Case note: penalty for breach of financial adviser best interests duty

In ASIC v Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) [2017] FCA 1267 the Federal Court of Australia determined the penalties payable by the company for its breaches of section 961B of the Corporations Act by failing to take reasonable steps to ensure that it provided advice that complied with the best interests duty obligations and section 961G of the Corporations Act by failing to take reasonable steps to ensure that its representatives provided advice that was appropriate to its clients. Background (liability reasons)

The court ordered that the company pay a pecuniary penalty to the Commonwealth in the amount of $250,000 in respect of the contraventions by the company and a pecuniary penalty to the Commonwealth in the amount of $750,000 in respect of the contraventions by its representatives. It was also ordered to pay $50,000 on account of ASIC’s costs.

The company admitted that it failed to take reasonable steps to ensure compliance by its representatives with the obligation imposed by s 961B(1) (the “best interests duty”) and the obligation imposed by s 961G (the “appropriate advice duty”) by reason of the following practices and policies:
(a) the new client advice process;

(b) training of NSG Representatives;

(c) NSG’s systems for monitoring and supervising representatives;

(d) external audits;

(e) compliance policies; and

(f) sales targets and remuneration.

The clients were commonly sold insurance and advised to roll over superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements.

Justice Moshinsky made the following observations in respect of the penalty:

First, it is not suggested that NSG’s conduct involved dishonesty.
Secondly, the circumstances in which the conduct took place include, relevantly, that at the very start of the transitional period relating to the relevant provisions, the eight year old daughter of Mr Tzouvelis passed away from a sudden childhood illness. This was only two weeks after the Future of Financial Advice reforms had passed into voluntary effect. Mr Tzouvelis entered into a period of intense grieving. The result was that NSG’s senior management was substantially impaired during the critical 12 months leading up to the compulsory implementation of the new Div 2 of Part 7.7A of the Act.
Thirdly, in relation to the size and financial position of NSG, during the relevant period it operated a substantial enterprise, with commissions received (before expenses) in the millions of dollars.
Fourthly, NSG has co-operated with ASIC, including in reaching an agreement in relation to the declarations of contraventions and the ASOF.
Further, in relation to the proposed pecuniary penalty, NSG has also reached an agreement with ASIC. I take NSG’s agreement to the proposal of a substantial penalty to demonstrate its recognition of the seriousness of its contraventions. Further, I note that Mr Tzouvelis has expressed contrition in his affidavit evidence.
Taking the above matters into account, I consider the penalty proposed by the parties, namely $1 million for both the contraventions of ss 961K(2) and 961L, to be appropriate. For the reasons indicated, I consider that separate penalties should be imposed for the s 961K(2) contraventions and the s 961L contraventions. In this regard, I consider the proposed amounts with respect to the two sets of contraventions (namely, $250,000 for the s 961K(2) contraventions and $750,000 for the s 961L contraventions) to be appropriate. In summary, I consider that these penalties, which are substantial, appropriately recognise the seriousness of the offending as well as the other circumstances of this case.

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