Australian Securities and Investments Commission v Commonwealth Bank of Australia
[2023] FCAFC 135
•17 August 2023
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Commonwealth Bank of Australia [2023] FCAFC 135
Appeal from: Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1149 File number: VID 630 of 2022 Judgment of: MOSHINSKY, O'BRYAN AND JACKMAN JJ Date of judgment: 17 August 2023 Catchwords: CORPORATIONS – conflicted remuneration – Div 4 of Pt 7.7A of the Corporations Act 2001 (Cth) (Act) – where the first respondent (CBA) and the second respondent (CFSIL) entered into arrangements whereby CFSIL would develop and manage, and CBA would distribute, a superannuation product – where CFSIL agreed to pay a proportion of net annual revenue earned from the superannuation product to CBA and where cash transfers were effected between the entities in connection with the promise to pay – where CBA and CFSIL are related entities – whether the contractual promise to pay and the cash transfers constituted a “benefit” for the purpose of s 963A – whether the presumption in s 963L was applicable – whether, because of the nature of the impugned benefits and the circumstances in which they were given, the impugned benefits were capable of influencing and could reasonably have been expected to influence the choice of financial product recommended, or the financial product advice given, by CBA to retail clients – whether the appellant, the Australian Securities and Investments Commission, was required, and failed, to establish that CBA provided financial product recommendations and/or financial product advice to retail clients – whether the impugned benefits came within reg 7.7A.16 of the Corporations Regulations 2001 (Cth) with the result that the prohibition on conflicted remuneration did not apply – Div 4 of Pt 7.7A of the Act did not apply to the impugned benefits – appeal dismissed
STATUTORY INTERPRETATION – proper construction of s 963A of the Act – meaning of the word “benefit” – whether s 963A capable of application where a financial service licensee recommends a single financial product – whether s 963A capable of application where a benefit is given by one legal entity to another within a wholly-owned group of companies
Legislation: Acts Interpretation Act 1901 (Cth), ss 15AA, 15AB
Corporations Act 2001 (Cth), ss 9, 623, 657A, Pt 7.1 Div 3, ss 760A, 761A, 761G, 761GA, 762A, 764A, 766B, 766H, Pt 7.7A Div 4, ss 963AA, 963A, 963D, 963E, 963L, 963K, 1012IA, Pt 10.18, ss 1526, 1528
Corporations Amendment (Financial Advice Measures) Act 2016 (Cth)
Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth)
Corporations Law, s 698
Superannuation Industry (Supervision) Act 1993 (Cth), ss 34C(1), 58(2)
Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Act 2019 (Cth)
Corporations Amendment (Further Future Of Financial Advice Measures) Bill 2012 (Cth)
Corporations Amendment Regulation 2013 (No. 5) (Cth)
Corporations Regulations 2001 (Cth), regs 7.1.08(1), 7.7A.16, 7.7A.16A, 7.7A.16B
Cases cited: Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27
Australian Building & Construction Commissioner v Construction Forestry, Mining & Energy Union (2018) 262 FCR 473
Australian Competition and Consumer Commission v Australian Egg Corporation Ltd (2017) 254 FCR 311
Australian Postal Corporation v Sinnaiah (2013) 213 FCR 449
Australian Securities and Investment Commission v Westpac Securities Administration Ltd (2019) 272 FCR 170
Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1149
Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570
Australian Securities and Investments Commission v Lewski (2018) 266 CLR 174
Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527
Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786; 162 ACSR 1
Australian Securities and Investments Commission v Westpac Banking Corporation (Omnibus) [2022] FCA 515; 407 ALR 1
Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88
Balanced Securities Limited v Dumayne Property Group Pty Ltd (2017) 53 VR 14
Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638
Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Cody v JH Nelson Pty Ltd (1947) 74 CLR 629
Commonwealth v Baume (1905) 2 CLR 405
Country Care Group Pty Ltd v Director of Public Prosecutions (Cth) (2020) 275 FCR 342
Deputy Federal Commissioner of Taxation (SA) v Ellis & Clark Limited (1934) 52 CLR 85
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Federal Commissioner of Taxation v Industrial Equity Ltd (2000) 98 FCR 573
Federal Commissioner of Taxation v Lutovi Investments Pty Ltd (1978) 140 CLR 434 at 444 (Gibbs and Mason JJ)
Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520
Guinn v United States, 238 US 347 (1915)
Hillam v Iacullo (2015) 90 NSWLR 422
Hunter Douglas Australia Pty Ltd v Perma Blinds (1969) 122 CLR 49
Lane v Wilson, 307 US 268 (1939)
McGraw-Hinds (Aust) Pty Ltd v Smith (1979) 144 CLR 633
Mersey Docks and Harbour Board v Henderson Bros (1888) 13 App Cas 595
Newton v Federal Commissioner of Taxation (Cth) (1958) 98 CLR 1
Norcast S.ár.L v Bradken Ltd (No. 2) [2013] FCA 235; (2013) 219 FCR 14
O’Connell v Nixon (2007) 16 VR 440
Pileggi v Australian Sports Drug Agency (2004) 138 FCR 107
Primac Holdings Ltd v IAMA Ltd (1996) 22 ACSR 454
Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355
Re Powertel (No 3) [2003] ATP 28
Registrar of Titles (WA) v Franzon (1975) 132 CLR 611
Robert Bosch (Australia) Pty Ltd v Secretary, Department of Innovation, Industry, Science and Research (2011) 197 FCR 374
Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Ltd (1993) 177 CLR 508
Savage Resources Ltd v Pasminco Investments Pty Ltd (1998) 159 ALR 304
Sea Shepherd Australia Ltd v Commissioner of Taxation (2013) 212 FCR 252
SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362
The King v Jacobs Group (Australia) Pty Ltd [2023] HCA 23
Thirteenth Beach Coast Watch Inc v Environment Protection Authority (2009) 29 VR 1
Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474
Vines v Djordjevitch (1955) 91 CLR 512
Westpac Securities Administration Ltd v Australian Securities and Investments Commission 270 CLR 118
Workpac Pty Ltd v Skene (2018) 264 FCR 536
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Number of paragraphs: 336 Date of hearing: 22-23 February 2023 Counsel for the Appellant: Mr P Solomon KC with Mr D Luxton and Ms A Wilson Solicitor for the Appellant: Johnson Winter Slattery Counsel for the First Respondent: Mr N J Young KC with Mr P Kulevski and Ms L Coleman Solicitor for the First Respondent: Clayton Utz Counsel for the Second Respondent: Mr N P De Young KC with Mr K Loxley Solicitor for the Second Respondent: King & Wood Mallesons ORDERS
VID 630 of 2022 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Appellant
AND: COMMONWEALTH BANK OF AUSTRALIA
(ACN 123 123 124)First Respondent
COLONIAL FIRST STATE INVESTMENTS PTY LTD
(ACN 002 348 352) AS TRUSTEE FOR COMMONWEALTH ESSENTIAL SUPER (ABN 56 601 925 435)Second Respondent
ORDER MADE BY:
MOSHINSKY, O'BRYAN AND JACKMAN JJ
DATE OF ORDER:
17 AUGUST 2023
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The Appellant pay the costs of the appeal of the First and Second Respondents.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MOSHINSKY J:
I have had the considerable benefit of reading in draft the reasons for judgment of O’Bryan J and the reasons for judgment of Jackman J. I agree with O’Bryan J that the appeal should be dismissed with costs. Subject to one issue, I agree with the reasons of O’Bryan J. The one issue is: whether the primary judge erred in concluding that ASIC had failed to establish that CBA provided financial product advice (appeal grounds 9 and 10). In my opinion, the primary judge erred in concluding that it was not established that CBA provided financial product advice. I would therefore uphold ground 10. However, this does not affect the overall outcome of the appeal.
I gratefully adopt the summary of the facts, issues and the parties’ submissions set out in the reasons of O’Bryan J. I will also adopt the abbreviations used in his Honour’s reasons.
I agree with O’Bryan J that: a benefit given to a financial services licensee cannot constitute conflicted remuneration if the licensee does not provide financial product advice to persons as retail clients in respect of the financial product in question; in the circumstances of the present case, ASIC was required to prove that CBA provided financial product advice in relation to Essential Super to retail clients; that does not require proof that CBA provided financial product advice on every occasion on which it distributed Essential Super, but there must be evidence from which the Court can conclude that financial product advice was given on at least some occasions.
I also agree with O’Bryan J that: in order to prove that CBA gave financial product advice to retail clients in respect of Essential Super, it was necessary to establish (on the balance of probabilities) that statements of a particular kind were made to retail clients, and that the content of those statements satisfied the definition of financial product advice; proof of that fact did not necessarily require evidence from individual staff members or individual customers; the fact could be proved to the requisite standard by a combination of documentary evidence and inference.
Further, I agree that: the evidence established that CBA developed and implemented comprehensive processes and procedures for the distribution of Essential Super by branch staff across a network of more than 1,000 branches; CBA trained its staff with respect to the types of statements that were permitted to be made to customers or potential customers in relation to Essential Super, and staff were provided with scripts and guides for that purpose; in the circumstances as described by O’Bryan J, the Court will readily infer that statements of the kind contained in training and other materials provided to branch staff are likely to have been communicated to customers who acquired Essential Super on many occasions.
The point of difference is whether, assuming that bank staff said words to the effect of the approved scripts, this conduct constituted the provision of financial product advice within the meaning of s 766B of the Corporations Act 2001 (Cth). The relevant parts of that provision are set out in the judgment of O’Bryan J. It suffices for present purposes to set out subsection (1):
(1)For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)could reasonably be regarded as being intended to have such an influence.
A distinction is drawn in s 766B between “personal advice” and “general advice”, but that distinction is not relevant for present purposes. It is not contended by ASIC that CBA gave “personal advice”. Therefore, if CBA gave financial product advice, any such advice was “general advice”: see s 766B(4).
The definition of “financial product advice” is to be construed in the context of Ch 7 of the Corporations Act as a whole. Ch 7 contains important protections for consumers in relation to the provision of financial product advice. Among other things, there are disclosure requirements that apply to the provision of financial product advice. The extent of these obligations differs depending on whether the advice is personal advice or general advice, with the requirements more onerous in the case of personal advice.
