On 14 December 2017, the former Governor-General of the Commonwealth of Australia, His Excellency General the Honourable Sir Peter Cosgrove AK MC (Retd), commenced a Royal Commission into Misconduct within the Banking, Superannuation and Financial Services Industries. On 1 February 2019, the Royal Commission submitted its final report. This report was tabled at Parliament on 4 February 2019.i The report emphasises:
- the need to simplify rather than complicate the matrix of financial services laws;
- the necessity of financial services companies adhering to and enforcing current regulations;
- the importance of regulators adopting a litigation-oriented enforcement culture rather than a culture of infringement notices and negotiated outcomes; and
- the need to reduce the power imbalance between financial services entities and consumers.
This begs an exploration of existing financial services laws, financial services companies' adherence to these laws, and financial services companies' enforcement of relevant regulations by their representatives (e.g., financial planners).
FINANCIAL SERVICES LAWS
Financial services laws apply to Australian Financial Services (AFS) Licensees, Financial Planners/Advisors and AFS Authorised Representatives.
AUSTRALIAN FINANCIAL SERVICES LICENCEES
An AFS Licensee is an entity that is licensed to conduct a business of providing financial services, including financial advice.
Financial Planners or Financial Advisors in Australia are persons who meet certain criteria set by the Australian Government. These include satisfactory completion of:
- an approved Bachelors degree or higher level of education in the relevant area,
- a professional year of supervised practice in the respective field, and
- an exam set by the Financial Adviser Standards and Ethics Authority ("FASEA").
AUSTRALIAN FINANCIAL SERVICES AUTHORISED REPRESENTATIVES
Australian Financial Services Authorised Representatives are authorised to provide a specified financial service or services on behalf of an AFS Licensee. They are not required to have the same educational qualifications as Financial Planners or Advisors and can be:
- body corporates,
- partnerships, or
- groups of individuals and/or body corporates that are trustees of a trust.
However, AFS Authorised Representatives must be appointed as an Authorised Representative by an AFS Licensee.
APPOINTMENT OF AFS AUTHORISED REPRESENTATIVES
Australian Financial Services Licensees have authority under the Corporations Act 2001 (Cth) ("the Act")ii to appoint Authorised Representatives. To appoint an Authorised Representative, an AFS Licensee must provide the relevant person/entity with written notice authorising them to provide a specified financial service or services on behalf of the AFS Licensee.iii The notice must specify what financial service(s) the Authorised Representative is authorised to provide.iv The person/entity is then considered to be appointed as an Authorised Representative of the AFS Licensee.
LICENSEES' DUTY TO INFORM THE AUSTRALIAN SECURITIES & INVESTMENT COMMISSION ("ASIC") OF THE APPOINTMENT OF AN AUTHORISED REPRESENTATIVE, INCLUDING CHANGES TO THE AUTHORISED REPRESENTATIVES DETAILS OR AUTHORISATION
An AFS Licensee must notify ASIC of the appointment of an Authorised Representative to act on the Licensee's behalf within 30 business days (subject to some limited exceptions). An AFS Licensee is also obligated to advise ASIC within 30 days if there are any changes to the Authorised Representative's details, such as a change of name or address, or changes to the Authorised Representative's authorisation itself, including termination of authorisation.
OBLIGATIONS OF AUTHORISED REPRESENTATIVES
Authorised Representatives are subject to strict regulations, including the following:
- As soon as possible after the Authorised Representative's first contact with a potential client regarding financial services, the Authorised Representative must provide the potential client with a Financial Services Guide (FSG). If not already provided, this FSG should ideally be given to the client at the beginning of the first meeting between the client and the Authorised Representative. However, if a client requests financial services before an FSG has been provided (e.g., over the phone, in person or over the internet),v and financial services are subsequently provided (e.g., over the phone), the Authorised Representative must send the client a FSG as soon as possible, and no later than five days after the financial services have been provided.
- When an Authorised Representative makes an offer for a client to invest in a financial product, the Authorised Representative must provide the client with a Product Disclosure Statement (and any supplementary product disclosure statements, if required). Product Disclosure Statements are typically prepared by the AFS Licensee and provided to the Authorised Representative by the Licensee to distribute to relevant clients.
