Introduction
The Federal Court of Australia in Australian Securities and Investments Commission, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345 has found a financial services licensee liable for breaches of the Future of Financial Advice (FOFA) reforms. The breaches were admitted by the financial services licensee and the Court made declarations substantially in terms which had been agreed between the parties. There being no agreement between the parties on the penalty, orders were made by consent with a view to a hearing taking place at a later time on the penalty.
Relevant provisions
The FOFA reforms are contained in Pt 7.7A of the Corporations Act 2001 (Cth) (“Act”) which relevantly includes, in Div 2, the following provisions:
- s 961B(1): This imposes a ‘best interests’ duty on providers in respect of personal financial advice provided to retail clients.
- s 961B(2): This provides a ‘safe harbour’ for complying with the best interests duty. If the provider can prove that the provider has taken each of the seven steps in s 961B(2), the provider will have satisfied the best interests duty.
- s 961G: This imposes an ‘appropriate advice’ duty on providers. The advice that is provided must be appropriate to the retail client, had the provider satisfied the best interests duty.
- s 961K(2): This provides that a financial services licensee contravenes s 961K if a representative (other than an authorised representative) of the licensee contravenes certain provisions (including ss 961B and 961G) and the licensee is a responsible licensee in relation to that contravention.
- s 961L: This provides that a financial services licensee must take reasonable steps to ensure that its representatives comply with, amongst certain other provisions, ss 961B and 961G.
Background
The financial services licensee in question (“Licensee”) carried on business as a provider of financial services and held an Australian Financial Services Licence which permitted it, inter alia, to advise retail clients about and deal in life risk insurance and superannuation products. The Licensee employed and contracted persons to provide financial services advice on its behalf as authorised representatives and as representatives other than authorised representatives.
ASIC sought declarations and pecuniary penalties against the Licensee. It alleged that on several occasions, certain of the Licensee’s authorised representatives and representatives other than authorised representatives (collectively “Licensee Representatives”) had failed to comply with ss 961B and 961G in relation to personal advice provided to the Licensee’s retail clients and that the Licensee had contravened:
- s 961K(2) in respect of the breaches by those Licensee Representatives who were not authorised representatives; and
- s 961L because the Licensee had failed to take reasonable steps to ensure that the Licensee Representatives complied with ss 961B and 961G.
The Licensee admitted that it had contravened the relevant provisions and the parties put forward an Agreed Statement of Facts (a copy of which was annexed to the judgment) and agreed minutes of orders for proposed declaratory relief. The parties, however, were not agreed with respect to the pecuniary penalties sought by ASIC.
Court’s decision
The matter was heard by Moshinsky J who made declarations substantially in the terms sought by the parties and made orders by consent with a view to a hearing taking place at a later time on the penalty.
Observations on the relevant provisions
Some of the observations made by his Honour on the relevant provisions in Div 2 of Pt 7.7A included the following:
- There was some difference in emphasis between the parties as to the interaction between s 961B(1) and s 961B(2). While ASIC accepted (as submitted by the Licensee) that a person might be able to satisfy the best interests duty in s 961B(1) even though they did not fall within the ‘safe harbour’ of s 961B(2), ASIC contended that, as a matter of practicality, s 961B(2) probably covered all the ways of showing that a person had complied with s 961B(1) and that a failure to satisfy one or more of the steps in s 961B(2) was highly relevant to the Court’s assessment of whether there had been compliance with the best interests duty (at [18]).
- It was common ground that, while s 961B was concerned with the process or procedure involved in providing advice that was in the best interests of the client, s 961G was concerned with the content or substance of that advice. While, at first blush, the text of s 961B did not appear to support this way of viewing s 961B, support for this view was provided by the context in which s 961B appeared, including the language of s 961G, the legislative history, and the legislative materials. However, it was not necessary to reach a concluded view on this issue (at [21]).
