Case note | Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187

Key Takeouts

  • This is a significant and important decision for the financial services industry. It dramatically changes the characterisation of general and personal financial product advice and will significantly impact the way licensee interact with clients. As a result of this decision, financial institutions will need to review:
    • their distribution models and channels;
    • the scope of their licences and activities;
    • marketing materials, online calculators and other tool; and
    • the types of information gathered from clients.
  • The MinterEllison insights at the conclusion of this case note outline the legal and practical implications for the industry.
  • The case largely concerns the question of what constitutes 'personal', as opposed to 'general' financial product advice under the Corporations Act. This is important because providers of personal advice are required to act in the best interests of the customer and comply with additional disclosure requirements if only general advice is given, the primary obligations on the provider of the advice are fewer.
  • In allowing ASIC's appeal, the Court found that superannuation switching marketing campaigns run by two Westpac subsidiaries, aimed at convincing customers to consolidate their superannuation accounts into a single Westpac-related account, did involve giving 'personal advice' within the meaning of s766B(3) of the Corporations Act 2001 (Cth).
  • Flowing from the finding that personal financial product advice was provided, the Court found that Westpac failed to comply with other sections of the Corporations Act, including (s961B) (best interests obligation).
  • The Court also agreed with the primary judge's view that Westpac failed to comply with and s912A(1)(a) (obligation to 'do all things necessary to ensure that the financial services covered by their licences were provided honestly, efficiently and fairly'), and in doing so lent weight to the emerging view that holders of an Australian Financial Service Licence (AFSL) are subject to an objective duty to act 'fairly'.
  • Next steps? The Court allowed ASIC's appeal with costs, and dismissed the cross-appeal with costs. The parties are to agree on the declarations and orders to be made by Court. In the absence of agreement, the parties are to make submissions and the Court will decide on the declarations and orders.
  • In a statement welcoming the decision ASIC said that it provides 'clarity and certainty concerning the difference between general and personal advice for consumers and financial services providers'.
  • In a short statement acknowledging the decision, Westpac said it is 'considering the decision'.

Overview of the decision

On 28 October, the Federal Court handed down its decision in Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187.

The Court was unanimous in allowing the Australian Securities and Investments Commission's appeal with costs, and dismissing the cross-appeal with costs. Their Honours, Allsop CJ, Jagot and O'Bryan JJ each provided separate reasons for their decision.

Context

At first instance, the Federal Court found that marketing campaigns implemented in 2014 and 2015 by Westpac subsidiaries (BT Funds Management Ltd (BTFM) and Westpac Securities Administration Limited (WSAL) (Westpac)) aimed at encouraging their customers to consolidate their external superannuation accounts into existing Westpac-related accounts (collectively, the BT accounts) involved the provision of general product advice, but that Westpac's conduct had breached section 912A(1)(a) of the Corporations Act 2001 (Cth) (the Act).

Section 912A(1)(a) states that holders of a AFSL must 'do all things necessary to ensure that the financial services covered by their licences were provided honestly, efficiently and fairly'.

However, the primary Judge held that ASIC failed to make out its case that Westpac provided 'personal advice' and that in consequence, ASIC failed to demonstrate alleged contraventions of ss 912A(1)(b), 946A and 961B of the Act. ASIC subsequently appealed the decision.

[Note: For a brief summary of the primary decision see: Governance News 16/01/2019].

Key Questions

When does marketing cross the line into financial product advice, and then into 'personal advice'?

The appeal was largely concerned with the questions of whether Westpac’s conduct (the marketing campaigns – primarily phone calls made by callers on behalf of Westpac to Westpac customers) involved:

  1. the provision of financial product advice within the meaning of s 766B(1); and
  2. if so, whether the advice was 'personal advice' within the meaning of s 766B(3) or 'general advice' within the meaning of s 766B(4) of the Act.

Ultimately, their Honours each held that Westpac’s conduct (the marketing campaigns) did involve the giving of financial product advice, that this was personal advice, and that flowing from this, the conduct also contravened various provisions of the Corporations Act 2001 (Cth).

