Australian Securities and Investments Commission v DOD Bookkeeping Pty Ltd (in liq), in the matter of DOD Bookkeeping Pty Ltd (in liq)
[2023] FCA 1622
•20 December 2023
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v DOD Bookkeeping Pty Ltd (in liq), in the matter of DOD Bookkeeping Pty Ltd (in liq) [2023] FCA 1622
File number: NSD 444 of 2021 Judgment of: GOODMAN J Date of judgment: 20 December 2023 Catchwords: CORPORATIONS – best interests obligations in Division 2 of Part 7.7A of the Corporations Act 2001 (Cth) – advice given to clients without adequate consideration of the interests of those clients – contraventions of s 961K of the Corporations Act established
CORPORATIONS – conflicted remuneration provisions in Division 4 of Part 7.7A of the Corporations Act – application of transitional provisions – payment of bonuses to advisers employed by the defendant upon the purchase of real properties by the trustees of self-managed superannuation funds (SMSF) following advice provided by such advisers to the defendant’s clients to establish an SMSF and to cause the trustee thereof to purchase real property – bonuses likely to influence the choice of financial product recommended to and the financial product advice given to clients of the defendant – contraventions of ss 963J and 963E of the Corporations Act established
Legislation: Australian Securities and Investments Commission Act 2001 (Cth), ss 13, 33
Corporations Act 2001 (Cth), ss 9, 601RAC, 761, 761A, 761G, 761GA, 764A, 766A, 766B, 766C, 910A, 913B, 944A, 946A, 960, 961, 961B, 961F, 961G, 961K, 961L, 961P, 963A, 963B, 963C, 963D, 963E, 963J, 967, 1012IA, 1526, 1528
Corporations Amendment (Future of Financial Advice Measures Act 2012 (Cth)
Retirement Savings Accounts Act 1997 (Cth), s 12
Superannuation Guarantee (Administration) Act 1992 (Cth)
Superannuation Industry (Supervision) Act 1993 (Cth), ss 10, 19, 52
Corporations Regulations 2001 (Cth), regs 7.1.29, 7.1.33A, 7.7A.16B, 7.7A.16C
Superannuation Industry (Supervision) Regulation 1994, reg 4.09
Cases cited: Australian Securities and Investments Commission and AGM Markets Pty Ltd (In Liq) (No 3) [2020] FCA 208; (2020) 275 FCR 57
Australian Securities and Investments Commission v AGM Markets Pty Ltd (In Liq) (No 4) [2020] FCA 1499; (2020) 148 ACSR 511
Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69; (2020) 377 ALR 55
Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1149; (2022) 163 ACSR 442
Australian Securities and Investments Commission v Commonwealth Bank of Australia [2023] FCAFC 135
Australian Securities and Investments Commission v Financial Circle Pty Ltd [2018] FCA 1644; (2018) 131 ACSR 484
Australian Securities and Investments Commission v MobiSuper Pty Limited [2022] FCA 990
Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211
Australian Securities and Investments Commission v NSG Services Pty Ltd [2017] FCA 345; (2017) 122 ACSR 47
Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527
Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877; (2022) 156 ACSR 371
Australian Securities and Investments Commission v Westpac Securities Administration Ltd [2019] FCAFC 187; (2019) 272 FCR 170
Australian Securities and Investments Commission v Westpac Banking Corporation [2019] FCA 2147
Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3; (2021) 270 CLR 118