Section 766B(1) refers to “a recommendation or a statement of opinion”. The meaning of these words was considered by the Full Court of this Court in Australian Securities and Investment Commission v Westpac Securities Administration Ltd [2019] FCAFC 187; 272 FCR 170 (Westpac Securities). All members of the Full Court (Allsop CJ, Jagot and O’Bryan JJ) held that the conduct of Westpac constituted the provision of financial product advice, and that such advice was personal advice. On appeal to the High Court, Westpac accepted that it had given financial product advice and the issue was whether that advice was personal advice or general advice: see Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3; 270 CLR 118 at [6], [46].
In Westpac Securities, Allsop CJ considered the meaning of the words “a recommendation or a statement of opinion” in s 766B(1) at [16]-[23], including:
16The primary judge, correctly in my view, at [83]-[93] of the reasons, considered it appropriate to give a broad interpretation to “recommendation” and “statement of opinion”, as words used in a provision intended to be, to a significant degree, protective. In particular, I agree with the approach of Sackville AJA in Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 at [365]-[366], referred to by the primary judge at [85]:
365The construction of s 766B(1) must take into account that the language encompasses a recommendation or statement of opinion that is intended to influence a person in making a decision relating to a financial product or could reasonably be regarded as having such an influence. A person wishing to influence another person (the client) to make a decision relating to a financial product … may do so in ways other than by express recommendations or explicit statements of opinion. Information or other material may be presented to the client in a form implying that the presenter favours or commends a particular course of action without saying so explicitly. Similarly information or other material may be presented in a form that implies that the presenter’s view is that the contemplated course of action is likely to be beneficial to the client.
366The authorities have accepted that the statutory language should be given a broad interpretation. Specifically, they support the proposition that a person may provide information or present material in a way that implicitly makes a recommendation or states an opinion in relation to a financial product.
17The protection of people from potentially selfishly motivated advice is not advanced by making fine logical distinctions based on overly precise linguistic choices about words of a general kind employed by Parliament in furtherance of the protective purpose. Protection from assiduous, clever and subtle advancement of another’s personal interest may require a generous breadth of meaning of words that are taken from, and are intended to relate to, human relational experience, and a giving of practical flexibility in the application of those words to the reality of human experience.
18The question is one of the practical application of the statute to the context in question to see whether an express or implied “recommendation” (that is, a commending something by favourable representation or presentation as worthy of confidence or acceptance or as advisable or expedient) or “statement of opinion” (that is, a judgment or belief or view or estimation) was made. The two concepts are, of course, related. The opinion may be the basis of the recommendation; and the recommendation may carry with it an implied opinion.
The meaning of the “a recommendation or a statement of opinion” in s 766B(1) was also considered by Jagot J at [216]-[218], [236]-[240] and by O’Bryan J at [330]-[339].
In the present case, the agreed facts in relation to branch sales included (capitalised terms having the meanings set out in the SAFID):
(a)A Branch Sale generally involved a customer becoming a member of Essential Super as a result of: (i) initiation of the Essential Super account opening process by a member (or members) of CBA’s staff in its “CommSee” system, within a Branch; and (ii) interactive completion of the application with the customer: SAFID, [48(a)].
(b)During the Relevant Period, CBA staff who had completed the prescribed training and testing (referred to as “Authorised Staff” in the SAFID) were permitted to undertake the process described above: SAFID, [49].
(c)During the Relevant Period, CBA staff who had not completed the prescribed training and testing (“Non-Authorised Staff”) could either perform a “warm transfer” to Authorised Staff to assist a customer with opening an Essential Super account or could call the Essential Super call centre and assist a customer to become a member of Essential Super together with an Authorised Staff member in the call centre: SAFID, [50].
(d)Between 1 July 2013 and 8 October 2017, Branch staff were to follow Standard Operating Procedures for Branch Sales: SAFID, [54].
(e)From in or around June 2013 until 8 October 2017, Authorised Staff were trained by CBA to engage with a customer or potential customer, in respect of Essential Super, under a “general advice model”: SAFID, [59].
(f)The training completed by Authorised Staff from in or around June 2013 until 8 October 2017 included (among other things) Module 12 – Providing Financial Advice: SAFID, [60(a)].
(g)Between 1 July 2013 and 8 October 2017, CBA provided Authorised Staff with: (i) a General Advice Warning approved script; and (ii) guides to use when introducing Essential Super to a customer or potential customer: SAFID, [61].
(h)The General Advice Warning approved script and guides referred to above could be accessed by Branch staff, including via: (i) hyperlinks in CBA’s “standard operating procedure” document for Essential Super account opening; and (ii) CBA’s electronically available Essential Super intranet or “iSource” pages: SAFID, [62].
Different versions of the “Standard Operating Procedure: Essential Super Account Opening – Personal Customer” were in place during different periods of time during the relevant period (AB 2933-2936). The Standard Operating Procedures each contained four stages: (1) Product introduction / discussing and creating interest; (2) Product fulfilment; (3) Complete forms; and (4) Send forms. By way of example, the Standard Operating Procedure in place during the period 1 July 2013 to 22 October 2013 required Authorised Staff to take the following steps during the “Product introduction / discussing and creating interest” stage:
1.1Provide a General Advice Warning (GAW) to the customer before starting application (accredited staff only)
1.2Provide FSG [financial services guide] and PDS [product disclosure statement] to customer and provide them the opportunity to read the PDS before opening account
1.3Discuss product benefits and features including fees
During the appeal hearing, we were taken to a one-page document containing approved scripts (AB 2893). It appeared to be common ground that this document was hyperlinked in the Standard Operating Procedures or, in any event, formed part of the instructions to Authorised Staff (T33, T35, T106). This document included the following approved script and instruction:
General Advice Warning: “I can provide you general advice about Essential Super, however you will need to decide if it is a suitable product for you by reading the PDS.”
Accredited staff providing general advice must preposition GAW at the start of interaction when discussing Essential Super.
(Emphasis in original.)
The document also set out the following five approved scripts:
Approved Scripts
1 “Generally, customers find that Essential Super is a straightforward superannuation product with the convenience of on line access through Netbank. Would you be interested in taking out Essential Super?” 2 “I’m letting my customers know about an exciting product called Essential Super. Essential Super is an online superannuation account which helps people to manage their super through NetBank. It also has the convenience of accepting employer contributions.” 3 “Many of our customers have found that selecting their own superannuation fund, rather than using the fund their employer provides, enables them to take greater control of their super. As Essential Super is accessible through NetBank, this makes it even easier as it provides flexibility for super and banking to be managed in the one place.” 4 “Thank you for giving me the opportunity to review your banking. There are a number of ways that I feel I may be able to assist you, but I would like to focus on 1 main area today. You mentioned that you goal is to purchase your first home; I would like to refer you to our lending Specialist Sam who will be able to talk to you about your lending needs and look at ways to get you into your home sooner. What time appointment would suit you?..... I am also letting all my customers know about Essential Super, a competitively priced superannuation account that allows customers to take more control of their super. Essential Super can be managed online in NetBank alongside a customer’s day to day banking. Would you be interested in opening an Essential Super account?” 5 Customer: A friend of mine told me you have a new super account (Essential Super). Is it a good account?
Staff: “I am able to provide you general advice about Essential Super, however you will need to decide if it is right for you by reading the PDS. Customers have found that Essential Super has provided them greater control over their superannuation as it can be viewed and managed online through NetBank. It has a competitive fee structure and is easy to open. Would you be interested in opening an account?”
The document also set out the following instructions:
Do’s Don’ts Must be clear about the advice you are providing by reading General Advice Warning (GAW) to the customer upfront Must not use words such as ‘you and your’ or phrases such as ‘meet your needs’ or ‘right for you’ Use scenarios when discussing Essential Super with a customer i.e. ‘Many of my customers have found...’ or ‘Generally, customers who select their own super...’ (the scenarios you are providing must be true) Must not relate to the customer’s individual circumstances including information located in CommSee or in discussions i.e. ‘I can see that you don’t have superannuation already. Based on this, Essential Super may be right for you’
In light of the agreed facts and the Standard Operating Procedures, it can be inferred that Authorised Staff of CBA made statements to the effect of the approved scripts. The context includes the fact that the conversations were with existing customers and potential customers of the bank. Further, the scripts concerned the customer making a choice about a superannuation product, an important financial decision. In this context, in my opinion, several of the statements in the scripts constituted an implied “recommendation” (a commending of something by favourable representation or presentation as worthy of confidence or acceptance or as advisable or expedient) or a “statement of opinion” (a judgment or belief or view or estimation), picking up the meanings of those words adopted by Allsop CJ in Westpac Securities at [18]. In particular, the statements that Essential Super was “competitively priced” (script 4) or had a “competitive fee structure” (script 5) were statements of opinion about the pricing of Essential Super compared with other superannuation products: cf Westpac Securities at [67]. The statement in script 3 that many customers had found that selecting their own superannuation product, rather than using the fund that their employer provided, “enable[d] them to take greater control of their super” was an expression of opinion about the practical advantages of Essential Super. The positive descriptions of Essential Super (“straightforward”, “easy to open”) were, in context, implied representations that choosing Essential Super would yield a positive outcome for the customer. Having regard to these matters, the scripts contained implied recommendations and statements of opinion that were intended, or could reasonably be regarded as intended, to influence a person in making a decision in relation to Essential Super.
This approach is consistent with, and furthers, the consumer protection purpose of the relevant legislation. It is not suggested that this conclusion would lead to any impractical or unduly onerous outcome. Indeed, it is apparent from the agreed facts and the Standard Operating Procedures that CBA’s processes were designed on the basis that Authorised Staff would be giving “general advice” (being a form of financial product advice).
For these reasons, I consider that the primary judge erred in concluding that ASIC had failed to establish that CBA provided financial product advice. I would uphold ground 10.