Separately, their Honours each separately agreed with the primary Judge, that the conduct did constitute a breach of s912A(1)(a).

Westpac's conduct did constitute financial product advice

Their Honours each agreed with the primary Judge in concluding that Westpac's communications (primarily a sample of 14 calls to customers) involved the provision of financial product advice and was not simply marketing or advertising.

In reaching this conclusion, Allsop CJ, Jagot and O'Bryan JJ each rejected Westpac's argument that the whole of the communication needs to bear the character of advice for the statutory definition (s766B(1)) to be satisfied.

Justice Jagot states 'Contrary to Westpac’s case, not every statement of fact, sales message or expression of enthusiasm which a financial product issuer makes about its own financial products will involve financial product advice. More is required in the form of a recommendation or statement of opinion. In the present case Westpac’s communications, in my view, fall well on the side of the line of financial product advice in distinction from mere marketing'.

This is because, 'The clear message conveyed by the callers in each call was that Westpac was calling to help the customer by providing them with a service that would be in the customer’s interest to accept. No reasonable customer would have expected that when Westpac said it was calling to help the customer, in fact, it was doing nothing more than helping itself to the customer’s superannuation irrespective of the customer’s best interests. Accordingly, the primary judge’s conclusion at [260] that each customer received a recommendation that that they should rollover their external accounts into their BT account is unassailable'.

Both Chief Justice Allsop and Justice O'Bryan reached similar conclusions.

Chief Justice Allsop also emphasised in his reasons that because the 'callers took the customers to the point of decision making over the phone in a call' having been given 'helpful recommendations and statements of opinion (even of a general character)' for example, that the customer could potentially save on fees and that combining accounts made sense from a management point of view or would enhance manageability, the communications 'can plainly be seen as a form of advice'.

Westpac's conduct did involve the provision of 'personal advice' within the meaning of s 766B(3) of the Act

The primary judge held that 'financial product advice' was not 'personal advice' within the meaning of s 766B(3)(a) of the Act because the advice was not given in circumstances where: a) Westpac (through the callers) considered any/all of the customer's objectives, financial situation or needs; and b) a reasonable person might expect Westpac (through the callers) to have considered the customer's objectives, financial situation or needs.

It followed from that conclusion that the financial product advice given by Westpac (through the callers) was general advice within the meaning of s 766B(4).

Their Honours each rejected this characterisation of the advice as 'general advice', each instead separately concluding that the advice was 'personal advice'.

No imperative that the clients' objectives, financial situation and needs be considered in their totality

Their Honours each separately rejected Westpac's contention that s766B(3) requires consideration of all of the clients 'objectives, financial situation and needs', 'as a whole'.

Justice O'Bryan held that s 766B(3) requires only that 'the provider [of the advice] has considered to some extent one or more of the recipient’s objectives, financial situation or needs; the paragraph does not require that the provider has considered any of them “as a whole” on the basis that doing so would defeat the purpose of s 961B'.

'On Westpac’s construction, if the provider did not have complete information about one or more of the client’s objectives, financial situation or needs, any advice given would not be personal advice and the obligation under s 961B would never arise. Such a construction would defeat the very purpose of s 961B'.

Justice Jagot makes a similar observation stating that 'If the legislature had intended that personal advice would be given only if the provider of the advice had considered the whole of one or more of the person’s objectives, financial situation and needs then there would be no need for the legislation to expressly contemplate that information relating to the client’s relevant circumstances may be incomplete for any category. Further, as ASIC submitted, it would lead to a perverse outcome if the client is protected by the personal advice provisions where the provider undertakes a detailed consideration of their personal circumstances but stops short of considering the whole of their circumstances…the legislature could not have intended that the personal advice protections are engaged when only some needs but all objectives are considered or vice versa but are not engaged if nearly all needs and nearly all objectives are considered'.

