All.Corporate & Commercial.Funds & Financial Services

The Future of Financial Advice (FOFA) reforms and various modifications progressively came into effect between 2013 and 2016, to improve the trust and confidence of Australian retail investors in the financial services sector while ensuring availability, accessibility and affordability of high-quality financial advice.

Australian Financial Services (AFS) licensees have been wondering just how the law requiring the "best interests" and "appropriate advice" duties under ss 961B(1) and 961G of the Corporations Act 2001 (the Act) would be viewed by the Australian Securities and Investments Commission (ASIC) and the courts. The Federal Court recently answered this question when it imposed a $1 million fine on Golden Financial Group Pty Ltd (formerly known as NSG Services Pty Ltd) (NSG). As an AFS licensee, NSG was held to have failed to have an adequate compliance framework in place to ensure it and its representatives provided personal advice to retail clients that was appropriate and in the client's best interests.

The legal requirement

When providing personal advice to retail clients, advisers are required:

  • to act in the best interests of the client under s 961B(1) (best interests duty), and
  • under s 961G, only to provide the advice if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the best interests duty (appropriate advice duty).

Failure by an AFS licensee's representatives to meet these requirements—as well as a failure to take reasonable steps to ensure that its representatives comply—constitute breaches by the AFS licensee and expose the licensee to a maximum fine of $200,000 for each contravention for an individual and $1 million for a body corporate.

NSG proceedings

NSG has an AFS licence authorising it to advise retail clients about, and deal in, life insurance and superannuation products. ASIC alleged that on several occasions between 1 July 2013 and 20 August 2015, certain NSG representatives (being employed financial advisers and authorised representatives within the meaning of the Act) failed to comply with their obligations under ss 961B and 961G of the Act. ASIC alleged NSG was liable for its financial advisers' conduct for the following reasons:

  • NSG failed to take reasonable steps to ensure its advisers complied with the best interests obligation when providing advice to clients and so, on numerous occasions, NSG advisers did not act in the best interests of their clients
  • NSG did not provide appropriate training to its advisers to ensure clients received advice in their best interests—instead NSG trained its advisers to take the position that it is almost always in a client's best interest to take out some form of life risk insurance, regardless of a client's financial situation
  • NSG's written policies relating to legal and regulatory compliance and risk management were  inadequate, and in any event, not followed or enforced
  • on eight specific occasions since 1 July 2013—and because of advice provided by NSG advisers—clients were sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements, and
  • NSG did not conduct regular and/or substantive performance reviews of advisers and did not take disciplinary action against advisers who failed to comply with their obligations under the Act.

On 30 March 2017, the Court declared that there had been breaches by NSG as follows:

  • s 961B and 961G breaches by its employed financial advisers on four occasions between July 2013 and 20 August 2015, for which it was liable under s 961K(2), and
  • NSG had failed to take reasonable steps to ensure its representatives complied with ss 961B and 961G on 16 occasions between 15 July 2013 and 20 August 2015—NSG's failure to check its systems, policies and practices were not contributing to representatives' contraventions under the Act meant it also contravened s 961L of the Act.

In determining the adequacy of the proposed penalty last month, Justice Moshinsky stated that he regarded NSG's contraventions of its obligations as "very serious in nature".  In this regard, his Honour referred to his previous finding that NSG had "failed to adequately address the systemic problems with its practices and policies" and considered a substantial penalty was warranted. NSG was ordered to pay fines of:

  • $250,000 for the breaches by its employed financial advisers, and
  • $750,000 for failing to take reasonable steps to ensure its representatives complied with ss 961B and 961G.

In imposing the fines, Justice Moshinsky took into account that there was no suggestion of dishonest conduct on NSG's part, that during the relevant period NSG operated a "substantial enterprise, with commissions received (before expenses) in the millions of dollars" and that NSG had cooperated and reached agreement with ASIC about the contraventions' declarations and the amount of the proposed penalty.

The implications of this prosecution and penalty

AFS licensees, especially licensees with large numbers of representatives and authorised representatives, must be proactive in the way they monitor and supervise their and their representatives' compliance with the statutory obligations. It is not sufficient to pay lip service to the compliance requirements. There must be active management of procedures and protocols to ensure representatives understand their obligations in this area and that their remuneration structures support the law rather than conflict with their obligations.

ASIC has announced that it is currently pursuing other litigation that includes suspected best interests breaches by financial services licensees.

In this case, the $1 million fine and the willingness shown by ASIC to take action to enforce the best interests obligations serve as a warning to all AFS licensees (in particular to dealer groups and financial planners) that there are significant compliance obligations associated with the FOFA reforms and that there is an expectation that these obligations will be managed properly. Education, training, appropriate remuneration models and regular compliance audits are necessary if AFS licensees are to avoid prosecution for breaches and the potential fines that follow.

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