I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky. Associate:
Dated: 17 August 2023
REASONS FOR JUDGMENT
O’BRYAN J:
A. INTRODUCTION
This appeal concerns the application of the statutory prohibition on conflicted remuneration in Div 4 of Pt 7.7A of the Corporations Act 2001 (Cth) (Act) to arrangements agreed between the first respondent, Commonwealth Bank of Australia (CBA), and the second respondent, Colonial First State Investments Limited (CFSIL), in relation to the distribution of a superannuation product called “Essential Super”.
CBA is the parent entity of the Commonwealth Bank of Australia group of companies (CBA Group). CFSIL is a wholly owned subsidiary of CBA.
The appellant, the Australian Securities and Investments Commission (ASIC), instituted proceedings alleging that, between 1 July 2013 and 30 June 2019 (the relevant period), when CFSIL issued and CBA distributed Essential Super, CFSIL gave and CBA accepted benefits in relation to Essential Super which comprised conflicted remuneration contrary to ss 963E and 963K of the Act. The benefits were alleged to comprise:
(a)the contractual promise made by CFSIL to pay CBA an annual fee of 30% of the total net revenue earned by CFSIL in respect of Essential Super in return for distributing Essential Super through CBA’s branch network and its digital distribution channels;
(b)payments by way of cash transfers from CFSIL to CBA in purported performance of the contractual promise; and
(c)journal entries posted in the general ledger of the CBA Group recording amounts payable from CFSIL to CBA in purported performance of the contractual promise.
The three categories of benefits were defined in the trial judge’s reasons as the “impugned benefits”. On the appeal, ASIC pressed its case only in respect of the contractual promise and the cash transfers, and not the journal entries. Reflecting ASIC’s case on appeal, these reasons adopt the term “impugned benefits” to refer to the contractual promise and the cash transfers.
The key statutory provision at issue in this proceeding is s 963A of the Act. That section defines conflicted remuneration as follows:
Conflicted remuneration means any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
(a)could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
(b)could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.
On 29 September 2022, the trial judge delivered judgment: Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1149 (primary judgment or PJ). The trial judge dismissed the proceedings on four principal bases, which can be stated as follows:
(a)first, the impugned benefits did not constitute benefits within the meaning of s 963A of the Act;
(b)second, the impugned benefits, because of their nature and the circumstances in which they were given, could not reasonably have been expected to influence the choice of financial product recommended by CBA to customers who became members of Essential Super or the financial product advice given by CBA to those customers;
(c)third, ASIC was required, and failed, to establish that CBA gave financial product advice to retail clients who opened an account in the Essential Super fund; and
(d)fourth, even if the impugned benefits given by CFSIL to CBA constituted conflicted remuneration for the purpose of s 963A, those benefits were exempted by operation of transitional provisions in s 1528 of the Act and the regulations made under that provision, being (relevantly) regs 7.7A.16, 7.7A.16A and 7.7A.16B of the Corporations Regulations 2001 (Cth) (Regulations).
By its notice of appeal, ASIC challenges the construction adopted by the trial judge of s 963A (ground 1). ASIC also challenges the findings of the trial judge that:
(a)the impugned benefits did not constitute a “benefit” within the meaning of s 963A (grounds 2 and 3);
(b)the presumption in s 963L did not operate in circumstances where the impugned benefits did not constitute a “benefit” within the meaning of s 963A (grounds 4 and 5);
(c)because of the nature of the impugned benefits and the circumstances in which they were given, the impugned benefits were not capable of influencing and could not reasonably have been expected to influence the choice of financial product recommended by CBA to retail clients or the financial product advice given to retail clients by CBA (grounds 6 to 8);
(d)ASIC was required, and failed, to establish that CBA provided financial product recommendations to retail clients and/or financial product advice to retail clients (grounds 9 and 10); and
(e)the impugned benefits came within reg 7.7A.16 of the Regulations with the consequence that Div 4 of Pt 7.7A did not apply to the impugned benefits (grounds 11 and 12).
With a limited exception, there is no appeal against any of the findings of primary fact made by the trial judge. The grounds of appeal largely concern the proper construction of s 963A of the Act and its application to the facts as found. Grounds 9 and 10 also challenge the trial judge’s conclusion that the evidence, and the primary facts as found, did not establish that CBA provided financial product advice to retail clients in connection with the distribution of Essential Super.
By a notice of contention, CBA contends that:
(a)if the trial judge erred in the construction of “benefit” within the meaning of s 963A, his Honour’s conclusion that CBA did not receive benefits ought to be upheld on other grounds (contention 1);
(b)if the trial judge erred in finding that CBA did not receive “benefits” within the meaning of s 963A with the consequence that s 963L of the Act did not apply, the trial judge’s finding as to s 963L ought to be upheld as that provision did not operate on other grounds (contention 2); and
(c)the trial judge ought to have found that ASIC carried the burden of proving that Div 4 of Pt 7.7A of the Act applied to the impugned benefits and ASIC failed to discharge that burden, including by reason of failing to establish that the impugned benefits were outside the transitional provisions (contention 3).
For the reasons that follow, I would dismiss the appeal. The trial judge was correct to conclude that the impugned benefits were not conflicted remuneration within the meaning of s 963A.
Whilst I agree with the trial judge as to the ultimate disposition of the proceeding, these reasons differ to those of the trial judge on a number of points. As discussed below, I would uphold certain of the grounds of appeal, but those grounds do not change the ultimate conclusion.
B. FACTUAL BACKGROUND
As noted above, the findings of primary fact made by the trial judge are not contested on the appeal (save in a minor respect). Certain facts were the subject of agreement between the parties at trial, as recorded in the Statement of Agreed Facts and Issues in Dispute dated 29 October 2020 (SAFID).
The facts that are critical to the disposition of this appeal, and that are not the subject of controversy, are summarised below. During the course of the hearing, the parties’ counsel took the Court to documents that were before the trial judge in order to highlight certain parts of those documents and to place the legal issues within their full factual context. No party submitted during the appeal that the contents of the documents were controversial. Where it is necessary to do so, those documents and their contents are referred to below.
CBA Group structure
At all relevant times, CBA was the holder of an Australian Financial Services Licence (PJ [38]).
Throughout the relevant period, the CBA Group was divided into legal entities and business units, including (PJ [37]):
(a)Retail Banking Services (RBS), a business unit that provided home loan, consumer finance and retail deposit products and services to all retail bank customers; and
(b)Wealth Management, a business unit that provided superannuation, investment, retirement and insurance products and services including financial planning.
RBS sits within the CBA legal entity (PJ [216]).
CFSIL is, and was throughout the relevant period, a wholly-owned subsidiary of CBA. It sat within the Colonial First State (CFS) division of the Wealth Management business unit (PJ [170], [204]).
The parties, and the documents on which they relied before the trial judge, at times referred interchangeably to “RBS” and “CBA”, “CFSIL” and “Wealth Management”, and “CFS” and “Wealth Management”. In applying the provisions of Div 4 of Pt 7.7A to the facts as found, these reasons usually refer to CBA and CFSIL as the statutory regime operates with respect to the legal entities.
At all relevant times, CBA had over 1,000 branches throughout Australia that together formed its retail branch network (PJ [55]). CBA also had digital channels including NetBank and CommBank, and after May 2016, CBA’s digital channels included the CommBank App. The digital channels were accessible online by the general public (PJ [56]).
MySuper
In 2012, legislation was enacted by the Commonwealth Parliament providing for the creation of a simple, cost-effective, default superannuation product called “MySuper” (PJ [40] and SAFID [14]).
One of the purposes for the introduction of MySuper was to simplify and standardise the default superannuation product available to all Australians. A further purpose was to create default superannuation products that had common characteristics so that they could be compared based on a few key differences – cost, investment performance and the level of insurance coverage – and would charge fees that would be described in the same way so that those fees could also be directly compared. All MySuper products were, by force of legislation, required to meet prescribed core criteria (PJ [40] and SAFID [15]).
MySuper products are tightly regulated. They involve a requirement to obtain authorisation from APRA before a trustee of a superannuation fund can offer a MySuper product, restrictions on the types of fees that can be charged and investment options limited to either a single diversified option or a life cycle option. All MySuper products must contain life and total permanent disability insurance on an opt-out basis. No commission can be paid on MySuper products from funds in member accounts. Superannuation trustees are generally only permitted to offer one MySuper product in a fund (PJ [41]).
From 1 January 2014, employers’ superannuation guarantee contributions for employees who had not made a choice of fund could only be directed to a fund that offered a MySuper product. Trustees of superannuation funds were required to transfer default amounts accrued prior to 1 January 2014 (accrued default amounts or ADAs) to a MySuper product before 30 June 2017 (PJ [42]).
Development of Essential Super
In or around April 2011, the CBA Group began to develop a superannuation product that would be compliant with the proposed MySuper reforms, would capture superannuation guarantee contributions and would consolidate superannuation from other funds (PJ [36]). At that time, the proposed superannuation product was referred to as “Simple Super”.
On or about 4 May 2012, a paper was presented to the CBA Group Executive Committee in relation to the Simple Super project (titled “Paper No 3 Simple Super”). A business case (Business Case) for the development of the Simple Super product was also presented (PJ [45]; SAFID [21]).
The Executive Committee paper recommended that the Executive Committee approve the Simple Super Project in principle, targeting a 1 July 2013 launch date of the product to coincide with the implementation date for MySuper. The paper stated the following rationale for the recommendation:
4.Rationale for recommendation
4.1The project will deliver a simple superannuation product that is accessible via NetBank alongside the customer’s transaction account. It will also provide the ability to view balances and make additional contributions through NetBank, offer a small number of investment options, as well as simple death and disablement insurance cover.
4.2. Key reasons for approving the project include:
4.2.1. Strong customer appeal: There is compelling benefit for our customers who seek to consolidate their financial relationships with fewer providers, and to manage their finances in one place. Furthermore, integrating superannuation into a customer’s banking relationship enhances the customer tenure overall.
4.2.2. A mass market product: Most Australians have simple superannuation needs. This product will allow the customer to take the same super and transaction accounts as they transfer from job to job.
