To comply with the best interests duty and associated provisions, above all else, licensees must establish and maintain adequate processes and controls.
The need for financial services licensees to maintain adequate processes and controls to ensure its representatives comply with the best interests duty has been reinforced by the $1 million in civil penalties recently imposed on Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) (NSG), a licensee, by the Federal Court of Australia (ASIC, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2)  FCA 1267).
It is the first time a penalty has been imposed for contraventions of the best interests duty. The penalty is significant as the revenue commissions of NSG for the financial year ending 30 June 2016 were said to be $4,655,103.
Background to the NSG case
NSG provided financial product advice in relation to life risk insurance and superannuation products through representatives, including both authorised representatives and employed financial advisers. The Court had previously held that there were 20 contraventions of sections 961K(2) and 961L by NSG relating to conduct of its representatives in advising eight clients between 1 July 2013 and 20 August 2015 (ASIC, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd  FCA 345).
A licensee contravenes section 961L by failing to take "reasonable steps" to ensure its representatives comply with certain provisions of the Corporations Act, including the best interests duty in section 961B and the prohibition on providing advice that is not appropriate in section 961G. The requirement closely resembles the general obligation in section 912A(1)(ca) (which is not a civil penalty provision) for a licensee to "take reasonable steps to ensure that its representatives comply with the financial services laws".
Section 961K(2) is automatically contravened by a licensee as a result of a contravention of certain provisions by its representatives (other than authorised representatives).
Penalties imposed on NSG
The penalties imposed by the Court included $750,000 for 16 contraventions of section 961L of the Corporations Act. A separate $250,000 penalty was for four contraventions of section 961K(2).
The largest penalty imposed was for NSG's failure to take "reasonable steps" to ensure compliance by its representatives. That reflects the seriousness of breaches which are systemic or result from broader deficiencies in processes or controls. These breaches are more likely to impact a larger group of a licensee's customers than breaches related to the conduct of individual representatives.
In his judgment, Justice Moshinsky commented that the contraventions of section 961L concerned the overall way in which the licensee itself conducted its operations. He noted that the relevant facts and matters associated with NSG's conduct demonstrate that the contraventions were very serious and warranted the imposition of a substantial penalty.
Justice Moshinsky made reference to a number of earlier cases establishing the applicable principles for determining whether a proposed penalty is appropriate, including a High Court decision where it was said that "whereas criminal penalties import notions of retribution and rehabilitation, the purpose of a civil penalty... is primarily if not wholly protective in promoting the public interest in compliance". He also noted the High Court's endorsement of an observation of the Full Court in Singtel Optus Pty Ltd v ACCC (2012) 287 ALR 249 that, in fixing a penalty, the Court must make it clear to the contravenor and the market that the cost of courting a risk of contravention cannot be regarded as an acceptable cost of doing business. That being so, the penalties for failing to comply with the best interests duty can be substantial, particularly if a licensee is operating on a large scale.
This case, along with a number of recent enforceable undertakings, illustrates that there is an ongoing focus on compliance with the best interests duty.
Processes for a licensee's representatives when giving advice
In his judgment on liability, Justice Moshinsky commented that it was common ground between the parties that "while section 961B is concerned with the process or procedure involved in providing advice that is in the best interests of the client, section 961G is concerned with the content and substance of that advice".
While it may be possible to comply with the best interests duty otherwise than by complying with the "safe harbour" provisions in section 961B(2), the safe harbour provisions are primarily concerned with the process for giving advice and not the outcome of the advice. In his decision on liability Justice Moshinsky noted that ASIC contended that "in a "real world" practical sense, section 961B(2) was likely to cover all the ways of showing that a person had complied s 961B(1) and, in this way, a failure to satisfy one or more of the limbs of section 961B(2) is highly relevant to the Court's assessment of compliance with the best interests duty".
In respect of the process which must be followed by a licensee's representatives when giving advice, section 961L requires that the licensee must take "reasonable steps" to, in effect, ensure that its representatives follow that process. To do this, a licensee must have in place relevant processes and controls, including (among other things):
- processes for obtaining complete and accurate information about a customer's objectives, financial situation and needs and the subject matter of advice sought;
- for training representatives and ensuring they are able to give the advice that is being sought; and
- for monitoring and supervising representatives who are providing advice.
What should you do?
Financial services licensees should ensure that they have and maintain adequate processes and controls to ensure that their representatives comply with the best interests duty and related provisions. They should regularly monitor and update their control environment to ensure that it remains effective.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.