Background

NSG Services (now named Golden Financial Group Pty Ltd) is a financial advice firm which advises private clients with respect to life risk insurance and superannuation products. Recently, the Victorian Federal Court ordered that NSG Services pay a $1 million civil penalty for 20 contraventions of the Corporations Act resulting from breaches of sections 961B and 961G by five of its representatives. ASIC also obtained an order banning two representatives of NSG Services from the financial services industry, however, both of these orders are the subject of appeals in the Administrative Appeals Tribunal.

This is the first penalty imposed by a Court against a licensee for a breach of the 'best interests' duty and the 'appropriate advice' duty following enactment of the Future of Financial Advice (FOFA) reforms in July 2012. Section 961L imposes a positive responsibility on financial services licensees to take reasonable steps to ensure their representatives comply with these obligations.

In the proceeding, ASIC and NSG Services reached consensus regarding liability and entered into an agreed statement of facts. The Court imposed a penalty, and made declarations, relating to deficiencies in NSG Services’ process and procedure. As a result of NSG accepting that it and five of its advisers had contravened the provisions there was no judicial consideration of the elements of sections 961B and 961G. However, the agreed statement of facts annexed to the judgment provides some guidance as to the types of behaviour that will fall foul of these sections of the Corporations Act.

What is the 'best interests' duty?

Section 961B imposes a “best interests” duty on financial advisers in respect of the process or procedure involved in providing personal financial advice to retail clients. To satisfy this duty to a client, an adviser must:

  • Identify the objectives, financial situation and subject matter of the advice sought by the client
  • Where it is apparent, make reasonable inquires to obtain complete and accurate information relating to the client’s circumstances
  • Assess whether they have the expertise to provide the advice, and if not, decline to provide it
  • Have conducted a reasonable investigation into any financial product that they consider recommending to a client
  • Base all judgements in advising the client on the client’s relevant circumstances
  • Take any other step that would be reasonably be regarded as in the bests interests of the client given their circumstances.

What is the 'appropriate advice' duty?

Section 961G provides that an adviser must only provide advice to a retail client in circumstances where it would be reasonable to conclude that the advice is appropriate to that client, had that adviser satisfied the duty to act in the client’s 'best interests'.

Section 961G focusses on the content or substance of the advice that is given to a client as opposed to the elements of section 961B which relate to the process or procedure necessary to ensure that reasonable steps are taken to act in a client’s 'best interest'. This obligation assumes that the adviser has complied with the best interests duty in section 961B.

How were the duties breached?

In the proceeding commenced against NSG Services, it and ASIC agreed that the following facts constituted a breach by NSG’s representatives of the best interests duty and the appropriate advice obligations outlined in sections 961B and 961G:

  • Recommending a superannuation fund without suggesting alternate funds and failing to provide the client with information or documents to compare the performance of the recommended fund with the client’s existing fund
  • Failing to give advice about the appropriate level of life insurance cover and the fees and costs associated with the recommended fund
  • Failing to advise the client that he already had pre-existing income and life insurance through his existing superannuation fund
  • Failing to disclose to a fund a client’s pre-existing medical condition
  • Failing to provide a written statement of advice.

In all of the factual scenarios described in the judgment, evidence was led that the client was financially worse off by virtue of the NSG Services adviser failing to act in their best interest and subsequently ensure that the advice they received was appropriate. For example, as a consequence of inappropriate advice received, the clients paid unnecessary insurance premiums and administration fees and had their superannuation funds depleted.

Section 961L

A financial services licensee must take reasonable steps to ensure its representatives comply with sections 961B and 961G. In the event a licensee does not take such steps, it may be the subject of adverse declarations by the court and civil penalties.

In this proceeding NSG Services consented to the Court making declarations that it had breached section 961L by failing to take reasonable steps to ensure its representative advisers complied with their obligations to act in the best interests of the client and provide appropriate advice.

NSG Services conceded that its client advice processes, training systems, and monitoring and supervision policies were deficient. NSG also accepted that its sales targets, 'commission only' remuneration arrangements and its failure to adequately respond to external audit findings all contributed to the breaches by its representatives.

Lessons learned

The outcome of this proceeding is a timely reminder to financial services licensees to review and assess their systems, procedures and policies to ensure their advisers are trained and adequately supervised, to act in the best interest of their clients. In addition to the civil penalties that a court may impose, the reputational impact from any adverse publicity could be detrimental to the ongoing viability of a financial advice firm.

Current relevant cases

In December 2016, ASIC issued proceedings against two Westpac subsidiaries (Westpac Securities Administration Limited and BT Funds Management Limited) alleging breaches of the 'best interest' duty in relation to telephone campaigns that recommended customers roll their superannuation funds into Westpac related accounts. This proceeding is set down for a five-day trial commencing in early February 2018. A further judgment is also pending in a proceeding commenced by ASIC against three corporate entities operating as the “Yes FS” business which includes alleged breaches of the 'best interests' duty.

Whilst it has taken some time for ASIC to secure a penalty in respect of the best interests duty, this proceeding against NSG Services may be the first of a number of successful prosecutions commenced by it against financial services licensees.