4.2.3. Supports retention of youth market: Simple Super can support CBA’s retention of young customers, particularly those burdened by multiple super funds due to casual work and job changes.
4.2.4. Competitive defence: In late 2007, Westpac gained a first-mover advantage by launching a Simple Super product, BT Super for Life, distributed through Westpac/St George branches and online. Westpac has highlighted BT Super for Life as a key growth strategy.
4.2.4.1. ANZ launched a similar product in December 2011, and NAB has scoped a simple super product which is on-hold pending funding. ING Direct’s super product is due for launch this year.
4.2.5. Regulatory environment: The commencement of MySuper legislation on July 2013 will herald a new generation of MySuper-style funds. MySuper is the new mandated product design for default super contributions.
4.3The high level financial summary is set out in the table below.
[Table omitted]
4.3.1. RBS and WM will equally share the project costs and net benefits.
…
4.3.3. The project will yield financial benefits of $63.8m over a 5 year period. The additional revenue is generated from incremental branch and online sales, with the branch being the primary channel under a General Advice model.
…
The Executive Committee paper also recorded that the project was “jointly owned by the WM and RBS Group Executives” and that the Steering Committee was to comprise “impacted” Executive General Managers and General Managers from RBS and CFS.
The Business Case was a lengthy document. Relevantly to the issues raised in the proceeding, the Business Case recognised that a joint initiative between RBS and Wealth Management was a means to achieve the development and distribution of the Simple Super product. The Business Case contemplated a division of responsibilities between RBS and CFSIL, whereby CFSIL was to “manufacture and administer” the product and RBS was to distribute it. The document contemplated that the product would be distributed via CBA’s retail branch network and online channels. The retail branch network was to be the primary distribution channel under a “general advice” model; however, online origination via NetBank would also be available. The Business Case assumed a 50:50 sharing of the costs and benefits between the RBS and CFSIL business units and proposed that, once the business case was approved, the finance teams of RBS and CFSIL would “agree to allocation methodology” (PJ [45]; SAFID [21]).
On 4 May 2012, the CBA Group Executive Committee approved (in principle) the Simple Super project and requested that a methodology be developed for the sharing of costs and earnings between the relevant entities (PJ [46]; SAFID [22]).
Between 4 May 2012 and 1 July 2013, RBS and Wealth Management jointly developed the Simple Super product. In October 2012, CBA and CFSIL chose “Essential Super” to be the name of the product (PJ [46]).
The Essential Super fund
Essential Super was first offered on 17 May 2013 with four investments options called Lifestage, Balanced, Australian Share and Cash Deposit. The Lifestage investment option was offered as a MySuper product from 16 November 2013 (SAFID [25]). At all relevant times, CFSIL was the trustee of the Essential Super superannuation fund (SAFID [8(c)]). Essential Super was launched for sale to individuals and employers through CBA’s retail branch network and online channels on 1 July 2013 (SAFID [27]).
At all relevant times, Essential Super has been a superannuation product within the meaning of s 761A of the Corporations Act (SAFID [17]).
The fees charged to members of the Essential Super fund were set out in the Product Disclosure Statement issued from time to time. CFSIL only earned revenue from “funded” Essential Super accounts; ie, those accounts that had been opened and into which funds had been placed (PJ [84]). Initially (from May 2013 until November 2013), there were three principal categories of fees charged to fund members: a member fee of $5 per month; a management fee of 0.8% per annum of funds under administration; and an insurance administration fee of 7.5% of the premiums paid for insurance held by members through the fund (PJ [85]). From November 2013, the management fee was divided into two fees, being an administration fee and an investment fee, each of which was calculated as 0.4% per annum of funds under administration (PJ [86]). From March 2015, the member fee was increased to $5.88 per month (PJ [87]). From November 2018, the administration fee was reduced to 0.35% per annum of funds under administration (PJ [88]).
APRA Standard SPS 231 Outsourcing
On 15 November 2012, the Australian Prudential Regulation Authority (APRA) published the Superannuation (prudential standard) determination No. 3 of 2012 under s 34C(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). The determination came into effect on 1 July 2013. By that determination, APRA Standard SPS 231 titled “Outsourcing” was made applicable to all “RSE licensees” (as defined in s 10 of the SIS Act). It is uncontroversial that CFSIL was an RSE licensee at all relevant times.
Paragraph 6 of APRA Standard SPS 231 stated that “outsourcing” involves an RSE licensee entering into an arrangement with any other party to perform, on a continuing basis, a business activity that currently is, or could be, undertaken by the RSE licensee itself. Paragraph 8 stated that the standard only applies to the outsourcing of a material business activity as defined in the standard. Paragraph 9 stated that a “material business activity” is one that has the potential, if disrupted, to have a significant impact on an RSE licensee’s business operations, its ability to manage risks effectively, the interests, or reasonable expectations, of beneficiaries, or the financial position of the RSE licensee, any of its RSEs or its connected entities.
APRA Standard SPS 231 imposed a range of obligations on RSE licensees with respect to the outsourcing of material business activities. Those obligations were summarised in the Standard in the following terms:
This Prudential Standard requires that all outsourcing arrangements involving material business activities entered into by an RSE licensee be subject to appropriate due diligence, approval and ongoing monitoring. All risks arising from outsourcing material business activities must be appropriately managed to ensure that the RSE licensee is able to meet its obligations to its beneficiaries.
The ultimate responsibility for the outsourcing policy of an RSE licensee rests with its Board of directors.
The key requirements of this Prudential Standard are that an RSE licensee must:
•have a policy, approved by the Board, relating to outsourcing of material business activities;
•have sufficient monitoring processes in place to manage the outsourcing of material business activities;
•have a legally binding agreement in place for all outsourcing of material business activities;
•consult with APRA prior to entering into agreements to outsource material business activities to service providers that conduct their activities outside Australia; and
•notify APRA after entering into agreements to outsource material business activities.
Relevantly, paragraph 20 stipulated that each outsourcing arrangement must be contained in a documented legally binding agreement and the agreement must be signed by all parties to it before the outsourcing arrangement commences.
Commercial arrangements between CBA and CFSIL in respect of Essential Super
Commercial terms
In late 2012, representatives of CBA and CFSIL commenced talks in relation to the attribution of costs and revenue from Essential Super (PJ [47]). By emails exchanged in November and December 2012, the CBA and CFSIL finance teams agreed that, for the first financial year ending 30 June 2014, there would be a 50:50 share of revenue and a 44:56 share of operating expenditure (PJ [537] and SAFID [28(a)])). In the next financial year, it was proposed that the actual performance of the product would be reviewed and a decision would be made as to the relevant split between the businesses (SAFID [28(a)]).
In May 2013, representatives of CBA and CFSIL exchanged email correspondence concerning the development of a Distribution and Administration Services Agreement in respect of Essential Super.
A draft agreement was circulated by email on 9 May 2013 (SAFID [29]). The draft agreement specified the services to be provided by CBA to CFSIL in respect of the distribution of Essential Super, and the fees to be paid by CFSIL to CBA in connection with those services. A range of fees were payable for different services (SAFID [29(a)]). The draft did not refer to the proposed cost and revenue sharing arrangement. Also attached to the email was a document that summarised the “key features” of the draft agreement. Relevantly, that document stated that the agreement had been prepared “in compliance with APRA’s prudential requirements for an outsourcing agreement as set out in its standard SPS 231”.
An email sent on 16 May 2013 referred to a meeting that morning and the proposed action was to document the “CFS/RBS revenue sharing agreement for review and endorsement” (SAFID [29(b)]). A further draft agreement was circulated by email on 20 May 2013 in which the fees schedule had been updated to reflect the “revenue sharing arrangement” (SAFID [29(c)]). In that draft, the fees schedule (being schedule 1) stipulated, in respect of all services provided under the agreement, that “The Trustee will pay the Bank for the Services outlined in this Schedule 1 an annual fee of 30% of total net revenue earned by the Trustee in relation to the Fund in the relevant financial year”.
On 27 June 2013, CBA and CFSIL entered into the Distribution and Administration Services Agreement (2013 Distribution Agreement) with respect to Essential Super for an initial 5‑year term (PJ [47]). The recitals stated that CFSIL (as the trustee of Essential Super) wished to appoint CBA to provide the defined services to the Essential Super fund and CBA had agreed to do so. By clause 3, CBA agreed to perform the services set out in schedule 2 to the agreement in connection with the distribution of Essential Super, which included the allocation and deployment of trained staff to distribute the product through CBA’s retail branch network, the development of marketing materials and services, maintaining product and application-related information in CBA’s internal and customer-facing IT systems, and providing access to Essential Super in NetBank. The agreement contained detailed provisions governing the supply of those services. Clause 4 stipulated that the agreement was not intended to create a partnership, joint venture or agency between the parties. Clause 8 stipulated that CFSIL was required to pay CBA the fees specified in schedule 1 for the performance of the defined services. Schedule 1 contained the same specification of fees as in the earlier draft, namely that “The Trustee will pay the Bank for the Services outlined in this Schedule 1 an annual fee of 30% of total net revenue earned by the Trustee in relation to the Fund in the relevant financial year” (PJ [538]). The term “net revenue” was not defined in the agreement. Schedule 1 to the agreement also stipulated that:
(a)at the end of each financial year, CFSIL (as the trustee) was to determine the total net revenue for the Essential Super fund for that financial year and advise CBA of the fee payable based on that total net revenue;
(b)after receiving the advice from CFSIL as to the amount due and payable, CBA was to issue an invoice for the fees set out in schedule 1; and
(c)the fee arrangements in relation to the outsourcing arrangement were to be reviewed by the parties after the end of each financial year,
(see PJ [54] and the terms of the agreement).
On 22 April 2015, the CFSIL Board was asked to approve the continuation of the outsourcing arrangement recorded in the 2013 Distribution Agreement. The Board paper noted that CFSIL’s outsourcing policy required an annual review of material outsourcing arrangements and APRA Standard SPS 231 required the Board to have sufficient monitoring processes in place. The Board paper recommended amendments to the 2013 Distribution Agreement which the paper described as immaterial. The minutes of the meeting of the CFSIL Board on 22 April 2015 stated that the Board approved “the continuation of the outsourcing arrangement with CBA” and the proposed amendments. On 2 June 2015, a new version of the Distribution and Administration Services Agreement with those minor amendments was executed (the 2015 Distribution Agreement) (PJ [48] and [541]). The fee schedule was unchanged.
