$1 million penalty for breach of FOFA

Legal Directions

Introduction

In 2012, the Corporations Act 2001 (Cth) (the Act) was amended [i] to include the Future of Financial Advice reforms (FOFA Provisions). Relevantly, the FOFA Provisions added to the Act:

  1. section 961B, which imposed a new ‘best interests’ duty on Australian Financial Services Licencees (AFSLs) in respect of personal financial advice provided to retail clients;
  2. section 961G, which requires that AFSLs to provide advice that is appropriate to the retail client;
  3. section 961K(2), which is a civil penalty provision that automatically imposes liability upon an AFLS for contraventions by its representatives (other than authorised representatives); and
  4. section 961L, also a civil penalty provision that imposes an obligation on an AFSL itself to take reasonable steps to ensure that all its representatives (including authorised representatives) comply, relevantly, with ss 961B and 961G.

The Federal Court of Australia in Australian Securities and Investments Commission, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267 recently ordered that combined civil penalties of $1 million be paid by NSG Services Pty Ltd (NSG) as a result of contraventions of the FOFA Provisions.

Liability Proceeding

NSG is an Australian Financial Services Licensee (AFSL). Its licence permitted it to provide advice regarding insurance and superannuation products. In summary, the Australian Securities and Investments Commission (ASIC) alleged, in proceedings commenced in the Federal Court of Australia, that on eight occasions between July 2013 and August 2015, NSG’s advisers provided advice to retail clients regarding insurance or rolling over their superannuation which committed them to costly, unsuitable and unnecessary financial arrangements.

ASIC sought declaratory relief against NSG in respect of NSG’s contraventions of various FOFA Provisions. NSG accepted that it had contravened these provisions and the parties put forward agreed minutes of proposed declarations for the Court to consider.

The parties agreed to a statement of facts which set out the numerous ways in which NSG’s representatives contravened sections 961B(1) and 961G of the Act. The conduct included:

  • providing identical advice (constituting a single sentence) to multiple clients
  • failing to collect sufficient data regarding the client’s personal circumstances and their existing superannuation and insurances
  • only partially completing NSG’s ‘Client Fact Finder’ and other forms
  • recommending that their clients apply for certain insurance when they already held that type of cover
  • failing to provide a statement of advice (SOA), and
  • failing to disclose advisor fees or the fees of the superannuation fund recommended.

NSG admitted that it failed to take reasonable steps to ensure compliance by its representatives with these duties (amounting to a breach of section 961L), by failing to train its representatives appropriately, implementing inadequate policies and/or failing to follow its own policies, and failing to conduct regular and/or substantive performance reviews and/or take disciplinary action against its representatives.

In March 2017, Justice Moshinsky made the proposed declarations.

Penalty Proceeding

ASIC sought the imposition of pecuniary penalties pursuant to s 1317G(1E) of the Act and its costs of the proceeding. Prior to the hearing, the parties agreed NSG should pay penalties of $1 million and $50,000 for ASIC’s costs.

The maximum pecuniary penalty for each contravention is $1 million. In total, NSG committed 20 contraventions.

Justice Moshinsky stated in his judgment that he regarded the contraventions by NSG as ‘very serious in nature’.

His Honour considered the following factors relevant to the penalty discretion:

  1. It was not suggested that NSG’s conduct involved dishonesty.
  2. The director of NSG had a personal tragedy which substantially impaired NGS’s senior management during the critical 12 months leading up to the compulsory implementation of the FOFA Provisions.
  3. During the relevant period NGS operated a substantial enterprise, with gross commissions received in the millions of dollars.
  4. NSG co-operated with ASIC, including in reaching an agreement in relation to the declarations of contraventions and the agreed statement of facts.
  5. NSG reached an agreement with ASIC regarding the proposed pecuniary penalty.
  6. Demonstrating its recognition of the seriousness of its contraventions, the director expressed contrition.

Four of NSG’s contraventions involved a finding that NSG had breached section 961K(2) of the Act. The remaining 18 contraventions involved a finding that NSG had breached section 961L of the Act.

Justice Moshinsky considered that a penalty of $1 million was appropriate but that the penalties for the contraventions of section 961K(2) and section 961L should be dealt with separately. His Honour ordered that a penalty of $250,000 be paid in respect of the s 961K(2) contraventions and a penalty of $750,000 be paid with respect to the section 961L contraventions. Justice Moshinsky also ordered that NSG pay $50,000 towards ASIC’s costs.

 Comment

This is the first civil penalty imposed on an AFSL for breaches of the best interests duty (section 961B). However, the Court did not provide a detailed ruling regarding the factors that will be pertinent in deciding on the level of penalty under the FOFA provisions because the parties agreed to the proposed penalties.

ASIC has said publicly that it will continue to pursue licensees who fail to comply with their FOFA obligations. Accordingly, this decision should serve as a reminder to AFSLs that, in order to avoid potentially substantial penalties, it is vitally important to implement and enforce policies and practices that ensure that the process the advisor follows is in the best interests of the client and the advice provided is appropriate.

[i] By the Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial Advice) Act 2012 (Cth)

Authored by Stephanie Young, Senior Associate, Melbourne

 


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