Atkins and Australian Securities and Investments Commission
[2018] AATA 3223
•5 September 2018
Atkins and Australian Securities and Investments Commission [2018] AATA 3223 (5 September 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2017/4259
Re:Jason Atkins
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal:Senior Member Dr M Evans
Date:5 September 2018
Place:Perth
The Tribunal affirms the Banning Order Decision dated 12 July 2017.
................[sgd].......................................................
Senior Member Dr M Evans
CATCHWORDS
CORPORATIONS – 3 year banning order – financial services – self-managed superannuation fund advice – limited recourse borrowing arrangement advice – decision by Australian Securities and Investments Commission to make banning order prohibiting Applicant from providing financial services for 3 years – duration of banning order – failure to comply with a financial services law – advice vetted by financial services licensee – failure to act in best interests of clients – no findings of fraud or dishonesty – no complaints from clients – new evidence not before delegate – decision under review affirmed
LEGISLATION
Australian Securities and Investments Commission Act 2001 (Cth) – s 1(2)
Corporations Act 2001 (Cth) – s 760A, s 761A, s 920A, s 920A(1), s 920A(1)(da),
s 920A(1)(e), s 920A(1)(f), s 920B, s 920C, s 961B, s 961B(1), s 961B(2), s 961GCASES
Davidof and Australian Securities & Investments Commission [2017] AATA 2594
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; 46 FLR 409
Drake v Minister for Immigration and Ethnic Affairs(No 2) (1979) 2 ALD 634; AATA 179
Faulkner and Comcare [2007] AATA 1541
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; 52 NSWLR 705
Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler and Others [2002] NSWSC 483
Rich & Anor v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129
Shi v Migration Agents Registration Authority [2008] HCA 31; 235 CLR 286; 103 ALD 467
Tarrant and Australian Securities and Investments Commission [2013] AATA 926
SECONDARY MATERIALS
Australian Securities & Investments Commission Regulatory Guide 98 – Licensing: Administrative Action Against Financial Services Providers (April 2006)
Australian Securities & Investments Commission Regulatory Guide 175 – Licensing: Financial Product Advisers – Conduct and Disclosure (October 2013)
The Administrative Appeals Tribunal’s Guideline on Persons Giving Expert and Opinion Evidence. (30 June 2015, President Duncan Kerr J)
REASONS FOR DECISION
Senior Member Dr M Evans
5 September 2018
THE PROCEDURAL BACKGROUND
The Australian Securities and Investments Commission (ASIC) issued a notice of hearing dated 13 January 2017 (the s 920A Notice) pursuant to s 920A of the Corporations Act 2001 (Cth) (Corporations Act), which was personally served on the Applicant on 16 January 2017 (T2, para [9]).
Attachment A to the s 920A Notice stated that ASIC was concerned that:
(a)the Applicant may not have complied with a financial services law (s 920A(1)(e) of the Corporations Act);
(b)there may be reason to believe that he was not adequately trained, or was not competent, to provide a financial service or financial services (s 920A(1)(da) of the Corporations Act); and
(c)the Applicant may have contravened a financial services law (s 920A(1)(f) of the Corporations Act) (T4).
The s 920A Notice provided the Applicant with the opportunity to attend a hearing
(the s 920A Hearing) before a delegate of the Respondent (the Delegate) so that he could give evidence and make submissions before a decision was made. The Applicant elected to attend the s 920A Hearing, which took place on 12 April 2017 (T3). The Applicant had legal representation at the hearing.
The Delegate found that the Applicant had not complied with a financial services law
(s 920A(1)(e) of the Corporations Act) in her decision dated 12 July 2017 (T2, para [97]), and accordingly, she did not make findings in relation to the other areas of concern set out in Attachment A to the s 920A Notice (T4).Further, the Delegate found that ASIC’s power to make a banning order under s 920A(1) of the Corporations Act was enlivened, and after considering the Applicant’s conduct, the Delegate exercised her discretion to make a banning order (T2, para [98]).
The effect of the banning order dated 12 July 2017 was to prevent the Applicant from providing any financial services for a period of three years pursuant to s 920A of the Corporations Act (T2, page 8) (the Banning Order Decision).
On 19 July 2017, the Applicant applied to the Tax and Commercial Division of the Administrative Appeals Tribunal (the Tribunal) for a review of the Banning Order Decision (T1).
ISSUE
At the hearing, the Applicant agreed that he did not comply with a financial services law by failing to act in the best interests of his clients (s 961B(1) of the Corporations Act) and further agreed that the Respondent’s power to make a banning order was enlivened (under s 920A(1)(e) of the Corporations Act). After considering the evidence and submissions in this matter, the Tribunal agrees with this position.
Consequently, the sole issue for determination by the Tribunal is the duration of the banning order.
MATERIAL BEFORE THE TRIBUNAL
The application was heard by the Tribunal on 14 June 2018. Mr TJ Palmer was counsel for the Applicant, instructed by Mr D Miller from Culshaw Miller Lawyers. Ms L Black was counsel for the Respondent, instructed by Mr M Povey of ASIC.
The hearing proceeded on the basis of submissions by counsel because the sole issue for determination by the Tribunal was the duration of the banning order to be imposed. Both the Applicant and the Respondent did not propose to call any witnesses.
The following documents were put into evidence at the hearing on 14 June 2018:
(a)Witness Statement of Jason Atkins, dated 16 April 2018 (Exhibit A1);
(b)Supplementary Witness Statement of Jason Atkins, dated 7 May 2018 (Exhibit A2);
(c)Applicant’s Statement of Facts, Issues and Contentions, received by the Tribunal on 16 April 2018 (Exhibit A3);
(d)Respondent’s s 37 documents, comprising of four volumes including documents T1 to T106 (Exhibit R1);
(e)Respondent’s Supplementary s 37 documents, including documents ST1 to ST10 (Exhibit R2);
(f)Respondent’s Statement of Facts, Issues and Contentions, dated 22 December 2017 (Exhibit R3);
(g)Respondent’s Reply to the Applicant’s Statement of Facts, Issues and Contentions, dated 21 May 2018 (Exhibit R4);
(h)Expert Report by Mr Patrick Canion, Certified Financial Planner, dated 12 December 2017 (Exhibit R5);
(i)Witness Statement of Mr David Jeyaratnam, Analyst employed by ASIC, dated 21 December 2017 (Exhibit R6);
(j)Statement of Craig Turner, Senior Specialist employed by ASIC, dated 27 October 2016 (Exhibit R7); and
(k)a comparative table titled “1. Cost of Managing Superannuation Portfolio Comparison” prepared by Mr Craig Turner (Exhibit R8).
