint Committee on Corporations and Financial Services.
In this case, ASIC alleged that NSG, the holder of an AFSL that permits it to advise retail clients about and to deal in life risk insurance and superannuation products, had breached the above civil penalty provisions. As is common, NSG employs representatives (that is, representatives other than authorised representatives, which are relevant to the breaches of section 961K(2)) and engages persons to provide financial services advice on its behalf as its representatives and authorised representatives as defined in section 961A of the Act (relevant to breach of section 961L).
By way of refresher, readers will recall that:
- the FoFA obligations apply to “providers” (the individual who provides the advice, even where the individual is a representative of an AFSL holder and is providing advice on behalf of that licensee);
- the “best interests” provisions contain seven “safe harbour” conditions, such as, for example, if a provider can prove that they identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions and taking any other step that, at the time the advice is provided, the advice of the provider would reasonably be regarded as being in the best interests of the client. If a provider can prove that they have done each of the seven things, they will have satisfied the best interests duty; and
- the obligation in section 961L (a civil penalty provision) mirrors the familiar s912A(1)(ca) (not a civil penalty provision) which requires financial services licensees to “take reasonable steps to ensure that its representatives comply with the financial services laws”.
Here, the Court made four declarations against NSG for breaches of section 961K(2) and sixteen declarations for breaches of section 961L. The facts relied upon to make the declarations were similar, the only distinction being whether the conduct related to NSG’s “representatives” or its “representatives, other than its authorised representatives”.
NSG admitted that it failed to take reasonable steps to ensure compliance by its representatives with their best interests obligations and their appropriate advice obligations by reason of the following practices and policies:
- new client advice process;
- training of NSG’s representatives;
- NSG’s systems for monitoring and supervising representatives;
- external audits;
- compliance policies; and
- sales targets and remuneration.
Uncertainty following the decision
The following points were issues, however the judge decided that it was not necessary to determine the issues in this case. It therefore remains unclear:
- while it was common ground between the parties, the judge commented that it is unclear whether the best interests obligation concerns the “process” or “procedure” involved in providing advice that is in the best interests of the client. The judge stated that there was some support for the view that it does;
- whether an AFSL holder’s liability for contraventions of section 961L arises because of:
- as contended for by ASIC:
- contraventions of section 961B and 961G by an AFSL holder’s representatives;
- failure by an AFSL holder to take reasonable steps to prevent these contraventions; and
- a causal nexus between the two, and
- as contended for by NSG, that, for the purposes of section 961L, it is neither necessary nor sufficient to show a contravention of another relevant provision (here, s961B(1) or section 961G).