Australia: LimeLight Issue No. 80

  • ASIC successfully enforces best interests and appropriate advice duty laws in Federal Court
  • Australian Securities and Investments Commission, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267

Introduction

The Federal Court of Australia has handed down the first civil penalty to an Australian Financial Services Licensee for breaching the "best interests" and "appropriate advice" duties under the Future of Financial Advices (FoFA) reforms introduced into the Corporations Act 2001 (Cth) from 1 July 2013.

By pursuing pecuniary penalties against NSG Services Pty Ltd (now Golden Financial Group Pty Ltd) (NSG), the Australian Securities & Investments Commission (ASIC) sent a clear message to the Australian financial services industry as to the serious consequences to be faced by licensees that fail to comply with their FoFA obligations.

Best Interests Duty

Financial advisers are obliged to act in the best interests of their client1 by, among other things:

  • identifying the client's financial needs;
  • identifying the client's relevant circumstances;
  • undertaking reasonable inquiries to obtain accurate and complete information of the client's financial circumstances;
  • declining to provide advice if they do not have the relevant expertise; and
  • basing all judgments in advising the client on the client's relevant circumstances.

Appropriate Advice Duty

Financial advisers must also provide advice that is appropriate to their client2. The appropriate advice duty is concerned with the content or substance of the advice that is provided to client.

Advice must only be provided if it would be reasonable to conclude the advice is appropriate to the client, and only after the financial adviser has satisfied their duty to act in the best interests of the client.

Background

When selling insurance and advising on superannuation accounts, NSG's representatives:

  • failed to provide a statement of advice;
  • failed to gather adequate data as to the client's personal circumstances and existing superannuation and insurance position;
  • incompletely answered NSG's "Client Fact Finder" form;
  • provided identical advice of one sentence in length to multiple clients;
  • failed to reveal advisor fees; and
  • recommended certain insurance when the client already held such insurance.

ASIC sought declaratory relief and pecuniary penalties3 as against NSG for its representatives having breached their duties under the FoFA reforms by failing to:

  • provide advice that complied with the best interest duty; and
  • take reasonable steps to provide advice appropriate to its clients in accordance with the appropriate advice duty.

ASIC asserted that there were 20 contraventions of these duties. The maximum pecuniary penalty for each contravention is $1 million.

Decision

NSG admitted the breaches and it was agreed between the parties that NSG would pay penalties totalling $1 million, as well as $50,000 for ASIC's costs.

The Court found that NSG itself was liable5 for "very serious" and systemic breaches of its obligation to ensure that its representatives complied with their duties when providing financial advice.

The Court considered NSG's processes and procedures, identifying a number of deficiencies, including:

  • failing to undertake regular or substantive performance reviews of its representatives;
  • insufficient training of regulatory and legal obligations offered to representatives to ensure clients received advice in their best interests;
  • inadequate and unenforced compliance policies that did not address the legal or regulatory duties of its representatives;
  • limited internal auditing and failing to adequately address or implement recommendations from external auditors; and
  • effecting a remuneration model that paid representatives by way of commission only.

Unfortunately, as the parties agreed to the penalties, the Court did not provide any guidance on the salient factors to be relied upon in determining the level of penalty for a breach of either the best interest or appropriate advice duty.

Implications

ASIC has made it clear that they intend to rigorously monitor and pursue licensees that fail to meet their FoFA obligations under the Corporations Act.

Australian Financial Services Licensees therefore need to ensure appropriate systems, procedures and training regimes are put in place so that personal advice to clients by financial advisers is both appropriate and in their clients' best interests.

Footnotes

1 Section 961B of the Corporations Act

2 Section 961G of the Corporations Act

3 Section 1317G(1E) of the Corporations Act

4 Section 961L of the Corporations Act requires an Australian Financial Services Licensee itself to take reasonable steps to ensure that all its representatives and authorised representatives comply with, inter alia, sections 961B and 961G

5 Pursuant to both section 961L and section 961K(2) of the Corporations Act, which imposes liability upon an Australian Financial Services Licensee for contraventions by its representatives (but not authorised representatives)

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