A recent $1 million civil penalty imposed on a Melbourne-based financial advice firm should put the industry on notice regarding the perils of not fostering a strong compliance culture.
In March 2017, the Federal Court declared that NSG Services (now Golden Financial Group) committed multiple breaches of the Corporations Act, including NOT taking reasonable steps to ensure its representatives complied with the best interests duty obligations. More specifically, between July 2013 and August 2015 NSG clients were sold insurance and advised to roll over superannuation balances to products that were either more costly or otherwise unsuitable.
It should be noted that NSG had consented to the making of declarations against it in accordance with the agreed statement of facts prepared by NSG and ASIC. Had this been a contested matter, greater judicial clarity may have been achieved regarding how the best interests “safe harbour” steps (refer Corporations Act s 961B(2)) would be satisfied in practice.
Nevertheless, the outcome serves as a powerful reminder that financial planning licensees must consider their business models as a whole and ensure that their advisers are given the support to meet their best interests duty obligations to clients. In its media release dated 4 April 2017, ASIC noted the court’s declarations in relation to the following deficiencies in NSG’s processes and procedures:
- NSG’s new client advice process was insufficient to ensure that all necessary information was obtained from, and given to, the client;
- NSG’s training on legal and regulatory obligations was insufficient to ensure clients received advice which was in their best interests;
- NSG did not routinely monitor its representatives nor identify deficiencies in the knowledge or skills of individual representatives;
- NSG did not conduct regular or substantive performance reviews of its representatives;
- NSG’s compliance policies were inadequate, and did not address its representatives’ legal or regulatory duties, and in any event, were not followed or enforced by NSG;
- There was an absence of regular internal audits, and the external audits conducted identified issues which were not adequately addressed nor recommended changes implemented; and
- NSG had a “commission only” remuneration model, which meant that some representatives would only be compensated and incentivised by way of commission for sales of life insurance products and superannuation rollovers.
We further noted the following observations in the court’s judgment:
- NSG’s system for providing advice to clients was designed to be completed quickly. Clients were given little or no time to reflect on the advice before agreeing to implement the recommendations;
- In some cases advice was implemented even before clients received or approved the content of a written SoA;
- NSG representatives did not properly ascertain clients’ objectives, financial situation and needs, nor conduct research into alternative financial products that may have been appropriate for their clients; and
- All NSG representatives were required to meet weekly sales targets and attended weekly sales meetings to discuss the previous week’s performance.
As this case represents the first finding of liability against a licensee for a breach of the FOFA reforms, it would be in financial planning firms’ own interests to check if similar deficiencies exist in their individual financial planning practices and if so, immediately address them. It must be emphasised that meeting the best interests safe harbour steps involves more than just following a simple checklist approach. Instead, all financial planning businesses must ensure their day-to-day operations effectively cater for FOFA requirements (EG giving advisers adequate opportunities to properly investigate their clients’ needs and alternative product offerings).
Enforceable Undertaking
Further guidance is provided by two more recent Enforceable Undertaking announced on 21 December 2017 which ASIC has accepted from a Victorian-based financial adviser and a Queensland-based financial adviser.
ASIC’s concerns related to advice about insurance products from June 2015 to August 2016, in particular that both authorised representatives were alleged by ASIC to have:
- Failed to act in the best interest of clients in relation to personal advice;
- Advised clients to switch insurance products when it was not appropriate;
- In some instances, failed to consider all costs, risks, benefits and disadvantages when advising clients to switch from an existing insurance product into a recommended new insurance policy; and
- Used generic Statement of Advice templates when making Financial Product Advice recommendations to clients.
An Enforceable Undertaking is costly and time consuming to implement. It can be avoided by ensuring that steps are taken to have proper processes in place to satisfy the best interest duty obligations. You can download the Enforceable Undertakings here 030133375 and 030133378.
We are aware that sometimes, licensees believe that by checking with their peers, they are following good practices deemed acceptable to ASIC. This approach is highly risky because a licensee could be misguidedly relying on the practices of another organisation which has misinterpreted the legal requirements and ASIC’s regulatory expectations. We suggest that all licensees should obtain professional advice from compliance experts rather than rely on their peers.
Know Compliance has extensive practical experience in compliance and our staff come from diverse regulatory (including ASIC), academic and financial services industry backgrounds. In addition to licensee audits and individual client file reviews, we can conduct reviews of your business model and operational practices to assist you to reduce the likelihood of compliance breaches. Should there be deficiencies, we can assist you to make improvements and be more efficient. To discuss how we can help please contact Mr Leon Betheras (Director, Know Compliance) on (03) 9689 1186.