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 259 Date of last submissions: 15 September 2023 Date of hearing: 2 and 3 December 2021; submissions filed 22 August 2022, 19 October 2022, 17 July 2023 and 15 September 2023 Counsel for the Plaintiff: Mr A Leopold SC with Ms T Fishburn Solicitor for the Plaintiff Australian Securities and Investments Commission, Litigation Team ORDERS
NSD 444 of 2021 IN THE MATTER OF DOD BOOKKEEPING PTY LTD (IN LIQUIDATION)
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff
AND: DOD BOOKKEEPING PTY LTD (IN LIQUIDATION)
Defendant
ORDER MADE BY:
GOODMAN J
DATE OF ORDER:
20 DECEMBER 2023
THE COURT ORDERS THAT:
1.The plaintiff approach the Associate to Goodman J for the purpose of scheduling a hearing as to the appropriate form of relief.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
1. INTRODUCTION
[1]
2. BACKGROUND
[4]
2.1 The defendant
[4]
2.2 The Advisers and their terms of employment
[5]
2.3 The advice
[11]
2.4 Bonus payments
[14]
2.5 The ASIC investigation and the appointment of a liquidator to the defendant
[15]
2.6 The expert report of Mr Richards
[18]
3. SOME MATTERS OF DEFINITION AND THEIR APPLICATION
[19]
3.1 Statements of Advice
[20]
3.2 Financial product
[21]
3.3 Financial product advice
[25]
3.4 Financial service
[30]
3.4.1 Regulation 7.1.29(1)
[33]
3.4.1.1 Regulation 7.1.29(3)
[36]
3.4.1.2 Regulation 7.1.29(5)
[43]
3.4.2 Regulation 7.1.33A
[45]
3.5 Personal advice
[48]
3.6 Retail client
[50]
3.7 Platform operator
[61]
3.8 Benefit
[63]
3.9 Summary
[64]
4. THE DIVISION 2 CASE
[65]
4.1 Introduction
[65]
4.2 Did Division 2 apply to the advice the subject of this proceeding?
[69]
4.3 Findings of fact
[70]
4.3.1 Generally
[70]
4.3.2 Mr and Mrs AA
[73]
4.3.3 Mr and Mrs BB
[83]
4.3.4 Mr and Mrs CC
[90]
4.3.5 Mr and Mrs DD
[94]
4.3.6 Mr and Mrs EE
[100]
4.3.7 Mr and Mrs FF
[108]
4.3.8 Ms GG
[116]
4.3.9 Mr HH and Ms JJ
[121]
4.3.10 Mr KK and Ms LL
[127]
4.3.11 Mr and Mrs MM
[137]
4.3.12 Mr NN and Ms OO
[143]
4.3.13 Ms PP
[148]
4.4 Section 961B
[154]
4.5 Section 961G
[167]
4.6 Conclusions concerning the Division 2 case
[180]
5. THE DIVISION 4 CASE
[183]
5.1 Threshold question: was the operation of Division 4 excluded by operation of s 1528 of the Act
[187]
5.1.1 First question: were the impugned benefits received under an arrangement entered into before the application day?
[192]
5.1.2 Second question: did a regulation made under s 1528(2) render Division 4 applicable (Advisers YY and ZZ)?
[196]
5.1.3 Third question – did a regulation made under s 1528(2) of the Act operate so as to make Division 4 applicable (Adviser XX)?
[210]
5.1.4 Conclusion as to the effect of s 1528 of the Act
[211]
5.2 Findings of fact
[214]
5.3 Section 963J case
[220]
5.3.1 “An employer of a financial services licensee, or a representative of a financial services licensee …”
[222]
5.3.2 “representative”
[228]
5.3.3 “…conflicted remuneration for work carried out, or to be carried out, by the licensee or representative as an employee of the employer”
[229]
5.3.3.1 Section 963A
[230]
5.3.3.2 Sections 963B, 963C and 963D
[239]
5.3.4 “… for work carried out, or to be carried out, by the [Adviser] as an employee of the employer”
[250]
5.3.5 Conclusions as to the s 963J case
[251]
5.4 Section 963E case
[252]
6. CONCLUSION
[258]
REASONS FOR JUDGMENT
GOODMAN J
1. INTRODUCTION
Part 7.7A of the Corporations Act 2001 (Cth) concerns best interests obligations and remuneration. Within that Part, Division 2 requires providers of personal advice to act in the best interests of their clients in relation to such advice and Division 4 prohibits the provision and receipt of conflicted remuneration in connection with the provision of particular advice.