On 23 February 2018, Linda Elkins, Executive General Manager at CFS, wrote a letter on behalf of CFSIL to Clive van Horen, Executive General Manager Retail Products, on behalf of CBA. That letter, titled “Letter of Variation”, recorded the agreement between CBA and CFSIL to vary certain clauses of the 2015 Distribution Agreement (PJ [50]). The letter of variation was countersigned on behalf of CBA on 28 February 2018 (PJ [51]). The letter stated that CFSIL and CBA had agreed to suspend the distribution and administration services provided via CBA branches with effect from 8 October 2017 and that, for the duration of the suspension, CBA was not required to meet certain performance and marketing standards and reporting requirements.
On 26 February 2018, CBA and CFSIL executed a further version of the Distribution and Administration Services Agreement (2018 Distribution Agreement) (PJ [52]). Although the format of schedules 1 and 2 to that agreement were revised, the promise by CFSIL to pay CBA an annual fee equal to 30% of total net revenue earned by CFSIL in relation to Essential Super in the relevant financial year remained unchanged (PJ [53]).
The contractual obligations in the Distribution Agreements for CFSIL to pay CBA an annual fee equal to 30% of total net revenue earned by CFSIL in relation to Essential Super is one of the impugned benefits the subject of the proceeding.
Cash transfers
CFSIL made the following cash transfers to CBA in respect of Essential Super (PJ [81] and [82]):
(a)$2,253,537.82 on or about 31 July 2014 for the 2014 financial year;
(b)$12,303,855.79 on or about 25 July 2018 for the 2018 financial year;
(c)$1,141,468.82 on or about 22 August 2018 for July 2018;
(d)$1,156,272.89 on or about 26 September 2018 for August 2018;
(e)$1,131,283.60 on or about 30 October 2018 for September 2018;
(f)$1,183,778.29 on or about 27 November 2018 for October 2018;
(g)$1,159,280.84 on or about 19 December 2018 for November 2018;
(h)$1,211,837.17 on or about 30 January 2019 for December 2018; and
(i)$1,226,166.87 on or about 29 March 2019 for January 2019.
Those cash transfers are also impugned benefits the subject of the proceeding.
The trial judge found that the cash transfers were calculated in accordance with the methodology for calculating the fees in the 2018 Distribution Agreement (PJ [82]). I assume that the trial judge intended to refer to the cash transfers in paragraphs (b) to (i) above (consistently with SAFID [82], also reflected at PJ [496]), as the cash transfer in paragraph (a) was made under the 2013 Distribution Agreement. In relation to the cash transfer in paragraph (a), Deidre Langan of CBA gave evidence, which was accepted by the trial judge, that:
(a)Ms Langdon was informed that RBS and CFSIL had agreed a 50:50 profit share with respect to Essential Super (PJ [110]); and
(b)as Essential Super was loss-making in the 2014 financial year, the Cash Transfer that was made in respect of that financial year was in an amount that effected a 50:50 share of losses between RBS and CFS (PJ [117]).
Although it was not the subject of submissions, I note also that the Distribution Agreements contemplated an annual payment of the applicable fee at the end of each financial year. The monthly payments during the 2019 financial year were, to that extent, inconsistent with the contractual terms.
In addition to the cash transfers, during the relevant period journal entries totalling $55,723,946.65 in respect of Essential Super were made in the CBA Group General Ledger (PJ [83]). Although ASIC no longer presses its case in respect of the journal entries, it is contextually relevant to note the following evidence that was given by Ms Langdon on behalf of CBA and which was accepted by the trial judge:
(a)the General Ledger is the master set of accounts that captures all transactions (including assets, liabilities, revenue and expenses) across the CBA Group business units and legal entities (PJ [98]);
(b)every CBA Group legal entity has its own subordinate ledger that sits within the General Ledger, to which journal entries can be posted (PJ [103]);
(c)journal entries are primarily used by the CBA Group to attribute and track costs, revenue and expenses of different business units within the CBA Group (PJ [104]);
(d)within the CBA Group it is common for one business unit (or legal entity) to incur expenses on behalf of another business unit (or legal entity) upfront (PJ [106]);
(e)it was only by means of a special “sweep” process that a journal entry would create a payable in the balance sheet, and the general practice was that all payables identified in that sweep process were thereafter settled by a cash payment between the relevant entities (PJ [107]);
(f)in relation to Essential Super, CBA incurred expenses upfront on behalf of CFSIL and Ms Langan was involved in posting one journal entry in the 2014 financial year, which was set up in such a way to “sweep” Essential Super costs borne by CBA (on behalf of CFSIL) to CFSIL (PJ [108]);
(g)the journal entry in the 2014 financial year was picked up in the CBA Group’s monthly sweep process as was intended, and on 31 July 2014 the cash transfer in respect of the 2014 financial year was transferred from CFSIL to the CBA (PJ [116]);
(h)no journal entries were posted to effect a profit share for the January to June 2015 portion of the 2015 financial year (PJ [123]); and
(i)a journal entry made on or around 29 April 2016 reflected a 50:50 split of profit earned on Essential Super in respect of the period July 2015 to April 2016 (PJ [124]-[125]).
The finance teams in CBA and CFSIL did not become aware of the 2013 and the 2015 Distribution Agreements until September 2017. Until then, they were working on the basis of a 50:50 profit share, as agreed in the exchange of emails between the finance teams in November and December 2012, not the 70:30 profit share agreed in the Distribution Agreements. Ms Langdon gave evidence that, from that point on, journal entries were posted in accordance with the 70:30 profit share arrangement as specified in the Distribution Agreements (PJ [131]). Further, the journal entry posted for October 2017 included an amount by way of “true-up” for the months of July, August and September 2017 so that the year to date for the 2018 financial year reflected the 70:30 profit share (PJ [132]). However, there was no attempt to rectify previous actions taken in the financial years preceding the 2018 financial year on the basis of the assumed 50:50 profit share (PJ [497], [506] and [509(b)]).
The finance teams in CBA and CFSIL also discovered after the end of the 2017 financial year that no journal entry since the July 2014 journal entry had in fact resulted in a cash transfer from CFSIL to CBA (PJ [135]). In the ensuing 2015, 2016 and 2017 financial years, only management account journal entries were made and there were no sweep entries in those years which created a cash payable entry and nor were any cash payments made (PJ [137]). Steps were taken to rectify the lack of cash payments in the 2018 financial year, but no steps were taken to rectify the absence of cash payments in the previous financial years (PJ [138], [140]).
On 21 February 2019, CBA and CFSIL agreed that payments from CFSIL to CBA under the 2018 Distribution Agreement would be suspended from and including the payment calculated on the basis of net revenue for February 2019 (SAFID [91]).
Distribution of Essential Super
Essential Super was distributed by CBA in the following ways (PJ [57]):
(a)from 1 July 2013 to about 8 October 2017, to individuals through CBA’s retail branch network (branch sales);
(b)from 1 July 2013 to about 3 July 2018, to individuals through CBA’s digital channels via an online application process (digital sales); and
(c)from 1 July 2013 to about 3 July 2018, to employers as a default fund for employees who did not make a choice of fund (employer sales).
In respect of employer sales, individuals became members of Essential Super when they:
(a)commenced employment with an employer who had nominated Essential Super as the default fund for employees who did not make a choice of superannuation fund; and
(b)did not make a choice of superannuation fund for superannuation contributions by that employer (PJ [58]).
In addition to the three distribution channels set out above, individuals also became members of Essential Super between September 2014 and August 2016 where they had accrued default amounts as members of the Colonial First State First Choice Superannuation Trust, which amounts were transferred to Essential Super (ADA Transfers) (PJ [60]).
During the relevant period, 390,400 individuals became members of Essential Super (excluding those members who never had funds in their Essential Super account) (PJ [59]). Of those, 191,364 became members pursuant to branch sales, 135,499 became members pursuant to digital sales, 22,872 became members pursuant to employer sales, and 40,665 became members as a result of ADA Transfers (PJ [60]).
Branch sales
Branch sales involved a customer becoming a member of Essential Super in circumstances where staff members initiated the Essential Super account opening process in CBA’s “CommSee” system within a branch and assisted the customer to complete the application (PJ [61]). Where CommSee was unavailable, a customer could lodge a paper application to become a member of Essential Super within a branch (PJ [62]).
During the relevant period, CBA staff who had completed the prescribed training and testing (authorised staff) were permitted to undertake the account opening process for Essential Super with customers (PJ [63]). CBA staff who had not completed the prescribed training and testing (non-authorised staff) could perform a “warm handover” to authorised staff to assist interested customers with opening an Essential Super account. Alternatively, non-authorised staff could call the Essential Super call centre and assist customers to become a member of Essential Super together with an authorised staff member in the call centre (PJ [64]).
Non-authorised staff were provided with approved scripts to use when discussing Essential Super with a customer or a potential customer (PJ [65]). The scripts contained approved phrases, including (PJ [66]):
“Have you heard about Essential Super; it’s a superannuation fund, which can easily be viewed and managed in NetBank alongside a customer’s day to day banking.”
“Essential Super is a simple superannuation fund, which can be easily viewed and managed in NetBank alongside a customer’s day to day banking”.
“Congratulations on your new job. If your employer pays super on your behalf Essential Super issued by CFS is a simple and easy online account that accepts employer and personal contributions. I can’t provide advice on this however let me introduce you to an accredited branch member who can help you?”
The text preceding the approved phrases included the statements (PJ [67]):
“Prepositioning Factual Information: I am not qualified to provide you advice about Essential Super, however let me introduce you to one of our Essential Super specialists (CSS) who can help you further.
…
Non-accredited staff should preposition Factual Information at the start of any interaction when discussing Essential Super.”