- When an Authorised Representative provides personal financial product advice, this advice must be accompanied or followed by a clear statement of advice.
- When an Authorised Representative provides general advice, the
Authorised Representative must advise the client:
- That the advice has been prepared without taking into account the client's objectives, financial situation or needs.
- That the client should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs.
- That where a product disclosure statement relating to the product is available, the client should obtain (or preferably be provided with) such and should carefully consider the product disclosure statement before making any decision about whether to acquire, dispose of or hold the financial product.
- Of the details of any commission, fees, remuneration or any other benefits the Authorised Representative will receive in connection with the provision of the financial service.
LIABILITY OF LICENSEES
Although Authorised Representatives are subject to strict regulations, responsibility for the conduct of Authorised Representatives is ultimately placed on the AFS Licensees. Legislation provides that AFS Licensees are responsible for the conduct of their Authorised Representatives, whether or not the Representative's conduct is within the authorisation granted them by the AFS Licensee.
LIABILITY OF LICENSEE FOLLOWING SUSPENSION OR TERMINATION OF AUTHORISATION
In the case of Casaclan v WealthSure Pty Ltd ("the Casaclan case"),vi the court outlined certain circumstances where an AFS Licensee may be held liable for the actions of a former Authorised Representative after the Representative's authorisation has been revoked.
In the Casaclan case, Mr Oberg acted as an Authorised Representative for AFS Licensee Wealthsure Pty Ltd ("Wealthsure") for a period of approximately six years, from 18 October 2004 to 30 September 2010. The plaintiffs, seven former clients, claimed that during this time, Mr Oberg misappropriated client funds, causing them to suffer loss. They claimed that Wealthsure was liable for Mr Oberg's conduct during this time, as well as for his conduct following termination of his representative status on 1 October 2010.
In approximately September 2010, Wealthsure received complaints from Mr Oberg's clients that Mr Oberg was dealing with funds without permission and that his advice was not suitable. On 1 October 2010, in response to these complaints, Wealthsure terminated Mr Oberg's representative status. On 12 October 2010, Wealthsure notified ASIC that Wealthsure would investigate these complaints against Mr Oberg.
During this period, Wealthsure failed to inform or notify Mr Oberg's clients of: 1) termination of Mr Oberg's representative status, and 2) reasons for the termination. Consequently, Mr Oberg stole additional funds from September 2010 through mid-2011 by continuing to represent to clients that he was Wealthsure's Authorised Representative.
His Honour Justice Buchanan reviewed the individual circumstances of each of the claimants' allegations and considered the liability of Wealthsure to be as follows:
- For losses incurred up to 30 September 2010 (during the authorised period)
His Honour held that pursuant to s 917B of the Act, an AFS Licensee is directly liable for the conduct of their representative, even where the representative's conduct was not authorised, and/or was outside the licensee's authority.
- For losses incurred beyond 30 September 2010
Even though Mr Oberg was no longer a licensed representative of Wealthsure, the Court viewed him as such due to 'apparent' authority. Apparent authority of a representative is the standard whereby the licensee's representation of authority to third parties is assessed. Pursuant to section 769B of the Act, Wealthsure was estopped from denying Mr Oberg's apparent authority due to Wealthsure's knowledge that Mr Oberg was still giving advice to his clients. Since the Court therefore considered Mr Oberg to be a licensed representative, Mr Oberg's conduct was subject to Wealthsure's supervision as a licensee. Wealthsure was therefore liable for the plaintiffs' losses.
In conclusion, the Court held that AFS Licensees can be liable for the actions of their former authorised representatives, although liability for post-termination damages will usually only extend to situations where the risk of injury/damage to the client was evident, as it was in this case.
PENALTIES FOR BREACH OF THE BEST INTEREST DUTY
Pursuant to section 961L of the Act, an AFS Licensee has a duty to act in the best interests of the client by taking reasonable steps to ensure that its representatives follow certain procedure when providing advice. To achieve this, AFS Licensees must put in place and maintain adequate processes and controls in relation to advice-giving.
In the case of ASIC, Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2),vii the Federal Court of Australia held that AFS Licensee Golden Financial Group Pty Ltd failed to take such reasonable steps. The Court enforced the best interests' duty and ordered $1 million in civil penalties.