This proceeding concerns advice given by the defendant to certain of its clients by one of three of its employed Advisers – Advisers XX, YY and ZZ – during the period from May 2015 to April 2018 and the remuneration paid by the defendant to those Advisers. Orders have been made protecting the confidentiality of the identity of the Advisers and the clients of the defendant who received the advice. Thus, the Advisers’ and the clients’ names have been anonymised in these reasons for judgment.
The plaintiff, the Australian Securities and Investments Commission (ASIC), alleges that the defendant contravened provisions of Division 2 by providing advice that was not in the best interests of its clients and was inappropriate (Division 2 case); and contravened Division 4 by providing particular bonus payments to the Advisers which were accepted by the Advisers (Division 4 case). These reasons for judgment explain why I am satisfied that the Division 2 case has been made out; and that subject to some minor exceptions, the Division 4 case has been made out.
2. BACKGROUND
2.1 The defendant
At all material times the defendant, which was then known as Equiti Financial Services Pty Ltd, was a “financial services licensee” within the meaning of s 761A of the Act because it held an Australian financial services licence granted under s 913B of the Act. Pursuant to that licence it was authorised to provide “financial product advice” for, and to deal in, various classes of “financial products”.
2.2 The Advisers and their terms of employment
The defendant employed: (1) various “authorised representatives” (as defined in s 9 and Chapter 7, Part 6, Division 5 of the Act); and (2) financial advisers. Advisers XX, YY and ZZ were financial advisers but were not authorised representatives of the defendant. Each of the Advisers was a representative of the defendant, by dint of his capacity as an employee of the defendant and the operation of ss 960 and 910A of the Act which deemed an employee of a financial services licensee to be a representative.
On or about 25 January 2013, the defendant and Adviser ZZ entered into an employment contract. Adviser ZZ’s duties, roles and responsibilities were described in that contract as including:
(1)conducting financial planning presentations;
(2)following through on leads generated through the defendant’s marketing processes and assisting the defendant in generating and introducing new financial planning clients;
(3)analysis and evaluation of clients’ current financial status with the aim of preparing structured Statements of Advice (SOAs) and the presentation of such SOAs to clients; and
(4)the implementation of steps in accordance with authorities to proceed provided by clients.
The employment contract also provided that Adviser ZZ was to be remunerated via a base salary of $150,000 plus superannuation, payable fortnightly; and bonuses, payable monthly. The provisions of the employment contract referable to the payment of bonuses were:
5.5 If you are eligible for payment of bonuses or incentives in accordance with [the defendant’s] scheme, the following additional terms apply:
(a) You will be entitled to payment of a bonuses (sic)/incentive for sales you effect/introduce only.
(b) Bonuses will be paid at the rate set out in the Bonus/Incentive Scheme as amended from time to time. Details of any changes to the bonus/incentive scheme will be communicated to you. [The defendant] reserves the right to review or change bonus/incentive arrangement with reasonable notice.
(c) Bonuses/incentives will be earned and paid only after [the defendant] has received full payment of the relevant service on which bonuses/incentives are claimed.
(d) Bonuses/incentives will not be paid on services for which [the defendant] received payment after your employment terminates, whether or not the sale is negotiated during your employment.
Please note that actual bonuses/incentives earned are at the entire discretion of the [defendant], and are subject to the overall business performance.
…
Equiti Bonus & Incentive Scheme-1 July 2012 to 30 June 2013
Financial Advisor
a) Your performance may be assessed on client acquisition, client retention and client satisfaction and you may receive performance or non-performance based bonuses as may be determined by management from time to time
On the same day, the defendant and Adviser YY entered into an employment contract in relevantly identical terms.
On or about 17 March 2016, the defendant and Adviser XX entered into an employment contract in terms relevantly identical to the employment contracts between the defendant and Advisers YY and ZZ, save that Adviser XX’s base salary was $75,000 per annum plus superannuation.
The evidence establishes that:
(1)these arrangements between the defendant and the Advisers did not relate to an “enterprise agreement” or a “collective agreement-based transitional instrument” as those terms were defined for the purposes of reg 7.7A.16C(6) of the Corporations Regulations 2001 (Cth); and
(2)the Advisers were not employed by any other financial services licensee while they were employed by the defendants.
