In Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No.2) [2021] FCA 877 Moshinsky J considered the liability of an AFSL holder (RI)(which was a subsidiary of ANZ Bank) for failing to take reasonable steps to ensure that its authorised representatives complied with the requirements under sections 961B, 961G, 961H and 961J to act in the bests interests of their clients when giving financial advice (Best Interests Obligations).
The claim was a civil penalty proceeding alleging that RI had breached s 961L of the Corporations Act.
ASIC sued in respect of alleged breaches of the Best Interests Obligations by RI's authorised representatives, Mr Doyle and his company. During the course of the trial Mr Doyle fell on his sword and made full admissions in respect of the breaches alleged. The proceeding continued against RI on the allegation that it had not taken reasonable steps to ensure that Mr Doyle had complied with the Best Interests Obligations.
Moshinsky J at [6] described ASIC’s case against RI, in broad outline as follows:
(a) RI knew or ought to have known that Mr Doyle was not meeting RI’s advice standards and was not complying with its business rules, such that there was a substantial risk that he was breaching the Best Interests Obligations;
(b) despite repeated warning signs, RI failed to take any significant steps to investigate Mr Doyle until mid-2015, after ANZ reviewed a selection of Mr Doyle’s advice files and gave them the worst possible rating on its advice “scorecard”;
(c) as a result, ANZ undertook further file reviews, which identified similar issues with Mr Doyle’s advice;
(d) even then, RI kept Mr Doyle on as an authorised representative for another year; and
(e) by doing so, RI ensured that Mr Doyle’s clients and their funds under management (FUM) – also referred to as funds under advice (FUA) – would stay with RI; it also ensured that Mr Doyle could keep advising clients where there was a substantial risk that he would breach the Best Interests Obligations.
The Court largely found ASIC's case to have been made out.
Section 961L of the Corporations Act provides as follows:
"961L Licensees must ensure compliance
A financial services licensee must take reasonable steps to ensure that representatives of the licensee comply with sections 961B, 961G, 961H and 961J.
Note: This section is a civil penalty provision (see section 1317E)."
At [370] - [396] Moshinsky J reviewed the authorities on the Best Interests Obligations and those relating to the obligation on the AFSL holder to take reasonable steps to ensure that its representatives comply with those obligations. His Honour's succinct, shorthand description of the nature of the obligation under s 961L was as follows:
[396] Although the duty in s 961L is broad, the case law has begun to fill in the contours of what is expected of a licensee by way of compliance with the provision. The authorities indicate that s 961L may require a licensee to take steps to ensure representatives are competent, to monitor and supervise them (including in relation to advice processes, advice quality and conflicts of interest), to ensure compliance concerns are escalated, and to take action that is commensurate with the risks presented by such concerns: see, eg, Australian Securities and Investments Commission v Financial Circle Pty Ltd (2018) 131 ACSR 484 at [62], [67]; AMP Financial Planning at [57]-[62]; AGM Markets at [488]-[499].
This is a reasonable statement to guide AFSL holders on what they must do to comply with their obligation to take reasonable steps to ensure that their representatives comply with the Best Interests Obligations.