Section 766B(3) should be considered in the context of the Act, and in the context of the communication as a whole

Their Honours each make clear that s766B(3) should be read in both the broader context the Act and in the context of the communication as a whole. Justice Jagot comments that 'The parties were in dispute about the meaning of "considered", "in circumstances where" and "one or more of the person’s objectives, financial situation and needs" as they appear in s 766B(3). I do not consider that the phrases…are capable of being given meaning outside of the full context in which they appear'. Justice Jagot also rejected the approach of the primary judge in looking at the principles of administrative law to give meaning to the word 'considered' and stated that 'considered' in this context should be given its ordinary meaning, being 'to pay attention or regard to; to view or think about with attention or scrutiny'.

Likewise, Chief Justice Allsop comments that 'Care must be taken not to over-complicate these questions, in particular by breaking up the questions of meaning into parts of a section or sub-section to be treated separately'.

The question, Chief Justice Allsop says 'is one of the practical application of the statute to the context in question to see whether an express or implied “recommendation” (that is, a commending something by favourable representation or presentation as worthy of confidence or acceptance or as advisable or expedient) or “statement of opinion” (that is, a judgment or belief or view or estimation) was made. The two concepts are, of course, related. The opinion may be the basis of the recommendation; and the recommendation may carry with it an implied opinion.'

More than marketing?

A 'reasonable person standing in the shoes of the customers might expect the callers to have considered one or more of the person’s objectives, financial situation and needs' given the context

In this case, Chief Justice Allsop held that though the marketing campaign was 'carefully calculated' to convince customers to consolidate their superannuation accounts into a Westpac-related superannuation account by giving no more than general advice (ie marketing/advertising a service), it was nevertheless personal advice.

'…the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for marketing or general advice. It is a decision that requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer. 'Westpac attempted, assiduously, to get the customer to make a decision to move funds to BT without giving personal financial product advice as defined in the legislation. It failed. It gave personal advice, because when the telephone exchanges are considered as a whole and in their context, including importantly the “closing” on the telephone by getting the decision made during the call, there was an implied recommendation in each call that the customer should accept the service to move accounts funds into his or her BT account carrying with it an implied statement of opinion that this step would meet and fulfil the concerns and objectives the customer had enunciated on the call in answer to deliberate questions by the callers about paying too much in fees and enhancing manageability'.

Likewise, Justice O'Bryan found that the way in which the call was framed and the context, meant that the advice to switch accounts involved personal advice. Notwithstanding the general advice warning that was given at the outset of the call; notwithstanding no fees were charged for the offer of help; and notwithstanding that it was apparent that the callers did not have information about the customer’s external superannuation accounts, in my view a reasonable person standing in the shoes of the customers might expect the callers to have considered one or more of the person’s objectives, financial situation and needs…By its conduct, Westpac engendered a circumstance in which it conveyed an implicit recommendation to its customers to consolidate their external superannuation accounts into their BT account, and engendered a circumstance in which customers might rely and act on that recommendation because they might expect Westpac to have considered one or more of their personal circumstances in making that recommendation' he writes.

This does not mean that all marketing is 'personal advice'

In finding that the advice was 'personal advice' Chief Justice Allsop said that 'The dichotomy which Westpac seeks to establish in this case between advertising and marketing on the one hand and advice on the other hand is unhelpful. It is true that all advertising and marketing is intended to influence the listener to acquire the provider’s products but that advertising and marketing is not necessarily advice. The rub in the present case is that while Westpac may have perceived what it was doing as a marketing campaign in the interests of Westpac, its campaign consisted of making calls to existing Westpac customers on the basis that the purpose of the call was to help the customer in respect of the customer’s superannuation. The reasonable customer would not expect that in such a serious context, the customer’s superannuation, and given the existing relationship between them, Westpac would present itself as helping the customer if, in reality, it was doing nothing more than helping itself. As the primary judge found at [47], while the customer would assume that Westpac was making the call to the customer self-interestedly, the customer would also assume that Westpac was making the call in the customer’s interest.'

Both Jagot and O'Bryan JJ reached similar conclusions.

The emphasis on 'closing' was a key factor

Chief Justice Allsop observed that 'Westpac could have avoided this conclusion and result by the callers by ensuring that the customers had the opportunity to consider their own positions and, having done so, later communicate an acceptance, if they wished'.

