Million dollar penalty imposed on licensee for systemic failures to address best interests dutyAuthor : Naomi Miller (Special Counsel)

Financial Lines
First time the Court has imposed a penalty on an Australian Financial Services Licensee (Licensee) for breaches of the best interests duty
  • On 30 March 2017, Justice Moshinsky of the Federal Court of Australia (Court) delivered judgment, declaring multiple breaches of s961K(2) and s961L of Corporations Act 2001 (Act) by Licensee, NSG Services Pty Ltd (NSG) (now Golden Financial Services Group Pty Ltd).
  • On October 27, 2017 the Court imposed a landmark penalty on NSG.
Lessons for Licensees and their insurers
  • ASIC will continue to pursue Licensees who fail to comply with their FOFA obligations. Licensees must take serious steps to ensure systemic compliance and will be punished severely if they ignore known problems.
  • Financial lines insurers should renew their focus on insured and prospective insured’s compliance programs, and also consider whether insureds have a same-day advice or similar business model, which may expose them to greater regulatory risk.

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THE RELEVANT FOFA REFORMS

In 2012, a new Part 7.7A was introduced to the Corporations Act 2001 (Act) as part of the FOFA reforms, with compulsory compliance from 1 July 2013. Key aspects of the reforms were duties for providers of personal financial advice to provide advice that is:

  • in the best interests of the client, under section 961B – with a focus on the process or procedure involved in providing advice; and
  • appropriate to the client, under section 961G – with a focus on the content or substance of that advice.

Importantly for Licensees, the reforms also introduced obligations in section 961L for a Licensee to take reasonable steps to ensure that its representatives comply with the best interests duties, and under section 961K(2) imposing strict liability on the Licensee for the conduct of representatives.

CONTRAVENTIONS BY NSG

NSG holds an AFSL permitting it to advise retail clients about, and deal in, life risk insurance and superannuation products.

ASIC commenced civil penalty proceedings against NSG in 2016, focusing on NSG’s “same day advice” model, in which retail investors were given little or no time to reflect upon financial advice, and advisors were primarily trained in sales, rather than compliance obligations.

On 30 March 2017, following the provision of an Agreed Statement of Facts by the parties, the Court found that NSG:

  • had committed multiple contraventions of the Act;
  • was aware of problems with the form and content its advice;
  • failed to adequately address systemic problems with its practices and policies;
  • obtained detailed advice from a number of external advisors and compliance consultants, but failed adequately to disseminate and implement that advice across the organisation; and
  • had a “commission only” remuneration model, which meant that representatives would only be compensated by way of commission for sales of life insurance products and superannuation rollovers.

LANDMARK PENALTY DECISION

On 27 October 2017, the Court imposed a $1M penalty on NSG for the contraventions.

In considering the appropriateness of the $1M penalty, the Court noted that the contraventions by NSG were “very serious in nature”, and that NSG operated a substantial enterprise, with commissions received in the millions of dollars.

IMPLICATIONS

Licensees must positively implement systems and procedures to ensure compliance in their organisation as a whole. Moreover, they will be the subject of severe penalties where they ignore known problems.

Sections 961K(2) and 961L of the Act make clear that Licensees must adopt a serious and comprehensive approach to:

  • their client advice processes;
  • training of representatives and employees;
  • systems for monitoring and supervising advisors;
  • external audits;
  • compliance policies; and
  • remuneration of advisors.

ASIC Deputy Chairman Peter Kell has publicly stated, “This outcome makes clear to the industry the serious consequences of financial services licensees failing to comply with their FOFA obligations. ASIC will continue to pursue licensees who fail to do so.”[1]

For financial lines insurers and brokers, it is important to consider whether clients or prospective clients have a ‘same day advice’ or similar business model, and to assess this risk in the post-FOFA era.

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[1] http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-365mr-financial-advice-firm-to-pay-1-million-penalty-for-breach-of-best-interests-duty/

Read the ASIC Media Release

03/11/2017