Between 1 July 2013 and 20 August 2015, NSG provided financial product advice through a number of representatives, including both Authorised Representatives and employed Financial Advisers. The Court concluded that NSG's conduct in advising eight clients violated sections 961K(2) and 961L of the Act by contravening provisions relating to:
- the best interests duty (s 961B),
- the prohibition on giving inappropriate advice (s 961G),
- giving warnings for advice based on incomplete or inaccurate information (s 961H),
- prioritising the client's interests when conflicts of interest arise (s 961J), and
- taking reasonable steps to ensure that the licensee's representatives comply with the previous provisions (s 961L).
The Court held that NSG's failure to take reasonable steps to ensure that its representatives complied with the relevant provisions was the most severe violation. The Court ultimately demonstrated that violations affecting a large portion of a licensee's customers, as well as violations caused by deficiences in broader processes or controls, are deemed the most severe of violations.
The Full Court of the ACCC in Singtel Optus Pty Ltd v ACCCviii stated that the court must make it clear to the transgressor and the market that the cost of crossing the line cannot be seen as a reasonable cost of doing business. Because of this, a licensee who operates on a large scale may be penalised seriously if they neglect their best interest (and other) obligations by failing to take reasonable steps to ensure their representatives follow appropriate procedures when providing advice.
LIABILITY FOR BREACH OF CYBERSECURITY-RELATED OBLIGATIONS
Australian Financial Services Licensees also have certain obligations relating to cybersecurity. These include managing cyber resilience and cybersecurity risks adequately, consulting cybersecurity experts, drawing on ASIC's existing guidance on the topic, and seeking legal advice if unsure of their obligations.
In the case of ASIC v RI Advice Group Pty Ltd,ix the Court found that AFS Licensee RI Advice Group Pty Ltd had contravened sections 912A(1)(a) and (h) of the Act by:
- failing to ensure that adequate cybersecurity measures were in place and implemented across its Authorised Representatives; and
- failing to implement adequate cyber resilience and cybersecurity measures, therefore exposing its Authorised Representatives' clients to an unacceptable level of risk.
Australian Financial Services Licensee RI Advice provided financial advice services to clients. Between 2014 and May 2020, nine cybersecurity incidents occurred, including hacking, ransomware, phishing emails, and unauthorised access to an Authorised Representative's service by an unknown and malicious agent. This compromised thousands of clients' confidential information, with some clients reporting that their personal information had been used without their authorisation. It wasn't until May 2018, that RI Advice began working on improving its inadequate cybersecurity policies and procedures. By its own admission however, these initiatives were poorly and ineffectively implemented until at least 5 August 2021.
RI Advice claimed that it had not violated its obligations and had made continuous improvements to cybersecurity management systems between 2018 and the present. They showed that the RI Advice's cybersecurity team were aware of their inadequate cybersecurity controls and had repeatedly sought external assistance in designing cyber risk mitigation strategies. However, their key downside was in failing to follow the recommendations of these external consultants in a timely manner.
The Court held that when it comes to cybersecurity and cyber resilience, AFS Licensee's must:
- identify risks they face in the provision of financial services, including risks relating to cybersecurity and cyber resilience;
- have documented controls and risk management systems in place to adequately manager cybersecurity and cyber resilience across their authorised representatives; and
- have the adequacy of their risk management procedures informed by experts in this area, with the reasonable standard required to be assessed by reference to a reasonable person qualified in the relevant area, not a person of the general public.
The decision also showed that directors and officers in particular should:
- maintain a general understanding of cybersecurity risks that may affect their company;
- engage cybersecurity experts to assess their company's risks, implement effective controls to manage those risks, and report periodically to the company's board on these issues; and
- have a safety plan in place to minimise the impact of a successful cybersecurity attack, including back-up systems.
DAMAGES (INCLUDING NON-PECUNIARY DAMAGES FOR PAIN AND SUFFERING)
In the recent case of Williams v Nugara,x a scam investment scheme cost countless individuals and couples their entire superannuation and life savings after their accountant and financial planner pressured them to invest their money in non-existent investment opportunities. The financial planner instead stole the funds. This resulted in a numerous litigations against the Licensee. The victims were represented by one of the Principal Solicitors at Pentana Stanton Lawyers, Mr Jesse LaGreca.