2.3 The advice
Each of the Advisers provided advice to clients of the defendant. That advice was provided, relevantly to the issues raised in this proceeding, between May 2015 and April 2018 to 165 clients of the defendant in the form of written SOAs on the letterhead of the defendant. The 165 SOAs in evidence before the Court were prepared by Adviser XX (19), Adviser YY (78) and Adviser ZZ (68). Of the 165 clients, 159 – including all of the clients the subject of the Division 2 case – did not already have a self-managed superannuation fund (SMSF). Each of those 159 clients was advised to establish an SMSF and to rollover their existing superannuation into the newly established SMSF. The SOAs followed a template format and contained a significant amount of common, or boilerplate, text. In particular, the following matters were common to each of the SOAs:
(1)a covering letter in the same form, which included: “This Statement of Advice is a comprehensive document that contains our advice and recommendations”;
(2)a generic summary of “risks”, which was not tailored to the individual client; and
(3)the clients were given advice (the usual advice) to:
(a)have the trustee of the SMSF purchase a property within the SMSF; and
(b)borrow to fund the purchase of the property.
ASIC’s Division 2 case focusses upon the advice provided to 12 individual or pairs of clients. Those clients are identified as Mr and Mrs AA, Mr and Mrs BB, Mr and Mrs CC, Mr and Mrs DD, Mr and Mrs EE, Mr and Mrs FF, Ms GG, Mr HH and Ms JJ, Mr KK and Ms LL, Mr and Mrs MM, Mr NN and Ms OO, and Ms PP. ASIC contends that in providing the SOAs to those clients the defendant did not act in their best interests in contravention of provisions of Division 2. The Division 2 case is considered at Part 4 below.
For each of these clients the usual advice was given and it was implemented. The purchase of the property was facilitated by Equiti Property Pty Ltd, a company related to the defendant.
2.4 Bonus payments
The defendant made bonus payments to Adviser XX for the years ended 30 June 2017 and 2018 and to Advisers YY and ZZ for the years ended 30 June 2016, 2017 and 2018. The Advisers accepted these bonuses. ASIC’s Division 4 case is that the defendant contravened provisions of Division 4 because the bonus payments made to Adviser XX (for the year ended 30 June 2018), Adviser YY (for the years ended 30 June 2017 and 2018) and Adviser ZZ (for the years ended 30 June 2017 and 2018) were “conflicted remuneration” within the meaning of that term in s 963A of the Act and that the defendant contravened: (1) s 963J of the Act (because it gave the bonuses to the Advisers); and (2) s 963E(2) of the Act (because the Advisers, as representatives of the defendant, accepted the bonuses). The Division 4 case is considered at Part 5 below.
2.5 The ASIC investigation and the appointment of a liquidator to the defendant
On 15 October 2018, ASIC commenced an investigation under s 13 of Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). That investigation included the issue of notices for the production of documents under s 33 of the ASIC Act to the defendant and other persons. Many documents were produced – including files held by the defendant concerning its clients – and have been included in the evidence before the Court which comprises more than 41,000 pages.
On 9 October 2020, and prior to the commencement of this proceeding the defendant entered into a members’ voluntary winding up and Mr Steven Nichols was appointed as liquidator of the defendant. The defendant has not formally appeared in this proceeding. ASIC prosecutes this proceeding for the purposes of general deterrence.
As no defence has been filed, no admissions have been made that may have otherwise narrowed the range of issues requiring determination and it has been necessary to consider in detail whether particular provisions of the Act and the Regulations were satisfied (including the operation of various exceptions and exceptions to exceptions and so on).