Exhibit R8 was submitted to the Tribunal by counsel for the Respondent on the date of the hearing, and was put into evidence. As counsel for the Applicant had not had the opportunity to view Exhibit 8 and to obtain instructions from the Applicant prior to the hearing, the Tribunal afforded the parties the opportunity to make written closing submissions with respect to Exhibit 8. These submissions were contained in the following documents:
(a)the Applicant’s Supplementary Submissions, received by the Tribunal on 22 June 2018;
(b)the Respondent’s Reply Submissions, received by the Tribunal on 29 June 2018, attaching copies of the following documents:
(i)Handbook 322-2007 produced by Standards Australia titled “Reference Checking in the Financial Services Industry”;
(ii)ASIC Regulatory Guide 104 titled “Licensing: Meeting the general obligations”;
(iii)an ASIC Current & Historical Company Extract of Wealth Plus Solutions Pty Ltd (Wealth Plus), date 27 June 2018; and
(iv)an extract taken from ASIC’s database on 27 June 2018 showing authorisation by MyPlanner Professional Services Pty Ltd (MyPlanner) to Wealth Plus; and
(c)an email dated 4 July 2018 from the Applicant’s lawyers which contains several submissions in reply to the Respondent’s Reply Submissions.
Two of the Exhibits described above, which ASIC now seeks to rely upon, were not before the Delegate (Exhibit A3, para [6]). These were the expert report by Mr Patrick Canion and the Witness Statement of Mr David Jeyaratnam (Exhibits R5 and R6). The Tribunal can consider new evidence that was not before the original decision maker. In Shi v Migration Agents Registration Authority [2008] HCA 31 at para [143], Kiefel J explained:
Where the decision to be made contains no temporal element, evidence of matters occurring after the original decision may be taken into account by the Tribunal in the process of informing itself. Cases which state that the Tribunal is not limited to the evidence before the original decision-maker, or available to that person, are to be understood in this light. It is otherwise where the review to be conducted by the Tribunal is limited to deciding the question by reference to a particular point in time.
The Banning Order Decision does not have a temporal element, and it is therefore open to the Tribunal to consider this new evidence. In doing so, the Tribunal is mindful that the parties must be afforded procedural fairness, and in this case, both parties made written and oral submissions, in particular, regarding the evidence of Mr Canion. Mr Canion’s report will be discussed under the heading of “expert evidence”.
Regarding the Witness Statement of Mr David Jeyaratnam (Exhibit R6), the Tribunal notes that it primarily relates to advice given to an additional client, Mr G. ASIC also sought to rely on documents filed with respect to Mr G (Exhibit R2, ST2 to ST10) who was also discussed in Mr Canion’s Report (Exhibit R5, paras [11.51]-[11.54]). However, these documents primarily related to the issue of whether the Applicant acted in the best interests of his clients, which has been conceded by the Applicant. Further, Mr Jeyaratnam, as well as Mr Turner who also provided a Witness Statement (Exhibit R7), are employees of ASIC. Additionally, Mr Jeyaratnam was present at the s 920A Hearing. Consequently, whilst these reports contain relevant background information, they cannot be relied upon as independent expert reports.
The Tribunal has given consideration to the written and oral submissions of the parties, together with all the documentary material before it and is satisfied that the parties have had an adequate opportunity to be heard by the Tribunal.
BACKGROUND FACTS
The Applicant substantially agreed with the facts set out in the Respondent’s Statement of Facts, Issues and Contentions dated 22 December 2017 (Exhibit A3, para [9]) and raised some additional relevant facts in Exhibit A3 and the Supplementary Submissions.
In a statement dated 6 April 2017, the Applicant stated that he has been involved in the financial services industry since 1997 (Exhibit R1, T97, para [3]). He is qualified as a financial advisor and a mortgage broker, but as will be explained below, has not practised as a financial advisor since October 2015 (T97, paras [3]-[4]).
In his statement, the Applicant stated his qualifications to include a Bachelor of Commerce (majoring in Economics and Finance) (1996), and a Diploma of Financial Planning which was completed through the Financial Planning Association (2004) (Exhibit R1, T97, paras [5] and [6]). Additionally, the Applicant completed the requirements to be a Self Managed Superannuation Fund (SMSF) Specialist Advisor through the Self Managed Superannuation Fund Association (2011), and has completed a Diploma of Finance and Mortgage Broking Management (2013) (T97, paras [5]-[9]). Up until he ceased working as a financial planner in October 2015, the Applicant completed the CPD requirements of a financial advisor and a SMSF Specialist Advisor (T97, para [11]).
The Applicant was an authorised representative of Financial Wisdom Limited between 4 September 2006 and 13 June 2013 (Exhibit R3, para [8]; Exhibit R1, T2, para [24];
Exhibit R1, T3).
The Applicant was also an authorised representative of Genesys Wealth Advisors Limited (Genesys) between 14 June 2013 and 8 May 2015 (Exhibit R1, T2, para [22], page 11). Genesys is owned by AMP Ltd (AMP) (Exhibit A3, para [10]).
Whilst the Applicant was an authorised representative of Genesys, any advice he prepared that involved a limited recourse borrowing arrangement (LRBA), or a SMSF had to be submitted and approved by AMP before being provided to the client (Exhibit A3, paras [15] and [17]).
Whilst an authorised representative of Genesys, the Applicant also underwent annual audits, which were conducted by AMP (Exhibit A3, para [23]). He received a B rating on his audit report on 27 February 2014, and an A rating on his audit report on 25 February 2015 (Exhibit A3, para [20]).
In a letter to ASIC dated 8 May 2015, Genesys advised that with respect to the last five statements of advice that the Applicant submitted to AMP for vetting, two were rejected because they did not meets AMP’s requirements and that “[t]hese SOAs [Statements of Advice] had to be amended before being provided to clients because Mr Atkins had not clearly explained the strategy and the risks in the SoAs” (Exhibit R1, T13). In the statement dated 16 April 2018, the Applicant stated that he had not seen a copy of this letter until the s 902A Notice of hearing was issued in January 2017 (Exhibit A1, para [10]).
In 2015, AMP decided to close Genesys, and the Applicant became an authorised representative of Magnitude Group Pty Ltd (Magnitude) from 11 May 2015 to 11 December 2015, having been appointed by Wealth Plus (Exhibit A3, para [21]; Exhibit R3, para [6]). Magnitude is owned by Westpac Ltd (Westpac) (Exhibit A3, para [11]).
Before accepting the Applicant as an authorised representative, Magnitude undertook a due diligence of the Applicant and his business, including reviewing advice provided under Genesys (Exhibit A3, para [22]). No concerns were raised by Magnitude following this due diligence process (Exhibit A3, para [23]).
Magnitude suspended the Applicant as an authorised representative in October 2015 and terminated the Applicant’s authorisation in December 2015 (Exhibit R1, T97, para [99]; Exhibit R3, para [6]).
The Applicant has not practised as a financial adviser since October 2015 (Exhibit R1, T97, para [4]; Exhibit A3, para [12]). The circumstances relating to the Applicant ceasing to work as a financial advisor are discussed below in para [94]. It was noted at the hearing that the Applicant is currently working as a mortgage broker (see also Respondent’s Reply Submissions, para [16]).
The Applicant was a Director of Wealth Plus, which was an authorised representative of Magnitude from 11 May 2015 to 11 December 2015, and from 12 December 2015 to approximately 3 April 2017 (Exhibit R3, para [5]; Exhibit R1, T9 and T10). During this time, the Applicant had a 45% (as amended from 47% by an email from the Respondent dated 3 July 2018) shareholding in Wealth Plus (Respondent’s Reply Submission dated 29 June 2018, para [18]; email dated 3 July 2018 from the Respondent’s lawyers in response to Respondent’s Reply Submissions). On approximately 4 April 2017, Wealth Plus became an authorised representative of MyPlanner (Exhibit R3, para [9]; Exhibit R1, T97, para [15], page 1945).