In 2016, the clients' accountant informed the clients that their existing superannuation portfolio was underperforming and advised them to invest in an alternative investment that would yield higher returns. The accountant referred each of the clients to a now notorious financial advisor named Terence Rio Rienzo Nugara ("Rio Nugara"). Rio Nugara advised the clients to invest all their superannuation and life savings into a property development opportunity. To convince the clients to do so, he made staggering (but what turned out to be outlandish) claims that:
- the investment opportunity contained huge profit margins and guaranteed more than 90% return within 24 months;
- the investment contained almost zero risk; and
- the returns would be significantly higher than the returns received from the clients' current superannuation funds.
Rio Nugara promptly set up a Self-Managed Superannuation Fund (SMSF) and arranged for the clients' existing superannuation funds to be transferred to this account. When he set up the SMSF, Rio Nugara ensured that he listed himself as an authorised signatory on the account, thus gaining full control over the funds. Once the clients transferred their superannuation and savings into the SMSF, Rio Nugara withdrew the funds. The clients assumed this was for the purpose of investing the funds in the proposed property development.
The clients waited several unprofitable years for the promised returns to materialise, only to discover that their entire life's savings, and ultimately retirements funds, had been fully depleted. Upon investigation it was discovered that:
- the funds had never been invested in the proposed property development;
- there was a plethora of noncompliance with the appropriate procedures for these types of investments, as required by the Act;
- the clients had not been provided with any of the relevant disclosure material which would have assisted them to make an informed decision about the investment; and
- there was no evidence to suggest any assessment was undertaken to ensure that the advice given was right for the clients.
Meanwhile, the Rio Nugara ceased responding to any contact from his clients. It was later discovered that he had fled the country with the funds.
In 2019, desperate to recover their funds, the clients sought legal representation from Pentana Stanton Lawyers. Principal Solicitor Mr Jesse LaGreca of Pentana Stanton Lawyers commenced legal action on their behalf against the financial planner Rio Nugara, the account and the AFS Licensee.
When calculating damages, the accepted approach is to calculate the amount that would put the party who suffered the loss in the position that they would have been in but for the tortious or misleading or deceptive conduct.xi Pentana Stanton Lawyers were therefore successfully able to recover the money the clients' lost, with interest.
Due to the extreme stress placed on the plaintiffs from loss of their superannuation and life savings, Pentana Stanton Lawyers sought further damages for mental anguish and distress. In her decision, Her Honour Matthews AsJ noted that Rio Nugara's conduct in depriving many of these clients of their life savings as they approached retirement resulted in significant stress, fear and anxiety. She awarded an additional amount of $25,000 for each plaintiff.
This case shows that in addition to receiving pecuniary damages, victims who have lost funds through advice given by financial planners and/or accountants may also be able to obtain non-pecuniary damages for pain and suffering.
In conclusion, strict financial services laws apply to both AFS Licensees and their Authorised Representatives. However, the ultimate responsibility for ensuring Authorised Representatives adhere to the relevant laws and regulations often rests with the AFS Licensee.
If you have lost money due to financial advice you have received, and/or have suffered pain and suffering due to such loss, contact Pentana Stanton Lawyers on (03) 900 22 800 and speak to someone from our experienced team for a free case assessment.
i Royal Commission Report
ii Corporations Act 2001 (Cth) ss 916A, 916B, 916C, 916D, 916E, 916F.
iii Corporations Act ss 916A(1), 916B(3).
iv Corporations Act 2001 (Cth) ss 916A(3), 916B(4).
v ICF, 2013, p. 23
vi  FCA 761.
vii  FCA 1267.
viii (2012) 287 ALR 249.
ix  FCA 1193.
x  VSC 331.
xi See paragraph 42 of Williams v Nugara  VSC 331; Orthodox position pursuant to the ACL, Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at [11-12]; in respect of tortious deceit, Toteff v Antonas  CA 16 at ; in respect of the tort of negligence, Livingstone v Rawyards Coal Co  UKHL 3.