What is expected of a Licensee: the decision of Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2)

13 August 2021

Australian Securities and Investments Commission (ASIC) commenced proceedings against RI Advice Group Pty Ltd (RI) (an Australian Financial Services License holder and a former subsidiary of ANZ), alleging that RI failed to adequately supervise the conduct of one of its former authorised representatives – John Doyle and his company.

ASIC’s alleged that Mr Doyle breached the Best Interest Obligations (set out in ss961B, 961G, 961H and 961J of the Corporations Act) by not acting in his clients’ best interests, providing inappropriate advice and failing to put his clients’ interests first.

Mr Doyle admitted these breaches.

ASIC’s claim against RI was that it had breached s961L of the Corporations Act by failing to take reasonable steps to ensure that Mr Doyle, as its authorised representative, complied with the Best Interest Obligations.

The Federal Court found for ASIC.

The Federal Court also found that RI failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly and therefore held that it also contravened s912A(1)(a) of the Corporations Act.

It is important to note that the fact an authorised representative has contravened the Best Interests Obligations does not of itself establish that the AFSL holder has contravened its obligations under s961L.

ASIC’s case against RI

ASIC’s case against RI was that:

  1. RI​ knew or ought to have known that Mr Doyle was not meeting RI’s standards and was not complying with its business rules, such that there was a substantial risk that he was breaching the Best Interests Obligations;
  2. 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”;
  3. as a result, ANZ undertook further file reviews, which identified similar issues with Mr Doyle’s advice;
  4. even then, RI kept Mr Doyle on as an authorised representative for another year; and
  5. by doing so, RI ensured that Mr Doyle’s clients and their funds under management (FUM) 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.

Inadequate policies and procedures of RI

His Honour emphasised that RI had an obligation to ensure that its policies and procedures include a process that monitors compliance and operative to actively identify if the policies and procedures are being circumvented. It was found that RI did not have adequate policies or processes in place to check when, for example, Mr Doyle was:

  • avoiding advice quality checks and bypassing compliance processes;
  • recommending inappropriate financial products to clients; or
  • recommending products that were not on RI’s approved product list.

What is expected of an AFSL holder to comply with its duty in section 961L?

In answering this question, the Federal Court highlighted, with reference to previous authorities, which may require the Licensee to:

  • take steps to ensure representatives are competent;
  • monitor and supervise representatives (including in relation to advice processes, advice quality and conflicts of interest);
  • ensure compliance concerns are escalated; and
  • take action that is commensurate with the risks presented by such concerns.

Conclusion

ASIC Deputy Chair Sarah Court commented on the outcome, stating that ‘Financial advice licensees need to understand that they can be liable if their advisers do not act in the best interests of their clients and do not prioritise their clients’ interests over their own.’2

This decision highlights the importance of Licensees actively and consistently monitoring compliance with their policies and procedures. If they fail to do so the defence of hindsight bias or lack of actual knowledge may do little to buffer the consequences.

The penalty hearing for RI and Mr Doyle has not yet been set.

This article was written by Rebecca Jaffe, Partner and Alex Porz, Solicitor. 

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