In summary, the concerns expressed by ASIC in the s 920A Notice relate to advice given by the Applicant to five clients (the Clients) whilst the Applicant was an authorised representative of Magnitude and Genesys (Exhibit R3, paras [16]-[17]). This advice was with respect to superannuation, life-insurance, total and permanent disability, income protection and trauma insurance products (Exhibit R1, T4, para [8]; Exhibit R3, para [16]).
ASIC’s main area of concern, however, was in relation to advice given by the Applicant in the area of self-managed superannuation and property investment. Specifically, the commonality between the Clients was that each had approached the Applicant for advice about establishing a SMSF in order to acquire an investment property (Exhibit A3, para [32]). This involved utilising a limited recourse borrowing arrangement (LRBA) to acquire the investment property (Exhibit A3, para [31]).
The Applicant prepared a Statement of Advice (SOA) for each client (Exhibit A3, paras [25]-[33]). More specifically, as described by the Applicant (Exhibit A3, para [33]):
Each statement of advice contained a recommendation for the client to:
(a)establish a self managed superannuation fund;
(b)roll over all or most of their existing superannuation into the self managed superannuation fund; and
(c)implement a limited recourse borrowing arrangement and purchase an investment property.
The findings of the ASIC Delegate in her Statement of Facts, Findings and Reasons for Decision dated 12 July 2017 (Exhibit R1, T2) were succinctly summarised by the Applicant (Exhibit A3, para [3]):
The Delegate found that Mr Atkins had failed to properly identify the subject matter of the advice being sought by the client. The Delegate found that he should have concluded that the subject matter of the advice being sought was retirement planning, rather than using the client’s superannuation to invest in property. The Delegate also found that Mr Atkins had failed to make reasonable investigation into the financial products that might permit the clients’ objective of planning for retirement and to permit the client to be properly advised.
In the decision of the Delegate, the Delegate quoted the following submissions made by the Applicant (Exhibit R1, T2, para [104.8]):
He has learned a great deal from the notice and the issues that ASIC has raised, including among other things, the need to improve documentation and to press clients as to why they want a particular strategy. As a result of reviewing the notice and also comments from Mr Craig Turner of ASIC, he recognises the need:
(a)to clearly set out the goals and objectives of the clients and in particular the reasons behind those goals and objectives and challenge the clients where necessary;
(b)to better define the scope of the advice;
(c)to address retirement planning no matter what the age or circumstance of the client;
(d)to document all comparisons; and
(e)to expand on file notes of discussions with clients.
The Delegate further stated (Exhibit R1, T2, para [105]):
105I accept that Mr Atkins:
105.1 has learned a great deal since having his authorisation terminated and from the hearing process;
105.2 believed he was complying with the best interests duty as he understood it from working with Genesys and Magnitude;
105.3 is sincere in wanting to be compliant; and
105.4 has adopted a proactive approach to improving Wealth Plus’ processes.
With respect to the gravity of the matter, the Delegate stated (Exhibit R1, T2, para [109]):
The potential risk to clients where the best interests duty is not met is very serious. This is amplified where the advice involves financial products that include relatively higher risk features such as LRBA’s, lack of diversification and potential liquidity issues plus the responsibilities and costs associated with a SMSF structure.
With respect to the scope and duration of the banning order, the Delegate stated (Exhibit R1, T2, para [110]):
It was submitted that if a banning order were to be made, it should be limited to advice regarding SMSFs or in particular LRBAs within SMSFs. The issue is not about Mr Atkins giving advice about SMSFs in itself. The issue is that Mr Atkins’ conduct in relation to the advice he gave the clients shows a fundamental lack of understanding of what was required of him to comply with the best interests duty and the application of a significantly flawed process.
The Delegate concluded that (Exhibit R1, T2, para [114]):
Having regard to my factual findings and RG 98, I am satisfied that a banning period in the lower range is warranted. I will make an order prohibiting Mr Atkins from providing any financial services for a period of three (3) years.
The Tribunal has summarised the decision of the Delegate in order to provide details of the factual background to this matter. It is the Tribunal’s role to hear the matter again from the beginning (a hearing “de novo”) and to look at the merits of the individual case before it. It is not the role of the Tribunal to find flaws in the original decision, but rather, to make a new decision (see Senior Member Hunt in Faulkner and Comcare [2007] AATA 1541 at 27; Drakev Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; 46 FLR 409 at 419 per Bowen CJ and Deane J).
None of the Clients have complained to the Applicant’s licensee or to ASIC about the advice that they received from the Applicant. Each of the Clients (save for one client who was not included in the original notice of hearing) provided testimonials in support of the Applicant for the notice of hearing proceedings (Exhibit R1, T97, both paragraphs numbered [115]; Exhibit A3, para [121]).
The Applicant had not been the subject of any other administrative or disciplinary action by ASIC or any other regulator, prior to the banning order of 12 July 2017 (A3, para [13]).
EXPERT OPINION
As noted above, the expert report by Mr Canion (Exhibit R5) was not before the original decision maker, but is relevant to a consideration of the length of the banning order, particularly in terms of the seriousness of the Applicant’s conduct.
On 10 November 2017, ASIC wrote to Mr Canion to request his expert opinion with respect to the financial product advice and recommendations made by the Applicant to the Clients (Letter annexed to Exhibit R5). Mr Canion provided his report dated 18 December 2017 (Exhibit R5). Although the report was requested by ASIC, Mr Canion wrote the report as an independent expert witness, and acknowledged that he had an overriding duty to provide impartial assistance to the Tribunal (Exhibit R5, para [12.0]). He further acknowledged that his report was prepared in accordance with the Tribunal’s Guideline on “Persons giving Expert and Opinion Evidence” (Exhibit R5, para [1.0]).
In this report, Mr Canion outlined his qualifications and experience. He stated that he is a Certified Financial Planner and holds a Master of Applied Finance and Investments Degree. He has been employed in the financial services industry since 1985 and has been practising as a financial advisor for most of that time. He is also a graduate member of the Australian Institute of Company Directors and is the Chief Executive Officer and director of a personal financial advice firm employing 20 staff and advising on client assets of approximately $700 million in total. Further, he has personally advised on SMSFs and LRBAs and has supervised financial advisors in those areas (Exhibit R5, paras [2.0]-[2.4]).
Mr Canion was not called to give evidence at the hearing, however, the Tribunal has considered, and heard submissions from the parties about his expert report. Counsel for the Applicant submitted at the hearing that the report contained a mix of expert evidence and fact-finding whereby Mr Canion had reviewed the statements of advice himself and had drawn his own factual conclusions.
Counsel for the Applicant stated at the hearing that the Applicant generally accepted Mr Canion’s opinion on the quality of the advice he gave to the Clients, but expressed some reservations about some factual errors in the report, which he conceded were probably peripheral to the issue before the Tribunal in the circumstances. For example, counsel for the Applicant commented that in paragraph 10.2 of the report, Mr Canion appeared to suggest that with respect to all Clients no specific investment property had been identified, whereas the Delegate had correctly identified that all Clients but one referred to a specific property. As such, counsel for the Applicant submitted that in accordance with Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; 52 NSWLR 705 (Makita), the Tribunal should give little or no weight to the factual conclusions of Mr Canion, and submitted that the Tribunal could make factual findings based on the other material before it.
