In brief

Australian Financial Services (AFS) licensees and their representatives beware: ASIC’s significant court win demonstrates that irresponsible advice will not be tolerated.

What you need to know

  • An AFS licensee providing personal advice to retail clients is responsible for the actions of its representatives and authorised representatives.
  • An AFS licensee has to ensure its representatives comply with their obligations to act in the best interests of the clients and only provide advice that is appropriate.
  • Representatives of an AFS licensee also have to ensure that they act in the best interests of the clients and provide advice that is appropriate.
  • An AFS licensee has to put in place sufficient and up-to-date policies relating to legal and regulatory compliance and risk management.
  • An AFS licensee has to ensure that its representatives have adequate training on legal and regulatory obligations.

Background

Under the FOFA reforms to the Corporations Act 2001 (Cth) (Corporations Act) introduced in 2013:

  • section 961B states that a provider of advice to clients must act in the best interest of the client; and
  • section 961G states that a provider must only provide advice that is appropriate to the client.

These obligations apply to both AFS licensees and their representatives.

The decision

NSG Services Pty Ltd (NSG) holds an AFS licence authorising the giving of financial advice to retail clients. On eight different occasions between July 2013 and August 2015, NSG’s representatives sold insurance and/or advised clients to rollover superannuation accounts that committed the clients to costly, unsuitable and unnecessary financial arrangements.

The Federal Court found that NSG’s representatives breached sections 961B and 961G as they failed to take reasonable steps to ensure that they provided advice that complied with the best interest obligations, and provided advice that was inappropriate to their clients.

Due to these breaches, NSG was also found to be in breach of section 961L of the Corporations Act, which states that a licensee must take reasonable steps to ensure that its representatives comply with sections 961B and 961G of the Corporations Act.

The Federal Court declared that NSG had: inadequate training on legal and regulatory obligations; lack of supervision of its representatives; failed to identify the knowledge deficiencies of its representatives; insufficient compliance policies; and a “commission only” remuneration model for it representatives.

ASIC has sought orders that NSG pay pecuniary penalties, which have yet to be determined by the Court. ASIC deputy chairman Peter Kell said “This finding, the first of its kind, provides guidance to the industry about what is required of licensees to ensure representatives comply with their obligations to act in the best interests of clients and provide advice that is appropriate.”

Conclusion

This case illustrates the responsibilities on AFS licensees to ensure their representatives comply with legal and regulatory obligations. It is critical for AFS licensees to put in place compliance policies and procedures and to ensure that their representatives are properly trained and regularly monitored.  Madgwicks can assist with preparing and implementing such compliance policies and procedures.

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