AFS licence holder cops penalty for breach of the best interests duty


Posted By on 3/11/17 at 9:26 AM

By Josephine Mammone (Trainee Lawyer), Kate Davey (Senior Associate) and Paul Welling (Principal Solicitor)

On 27 October 2017, the Federal Court imposed a significant penalty, totaling $1 million, against financial services firm NSG Services Pty Ltd (NSG) in what ASIC has described as ‘the first civil penalty imposed on a financial services licensee for breaches of the best interests duty’.

Background

This proceeding (issued by ASIC in June 2016) concerned alleged breaches of the ‘best interests obligations’ contained in Part 7.7A of the Corporations Act (Act), enacted in 2012 as part of the Future of Financial Advice (FOFA) reforms.

NSG held an Australian Financial Services Licence permitting it to provide advice to retail clients regarding risk insurance and superannuation products. NSG engaged representatives to provide the financial services advice on its behalf. It was alleged that those representatives failed to obtain all relevant information from their clients, failed to properly consider the individual circumstances of their clients, failed to advise as to appropriate alternatives and generally sold insurance policies and recommended superannuation rollovers that resulted in increased premiums and decreases in superannuation balances.

In March 2017 the Court made declarations (by consent) that NSG representatives had failed to comply with Sections 961B and s 961G of the Act (ASIC, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345). Section 961B imposes a best interests duty on providers regarding personal financial advice provided to retail clients whilst section 961G requires the advice provided to be appropriate to the retail client.

 

best interests duty

 

Justice Moshinsky noted that: “…at all relevant times, NSG was aware of problems with the form and content of financial product advice provided by its representatives to retail clients. While NSG took some steps to address issues as they arose, NSG failed adequately to address the systemic problems with its practices and policies that enabled representatives to provide advice in contravention of the best interests duty and the appropriate advice duty”.

It was also declared that NSG had contravened sections 961K(2) and 961L of the Act in respect of the contraventions by its representatives (other than authorised representatives) of sections 961B and 961G and by failing to take reasonable steps to ensure compliance.

The factors relevant to NSG’s breach of Section 961L were:

  • The new client advice process was often not adhered to;
  • Training of NSG representatives did not include any training on the substance of legal obligations imposed by the FOFA reforms;
  • NSG’s systems for monitoring and supervising representatives were inadequate and when problems were identified during audits no action was taken;
  • External audits were conducted and failures identified;
  • NSG did not have a policy which addressed the statutory duties and requirements imposed on its representatives by the Act;
  • Sales targets and remuneration – representatives were only compensated by way of commissions for sales of life insurance policies and superannuation rollovers.

Penalty Order

In the penalty order made by consent on 27 October 2017, Justice Moshinsky ordered that Golden Financial Group (the current name for NSG) pay $250,000 in respect of the contravention of Section 961K(2) of the Act and $750,000 in respect of the contravention of Section 961L. The court also ordered that Golden Financial Group pay ASIC’s costs of $50,000.

Watch this space!

ASIC is pursuing other litigation alleging breaches of the best interests duties by other financial services licensees (ASIC v Westpac Securities Administration Ltd ACN 000 049 472 & Anor; ASIC v Wealth & Risk Management Pty Ltd & Ors) with both hearings currently set down for February 2018.

If you are an Australian Financial Services Licence holder and have any further questions, please do not hesitate to contact us.

Principal Solicitor

Paul Welling joins KHQ as the leader of our litigation team. He spent over a decade at a top tier national law firm and is a highly experienced litigator specialising in all areas of complex commercial... Read More