The following commentary from the judgment of Heydon JA in Makita (para [64]) is relevant:
The basal principle is that what an expert gives is an opinion based on facts. Because of that, the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to fact on which the opinion is based. If other admissible evidence establishes that the matters assumed are ‘sufficiently like’ the matters established ‘to render the opinion of the expert of any value’, even though they may not correspond ‘with complete precision’, the opinion will be admissible and material.
And further, His Honour stated that (para [85]):
In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of ‘specialised knowledge’; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be ‘wholly or substantially based on the witness’s expert knowledge’; so far as the opinion is based on facts ‘observed’ by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on ‘assumed’ or ‘accepted’ facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert’s evidence must explain how the field of ‘specialised knowledge’ in which the witness is expert by reason of ‘training, study or experience’, and on which the opinion is ‘wholly or substantially based’, applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert’s specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight.
The Tribunal is of the opinion that the report of Mr Canion is consistent with the aspects of admissible opinion evidence identified in Makita. He is an expert by virtue of his training, study and experience and he has given opinions which are wholly based on his expert knowledge. He has clearly set out the facts on which he has based his opinion, the facts of which can also be objectively ascertained by the Tribunal from the other material before it. He has also shown the reasoning process by which he reached his opinions in his report.
Additionally, the Applicant has conceded that he did not act in the best interests of his Clients and therefore, the Tribunal does not rely on any factual findings made by Mr Canion in that regard. Mr Canion’s report does, however, provide some guidance that is relevant to assisting the Tribunal to assess what a reasonable adviser would have done in the same circumstances. This is relevant to a consideration of the length of the banning order, particularly in terms of the nature and seriousness of the Applicant’s misconduct.
Mr Canion stated that a “SMSF/Property strategy” is (Exhibit R5, para [9.0]):
… in my opinion … a sophisticated and advanced financial planning strategy. It interacts with a number of financial planning aspects, and once implemented, is in place for many years and potentially plays a very large role in a client’s financial life.
With respect to the complexity of using a SMSF to purchase property, Mr Canion further stated that (Exhibit R5; para [9.7]):
SMSF/Property strategy is a complex and advanced strategy, which in my opinion is typically engaged in by experienced clients with strong personal balance sheets and existing, well-diversified portfolios. This is because there are a number of additional costs and risks associated with this strategy, that do not exist in typical public-offer superannuation funds.
Further, Mr Canion noted (Exhibit R5; para [9.10]):
Almost every person considering a SMSF/Property strategy would have an existing superannuation fund. Therefore, the question that a reasonable financial adviser needs to ask when recommending this strategy is: ‘Is the property asset intended to be purchased, going to sufficiently outperform the client’s existing portfolio to compensate for the increased costs associated with the SMSF and the increased investment risk due to diminished investment diversification?’
Mr Canion made the following “general comments” about the Statements of Advice prepared by the Applicant (Exhibit R5, paras [10.0]-[10.1]):
10.0In all files that were reviewed, I observed a number of deficiencies in the collection of data and the presentation of recommendations in the Statements of Advice. These ranged from inaccurate recording of information to incomplete fact-finds to inappropriate benchmarks for investment recommendations. In answering this question, however, I have focussed on the most relevant aspects that have influenced my opinion as it relates to acting in the best interest of the client.
10.1The Statements of Advice were very similar in content and suggested a ‘one size fits all’ approach to advice that was independent of the particular client’s individual circumstances.
Mr Canion further commented, with respect to the Statements of Advice, that (Exhibit R5, paras [10.3]-[10.5]):
…all client files had relatively low superannuation account balances. All but one client was below the minimum $200,000 balance suggested by ASIC in INFO206 (a copy of which is attached to this report) as to what should be considered for a retail client.
10.4All files recommended a SMSF/Property strategy with the addition of gearing this investment through the use of Limited Recourse Borrowing Arrangements (‘LRBA’). The use of leveraging exponentially increases the investment risk.
10.5All files also equated an expressed interest in a SMSF/Property strategy as a goal. In my opinion, this is not a goal, it is one possible solution to a goal. By contrast, a goal may be expressed as ‘to provide tax-effective income in retirement’, and a SMSF/Property strategy, may be one possible pathways towards achieving that goal. This indicates that Atkins did not adequately identify the clients’ goals and hence did not act in their best interests.
With respect to the deficiencies in each client’s file, and the actions that the Applicant ought to have taken, Mr Canion stated (Exhibit R5, paras [11.0]-[11.5]):
11.0In my opinion, Atkins has not adequately undertaken all actions that would be regarded in the best interests of the client. There were a number of deficiencies in each file. All files had the following deficiencies in common:
(a)Unsatisfactory identification and exploration of the clients’ objectives and needs;
(b)Inappropriate alternative strategies were used to compare against recommended strategies, resulting in the lack of any ‘like-for-like’ comparisons;
(c)Insufficient investigation into and/or misrepresentation of investment options with existing investments;
(d)Investment recommendations that materially varied from the client’s stated asset allocation targets with resulting lack of investment diversification;
(e)Insufficient basis for investment projections; and
(f)Inappropriately limiting the scope of advice.
11.1 Each client file had, as a client’s primary need, some variation of the SMSF/Property strategy as the client’s objectives or goals. This strategy is a possible solution to a goal, not a goal in itself. A financial adviser acting in a client’s best interests is not simply an order-taker, assisting a client to transact whatever their particular interest is, regardless of the consequences. A financial adviser has a duty to explore and understand the underlying driver of an expressed interest, so that they can determine if that solution is likely to leave the client in a better position.
11.2 Part of that process is also to explore with the client, alternative solutions that the client may not be aware of or understand. I saw no evidence of this on the client files. Rather, Atkins typically repeated the expressed interest as a goal and then mirrored this with his recommendation.
11.3 Alternative strategies are an important element of advice, as they demonstrate a deep understanding of the client’s goals and an explanation as to why similar alternatives have been discounted in favour of the recommended strategies. It stands then, that these alternatives should include the most similar financial products and investment strategies that are likely to be used, rather than a construct that avoids a ‘like-for-like’ comparison.
11.4In all cases, in my opinion, Atkins failed to include the two most appropriate alternative strategies for comparison:
(a)Accessing property through managed funds and/or property trusts; and
(b)Remaining with a client’s existing superannuation fund and simply increasing contributions.
11.5 Both of these alternatives would have satisfied a client’s desire for exposure to property as an asset class, albeit not in a direct capacity. Both would have been a simpler and less expensive solution. Most importantly, both these comparisons would have highlighted the relative costs, risks and benefits of a SMSF/Property strategy (with a LRBA) very clearly. This would assist the client to make an informed decision as to whether the qualitative benefits as this strategy represented value to the client.
Further, Mr Canion stated in his report that (Exhibit R5, paras [11.8]-[11.9]):
11.8Despite recording the preferred asset allocation, every file recommended an immediate concentration into property without (beyond boilerplate warnings) any discussion on how this might affect volatility or returns. Nor was there any plan for how the portfolio would be brought back to the appropriate asset allocation over the coming years. Atkins ought to have included this discussion or declined to make the recommendation that resulted in this concentration.