Authorised staff were trained by CBA to engage with customers or potential customers in respect of Essential Super under a “general advice model” (PJ [69]). The training included various modules relating to the provision of general advice about superannuation (PJ [70]). Authorised staff were also provided with (PJ [71]):
(a)a “General Advice Warning” approved script, which authorised staff were required to use and which generally read as follows: “I can provide you general advice about Essential Super, however, you will need to decide if it is a suitable product for you by reading the PDS”; and
(b)guides to use when introducing Essential Super to a customer or potential customer, including guides titled:
(i)“Start a Super Conversation”;
(ii)“Essential Super QRG”;
(iii)“How to discuss insurance or Essential Super with a customer”; and
(iv)“Essential Super Insurance: Common questions and suggested responses”.
All staff, both authorised and non-authorised, were required to follow “standard operating procedures” when interacting with customers in the course of branch sales (PJ [68]). The standard operating procedures comprised one-page documents that contained links to other documents and that set out the steps that CBA staff were required to follow. Different standard operating procedures applied to “personal” (individual) customers and to “business” (employer) customers, and the standard operating procedures were amended throughout the relevant period. In broad terms, the standard operating procedures that applied to personal customers during the relevant period directed authorised staff to take the following steps when completing a branch sale for a personal customer (SAFID [55]-[58]):
(a)provide an oral, general advice warning to the customer before beginning the Essential Super application;
(b)provide an Essential Super information pack to the customer, which included (among other things) copies of the Financial Services Guide and the Product Disclosure Statement, and provide the customer with an opportunity to read the Product Disclosure Statement before opening the account;
(c)discuss the product benefits and features, including fees;
(d)confirm the customer’s personal details and NetBank registration;
(e)initiate the Essential Super account opening process and complete the application with the customer;
(f)update the account with the customer’s tax file number, if provided, and to discuss the implications if it is not provided;
(g)in the period before 28 March 2015, allow the customer to select investment and insurance options and, in the period after 28 March 2015, explain the default investment and insurance options and how these could be changed by the customer;
(h)provide all forms as required, including account summary, choice of fund (to direct employer superannuation contributions to an Essential Super account) and bring together superannuation forms (to consolidate the customer’s superannuation interests into an Essential Super account);
(i)in the period after 23 October 2013, confirm with the customer whether they would like to search for lost or inactive super; and
(j)direct the customer to the declaration and obtain the customer’s signature.
Authorised staff could access the general advice warning approved script and the guides referred to above, as well as other approved scripts for interacting with customers in branch sales, via hyperlinks in the standard operating procedures and on the Essential Super intranet or “iSource” pages (SAFID [62]).
The standard operating procedures contained links to approved scripts for authorised staff to use in branch sales. During the course of the hearing, the Court was taken to a copy of an approved script for the relevant period, which contained approved phrases, including:
“Generally, customers find that Essential Super is a straightforward superannuation product with the convenience of on line access through NetBank. Would you be interested in taking out Essential Super?”
“I’m letting my customers know about an exciting product called Essential Super. Essential Super is an online superannuation account which helps people to manage their super through NetBank. It also has the convenience of accepting employer contributions.”
“Many of our customers have found that selecting their own superannuation fund, rather than using the fund their employer provides, enables them to take greater control of their super. As Essential Super is accessible through NetBank, this makes it even easier as it provides flexibility for super and banking to be managed in the one place.”
“… I am also letting all my customers know about Essential Super, a competitively priced superannuation account that allows customers to take more control of their super. Essential Super can be managed online in NetBank alongside a customer’s day to day banking. Would you be interested in opening an Essential Super account?”
Customer: A friend of mine told me you have a new super account (Essential Super). Is it a good account? Staff: “I am able to provide you general advice about Essential Super, however you will need to decide if it is right for you by reading the PDS. Customers have found that Essential Super has provided them greater control over their superannuation as it can be viewed and managed online through NetBank. It has a competitive fee structure and is easy to open. Would you be interested in opening an account?”
Digital sales
Digital sales were completed by individuals by completing an online application to open an Essential Super account via a digital channel (PJ [76]). The form and content of the online application varied over the relevant period, but the key features remained largely the same (PJ [78]). The application process (PJ [77]; SAFID [71]-[74]):
(a)contained details on how to apply for Essential Super;
(b)directed the customer to read the Product Disclosure Statement in respect of Essential Super;
(c)required the customer to confirm their personal details;
(d)in the period before 28 March 2015, required the customer to select their investment and insurance options and, in the period after 28 March 2015, to view the default options selected;
(e)asked the customer whether they wished to take steps to direct their employer to make superannuation contributions on their behalf to their Essential Super account; and
(f)prompted customers to make their first contribution to their Essential Super account (whether by directing their employer to pay contributions to their Essential Super account or otherwise) and to consolidate their superannuation funds into their Essential Super account.
Between 1 July 2013 and March 2015, the “landing page” in digital channels contained the following statements (SAFID [71(a)]):
Important Information This application form provides general information only and is not financial advice. It does not take into account your individual objectives, financial situation or needs ... A Product Disclosure Statement (PDS) (PDF XXKB) for Essential Super is available from commbank.com.au/super or by calling 13 40 74. You should read the PDS and assess whether the information is appropriate for you before making an investment decision..."
From July 2015, the “landing page” in digital channels also contained a general advice warning as follows (SAFID [73]-[75]):
The information being provided to you is general advice only. This information doesn't take into account your objectives, financial situation or needs.
Employer sales
Employer sales occurred either in-person at one of CBA’s retail branches or through one of the digital channels using an online application form (PJ [72]). Once an employer had been set up as a “standard employer sponsor” with respect to Essential Super, the employer was able to add employees as members of Essential Super in a branch, by calling the Essential Super call centre or via one of the digital channels (PJ [73]). Only authorised staff were permitted to assist employers to be set up as a “sponsor” (PJ [74]).
The processes in respect of both forms of employer sales were substantially similar to the branch sales and digital sales in respect of individuals described above.
At all relevant times, CBA had in place standard operating procedures for authorised staff conducting in-branch employer sales (SAFID [66]). The standard operating procedures changed throughout the relevant period. In broad terms, however, the standard operating procedures directed authorised staff to take the following steps (SAFID [67]‑[68]):
(a)identify whether a customer may be interested in Essential Super;
(b)use an “Essential Super tag” that incorporated the general advice warning;
(c)provide the customer with copies of the Financial Services Guide and Product Disclosure Statement to read;
(d)discuss the product benefits and features (saves time and can easily add, remove and pay employees in NetBank);
(e)explain what employee information was necessary to open the Essential Super accounts;
(f)confirm the relevant business details and NetBank registration;
(g)initiate the employer arrangement and to complete the “Employer Acknowledgement”; and
(h)explain how employees can be added in the future and, if no employees added at the opening of the account, to follow up with the business owner.
In relation to digital employer sales, CBA provided an online application form for employers which stated (PJ [75]):
Reasons for applying:
- To have a central depository for all your employee super details
- The ability to create a superannuation account for your employees.
Before you get started
- Please download and read the Essential Super Product Disclosure Statement (PDF 415KB) and Financial Services Guide (PDF 603.72KB).
Important information
- This application form provides general information only and is not financial advice
…
- This application form provides general information only and is not financial advice. It does not take into account your individual objectives, financial situation or needs.
… A Product Disclosure Statement (PDF 600KB) for Essential Super is available from commbank.com.au/super or by calling 13 40 74. You should read the PDS and assess whether the information is appropriate for you before making an investment decision.
ADA Transfers
Individuals who became members of Essential Super as a result of ADA Transfers received a welcome pack after their Essential Super accounts had been opened. The welcome pack contained a covering letter, a document titled “Investment Confirmation” summarising the Essential Super account, a Product Disclosure Statement, a “Super Choice” form to instruct the member’s employer to pay future contributions to Essential Super, a non-lapsing death benefit nomination form and a booklet with information regarding NetBank and superannuation (PJ [79]).
Group accounting
Extensive lay and expert evidence was led by CBA at trial concerning the structure of the CBA Group, the relevant accounting practices that operated within the CBA Group, and the practical consequences of those practices (including in relation to the distribution of profit earned by CFSIL from Essential Super). The evidence was accepted by the trial judge. Relevant aspects of that evidence for the purpose of the appeal are as follows.
The CBA Group reported on the financial performance of CBA and its subsidiaries on a consolidated basis. The financial results of all transactions that occurred within the CBA Group were therefore presented in the CBA Group’s financial statements for each reporting period (PJ [171]).
Relevantly in respect of Essential Super, the revenue earned from Essential Super by CFSIL in each financial year was recorded as “funds management income” which formed part of the CFS total recorded “funds management income” (together with other subsidiaries of CFS). The CFS “funds management income” was recorded as part of the Wealth Management total “funds management income”, which was in turn recorded as part of CBA Group’s total “funds management income” in the CBA Group annual financial statements (PJ [173]).
During the relevant period, profits recognised in the CFSIL legal entity were distributed to the CBA legal entity (being CFSIL’s ultimate parent entity) through the CBA Group’s legal entity ownership structure as dividends, in accordance with the CBA Group Capital Management of Subsidiaries Branches Policy (dividend policy). Dividends retained by CBA were retained as earnings or paid to its shareholders (PJ [175]-[176]). Under the dividend policy, subsidiaries were required to pay dividends to CBA equal to their cash net profit after tax at least semi‑annually, save where the subsidiary needed to retain profits to remain solvent or to satisfy capital or regulatory requirements (PJ [176]).
For each year in the relevant period, CFSIL paid dividends to its immediate parent entity, which were then paid on from each entity above in the CBA Group structure ending at CBA (PJ [177]). Those payments were recorded in the annual financial statements of each entity (PJ [178]). The actual percentage of net profit after tax distributed by CFSIL by way of dividend ranged from a low of 44% to a high of 98%, in circumstances where CFSIL was subject to different capital requirements over time (PJ [182], [185]-[190]).