Consequences of the findings that the conduct constituted personal advice: Other contraventions of the Act

Having found that the conduct did constitute personal advice, their Honours each held that Westpac also contravened s 961B(1) (the duty to act in the best interests of the client) and in consequence also breached ss 961K(1), 912A(1)(b) and (c).

In addition, their Honours also agreed with the primary judge that Westpac's conduct contravened s 912A(1)(a).

Contravention of s912A(1)(a): One duty or three?

The case also includes discussion of the interpretation of s912A(1)(a): the requirement that financial services licensees must 'do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly'.

Chief Justice Allsop acknowledged that the Courts have held s912A(1)(a) to be 'compendious as a single, composite concept, rather than containing three discrete behavioural norms', referencing the decision in Story v National Companies and Securities Commission (1988) 13 NSWLR 661, but cast doubt over this decision and the various cases that have followed it. The Chief Justice was careful to 'reserve for an occasion where the matter was fully argued' whether the phrase is compendious, but in doing so lent weight to the emerging view in the industry that s912A(1)(a) imposes three concurrent but separate obligations imposed on AFSL holders, including an obligation to act 'fairly'.

'Fair' to be given its ordinary meaning

Observing that the word 'fair' as used in s 912A(1)(a) has not received detailed judicial consideration, Justice O'Bryan commented that 'it seems to me that there is no reason why it cannot carry its ordinary meaning which includes an absence of injustice, even-handedness and reasonableness…It seems to me that the concepts of efficiently, honestly and fairly are not inherently in conflict with each other and that the ordinary meaning of the words used in s 912A(1)(a) is to impose three concurrent obligations on the financial services licensee: to ensure that the financial services are provided efficiently, and are provided honestly, and are provided fairly'. Likewise, Chief Justice Allsop cites the Macquarie Dictionary definition of fairness in his reasons.

Form over substance

In his reasons, Chief Justice Allsop observed that 'the provision is part of the statute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to' and as such, emphasis 'must be given to substance over form and the essential over the inessential in a process of characterisation by reference to the stated norm'.

Conclusions on s912A(1)(a)

In this case, their Honours each separately agreed with the primary Judge, that the conduct did constitute a breach of s 912A.

Chief Justice Allsop commented that 'It could hardly be seen to be fair, or to be providing financial product advice fairly, or efficiently, honestly and fairly, to set out for one’s own interests to seek to influence a customer to make a decision on advice of a general character when such decision can only prudently be made having regard to information personal to the customer…There was a degree of calculated sharpness about the practice adopted in the QM Framework [quality monitoring framework]'.

His Honour goes on to say that 'The QM Framework courted the risk of personal advice being given; and it was. I do not intend to be either flippant, or disrespectful, but the perceived importance of the “closing” being over the phone might be seen as not wanting to let the customer out of the showroom or shop. This is not ensuring that financial services covered by its licence were provided efficiently, honestly and fairly. There was a contravention of s 912A(1)(a).'

Justice Jagot commented along similar lines that 'on the primary judge’s approach to the facts (that is, that Westpac did not give personal advice) it can nevertheless be said that Westpac was guilty of what would colloquially be described as systemic sharp practice about what must have been one of their clients’ major financial concerns, their superannuation. The fact that Westpac provided training to its staff to avoid giving personal advice does not alter this conclusion'. Justice O'Bryan likewise held that it the conduct was 'was inherently likely to result in financial advice being given to customers in a manner that was unfair to those customers, contrary to the requirement in s 912A(1)(a)'.

Failure to act in the best interests of the client: s961B

Their Honours also each concluded that flowing from the finding that Westpac acted in a manner that was unfair to customers, the conduct also constituted a failure to act in the best interests of the client (in breach of s961B).

Justice O'Bryan said that 'The facts found by the primary judge compel a conclusion that the callers contravened s 961B(1) and Westpac thereby contravened s 961B(1). Westpac, through its representatives, failed to act in any of the ways referred to in paragraphs (b) to (g) of s 961B(2). The callers failed to obtain the most basic information that would have been required in order to act in the best interests of the customers'.