11.9All files contained projections as to future cashflows and investment values. Many of the recommendations as to property purchase price, LRBA amounts, gearing levels, and superannuation contributions were at least partly dependent on assumptions as to property rental yields. Yet there was no link between these assumptions and the actual historic investment performance of a particular investment property. The property investment assumptions used appear to be based on the ASX300 REIT index, which is essentially composed of large capitalisation property trusts, whose underlying assets are typically office buildings, shopping centres and other commercial property. In my opinion, this index is not an appropriate proxy for a projecting rental and growth yields for a single residential property.
The Tribunal notes the Applicant’s disagreement with Mr Canion’s observations in 11.9 above. The Applicant submitted that (Applicant’s Supplementary Submissions, para [6(b)]):
Mr Canion in his report at paragraph 11.9 states that the property investment assumptions used appear (underline added) to be based on the ASX 300 REIT Index. This is not correct. The investment assumptions are based on the licensee’s assumptions for growth – that the is the (sic) property is modelled on a 2% growth rate (save for … [Mr B] … at 4%), the initial yield is modelled at 5% (and the income is not indexed over the 5-year period and expenses increase on a assumed CPI of 2.5% (see for example T29 page 514). (Original emphasis.)
The Tribunal accepts this submission from the Applicant.
Mr Canion noted the following with respect to the advice given by the Applicant (Exhibit R5, para [11.31]):
11.31 In my opinion, Atkins did not provide appropriate advice to any of the clients. This is because:
(a)All clients were not in a better position as a result of following the advice provided, as evidenced by:
(i) the significant establishment costs and significantly higher ongoing costs of the SMSF/Property Strategy; and
(ii) The reduction in diversification in type and quantity of assets that varied materially from the clients’ expressed investment risk profile.
(b)Although each client expressed an interest in direct residential property, a cost-effective, viable and appropriate option for each of them at the time would have been to access professionally managed property in their existing superannuation fund; and
(c)If the clients’ preference for direct residential property was so strong that they declined to consider alternatives, Atkins should have declined to provide the advice because of the facts described in (a) above.
LEGISLATION AND POLICY
This section will set out relevant provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Corporations Act. It will also discuss relevant policy guidelines, namely the Australian Securities & Investments Commission Regulatory Guide 175 – Licensing: Financial Product Advisers – Conduct and Disclosure (October 2013) (RG 175), and Australian Securities & Investments Commission Regulatory Guide 98 – Licensing: Administrative Action Against Financial Services Providers (April 2006) (RG 98).
Regulatory Guides
With respect to RG 175 and RG 98, the Tribunal agrees with and applies the following analysis of President Kerr and Senior Member Redfern (as she then was) in Tarrant and Australian Securities and Investments Commission [2013] AATA 926:
20Simply deciding the matter in accordance with ASIC policy without regard to whether a more appropriate outcome might have been reached would be an error of law. In Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 Bowen CJ and Deane J stated at 590:
...the Tribunal is not, in the absence of specific statutory provision, entitled to abdicate its function of determining whether the decision made was, on the material before the Tribunal, the correct or preferable one in favour of a function of merely determining whether the decision made conformed with whatever the relevant general government policy might be.
It is in that context that Brennan J’s oft cited observations as President of the AAT in Re Drake and Minister for Immigration and Ethnic Affairs (Drake No 2) [1979] AATA 179; (1979) 2 ALD 634 that the Administrative Appeals Tribunal is entitled to have regard to government policy unless the policy is unlawful or there are cogent reasons to the contrary must be understood. Those remarks are often cited as if they preclude challenge to the soundness of policy. That ignores the holding of the Full Court and Brennan J’s own rejection of that proposition. In Re Drake No 2
(a)Brennan J noted the policy he was applying had been made in the exercise of explicit statutory power and was subject to parliamentary scrutiny (at 643-4);
(b)Brennan J referred to the distinction he had first adverted to in Re Becker and Minister for Immigration and Ethnic Affairs [1977] AATA 12; (1977) 15 ALR 696 between such high level ministerial policy and that made at a departmental level (at 644); and
(c)Brennan J recognised that the Tribunal could not deprive itself of its freedom to give no weight to a Minister’s policy in a particular case.
Moreover, if the application of otherwise sound ministerial policy would work injustice in a particular case, Brennan J observed (at 645) that that of itself would provide a cogent and sufficient reason to depart from the policy as ‘consistency is not preferable to justice’.
21However, insofar as they set out the policy formulated by ASIC, the Tribunal accepts it should apply the policy expressed in Regulatory Guides 98 and 175, notwithstanding it is agency rather than high level ministerial policy. Neither at the time when the applicant was legally represented, nor later when he was not, was it suggested that the Regulatory Guides were unlawful or that there were cogent and sufficient reasons to depart from the policy expressed by them. The Tribunal has not of its own motion identified any deficiencies to suggest such a conclusion should be reached. The Regulatory Guides appear to be carefully calibrated documents produced by an agency which has responsibility for prudential regulation of the provision of financial advice. The policy appears sound. That observation is not intended to preclude the possibility of later challenges—it is made merely to indicate that where a policy on its face is uncontentious the Tribunal is lawfully entitled to have regard to such policy and to apply it subject to the right of an applicant to put the matter in issue and subject to the policy not working unfairness in the particular case.
Accordingly, the Tribunal considers it appropriate to have regard to RG 175 and in particular, RG 98 which is relevant to the main issue before the Tribunal, being the length of the banning order.
ASIC as a regulator
Section 1(2) of the ASIC Act provides that:
(2) In performing its functions and exercising its powers, ASIC must strive to:
(a)maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and
(b)promote the confident and informed participation of investors and consumers in the financial system; and
(d)administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and
…
(g)take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.
Objects of the Corporations Act
Section 760A of the Corporations Act sets out the objects of Chapter 7, “Financial Services and Markets”, of the Corporations Act as follows:
The main object of this Chapter is to promote:
(a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b)fairness, honesty and professionalism by those who provide financial services;…
Best interests
Section 961B of the Corporations Act further provides:
(1)The provider must act in the best interests of the client in relation to the advice.
(2)The provider satisfies the duty in subsection (1), if the provider proves that the provider has done each of the following:
(a)identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
(b)identified:
(i) the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
(ii) the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances );
(c)where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
(d)assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
(e)if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
(i) conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
(ii) assessed the information gathered in the investigation;
(f)based all judgements in advising the client on the client’s relevant circumstances;
(g)taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances .
Note: The matters that must be proved under subsection (2) relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to the advice sought.
Further, s 961G of the Corporations Act provides:
The provider must only provide the advice to the client if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under section 961B to act in the best interests of the client.
Note: A responsible licensee or an authorised representative may contravene a civil penalty provision if a provider fails to comply with this section (see sections 961K and 961Q). The provider may be subject to a banning order (see section 920A).
Further, guidance on the best interests duty can be found in RG 175. The October 2013 version of RG 175 has now been superseded by a newer version (November 2017) but the October 2013 version was the applicable version at the time that the Applicant advised the Clients and at the time that the banning order was made.
