For the first time we get a read on how the Future of Financial Advice (FOFA) reforms will be interpreted by the courts.
ASIC says the Federal Court has found that Melbourne-based financial advice firm NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) (NSG) breached the best interests obligations of the Corporations Act introduced under the Future of Financial Advice (FOFA) reforms.
This is the first finding of liability against a licensee for a breach of the FOFA reforms.
This matter relates to financial advice provided by NSG advisers on eight specific occasions between July 2013 and August 2015. On these occasions, clients were sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable, and unnecessary financial arrangements.
NSG consented to the making of declarations against it and after a hearing on 30 March 2017 the Court was satisfied that declarations ought to be made.
The Court found that NSG’s representatives:
- breached s 961B of the Corporations Act by failing to take reasonable steps to ensure that they provided advice that complied with the best interests obligations; and
- breached s 961G of the Corporations Act by failing to take reasonable steps to ensure that they provided advice that was appropriate to its clients.
Those breaches amounted to a contravention by NSG of s 961L of the Corporations Act, which provides that a financial services licensee must ensure its representatives are compliant with the above sections of the Act.
The Court made the declarations based on 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 representatives would only be compensated by way of commission for sales of life insurance products and superannuation rollovers.
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”.
ASIC has sought orders that NSG pay pecuniary penalties in relation to the declarations made. A date for the hearing on penalty will be fixed by the Court.
Background
On 3 June 2016, ASIC commenced proceedings against NSG in the Federal Court (refer: 16-187MR).
ASIC has banned Mr Adrian Chenh and Mr Bill El-Helou from providing financial services for a period of five years each following an ASIC investigation.
ASIC’s investigation found that Mr Chenh and Mr El-Helou provided advice to clients that was in breach of the best interests duty introduced under the Future of Financial Advice (FOFA) reforms.
ASIC found that Mr Chenh and Mr El-Helou had:
- failed to act in the best interests of clients in that the advice provided did not leave them in a better position;
- failed to provide advice that was appropriate to the clients; and
- failed to provide financial services guides, product disclosure statements and statements of advice.
An additional finding was made that Mr El-Helou was not adequately trained, or not competent, to provide financial services.
ASIC deputy Chairman Peter Kell said, ‘Financial advisers must act in the best interests of their clients and provide advice that is appropriate. ASIC is committed to raising standards in the financial advice industry.’
Mr Chenh and Mr El-Helou both have a right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decisions. Mr Chenh has exercised his right of appeal and filed an application for review on 21 March 2017.
Background
ASIC has commenced proceedings against NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) (NSG) for breaches of the “best interests obligations” contained in the Corporations Act, and is seeking declarations of breaches and financial penalties (refer: 16-187MR). A hearing on liability occurred on 30 March 2017.
Both Mr Chenh and Mr El-Helou, previously representatives at NSG, gave financial product advice, particularly in relation to superannuation and insurance.