Chief Justice Allsop held that 'The whole approach of Westpac was to obtain an advantage for itself without engaging with the personal circumstances of the customers so as to avoid the consequences of the responsibilities of providing personal advice'.

Regulatory context: ASIC has said that is it targeting 'potential misconduct and harms to consumers that may arise from the industry's shift towards "general advice' models"

ASIC has identified 'fairness' and 'address(ing) poor financial advice outcomes' as a key area of focus. More particularly, ASIC's latest Corporate Plan states that the regulator will support measures to improve professional of financial advisers and 'target the potential misconduct and harms to consumers that may arise from the industry's shift towards 'general advice' models'.

ASIC has also flagged plans to review regulatory guide 146: Training of Financial Product Advisers (RG 146) over 2019-2020 to assess what training standards apply to individuals providing general advice, or personal advice on basic banking products, general insurance and consumer credit insurance, to retail clients.

MinterEllison Insights

Legal implications

  • The decision establishes a threshold for what constitutes 'personal' as opposed to 'general' financial product advice which is lower than what many within the industry had adopted.
  • It is clear there is a risk that any financial product advice provided after gathering information about a client's financial situation, objectives or needs may constitute personal advice and that information on one of these factors alone may be sufficient.
  • The element of 'consideration' of the factors relevant to the client does not require a detailed analysis to be established, nor does consideration necessarily have to occur at the same time as the recommendation is provided.
  • It is also clear that the overall impression created through customer interactions and any pre-existing relationship with the provider are relevant considerations in respect whether a reasonable person would expect the advice provider to have taken the client's financial situation, objectives and needs into account.
  • The posing of questions to the client which illicit information about their financial situation, objectives and needs will also contribute to the overall impression of the advice provided.
  • The 'reasonable person' for the purposes of assessing whether there is an expectation of personal financial situation, objectives and needs being considered is likely to be a reasonable person in the circumstances of the relevant client.
  • The decision lends significant weight to the emerging view that the general obligation under s912A(1)(a) to act ‘efficiently, honestly and fairly’ imposes three concurrent but separate obligations, contradicting previous caselaw on this point (see for example Young J in Story v National Companies and Securities Commission (1988) 13 NSWLR 661).
  • Give that the Court effectively held that acting in its own self-interest as unfair, this raises the question of whether licensee will effectively be held to act in the best interests of their clients irrespective of whether persona advice is provided.

Practical implications

  • The decision significantly impacts on the way licensees interact with clients and potentially signals the end of direct telephone-based product campaigns when considered in combination with the proposals to further reforms the ant-hawking regime.
  • Licensees will need to consider whether general advice and 'no advice' distribution models (both directly and via third parties) remain appropriate and sustainable in light of the decision.
  • For general advice and 'no advice' distribution models that are retained, the overall impression created through the sequence of customer interactions should be scrutinised to determine whether there is a risk personal advice will be provided. Close examination of the customer information gathered will be critical to this step.
  • Licensees with advice authorisations restricted to general advice will need to reconsider the scope of their activities and the suitably of a limited licence in this regard.
  • Marketing materials, telephone call scripts, representative training and digital tools should be assessed in isolation and as a complete customer experience.
  • Compliance with the general obligation of acting efficiently, honestly and fairly must be imbedded in all aspects of the licensee's business given there is likely to be an increase in ASIC relying on breaches of the obligation as the basis for regulatory and enforcement action.
  • Implementation of the upcoming design and distribution reforms should be mindful of the decision in determining target markets and setting distribution conditions.
  • Licensees currently undergoing remediation projects will need to consider the impact of the decision on remediation methodologies, strategies and compensation provisions. For remediation projects dating back prior to the introduction of the FOFA best interest duty, licensees will need to consider whether a different methodology should apply depending on when the advice was provided.

[Sources: Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187; [registration required] The AFR 28/10/2019; 28/10/2019; Financial Standard 28/10/2019; Independent Financial Adviser 28/10/2019; [registration required] The AFR 29/10/2019]