Relevant provisions of RG 175 are as follows:
175.221When providing personal advice to a client, an advice provider must act in the best interests of the client in relation to that advice: s961B(1). We refer to this as the ‘best interests duty’.
…
175.225When assessing whether an advice provider has complied with the best interests duty, we will consider whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice.
175.226This depends on the circumstances and includes the following factors:
(a) the position the client would have been in if they did not follow the advice, which is to be assessed at the time the advice is provided;
(b) the facts at the time the advice is provided that the advice provider had, or should have had, if they followed their obligations. In particular, we will not examine investment performance retrospectively, with the benefit of hindsight…;
(c) the subject matter of the advice sought by the client;
(d) the clients objectives, financial situation and needs…;
…
(f) that the client receives a benefit that is more than trivial…
175.227We do not expect an advice provider to give ‘perfect advice’ to establish that the client is likely to be in a better position if the client follows the advice.
…
175.232We expect that advice providers will follow processes to ensure that they act in the best interests of their clients.
…
175.234We expect that processes for complying with the best interests duty will ensure that, within the subject matter of the advice sought by the client:
(a) the scope of the advice includes all the issues that must be considered for the advice to meet the client’s objectives, financial situation and needs (including the client’s tolerance for risk);
(b) if the scope of the advice changes, the change is consistent with the clients objectives, financial situation and needs;
(c) the client’s objectives, financial situation and needs are identified through inquiries or otherwise; and
(d) the advice provider focuses on providing advice that is not product specific, or on a combination of advice that is both product specific and non-product specific, where this would better suit the client’s objectives, financial situation and needs. Advice that is not product specific may include advice to do nothing.
…
175.261An advice provider needs to use their judgement in deciding on the scope of the advice. An advice provider must determine the scope of the advice in a way that is consistent with the client’s relevant circumstances and the subject matter of the advice they are seeking.
…
175.318We consider that, when giving switching advice,s961B(2)(e) requires an advice provider to consider and investigate:
(a) the existing product (and, if applicable, the relevant option) if it is a financial product that might meet the client’s relevant circumstances;
(b) the new financial product (and, if applicable, the options available under the financial product) that the clients could potentially acquire or invest in; and
(c) the new product (or option) recommended to the client.
Banning order
Section 920A of the Corporations Act provides:
(1)ASIC may make a banning order against a person, by giving written notice to the person, if:
…
(e)the person has not complied with a financial services law (other than section 921E (relevant providers to comply with the Code of Ethics));…
A “financial services law” is defined in s 761A of the Corporations Act to include a provision in chapter 7 of the Corporations Act, which includes s 961B.
Section 920B of the Corporations Act, titled “What is a banning order?”, provides:
(1)A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2)The order may prohibit the person against whom it is made from providing a financial service:
(a)permanently; or
(b)for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
(3)A banning order may include a provision allowing the person against whom it was made, subject to any specified conditions:
(a)to do specified acts; or
(b)to do specified acts in specified circumstances;
that the order would otherwise prohibit them from doing.
Section 920C of the Corporations Act details the “[e]ffect of banning orders” as follows:
(1) A person against whom a banning order is made cannot be granted an Australian financial services licence contrary to the banning order.
(2) A person contravenes this subsection if:
(a)the person engages in conduct; and
(b)the conduct breaches a banning order that has been made against the person.
Note: A contravention of this subsection is an offence (see subsection 1311(1)).
RG 98 provides guidance with respect to ASIC’s administrative powers to enforce compliance with the Corporations Act, including ASIC’s power to make a banning order, and indicates the matters which ASIC generally takes into account when exercising those powers (see RG 98.1).
Table 1 of RG 98 is titled “key factors we consider in deciding to take administrative action”. Table 1 consists of a non-exhaustive list of key factors which may be taken into account in determining whether ASIC will pursue administrative action. The table reads as follows:
Table 1: Key factors we consider in deciding to take administrative action
Factors Relevant Considerations Nature and seriousness of the suspected misconduct · Whether there is evidence that the contravention involved dishonesty or was intentional, reckless or negligent
· The amount of any benefit gained or detriment suffered as a result of the misconduct
· The amount of any loss caused to investors and consumers
· The impact of the misconduct on the market, including potential loss of public confidence
· Whether the conduct is continuing
· Whether the misconduct indicates systemic compliance failures
· Whether the licensee or person has a poor compliance record (e.g. they have previously engaged in the misconduct)
· Conduct which may amount to a serious conflict of interest
Internal controls · Whether the licensee had in place effective internal procedures to ensure compliance with obligations and to detect any breaches of them
· Whether those procedures were complied with and whether any breaches of obligations were detected
· If the misconduct was committed by a representative of a licensee, whether it indicates a systemic compliance failure of the licensee
· Whether a corporate culture conducive to compliance with obligations is evident (e.g. effective educational and compliance programs)
Conduct after the alleged contravention occurs · When and how the breach came to the attention of ASIC
· The level of cooperation with our investigation
· Whether remedial steps have been taken
The expected level of public benefit · Whether the case is likely to help participants in financial markets to better understand their obligations
· The protective effect for the public and reinforcement of the integrity and reputation of the financial services industry
Likelihood that:
• the person’s or entity’s behaviour will change in response to a particular action
• the business community is generally deterred from similar conduct through greater awareness of its consequences
· The compliance history of the licensee or person
· Whether behaviour (of an entity or broader industry) is more likely to change if the person is banned or has their licence suspended or cancelled
Mitigating factors · Whether there would be any personal hardship were a banning order to be made
· Whether the misconduct relates to an isolated complaint and consumers have generally not suffered substantial detriment
· Whether the misconduct was inadvertent and the person undertakes to cease or correct the conduct
Table 2 of RG 98 provides examples of conduct relating to specific periods of banning, as follows:
Table 2: Factors and examples of conduct relating to specific periods of banning
Outcome Factors Examples of conduct (indicative only) Banning for less than 3 years · Conduct is the result of carelessness or inadvertence
· Attempt to remedy the contravention and person has fully cooperated with ASIC
· No loss (or minimal loss) to client
· Giving a complying disclosure document, but not within the required time
· Failing to lodge documents with ASIC as required
· Failing to notify ASIC about a representative’s breach of the licensee’s obligations
Banning for 3-10 years · Conduct inconsistent with the orderly operation of a financial market
· Adverse impact on confidence in or the integrity of a financial market
· False, misleading or deceptive, or unconscionable conduct, or conduct with a lesser degree of dishonesty
· A deliberate course of conduct to enrich themselves at others’ expense
· Incompetence, irresponsibility or high level of carelessness, but with the possibility that the person may develop requisite skills and abilities
· Disregard for the law and compliance with regulations
· Insider trading
· Market manipulation or other misconduct in relation to a financial product traded on a financial market (e.g. s1041A-1041E)
· Misconduct in relation to financial products or financial services (e.g. s1041F-1041H and Div 2 of Pt 2 of the Australian Securities and Investments Commission Act 2001 (ASIC Act))
· Not acting in the best interests of the client, in relation to any personal financial advice given, and not complying with the associated best interests obligations (s961B-961Q) …
· Offering or recommending interests in a managed investment scheme that needs to be registered, but has not been
· Carrying on a financial services business without holding an AFS licence
· Providing financial services that are not covered by the AFS licence, if one is required
· Providing financial services contrary to s911B
· Failing to keep financial records that must be kept
· Failing to comply with disclosure requirements, including not disclosing commissions and other benefits or relevant interests and associations …
· Unauthorised discretionary trading
· Failure by a director of the licensee to ensure the licensee complies with its obligations
· Misleading clients about the nature of the products being acquired or disposed of on their behalf that are not for the clients’ benefit
Banning for 10+ years and permanent banning · Dishonesty or intent to defraud
· Continued, knowing and wilful contraventions of the law, including market integrity rules and disregard of legal obligations
· Previous contraventions of the law
· Serious incompetence and irresponsibility
· A likelihood that the person will engage in contravening conduct in the future
· Significant adverse impact on confidence in or the integrity of a financial market
· Conduct significantly inconsistent with the orderly operation of a financial market
· Any dishonest conduct involving clients
· Misappropriation of client funds or otherwise engaging in fraud or theft
· Falsification, concealment or deliberate destruction of records required to be kept
· Engaging in a pattern of persistent contraventions that indicates systemic failure or a general lack of understanding of and regard for compliance
· More substantial insider trading
· More substantial market manipulation or other significant misconduct in relation to a financial product traded on a financial market (e.g. s1041A-1041E)
· Failure to apply client’s funds in accordance with the client’s instructions
· Forging a client’s signature
· Providing clients with false insurance documents
The following note is at the end of Table 2 of RG 98:
Note: These factors and examples are indicative only. Each case must depend on its particular circumstances and will be determined on a case-by-case basis. The factors in this table have been compiled taking into account the propositions formulated in HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Re: ASIC v Adler, (2002) 42 ACSR 80. A combination of more than one example of misconduct can increase the seriousness of the misconduct, so that a longer banning than indicated by this table is merited. Investor loss is not a prerequisite for a period of banning.
