Case note: financial adviser best interests duty

In Australian Securities and Investments Commission, Re NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345 the Federal Court made declarations of contravention of the adviser’s best interests duty as a result of the adviser’s clients being sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable, and unnecessary financial arrangements.

In the first case on this issue, 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.

However Justice Moshinsky observed:

“It was common ground that, while s 961B is concerned with the process or procedure involved in providing advice that is in the best interests of the client, s 961G is concerned with the content or substance of that advice. At first blush, the text of s 961B does not appear to support the proposition that s 961B is concerned with the process or procedure involved in providing advice that is in the best interests of the client. However, support for this way of viewing the focus of s 961B is provided by the context in which it appears, including the language of s 961G, the legislative history, and the legislative materials …. It is unnecessary for present purposes to reach a concluded view on this issue.”

The key agreed facts were:

  • The system at NSG for providing advice to new retail clients was designed to be completed quickly. Although new clients spoke with NSG staff over the telephone before meeting an adviser, the substantial majority of client instructions were provided at the sole meeting between the client and NSG representative. NSG provided its representatives with a detailed ‘Client Fact Finder’ form to assist with obtaining client instructions, but did not regularly check whether the Client Fact Finders were accurate, and NSG Representatives often completed forms after the client meeting in the absence of the client. NSG Representatives provided advice at the client meeting, and sought and obtained instructions to implement the advice at the same meeting.
  • Clients were given little or no time to reflect on the advice by NSG Representatives before agreeing to implement the recommendations and advice. NSG had no system in place to ensure that clients received and approved the content of a written statement of advice (SOA) prior to the implementation of the financial advice, or at all. In the case of each of the clients identified in the ASOF, NSG Representatives prepared SOAs after the sole client meeting, and after the client had agreed to implement the advice.

The result of this process meant that NSG Representatives were able to give financial product advice:

(a) in the absence of proper, sufficient and complete instructions and information about the client’s objectives, financial situation and needs;
(b) without conducting research into appropriate financial products after the provision of complete instructions by the client;
(c) without comparing the client’s existing superannuation and life and risk insurance products with the client’s stated objectives, and with the products recommended by NSG; and
(d) prior to the preparation of a written SOA or the client receiving, and considering, the matters in a SOA.

The Court also concluded that:

• 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 has banned NSG representatives Mr Adrian Chenh and Mr Bill El-Helou from providing financial services for a period of five years each following an ASIC investigation.

Mr El-Helou has appealed.

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