2.6 The expert report of Mr Richards
ASIC relies upon an expert report of Mr Peter Richards, a financial planner and financial advisor of more than 30 years’ experience. In that report, Mr Richards has undertaken an analysis of both the process by which the 12 clients the subject of the Division 2 case were provided with advice by the Advisers; and of the substance of that advice. I accept the evidence given by Mr Richards, whilst acknowledging that it has not been challenged by contrary evidence or cross-examination. In this regard, I note that: (1) Mr Richards’s analysis is careful and detailed and appears, consistently with his obligations as an expert witness, to take a balanced approach, in which he has identified both matters which are consistent with the defendant having acted in accordance with its statutory obligations and other matters which are not; and (2) a number of the conclusions expressed by Mr Richards, respectfully, appear to be self‑evident.
3. SOME MATTERS OF DEFINITION AND THEIR APPLICATION
I turn now to address some matters of definition and their application. The analysis below considers the provisions of the Act and the Regulations during the period of the alleged contraventions.
3.1 Statements of Advice
The expression “Statement of Advice” was defined in s 761A of the Act to mean “a Statement of Advice required by section 946A to be given in accordance with Sub-division C and D of Division 3 of Part 7.7”. Section 946A of the Act relevantly provided that a providing entity was required to give a client a Statement of Advice in accordance with sub-divisions C and D of Division 3 of Part 7.7 of the Act. Section 944A of the Act provided that Division 3 applied where “personal advice” was provided by a “financial services licensee” to a client as a “retail client”. In the present case, the SOAs constituted “personal advice” (see 3.5 below) and the defendant was a “financial services licensee” (see [4] above) and the advice was provided to the clients as retail clients (see 3.6 below). It follows that each SOA was a “Statement of Advice” as defined in s 761A of the Act.
3.2 Financial product
A central concept in Chapter 7.7A was (and remains) that of a “financial product”. By dint of s 9 of the Act, “financial product” had the meaning in Chapter 7.7A that it had in Chapter 7 of the Act. That meaning was provided by Division 3 of Part 7.1 of the Act. Within that Division, there was a general definition, some specific inclusions and some overriding exclusions. ASIC relies upon one of the specific inclusions, namely s 764A(1)(g), which provided that a “superannuation interest” within the meaning of the Superannuation Industry (Supervision) Act 1993 (SIS Act) was a “financial product”.
Section 10 of the SIS Act defined “superannuation interest” to mean “a beneficial interest in a superannuation entity”. That same section defined “superannuation entity” in terms which include a “regulated superannuation fund”. Section 19 of the SIS Act defined “regulated superannuation fund” as a superannuation fund in respect of which there had been compliance with s 19(2) to (4) of the SIS Act. Section 19(2) to (4) required that the superannuation fund have a trustee; that the trustee of the fund be a constitutional corporation pursuant to a requirement contained in the governing rules, or, the governing rules provide that the sole or primary purpose of the fund was the provision of old-age pensions; and the trustee or trustees have given to APRA, or such other body or person as is specified in the regulations, a written notice that was in the approved form and signed by the trustee or each trustee electing that the SIS Act was to apply in relation to the fund.
As noted at [11] above, 159 of the 165 clients – including all of the clients the subject of the Division 2 case – did not have an extant SMSF at the time that the subject advice was given. It follows that for those clients, the requirements of s 19(2) to (4) of the SIS Act had not been met because at the time the advice was given, the “financial product” in the form of a “superannuation interest” did not yet exist. However, this is not an impediment to a finding that the advice given in the SOAs to, inter alia, establish an SMSF and cause the trustee of the SMSF to purchase a property is advice that “is intended to influence a person or persons in making a decision in relation to a particular financial product … or could reasonably be regarded as being intended to have such an influence” for the purposes of s 766B(1)(a) of the Act (see 3.3 below): see Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 at [401] to [421] (Sackville AJA).
The six clients who had a pre-existing SMSF (the six extant SMSF clients) had a “superannuation interest” in the form of a beneficial interest in that SMSF.
3.3 Financial product advice
The expression “financial product advice” was defined in s 761A of the Act as having the meaning given by s 766B of the Act which, in so far as is presently relevant, was as follows:
766B Meaning of financial product advice
(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.
(1A)However, subject to subsection (1B), the provision or giving of an exempt document or statement does not constitute the provision of financial product advice.