The following comment by Deputy President Rayment and Senior Member Kelly in Davidof and Australian Securities and Investments Commission [2017] AATA 2594 (Davidof) at [19] is relevant when considering the factors in Table 2 to assess the appropriate length of a banning period:
… A range of banning orders of three to ten years is in our opinion, speaking generally, good guidance for a regulator to provide, and the object of promoting consistency is a good one. Of course, the range is guidance rather than something which is intended to be mandatorily or inflexible.
Hence, the Tribunal should have regard to Table 2, but in doing so must ensure that it does not inflexibly apply Table 2 and that the merits of the individual case are considered.
The factors to be considered with respect to the imposition and duration of a banning order have been judicially considered. In Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler and Others [2002] NSWSC 483 (HIH), Santow J, at [55], listed “propositions, by way of guiding principles or relevant factors, that can be derived from the cases which have dealt with these provisions or their predecessors”. These principles were cited with approval by McHugh J in Rich & Anor v Australian Securities and Investments Commission [2004] HCA 42 at [48]-[49].
The “guiding principles or relevant factors” identified by Santow J, at [56], in HIH are reproduced below with case references removed for brevity:
[56]…The propositions that may be derived from these cases include:
(i)Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards: …
(ii)The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office: …
(iii)Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors: …
(iv)The banning order is protective against present and future misuse of the corporate structure: …
(v)The order has a motive of personal deterrence, though it is not punitive: …
(vi)The objects of general deterrence are also sought to be achieved: …
(vii)In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company: …
(viii)Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty: …
(ix)In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public: …
(x)It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct: …
(xi)A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming: …
(xii)The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
·character of the offenders;
·nature of the breaches;
·structure of the companies and the nature of their business;
·interests of shareholders, creditors and employees;
·risks to others from the continuation of offenders as company directors;
·honesty and competence of offenders;
·hardship to offenders and their personal and commercial interests; and
·offenders’ appreciation that future breaches could result in future proceedings.
…
(xiii)Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
·large financial losses;
·high propensity that defendants may engage in similar activities or conduct;
·activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
·lack of contrition or remorse;
·disregard for law and compliance with corporate regulations;
·dishonesty and intent to defraud;
·previous convictions and contraventions for similar activities.
…
(xiv)In cases in which the period of disqualification ranged from 7-12 years, the factors evident and which lead to the conclusion that these cases were serious though not ‘worst cases’, included:
·serious incompetence and irresponsibility;
·substantial loss;
·defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;
·continued, knowing and wilful contraventions of the law and disregard for legal obligations;
·lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform; …
(xv)The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were:
·although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;
·the defendants had no immediate or discernible future intention to hold a position as manager of a company;
·in Donovan’s case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings;…
CONSIDERATION OF THE LENGTH OF THE BANNING ORDER
In determining the appropriate length of the banning order, the Tribunal must be mindful of the key factors set out in Table 1 of RG 98 together with the guiding principles identified by Santow J in HIH. An analysis of these factors and principles is set out in the following paragraphs.
The Applicant agreed that he did not comply with a financial services law by failing to act in the best interest of the Clients. There is, however, no evidence of dishonesty or recklessness on the part of the Applicant. The Applicant believed that he was complying with relevant financial services laws and that he was acting in his client’s best interests.
This belief was supported by the annual audits conducted by AMP and the Applicant’s statements of advice being vetted by AMP. Magnitude also undertook a due diligence of the Applicant and his business before accepting him as an authorised representative and no concerns were raised as a result of this due diligence process.
Counsel for the Applicant submitted that the mistakes made by the Applicant in advising the Clients were not obvious. If they were, counsel submitted, AMP would have identified them as part of their vetting process. He further submitted that the Applicant’s error as to the subject matter of the advice sought by the Clients affected the rest of the advice given. He made further submissions that the error may have been understandable given the complexity of the regulatory regime, including a reading of the regulatory guidelines including RG 175. For example, counsel for the Applicant submitted that a reading of RG 175.265, for example, may suggest that the steps in s 961B(2)(b) of the Corporations Act did not have to be taken into account when a client was asking for advice about a basic banking product.
The Tribunal does not accept this argument, and prefers the submission put forward by the Respondent. In summary, counsel for the Respondent submitted that the deficiencies in the advice were obvious and should have been identified by AMP in their vetting process. This was a failure on the part of AMP, but does not absolve the Applicant of responsibility. The regulatory framework makes it clear that advice to a client should be with a view to ensuring that the client will be in a better position after following the advice. Indeed, this is the whole point of obtaining financial advice in the first place. The Applicant did not consider whether the new SMSF/Property strategy would outperform the Clients’ existing superannuation funds. This does not require a detailed understanding of the regulatory framework because a reasonable financial advisor, especially one with the level of training, knowledge and years of experience that the Applicant has, should have considered this.
Some benefit was gained by the Applicant for providing the advice in the form of an initial advice fee for each client in the sum of $12,850, together with ongoing annual advice fees (Exhibit R8). The Tribunal accepts the Applicant’s submission that these fees are not all “profits”, and that they are inclusive of GST and disbursements (Applicant’s Supplementary Submissions, para [4]). However, the Tribunal notes that these fees are somewhat independent of the specific content of the advice, provided that the Clients proceeded with the advice. It cannot be concluded that the Applicant gained additional benefits as a result of failing to act in the best interests of his Clients above any he would have gained if the Clients had proceeded with compliant advice from him. This also weighs in favour of imposing a banning order for less than three years.
