The Federal Court recently imposed a $1 million civil penalty on a licensee for breaches by its representatives of the best interests and appropriate advice duties. The penalties were the same amount that was agreed between ASIC and the licensee. The decision is a reminder to financial services licensees that they are responsible for their advisers' advice and that ASIC can and will take enforcement action against licensees when it identifies breaches of personal advice duties. Partner Michelle Levy, Associate Katie Gardiner and Lawyer Jamil Diu report.
- This is the first decision resulting in civil penalties for offences by a financial services licensee relating to the best interests obligations.
- ASIC is actively pursuing penalties for breaches of personal advice duties.
- Courts remain willing to impose penalties agreed to between ASIC and defendants provided that the proposed penalty is appropriate.
As we reported earlier in the year, Golden Financial Group Pty Ltd (previously NSG Services Pty Ltd) is a financial services licensee. Its employee advisers provided personal advice to clients in relation to insurance and superannuation products.
In March 2017, Justice Moshinsky of the Federal Court declared that Golden Financial had contravened sections of the Corporations Act that required:
- its representatives to act in the best interests of their clients and to provide appropriate advice; and
- Golden Financial to take reasonable steps to ensure that its representatives did so.
Under section 961K(2), a licensee contravenes the section if its representative contravenes the representative's duties to act in the best interests of their client and to give appropriate advice. In this case, Justice Moshinsky found that Golden Financial's representatives (namely its employee advisers), breached both of these duties because, between July 2013 and August 2015:
- clients were not provided with written advice until after they had already orally instructed advisers to implement the adviser's recommendations in an initial meeting;
- advisers did not take complete instructions and did not research the appropriateness of the financial products that they recommended; and
- the clients' existing life insurance and superannuation products were not compared with new ones to ensure that they were getting a better deal.
Under s961L, a licensee must take reasonable steps to ensure that its representatives comply with their duties. Justice Moshinsky also found that Golden Financial breached this obligation because it did not have adequate staff training, compliance policies, regular internal audits or regular staff performance reviews.
The declarations made by the Federal Court followed consent orders from ASIC and Golden Financial that agreed on liability. At the time of the declarations, the parties did not agree on the penalties and costs that should follow the declarations, and the matter was timetabled for a hearing.
The parties later reached an agreed position on penalties ($1 million and $50,000 of costs) and asked the court to make orders in accordance with their position.
In deciding whether to accept the agreed position on penalties, Justice Moshinsky considered whether his Honour was 'sufficiently persuaded of the accuracy of the parties' agreement as to facts and consequences' and whether the penalties proposed were appropriate. He noted that the maximum penalty for each contravention was $1 million. A total of 20 contraventions were declared by Justice Moshinsky in his March 2017 decision.
In deciding that the agreed penalty was appropriate, his Honour noted that the contraventions were 'very serious in nature' and took into account the following factors:
- Golden Financial did not act dishonestly;
- the management of Golden Financial was 'substantially impaired' in the period leading up to the commencement of the best interests duty because of the death of the Executive Director's child from a childhood illness;
- Golden Financial was a substantial enterprise earning millions in commissions (for example, from financial years ending 2014 to 2016 its annual revenue ranged from $4.66 million to $8.24 million);
- Golden Financial cooperated with ASIC and agreed on declarations of contraventions as well as a proposed penalty; and
- the Executive Director expressed contrition in his affidavit.
Justice Moshinsky also considered it appropriate for the penalty to consist of separate amounts for the two types of contraventions identified above. The $1 million figure was split so that $250,000 was payable in respect of the licensee's representatives failing to act in the best interests of their clients and providing appropriate advice (s961K(2)), and $750,000 was payable in respect of the licensee failing to take reasonable steps to ensure that its representatives did not breach their duties (s961L). Fixed costs were also awarded against Golden Financial by consent.