- The parties differed to some degree as to the requirements necessary to establish a contravention of s 961L. ASIC submitted in its written submissions that the Licensee’s liability under s 961L arose by reason of the Licensee Representatives’ contraventions of ss 961B and 961G, a failure by the Licensee to take reasonable steps to prevent those contraventions, and a causal nexus between the two. The Licensee, however, submitted that s 961L required consideration only of the reasonableness of the Licensee’s conduct (i.e. the steps taken by it) and that it was not necessary or sufficient to show a contravention of another relevant provision such as s 961B or s 961G. In oral submissions, ASIC did not advocate a firm position on the issue, but considered, as a matter of practicality, that some form of causal nexus was likely to exist in most cases. It was not necessary to resolve this issue as the agreed facts established the underlying contraventions of ss 961B and 961G by the Licensee Representatives and also demonstrated a causal relationship between the Licensee’s failure to take reasonable steps and the contraventions of ss 961B and 961G by the Licensee Representatives (at [36]-[39]).
Contraventions of s 961L
The following practices and policies of which the Licensee was aware were found to demonstrate the Licensee’s failure to take reasonable steps to ensure compliance by the Licensee Representatives with their best interests duty and appropriate advice duty. Accordingly, the Licensee had contravened s 961L (see [40]-[74]):
(a) The new client advice process involved most client instructions being provided at the only meeting which took place between the client and the Licensee Representative, with advice being given to the client and the client agreeing to implement the advice at that same meeting. Clients signed incomplete forms and documents which were often completed by the Licensee Representative after the meeting and in the absence of the client. Statements of Advice (“SOA”) were prepared after the provision and implementation of the advice. This meant that the Licensee Representatives gave financial product advice:
- in the absence of proper, sufficient and complete instructions and information about the client’s objectives, financial situation and needs;
- without conducting research into appropriate financial products after the provision of complete instructions by the client;
- without comparing the client’s existing superannuation and life and risk insurance products with the client’s stated objectives, and with the products recommended by the Licensee; and
- prior to the preparation of a written SOA or the client receiving, and considering, the matters in a SOA.
(b)There was inadequate training given to the Licensee Representatives about their individual obligations under the Act which meant that they were not adequately made aware of their personal responsibility for compliance with the best interests duty, the appropriate advice duty, or of the legal consequences of non-compliance.
(c) There was an inadequate system for monitoring and supervision because the Licensee did not conduct regular or substantive performance reviews of the Licensee Representatives, and did not conduct regular internal audits of the advice provided by the Licensee Representatives, or check that advice was provided in compliance with the obligations in Div 2 of Pt 7.7A. In some cases, internal audits had revealed non-compliance but the Licensee Representative was not adequately sanctioned and the Licensee did not interrogate its systems, policies and practices to determine if there were deficiencies in the processes that enabled advisers to avoid compliance with their regulatory obligations.
(d) Although a number of external audits had identified various unsatisfactory acts and omissions of Licensee Representatives in providing advice, and potential breaches of the Licensee’s and Licensee Representatives’ obligations under the Act and provided detailed advice about what should be done, the Licensee had failed adequately to follow or implement that advice.
(e) The Licensee did not have adequate compliance policies. It did not have any policy which addressed the Licensee Representatives’ statutory duties and requirements under Div 2 of Pt 7.7A, or any other provisions, of the Act. While it had a number of written policies relating to legal and regulatory compliance and risk management, the policies were inadequate and, in many cases, not followed or enforced by the Licensee. The Licensee maintained a register for recording breaches by its representatives of their own and the Licensee’s statutory obligations, but regularly failed to record instances of conduct that might have constituted a breach. The Licensee also maintained a complaints register for recording complaints by clients against representatives but this did not record all complaints and, the complaints which were recorded, demonstrated conduct by the Licensee Representatives that was consistent with the findings of the external auditors.
(f) Some Licensee Representatives were paid only by way of commission which created an incentive for them to emphasise sales imperatives over compliance requirements and a culture in which the best interests and appropriate advice duties were more likely to be overlooked.
Contraventions of s 961K(2)
Moshinsky J said that liability under s 961K(2) was automatically imposed on the Licensee by reason of its Licensee Representatives, other than authorised representatives, having contravened ss 961B and 961G. The Licensee Representatives in question were employees of the Licensee. Accordingly, the Licensee was found to have contravened s 961K(2) (at [32]-[34]).
