The Federal Court of Australia recently considered the ‘best interests and appropriate advice duties’ required of financial services licensees and providers, which form Part 7.7A of the Corporations Act 2001 (Cth) (the Act).
The Australian Securities and Investments Commission (ASIC) alleged several breaches of ss 961B and 961G of the Act, by NSG Services Pty Ltd (now Golden Financial Group Pty Ltd) occurring between 1 July 2013 and 20 August 2015. The contraventions resulted in clients being offered advice or sold products that were either costly, unnecessary or unsuitable for their circumstances.
The cases demonstrate ASIC’s power to instigate proceedings against financial services licensees for breaches of these provisions and the Court’s willingness to impose significant penalties ($1 million in pecuniary penalties) where appropriate and in the public’s interests.
The ‘best interests and appropriate advice’ provisions
Section 961K provides for civil penalties for contraventions of (amongst others) ss 961B and 961G of the Act.
Section 961B requires a provider of financial advice to act in the best interests of the client in relation to the advice. The section sets out the steps that, if taken by the provider, will satisfy these obligations.
Section 961G provides that advice must be appropriate to the client.
The contraventions alleged against NSG Services Pty Ltd (NSG) stemmed from NSG’s failure to take reasonable steps to ensure that its representatives complied with the best interest provisions when advising or offering products to clients. In particular:
• NSG’s ‘new client advice processes’ focused on quick turnaround as opposed to a thorough and accurate assessment of the client’s needs and clients were provided little or no time to absorb the advice given before implementing the recommended advice.
• Representative training was communication and sales oriented.
• The ‘commission only’ remuneration system offered by NSG to its representatives prioritised sales over compliance.
Essentially, the alleged breaches were apparent on the facts and admitted by NSG. Accordingly, the Court was not required to go to great lengths in considering any substantive arguments regarding the elements necessary to establish a contravention of each provision. No doubt such precedent will evolve as future cases are considered.
In the meantime, the Court’s comments on NSG’s conduct flag important reminders when implementing and reviewing policies within the financial services industry:
An examination of each of these practices and policies demonstrates that at all material times NSG was aware of problems with the form and content of financial product advice provided by its representatives to retail clients. While NSG took some steps to address issues as they arose, NSG failed adequately to address the systemic problems with its practices and policies that enabled representatives to provide advice in contravention of the best interests’ duty and the appropriate advice duty. NSG obtained detailed advice from a number of external providers, but failed adequately to disseminate and implement that advice across the organisation.
All financial services providers are encouraged to review their procedures and policies to ensure compliance.