ASIC has launched its first test case of the new best interest duty for financial advisers introduced as part of the 2012 FOFA reforms. In the claim, lodged yesterday in the Federal Court, ASIC seeks pecuniary penalties against NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) (NSG) alleging that NSG failed to update its written policies to reflect the FOFA reforms, failed to appropriately train its advisers in respect of their best interests duty and failed to review the performance of its advisers. ASIC contends that three systemic failures on the part of NSG resulted it two of its advisers providing inappropriate advice in relation to life risk insurance on eight separate occasions.

Background

In 2012 the then Federal Government introduced a raft of reforms, known as the Future of Financial Advice (FOFA) reforms, aimed at improving the quality of financial advice provided to retail clients. The reforms, contained in Part 7.7A of the Corporations Act 2001 (Cth) (Act), commenced on 1 July 2012 and provided for a transitional period whereby mandatory compliance was required from 1 July 2013.

Along with numerous provisions relating to adviser remuneration, a centrepiece of the reforms was the introduction of a ‘best interests duty’ contained in section 961B of the Act. That duty is simply expressed: a financial services ‘provider must act in the best interests of the client in relation to advice’. It then provides a prescriptive range of steps which, if followed by the provider, will constitute satisfaction of that duty including:

  • identify the objectives, financial situation and needs of the client (as disclosed by the client);
  • identify (by making reasonable inquiries) the ‘client’s relevant circumstances’ – being the objectives, financial situation and needs of the client that would reasonably be considered relevant to the advice sought;
  • investigate and assess the available financial products which might achieve the clients objective;
  • assess whether the products recommended are in the best interests of the client having regard to the client’s objectives and the client’s relevant circumstances;
  • assess the provider’s own expertise and declined to provide advice where such expertise was insufficient;
  • take all other reasonable steps to act in the clients best interests, given the client’s relevant circumstances.

There is also a requirement that the advice provided be objectively ‘appropriate’ (section 961G).

While such considerations could be regarded as little more than a recital of the duty of care of a financial adviser, the sting in the tail was the clear prescription of those duties, the prominence given to conflicts of interest and the fact that breach of either section 961B or 961G, gives rise to pecuniary penalties (section 961K). Further, financial services licensees are required to take reasonable steps to ensure that their representatives comply with the duties. A failure to do so will expose licensees to pecuniary penalties (section 961L).

Following the introduction of the best interest duty, ASIC indicated that it would take a facilitative approach to enforcement of inadvertent breaches arise during the first 12 months provided that the provider was making reasonable efforts to comply and that it had commenced the process of systems changes. However, ASIC warned that it would take a stronger approach to enforcement thereafter or where there was evidence of deliberate and systemic breaches.

Enforcement Proceedings

On 8 June 2016 ASIC commenced its first enforcement action in the Federal Court of Australia seeking civil penalties against NSG for breaches of the 'best interests duty' introduced under the ‘Future of Financial Advice’ (FOFA) reforms.

ASIC alleges a systemic failure on the part of NSG to take reasonable steps to ensure that its advisers complied with the best interests obligation when providing advice to clients. As a result, ASIC alleges that, on numerous occasions, two identified NSG advisers (Mustafa Ozak and Vanr Trinh) did not act in the best interests of their clients in breach of sections 916B and 916G of the Act. ASIC seeks pecuniary penalties against NSG under section 916K(2) and 961L.

More specifically, ASIC has alleged that:

  • NSG trained its advisers that it is almost always in a client's best interest to take out some form of life risk insurance, regardless of a client's financial situation. Such training was not appropriate to ensure clients receive advice in their best interests; and
  • NSG's written policies relating to legal and regulatory compliance and risk management have been inadequate, and in any event, not followed or enforced; and
  • NSG advisers provided inappropriate advice to clients on eight specific occasions as a result of which clients were sold life insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable, and unnecessary financial arrangements;
  • NSG failed to conduct regular and or substantive performance reviews of advisers and failed to take appropriate disciplinary action against advisers who do not act in the best interest of their clients and provided inappropriate advice.

Conclusion

Financial services licensees and their insurers will watch these proceedings with interest. At their heart, the proceedings target a belief by ASIC that NSG created a systemic culture which encouraged its advisers to sell life products (which carried with them generous upfront and trailing commissions) in a manner which preferred its own interests over the interests of some of its clients for whom such products were not appropriate. ASIC’s enforcement action serves as a warning to other financial advisers that ASIC’s initial facilitative approach to compliance with the 2012 FOFA reforms has well and truly come to an end.