The detriment and potential loss caused to the Clients is potentially very serious. The Applicant facilitated a high risk investment strategy for the Clients whereby all of the Clients were in a worse financial position than if they had done nothing and not followed his advice. The Clients also had ongoing annual and compliance costs as a result of following the Applicant’s advice, which were substantially more than those under their existing superannuation funds (Exhibit R8).
The Clients were also left in the disadvantageous position of having a single property as the sole asset in their superannuation funds, leaving them in a precarious position, for instance: if the market were to drop; if the property were to be un-tenanted; or if the Clients otherwise have cash flow problems, such as in the case of a redundancy. This was potentially an issue for Mr and Mrs C whose advice was put on hold in case Mr C, the main income earner, was made redundant (Exhibit R1, T53). As noted by Mr Canion in his report, the Applicant failed to advise the Clients with respect to cash flow (Exhibit A2, para [11.12]). Furthermore, some of the Clients were very young. For example, Mr and Mrs C were 34-35 years old at the time of the advice. The advice may not impact on the Clients for many years, but when it does, the impact may be significant. This weighs in favour of imposing a banning order in excess of three years.
The Applicant has a good compliance history and there is no evidence of any prior complaints regarding the Applicant during the many years that he has worked in the financial services industry. The Clients did not complain about the Applicant’s advice, and indeed they provided statements confirming that they were happy with the advice given by him, primarily because he facilitated their requests.
The Applicant’s conduct is not continuing, and he understands the deficiencies in the advice that he gave to the Clients. At all times, the Applicant has cooperated with the investigations by Magnitude and ASIC regarding his advice. He has reflected upon, and has learnt from his mistakes, including taking steps to improve his understanding of the legislative and regulatory framework to ensure that he acts in the best interest of his clients in the future (Exhibit R1, T97, paras [101] and [103]). These are mitigating factors.
There is no doubt that the Applicant has suffered hardship as a result of the banning order. He has suffered a reduction in his income, and has experienced embarrassment, stress and anxiety. His membership of several professional associations has been cancelled, and his lending accreditations with the Commonwealth Bank, Westpac and AMP have been terminated (Exhibit A1, paras [18]-[24]). The Applicant has also received notice from the Tax Practitioners’ Board that they may terminate his registration, pending the outcome of these Tribunal proceedings (Exhibit A1, para [17] and annexure JA31). In this regard, the Tribunal notes that a banning order is not made to punish a person even though the practical outcome of such an order may be to do so. It certainly could be said that the banning order has had a deterrent effect upon the Applicant in that he appears to be remorseful and has learnt from his mistakes.
On the other hand, as noted by Santow J in HIH at [56], any hardship to the Applicant must be balanced against the public interest and the need for protection of the public from any repeat of the conduct. The implications of defective advice in the area of superannuation are very serious. Most members of the public will substantially depend on their superannuation monies to meet their costs of living in retirement. A lack of diligence on the part of a financial advisor could mean the difference between a client struggling to meet the cost of living in retirement and a comfortable retirement. A banning order in these circumstances would also act as a deterrent to others who are involved in the industry and who provide advice in the areas of SMSFs and LRBAs, as well as benefiting investor confidence in the effective regulation of the financial services industry.
The Tribunal has also taken into account the parties’ submissions with respect to whether the Applicant was effectively prevented or restricted by ASIC from working as a financial services advisor for approximately a 13 month period from the date of the Applicant’s termination by Magnitude until the issue of the s 920A Notice, or whether the Applicant ceased work voluntarily.
A letter to ASIC from the Westpac group dated 25 November 2015 states that “[f]ollowing an initial file review that commenced on 3 September 2015, and as advised to ASIC on 5 November 2015, the Representative [the Applicant] was suspended from providing any financial services to clients on 30 October 2015, pending the completion of an internal investigation” (Exhibit R1, T14). This supports the Respondent’s submission that “the decision to suspend and then terminate Mr Atkins was a decision of that licensee and did not arise from a requirement imposed by the Respondent” (Respondent’s Reply Submissions to the Applicant’s Supplementary Submissions dated 22 June 2018, para [9]).
The Tribunal notes that during this period it may have been difficult for the Applicant to obtain employment as an authorised representative with another licensee because he would need to disclose the fact that ASIC was investigating him (Applicant’s Supplementary Submissions filed on 22 June 2018, paras [11]-[15]). However, the Applicant is currently employed as a mortgage broker and during the period between his termination from Magnitude and disqualification by ASIC, a company that the Applicant held a 45% shareholding in, Wealth Plus, was granted a financial services authorisation by MyPlanner on 4 April 2017 (Respondent’s Reply Submissions to the Applicant’s Supplementary Submissions of 22 June 2018, para [18]). Thus, it appears that the Applicant was still able to work in the financial services industry during this time.
The Tribunal appreciates that this would have been a difficult period for the Applicant. The Tribunal notes that the detrimental effect on the Applicant’s career and his ability to maintain a level of income is relevant to the hardship that he may have suffered. However, in light of the other factors discussed in this section, the Tribunal is not of the view that it is appropriate to effectively backdate the commencement of the banning order by shortening the three year period to take this 13 month period into account.
Additionally, the Tribunal has also considered the factors in Table 2 of RG 98. The Tribunal notes that Table 2 includes a reference to “not acting in the best interests of the client, in relation to any personal financial advice given, and not complying with the associated best interests obligations (s 961B- 961Q)” under the outcome of “banning for 3-10 years”. This undoubtedly reflects the serious consequences which can result from failing to act in the best interests of the client and weighs in favour of a banning order of three years or more.
Regarding the factors under the outcome of “banning for less than 3 years”, the Tribunal notes that the Applicant’s conduct was the result of inadvertence, not dishonesty, he fully cooperated with ASIC in its investigation, and accepted that he had failed to act in the Clients’ best interests. This weighs in favour of a banning order for less than three years.
It could not be said, however, that (even after taking into account the Applicant’s submissions with respect to Exhibit R8 – see Applicant’s Supplementary Submissions, para [6]) there was no loss, or a minimal loss, to the Clients, which is a factor suggestive of “banning for less than 3 years”. Each client was financially worse off after following the advice of the Applicant. Indeed, the calculations of Mr Canion (Exhibit R8) project that even after a five year period, the Clients are likely to incur negative net growth. Further, the true extent of the losses that may be suffered by the Clients may not become apparent until many years into the future. This weighs in favour of a banning order for three years or more.
CONCLUSION
Based on the consideration above, a banning order of three years is the correct and preferable decision.
DECISION
For the reasons discussed above, the Tribunal affirms the Banning Order Decision dated 12 July 2017.
I certify that the preceding 101 (one hundred and one) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr M Evans
..........................[sgd]............................
Administrative Assistant Legal
Dated: 5 September 2018
Date of hearing: 14 June 2018 Counsel for the Applicant: Mr TJ Palmer Solicitors for the Applicant: Culshaw Miller Lawyers Counsel for the Respondent: Ms L Black
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