Mr Tony Samuel gave expert evidence which was accepted by the trial judge. Mr Samuel’s evidence included the following opinions:
(a)Consistently with the principles relevant to the presentation and preparation of consolidated financial statements and CBA’s accounting policy, all intercompany transfers between CBA and CFSIL would be eliminated in the CBA Group’s consolidated financial statements, so that only transactions with external parties would be reported (PJ [221], [230]).
(b)It is a common and recognised business practice for corporate groups to maintain an appropriate allocation of costs and revenues between members of the group so as to permit appropriate reporting about the performance of separate entities and business units within the group (PJ [222]).
(c)Statutory financial reporting can be contrasted with management reporting. Statutory reporting is concerned with the presentation of financial statements in accordance with requirements of the Act, which incorporates the Australian Accounting Standards. The Act requires consolidated financial statements to be prepared where the preparation of such statements is required by an accounting standard, which is normally the case where an entity controls one or more other entities. Management reporting, on the other hand, is optional, for internal use and there are no legal or accounting requirements. Management reporting is the foundation for monitoring performance, tracking financial performance against plans or forecasts and making strategic business decisions. In this regard, management reporting includes details typically not contained in statutory reporting and provides greater insights into the financial position of the group and, specifically, individual business units. CBA Group’s method of recording its financial transactions using journal entries in a general ledger is consistent with the Act’s requirements and common accounting practices (PJ [224]-[226]).
(d)The journal entries made in the CBA Group General Ledger in relation to Essential Super between 2014 and 2018 reflected reallocations of income and costs from the CFS cost centre to the RBS cost centre and would have netted off to nil with no impact on either CBA or CFSIL because of how they were accounted for in the CBA General Ledger (PJ [227]).
(e)Ultimately, all or almost all of CFSIL’s net profit after tax was distributed as dividends to CBA, including the profit derived from the sale of Essential Super (PJ [229]).
(f)All of the relevant cash transfers “cancelled out” on consolidation of the CBA Group accounts by reason of the double-entry accounting process adopted and the group dividend policy (PJ [238]).
C. REASONS OF THE TRIAL JUDGE
The trial judge dismissed the proceeding brought by ASIC for four principal reasons:
(a)first, the impugned benefits did not constitute “benefits” within the meaning of s 963A of the Act (PJ [478]);
(b)second, the impugned benefits could not reasonably be expected to influence either the choice of financial product recommended or the financial product advice given to a retail client by CBA (PJ [503]);
(c)third, ASIC failed to establish that CBA provided financial product advice to any retail client in connection with the distribution of Essential Super (PJ [513], [526]); and
(d)fourth, even if the impugned benefits constituted conflicted remuneration within the meaning of s 963A, the impugned benefits were exempted from the prohibitions in Div 4 of Pt 7.7A of the Act pursuant to the transitional provisions in s 1528 of the Act and reg 7.7A.16 of the Regulations.
In my view, the respondents’ argument should be accepted. The promise by CFSIL to pay CBA 30% of net revenue of the Essential Super Fund in return for services to be provided by CBA as agreed from time to time was given under an arrangement entered into on 27 June 2013 which continued thereafter throughout the relevant period. While there were changes made to the terms of the Distribution Agreements, including the specification of the services and service standards to be met by CBA, there was continuity of the arrangement to pay 30% of net revenue in return for the services agreed upon from time to time. The regulations themselves make clear that the matter is not to be treated as a contractual question as to whether a new contract has been entered into to replace the previous contract, as distinct from merely amending the previous contract. A compelling indication of that intention is provided in the language of the regulations which makes clear that if a party to an arrangement changes, the arrangement is taken to have continued in effect, after the change, as the same arrangement: regs 7.7A.16(3), 7.7A.16A(5), and 7.7A.16B(4)(a). That is to be contrasted with the relevant principle under the common law of contract, whereby a change to a party would ordinarily mean that a new contract had been entered into. The conclusion is also supported by the Explanatory Statement to the Corporations Amendment Regulation 2013 (No. 5) 2013 No. 151 (Cth) (the Explanatory Statement) which states in attachment A, page 2: “If the changes to an arrangement extend beyond a change to a party, the parties will need to give consideration to whether the changes are sufficiently material to trigger a new arrangement.” In my view, the changes made in 2015 and 2018 were not sufficiently material to lead to the conclusion that a new arrangement had been entered into, as distinct from the continuation of the same arrangement. References in the CFSIL board papers and minutes to the 2015 and 2018 Distribution Agreements as amendments or continuations of the existing arrangement with CBA were, in my view, natural and appropriate descriptions of the commercial reality of a single on-going arrangement.
Accordingly, in my view, the alleged benefits throughout the relevant period were given under an arrangement that was entered into before 1 July 2013.
In relation to the 2014 payment made by CFSIL to CBA, which was calculated by reference to a 50:50 net revenue split, that benefit was made pursuant to the understanding between CFSIL and CBA which was formed in late 2012, before the execution of the 2013 Distribution Agreement.
Was the alleged benefit given by a person acting in the capacity as a platform operator?
It is common ground between the parties that CFSIL was a platform operator at all material times. That fact, however, is only an initial step towards the present issue concerning whether the benefit was given by a person acting in the capacity as a platform operator. A crucial distinction between regs 7.7A.16A and 7.7A.16B concerns whether the benefit is so given. Regulation 7.7A.16A(2)(a) requires that the benefit is given by a person acting in the capacity as a platform operator, whereas reg 7.7A.16B(2)(a) requires that the benefit is given by a person who is not acting in the capacity of a platform operator. Both regulations contain in subreg (3) the provision that one is to treat a benefit as having been given by a person acting in the capacity as a platform operator if it:
(a)is given by a platform operator (which is satisfied by the common ground between the parties in the present case that CFSIL was a platform operator); and
(b)relates to activities undertaken in connection with the platform as the result of instructions to the platform operator from a client who has set up, or is setting up, an account on the platform.
The primary judge held that the requirement that the benefit must relate to the acquisition of a financial product by the platform operator on the instruction of a client does not apply to the present case. His Honour reasoned that the alleged benefits related to funded Essential Super accounts, but they did not relate to activities undertaken in relation to the platform, consisting of the acquisition of a financial product by the platform operator as a result of instructions to CFSIL from members as to their investment option, as required by the extended definition of platform operator in subs 1526(2): [552].
ASIC submitted that the alleged benefits were given in the capacity of a platform operator within the meaning of subreg (3) because the benefits are a percentage of CFSIL’s earnings from Essential Super and therefore “relate to” CFSIL’s activities in administering and investing the funds placed in Essential Super accounts, which CFSIL must invest in accordance with the client’s chosen investment option. Accordingly, ASIC submits, the activities are undertaken by CFSIL in connection with the platform as a result of instructions to CFSIL from clients.
CBA submitted that the alleged benefits do not relate to activities by the platform operator acquiring financial products on instructions from retail clients. Rather, the payment (and promise of payment) in the present case is simply a service fee to CBA for distribution services, contacting potential members and presenting them with the option of signing up. In the process of discussing Essential Super with potential members, no activities were being undertaken on instructions from existing retail clients to the platform operator.
In my view, the submissions by CBA are correct. In the first place, I read subreg (3) as an exhaustive statement (expressed imperatively by the word “treat”) as to when a benefit is to be treated as having been given by a person acting in the capacity as a platform operator. The circumstances set out in subreg (3) are such an obvious case of a benefit being given in that capacity that I do not see the practical point of the subreg if it were intended merely to be an inclusive definition. CBA expressly submitted that subreg (3) was exhaustive, and provided for the only way in which a benefit is given by a person acting in the capacity as a platform operator (T127.18-27). ASIC did not take issue with that construction, and its written submissions at [67] proceeded implicitly on the same basis. I therefore regard it as being common ground between the parties that subreg (3) is exhaustive, and not merely inclusive. In the second place, the alleged benefit in the present case related to the distribution services provided by CBA, which involved attracting new clients and presenting them with the opportunity to become members. The alleged benefit did not relate to the actual activities which are undertaken on clients’ instructions to CFSIL once they have set up, or are in the process of setting up, an account on the platform. Although the expression “relates to” is capable of a wide operation, I regard any connection between the alleged benefit and the carrying out of the instructions of actual existing clients as too tenuous to fall within paragraph 3 of each of regs 7.7A.16A and 7.7A.16B.
I note that the Explanatory Statement includes the following passage:
Subparagraph 7.7A.16A(2)(c)(ii) is designed to ensure benefits paid by a platform operator that do not specifically relate to a person who opened an account on the platform before 1 July 2014 and otherwise would be conflicted remuneration are subject to Division 4 of Part 7.7A of the Act. An example of this may include a marketing or sponsorship payment from a platform operator to a licensee that is designed to incentivise the licensee to recommend the platform to its clients.
The example given in the last sentence is referred to only as a possibility, the operative word being “may”, not “would”. Moreover, the quoted passage is directed to subpara 7.7A.16A(2)(c)(ii), rather than to 7.7A.16A(3). The passage does not appear to be intended to elucidate the meaning of giving a benefit in the capacity as a platform operator.
The consequence of that reasoning is that reg 7.7A.16A cannot apply, because the circumstance referred to in subreg (2)(a) is not satisfied. The further consequence is that reg 7.7A.16B(2)(a) will be satisfied, because the alleged benefit was given by a person who was not acting in the capacity of a platform operator.
Does regulation 7.7A.16B apply to the alleged benefit?
I have set out the relevant terms of reg 7.7A.16B above. The reasoning to this point has established that the elements of paras (2)(a) and (b) are satisfied. The remaining analysis focuses then on paras (2)(c) and (d).
Paragraph (c) poses the question whether the benefit:
(a)is given in relation to the acquisition, on or after 1 July 2014, of a financial product, for the benefit of a retail client; or
(b)does not relate to a financial service provided, before 1 July 2014, for the benefit of a retail client.
