14 November, 2017
Financial advice firm ordered to pay $1m for "serious" contraventions of best interests duty
What you need to know
The Federal Court has imposed a civil penalty of $1m against a Melbourne-based financial advice firm for breaches of the best interests duty and appropriate advice obligations introduced under the Future of Financial Advice (FOFA) reforms; Australian Securities and Investment Commission, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267.
This is the first civil penalty imposed on a financial services licensee for breaches of the best interests duty. Those breaches formed the basis of 20 contraventions, which were the subject of agreed facts and a joint written submission on the proposed pecuniary penalty.
What you need to do
The judgment serves as a reminder of the need for robust internal audit and monitoring and supervision processes to ensure that potential breaches of the best interests duty can be detected before regulatory action is taken. It also highlights the importance of acting on issues when they are detected.
The Federal Court has imposed a civil penalty of $1m against a Melbourne-based financial advice firm, Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) for breaches of the best interests duty introduced under the Future of Financial Advice (FOFA) reforms.
This is the first civil penalty imposed on a financial services licensee for breaches of the best interests duty. Those breaches formed the basis of 20 contraventions, which were the subject of agreed facts and submissions on the proposed pecuniary penalty.
| BEST INTERESTS AND APPROPRIATE ADVICE DUTIES |
|---|
| The FOFA reforms introduced a statutory best interest duty (s 961B of the Corporations Act 2001 (Cth)) and an appropriate advice duty (s 961G) in relation to the provision of personal advice to a person as a retail client.
Section 961K(2) imposes civil penalty liability on financial services licensees if their officers and employees contravene the best interests and appropriate advice duties (and other related duties) — that is, direct liability for the breaches by such representatives. Section 961L requires licensees to take "reasonable steps" to ensure that their representatives (including authorised representatives) comply with those obligations under the FOFA regime, and if the licensee does not take such steps it may be liable to a civil penalty – this provision is more focussed on the steps taken by the licensee, rather than the representative's conduct. |
Liability judgment
This penalty judgment follows a liability judgment handed down earlier this year in which, following joint submissions on liability, Moshinsky J made declarations that NSG had contravened s 961K(2) and s 961L. Our June edition of What's New? has more details on this judgment.
At the time of the hearing on liability, no agreement had been reached on penalty and so a timetable was set down in preparation for a contested hearing. Shortly before the penalty hearing commenced, however, ASIC and NSG reached agreement on the level of penalties and joint submissions were presented in support of the proposed $1m penalty.
Penalty
Applying the High Court decision in Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46 allowing the Court to have regard to an agreed position on civil penalty (see our update here on the implications of this decision (see our update on the implications of this decision, Moshinsky J held that the questions to be determined were whether:
- the court was sufficiently persuaded of the accuracy of the parties' agreement as to facts and consequences; and
- the penalty that the parties were proposing was an appropriate remedy in the circumstances.
His Honour's conclusion on these questions was that he was satisfied that the matters set out agreed statement of facts warranted the consequences of a "substantial penalty" which was appropriate in the circumstances, as the contraventions by NSG were "very serious in nature".
Moshinsky J dealt with the contraventions of s961K(2) and s961L separately, his Honour noting that s961L imposes an obligation on NSG itself to take reasonable steps to ensure that its representatives comply with the FOFA provisions. His Honour's reasons suggest that the focus under s 961L is on the steps taken by the licensee (as the language of s 961L would suggest).
His Honour noted the following factors relevant to penalty:
- no suggestion of dishonesty by NSG
- at the start of the FOFA transitional period, NSG's senior management was substantially impaired (by reason of the death of the two year old daughter of the sole director)
- NSG, operated a substantial enterprise, with commissions in the millions of dollars
- NSG co-operated with ASIC
- NSG reached agreement with ASIC on the proposed pecuniary penalty, something which "demonstrated its recognition of the seriousness of its contraventions".
His Honour was satisfied as to the penalty proposed by the parties, and ordered separate single penalties with respect to the two sets of contraventions (being a single $250,000 penalty for the four s 961K(2) contraventions and a single $750,000 for the 16 s 961L contraventions). (The maximum penalty per contravention was $1 million.)
NSG was also ordered to pay ASIC's costs in a fixed amount of $50,000.
Significance of the case
As the first civil penalty imposed on a financial services licensee for breaches of the best interests duty, the case provides some measure of yardstick to the attitude of ASIC and the Courts to penalty for what were held to be serious contraventions of the best interest and appropriate advice duties. The conduct here was quite systemic, and included a lack of proper training on FOFA obligations, an organisational emphasis on sales over compliance, and, importantly, a failure to act when issues with financial advice were identified.
It is relevant to note that the court received a joint written submission on the proposed level of penalty. It therefore remains to be seen how a court would approach its determination of the appropriate level of penalty for contraventions of the best interest and appropriate advice duties in a contested setting.
Interestingly, there was no discussion of the application of the principles used to determine penalty where there are multiple related contraventions.
As discussed in our recent edition of What's New, the Full Federal Court has recently said in Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2017] FCAFC 113 that a single penalty cannot be imposed for multiple contraventions of a civil penalty provision on the basis of the "totality principle" or the "course of conduct" principle, unless specifically authorised by statute (although those principles still apply). Here, the Court did impose a single penalty for multiple contraventions, without referring to the Full Court's judgment.
Another interesting feature of the case is the way it dealt with contraventions of the reasonable steps obligation in s 961L. The declarations of contravention made in the liability judgment were made in respect of each of the established contraventions of the best interests duty and appropriate advice duty by the authorised representatives, resulting in 16 contraventions of s 961L. It is far from clear though why each contravention of s 961B and s 961G by the authorised representatives was a separate breach of the licensee's obligation to take reasonable steps in s 961L. Moshinsky J in the liability judgment did not consider it necessary to rule on the different submissions about this point. The relationship between these provisions may well require further consideration by the Courts if ASIC maintains the position it put forward in this matter.
For further information, please contact:
Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com
