Some of the worst examples of misconduct in the financial services industry are set out in the recent judgment of the Federal Court of Australia in ASIC -v- Financial Circle Pty Ltd  FCA 1644, which condemns a financial services provider that targeted financially vulnerable members of society for its own gain.
In this case, the Court approved a settlement reached by the parties for six courses of conduct that breached several sections of the financial services legislation, and imposed penalties of $8.98M.
By using targeted website advertising, Financial Circle Pty Ltd (Financial Circle) marketed its personal lending business to members of the public who had "bad credit histories, low levels of financial literacy and who were in a weak bargaining position".
Personal loans were provided by Financial Circle on the condition that the applicant engage a Financial Circle adviser (Adviser) to provide financial advice, implement that advice (which typically required switching superannuation funds) and always required the applicant to purchase or replace existing life, TPD and income protection insurance, as well as pay a fee for advice, usually from the applicant's superannuation fund. The applicant was also required to commit to paying annual insurance premiums from his or her superannuation. The effect of the advice was often to deplete the balance of the applicant's superannuation, in some cases by up to 30%.
Most of Financial Circle's revenue was derived from financial advice fees and insurance commissions. Financial advice was often not sought by the applicants, who were looking for short term finance in dire financial circumstances.
Misleading or deceptive and unconscionable conduct
The Court found that, between September 2017 and 22 December 2017, Financial Circle:
- engaged in misleading or deceptive conduct;
- engaged in unconscionable conduct;
- failed to take reasonable steps to ensure compliance with financial services laws; and
- conducted a credit activity without a licence.
Specifically, Financial Circle was found to have:
- made false representations that it provided several types of loans (investment, home loans, car and other loans), when it only provided personal loans;
- made representations (without reasonable grounds) that it was in the applicant's interests to obtain financial advice from an Adviser;
- made representations and recommendations (without reasonable grounds) that it was in the applicant's interests to switch superannuation funds and acquire insurance;
- provided financial advice to applicants that was not in their best interests; and
- engaged in conduct adverse to the interests of the applicant for the purpose of obtaining fees and commissions.
Financial Circle's compliance and training regime was heavily criticised for being fundamentally flawed and "designed to minimise regulatory risk rather than guide the activities of the business". Compliance manuals were templates, Advisers were not provided with any (or any adequate) training, there were inadequate conflict identification and management procedures, and there were no proper complaints procedures.
The Court was satisfied that Financial Circle had contravened its duties to take reasonable steps to ensure its authorised representatives complied with the Corporations Act 2001 (Cth) and financial services laws in breach of sections 961L and 912A(1)(ca) of the Corporations Act.
The Court approved penalties for each course of conduct outlined below:
|Maximum penalty||No. of contraventions||Penalty|
|1||Misleading or deceptive conduct directed to the public|
$2,100,000 (s12DF ASIC Act)
$420,000 (s160D National Credit Act)
|2||Unconscionable conduct directed to members of the public|
|$2,100,000 (s12CB ASIC Act)||~25,000||$1,680,000|
|3||Misleading or deceptive conduct directed to applicants|
$2,100,000 (ss12DF, 12DB(1)(h) ASIC Act)
$420,000 (s 60D National Credit Act)
|4||Unconscionable conduct directed to applicants|
|$2,100,000 (s12CB ASIC Act)||89||$1,680,000|
|5||Failure to take reasonable steps to ensure compliance with financial services law|
|$1,000,000 (s961L Corporations Act)||144||$1,000,000|
|6||Engaging in a credit activity without a licence authorising it to engage in a credit activity|
|$420,000 (s29(1) National Credit Act)||51||$420,000|
Several of the penalties were imposed at the statutory maximum given the number of contraventions. The Court considered that the "egregious nature" of Financial Circle's conduct supported the penalties. Injunctions and costs of $250,000 were also ordered.
Whilst there is no doubt that the size of the penalties imposed against Financial Circle reflect the seriousness of its conduct, the findings in the recent Banking Royal Commission interim report advocate for more rigorous regulatory and enforcement action across the board. We therefore expect to see ASIC commence more enforcement actions, including in relation to fees for no service and non-compliant financial advice stemming from endemic practices such as vertical integration, performance-based remuneration and inadequate disclosure.
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