Unravelled: Recent decision on FoFA advice provisions – ASIC v NSG
5 May 2017
Other articles in this edition of Unravelled:
- CIPRs – some interesting findings
- Reporting significant breaches – or something that may (or may not) be a breach?
Written by Managing Associate Simun Soljo and Law Graduate Chris Walsh
The recent case of ASIC v NSG Services Pty Ltd considers the FoFA best interests and appropriate advice provisions, as well as obligations of licensees. While the facts of the case provide an extreme example of how advisers and licensees can fail to comply with these duties, it also provides some useful judicial commentary on the provisions.
NSG is an Australian Financial Services Licensee that advises retail clients about life risk insurance and superannuation products. At the relevant times, NSG advisers were either representatives or authorised representatives of the company.
In mid-2016, ASIC commenced proceedings against NSG in the Federal Court, seeking declaratory relief, pecuniary penalties, and costs.
ASIC alleged that:
- NSG advisers had not complied with sections 961B and 961G of the Corporations Act 2001 (Cth) when providing personal advice to NSG's retail clients. Those provisions require advisers to act in the best interests of clients (s961B), and only to provide advice to the client 'if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under section 961B to act in the best interests of the client' (s961G).
- NSG failed to take reasonable steps to ensure that its advisers complied with those provisions, and so breached s961L which requires a licensee to take such steps.
- NSG breached s961K(2) in respect of the breaches by representatives who were not authorised representatives. That sub-section is contravened if ‘a representative, other than an authorised representative, of the licensee contravenes section 961B, 961G, 961H or 961J; and the licensee is the, or a, responsible licensee in relation to that contravention’.
NSG admitted the contraventions, and with ASIC it applied for the court to make declarations by consent. The court made these declarations, and there will be a hearing later this year to determine the penalty to be imposed on NSG. The judgment sets out the judge's reasons for making the declarations sought, including His Honour's views on the relevant sections. His Honour said that:
the declarations sought are appropriate because they serve to record the Court’s disapproval of the contravening conduct, vindicate ASIC’s claim that NSG contravened the Act, assist ASIC in carrying out its regulatory duties in the future, inform the public of the contravening conduct, and deter other corporations from contravening the Act
The interplay between the relevant provisions
It was not in dispute between ASIC and NSG that s961B (the best interests duty) focuses on the process of providing advice, while s961G (the appropriate advice duty) focuses on the content of the advice given. However, Justice Moshinsky noted that it was not necessary in this case to reach a conclusion on whether that view was correct.
In relation to s961L, ASIC submitted that to prove a breach by NSG of that section, it was necessary to prove that the advisers had contravened the best interests or appropriate advice duties, that NSG failed to take reasonable steps to prevent those contraventions, and that there was a causal connection between those two facts. On the other hand, in somewhat of a role reversal, NSG argued that a breach of s961L was easier to prove than ASIC argued: there was no need to show an actual contravention of either of the duties. Justice Moshinsky noted that, in oral submissions, ASIC submitted that the court need not reach a concluded view on this matter. His Honour agreed, given that contraventions of the two duties were established in the agreed facts, as was a causal connection between the contraventions and NSG’s failure to take reasonable steps to prevent them. The judgment notes that ASIC 'submitted that it did not advocate a firm position on the point, but as a matter of practicality some form of causal nexus was likely to exist in most cases'.
Numerous agreed aspects of the way NSG's advisers operated were said to constitute the relevant contraventions. It is easy to see why NSG admitted contraventions. The litany of poor practices provides good examples of how not to run a financial advice business.
First, the new client advice process was designed to be completed quickly, with little time for clients to reflect on advice provided before it was implemented. In many cases, the first meeting included initial client instructions, the provision of advice, and client instructions to act on that advice. There was also no process in place to ensure that advisers gave clients a written statement of advice. In the cases contained in the agreed facts, advisers prepared statements of advice after the sole client meeting, and after the client had already instructed the adviser to implement the advice that had been given orally.
As a result of the above failings, advisers did not have complete instructions or sufficient detail about the clients' needs, and did not research properly the appropriateness of the financial products they recommended. The advisers also failed to compare the clients' existing life insurance and superannuation products with the new ones. At least in totality, these constituted breaches by the advisers of the best interests duty and the appropriate advice duty.
In relation to s961L, NSG’s failure to take reasonable steps to prevent contraventions by the advisers lay in the fact that NSG was aware of problems in the process and content of advice, but did not address systemic problems in its policies and practices. Although it obtained external advice, it did not implement that advice across its business. Furthermore, NSG did not provide sufficient training to advisers about their obligations. The training that NSG provided focused on client communication and sales effectiveness, rather than on how to provide appropriate financial advice or how to comply with the duties imposed on individual advisers.
Additional ways in which NSG was said to have breached s961L were a lack of an adequate compliance system, and a commission-based salary structure which 'created an incentive for representatives to emphasise sales imperatives over compliance requirements and a culture in which the best interests and appropriate advice duties were more likely to be overlooked.'
What are the implications of the case for financial services licensees?
Although the case does not set any new legal ground, it is noteworthy as being one of the few to deal with the FoFA licensee requirements. It provides a useful example of the many ways licensees and representatives can go wrong in their compliance with their duties when advising clients.
It is a timely reminder for licensees of the importance of ensuring that their training, systems, procedures and policies are rigorous enough to ensure that both the process of providing advice, and the content of the advice itself, satisfy the FoFA requirements.
Other articles in this edition of Unravelled
- Simun SoljoPartner,
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