ASIC points out that para (c)(ii) operates as an alternative to para (c)(i), such that only one of those paragraphs needs to be satisfied. ASIC then relies on a broad and literal construction of para (c)(ii) as requiring merely that the benefit “does not relate to a financial service provided before 1 July 2014, for the benefit of a retail client”, and submits that those literal words are satisfied in the present case. ASIC emphasises the width of the connecting phrases “in relation to” and “relate to”. ASIC also draws attention to the statement in the Explanatory Statement, Attachment A, p 5 that: “Together, regs 7.7A.16A and 7.7A.16B grandfather benefits given by platform operators and persons other than platform operators under a consistent approach. In both cases, benefits given in relation to new clients from 1 July 2014 are not grandfathered, even if the benefit is given under a pre-application day arrangement.” ASIC accepted that grandfathering would apply to those persons who opened accounts before 1 July 2014.
As to para (c)(i), CBA submits that the alleged benefit was not given by the platform operator in relation to the acquisition of a financial product for the benefit of a retail client. CBA submits that the “acquisition” of a financial product referred to in para (c)(i) is a reference to the acquisition of a financial product by the platform operator, and thus does not apply to the retail client signing up to Essential Super, being the acquisition of a financial product by the retail client himself or herself. CBA further submits that the expression “for the benefit of a retail client”, combined with a “financial product”, makes it clear that the language is concerned with the circumstance where products are being acquired by the platform operator, but in some way not necessarily on the instructions of a retail client but nonetheless for the benefit of its existing retail client. Again, CBA submits that the alleged benefit was payable for the provision of services in connection with the distribution of Essential Super by CBA. The alleged benefit was not being given in relation to the acquisition of a financial product for the benefit of an existing retail client. CBA further points out that para (c) must be construed in the context of para (d), which refers to the client not having an interest in the product (noting the use of the definite article in “the client”) before 1 July 2014. Accordingly, in applying the regulation, one must be able to say what the product is, when it was acquired, and the identity of the client for whom the product was acquired.
As to para (c)(ii), CBA submits that the “financial service” must be a financial service provided to an existing retail client of the platform operator, emphasising that para (c)(ii) must be construed in the context of para (d) which refers to existing clients. CBA submits that that is not satisfied in the present case in which the alleged benefit related to distribution services by CBA which were anterior to the potential client being an existing client of CFSIL. The alleged benefits did not relate to a financial service being provided to existing retail clients of the platform operator.
CBA submits that a literal interpretation of para (c)(ii) would rob para (c)(i) of any operation and that one should not interpret para (c)(ii) in a way which would destroy any purpose in para (c)(i) and be inconsistent with para (d). CBA submits that one must construe para (c)(ii) as being concerned with financial services to existing retail clients. CBA points out a passage in the Explanatory Statement, attachment A, page 4, in which an example is given of the intended application of para (c)(ii), being a marketing or sponsorship payment from a product issuer to a licensee that is designed to incentivise the licensee to recommend the issuer’s products.
In my view, CBA’s submissions should be accepted. There are two principal reasons for that conclusion.
First, para (c)(ii) must be construed in the context of para (d). Paragraph (d) contemplates an existing retail client, and an actual financial product (or perhaps class of financial products) in respect of which one can say definitively whether the particular client had an interest before 1 July 2014. In that context, para (c)(ii) is directed to the timing question of whether the benefit relates to a financial service which was provided to an existing retail client in relation to a particular financial product (or class of products) before 1 July 2014 or from 1 July 2014, irrespective of whether such product or products were acquired by that retail client. If the benefit does not relate to such a service provided before 1 July 2014, then para (c)(ii) is satisfied. The alleged benefit in the present case related to services by CBA to attract potential members of Essential Super, rather than relating to services being provided to existing retail clients of CFSIL.
The example given in the Explanatory Statement to which CBA referred (ie, that para (c)(ii) applies to a marketing or sponsorship payment from a product issuer to a licensee that is designed to incentivise the licensee to recommend the issuer’s products) confirms that para (c)(ii) was intended to apply to benefits which relate to financial services for the benefit of a retail client. Accordingly, the example indicates that the word “not” in para (c)(ii) is intended to apply to the timing issue of whether such a financial service was not provided before 1 July 2014, rather than the question whether a financial services was provided at all. I have given consideration to the Explanatory Statement pursuant to s 15AB(1)(b)(i) of the Acts Interpretation Act1901 (Cth) to determine the meaning of a provision which is ambiguous or obscure.
Second, I agree that a literal construction of para (c)(ii) would give para (c)(i) little or no practical work to do. A benefit “given in relation to the acquisition, on or after 1 July 2014, of a financial product, for the benefit of a retail client” (ie, para (c)(i)) would almost invariably be a benefit which literally “does not relate to a financial service provided, before 1 July 2014, for the benefit of a retail client” (ie, para (c)(ii)). It would appear from the text and structure of para (c) that subpara (c)(i) was intended to have a substantial scope of operation independent of subpara (c)(ii), being the first of two alternatives set out in that paragraph.
While the quantification of the payment of 30% of net revenue to CBA would have been affected by the amount of investments by retail clients of CFSIL (including those who became members on or after 1 July 2014) from which the revenue of CFSIL was generated, that is too tenuous a connection to satisfy the circumstances to which para (c) refers. I agree, as CBA has submitted, that the alleged benefits in the present case were given in relation to activities concerned with attracting potential retail clients rather than the acquisition of financial products for the benefit of existing retail clients or the provision of financial services to existing retail clients.
Do the conflicted remuneration provisions have any application?
It follows from the conclusions I have reached that neither reg 7.7A.16A nor reg 7.7A.16B has any application to the alleged benefits in this case. That leaves the field clear for the application of reg 7.7A.16 which prescribes a circumstance in which the conflicted remuneration provisions Div 4 of Pt 7.7A do not apply.
The circumstance referred to in reg 7.7A.16(2) is satisfied where the benefit is given by a platform operator (which it is common ground is satisfied), and the benefit is given under an arrangement that was entered into before 1 July 2013 (which I have found to be the case, given the continuity throughout the relevant period of the arrangement reflected in the 2013 Distribution Agreement entered into on 27 June 2013). Accordingly, reg 7.7A.16 is satisfied, and therefore Div 4 of Pt 7.7A of the Act does not apply.
Miscellaneous Matters
There was considerable debate as to which party bears the onus of proving the elements of regs 7.7A.16, 7.7A.16A and 7.7A.16B. In light of the conclusions I have reached it is not necessary to decide that question. It is well established that the plaintiff bears the onus of establishing the ingredients of a provision which defines the scope of the application of a prohibition, as distinct from a provision which defines an exception: Vines v Djordjevitch (1955) 91 CLR 512 at 519-520; Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249 at 257-9; Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88 at 94-95; Australian Securities and Investments Commission v Lewski (2018) 266 CLR 174 at [83]. In my view, the substance of the language used in regs 7.7A.16, 7.7A.16A and 7.7A.16B defines the scope of a prohibition, rather than providing an exception as such. Accordingly, had it been necessary to do so, I would have found that the relevant onus of proof with respect to the application or non-application of the grandfathering provisions lay with ASIC.
I note that there was some debate concerning pleadings, and in particular the way in which these regulations were relied on in the respondents’ defences. I read the defences as raising an issue as to the application of regs 7.7A.16, 7.7A.16A and 7.7A.16B and, I do not read the defences as conceding that the only available grandfathering was in relation to clients who opened accounts on or after 1 July 2014. That is also how the trial was conducted. I note further that in oral submissions in reply, after full argument had taken place on all these regulations, ASIC expressly took no point concerning the way in which issues concerning the regulations had been raised on appeal.
Finally, I wish to say something about the term “grandfathering”. I have used the term only because it was adopted by the parties, reflecting the usage in the Explanatory Statement and elsewhere. The term “Grandfather Clause” originated in the second generation after the US Civil War when a number of southern states enacted property, literacy or other voter qualifications but provided that they need not be met by men who had voted before 1867 or had served in the military in the Civil War or in certain earlier wars, or who were descended from such persons. The Louisiana Convention enacted the first such Grandfather Clause in 1898, whereby males entitled to vote before 1867, their sons and grandsons over 21, and foreign-born naturalised males over 21 were permitted to register to vote without meeting the literacy or property requirements. In Louisiana, more than 130,000 African Americans had voted in 1896, before the disenfranchising measures were enacted, but in 1900 the number was down to 5,320: Benno C. Schmidt, “Principle and Prejudice: The Supreme Court and Race in the Progressive Era” (1982) 82 Columbia Law Review 835 at 847. Similar Grandfather Clauses were enacted in the following decade by North Carolina, Alabama, Virginia, Georgia and Maryland. This was a blatant denial of the right to vote based on race, despite the 15th Amendment prohibiting the denial of voting rights “on account of race, color or previous condition of servitude”. In 1915, the US Supreme Court held that an amendment to the Constitution of Oklahoma enacting a Grandfather Clause was invalid, being in contravention of the 15th Amendment: Guinn v United States, 238 US 347 (1915). The unanimous opinion of the Supreme Court was delivered by Chief Justice White, who had himself fought in the Civil War as a Confederate soldier from Louisiana. The Oklahoma legislature responded brazenly in 1916 by enacting a new registration law that gave permanent voting privileges to all those registered to vote in the 1914 general election, which had been held under the Grandfather Clause, and gave all others eligible in 1916 only 12 days to get their names on the rolls, unless prevented by illness or absence, or be perpetually disenfranchised. Oklahoma thereby grandfathered the Grandfather Clause (Benno C. Schmidt, op. cit., p. 880), and it was not until 1939 that the Supreme Court (by majority) struck down the new Oklahoma scheme: Lane v Wilson, 307 US 268 (1939). It is surprising that the unexceptional technique in statutory drafting of preserving the operation of the previous legal regime, in limited and defined circumstances for those who were engaging in the relevant conduct at the time the legislation was passed, should be expressly associated with one of the more regrettable episodes of US legislative history. In an age when seemingly innocuous language is frequently made the object of censure, it is ironic that this usage has passed uncritically into current legal jargon. A more literal term, such as “preservation”, might be considered more appropriate in contemporary Australia.
Conclusion
Accordingly, in my view, the appeal should be dismissed with costs.
I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman. Associate:
Dated: 17 August 2023
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