(1B)Subsection (1A) does not apply for the purpose of determining whether a recommendation or statement of opinion made by an outside expert, or a report of such a recommendation or statement of opinion, that is included in an exempt document or statement is financial product advice provided by the outside expert.
...
(5)The following advice is not financial product advice:
(a)advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts;
(b)except as may be prescribed by the regulations—any other advice given by a lawyer in the ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of those activities;
(c)except as may be prescribed by the regulations—advice given by a registered tax agent or BAS agent (within the meaning of the Tax Agent Services Act 2009), that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities.
(6)If:
(a)in response to a request made by a person (the inquirer) to another person (the provider), the provider tells the inquirer the cost, or an estimate of the likely cost, of a financial product (for example, an insurance product); and
(b)that cost or estimate is worked out, or said by the provider to be worked out, by reference to a valuation of an item (for example, a house or car to which an insurance policy would relate), being a valuation that the provider suggests or recommends to the inquirer;
the acts of telling the inquirer the cost, or estimated cost, and suggesting or recommending the valuation, do not, of themselves, constitute the making of a recommendation (or the provision of any other kind of financial product advice) relating to the financial product.
(7)If:
(a)in response to a request made by a person (the inquirer) to another person (the provider), the provider tells the inquirer information about:
(i)the cost of a financial product; or
(ii)the rate of return on a financial product; or
(iii)any other matter identified in regulations made for the purposes of this subparagraph; and
(b)the request could also have been complied with (but was not also so complied with) by telling the inquirer equivalent information about one or more other financial products;
the act of telling the inquirer the information does not, of itself, constitute the making of a recommendation (or the provision of any other kind of financial product advice) in relation to the financial product referred to in paragraph (a).
....
(9)In this section:
exempt document or statement means:
(a)a document prepared, or a statement given, in accordance with requirements of this Chapter, other than:
(i)a Statement of Advice; or
(ii)a document or statement of a kind prescribed by regulations made for the purposes of this subparagraph; or
(b)any other document or statement of a kind prescribed by regulations made for the purposes of this paragraph.
...
(emphasis in original)
I am satisfied that the SOAs constituted “financial product advice” for the following reasons.
First, s 766B(1) was satisfied. It is plain from the face of the SOAs that they contained express recommendations and statements of opinion (as per the chapeau to s 766B(1)). So much is clear from the covering letter for each SOA which stated: “This Statement of Advice is a comprehensive document that contains our advice and recommendations”. It is also plain on the face of the SOAs that those recommendations and opinions were intended by the Advisers to (or could reasonably be regarded as being intended to) influence the recipients of the SOAs 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”, where the financial product was the interest in the SMSF (s 766B(1)). I note in this regard that it is not necessary for the whole of the communication (i.e. the SOA) to have borne the character of an advice: Australian Securities and Investments Commission v Westpac Securities Administration Ltd (Westpac Securities FFC) [2019] FCAFC 187; (2019) 272 FCR 170 at 219 to 220 [217]; and that the expression “in relation to” in the context of legislation designed to protect consumers, should be construed with that design in mind: Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211 at 214 [9].
Secondly, the exception in s 766B(1A) was not engaged because Statements of Advice were specifically excluded from the definition of “exempt document or statement” in s 766B(9).
Thirdly, the exceptions in s 766B(5), (6) and (7) were self-evidently not engaged.
3.4 Financial service
Section 766A of the Act provided, in so far as is presently relevant:
766A When does a person provide a financial service?
General
(1)For the purposes of this Chapter, subject to paragraph (2)(b), a person provides a financial service if they:
(a)provide financial product advice (see section 766B); or
…
Regulations may deal with various matters
(2)The regulations may set out:
…
(b)the circumstances in which persons are taken to provide, or are taken not to provide, a financial service.
…
(emphasis in original)
For the reasons set out at 3.3 above, the defendant provided “financial product advice” and as such provided a “financial service” (s 766A(1)(a)), subject only to the operation of any regulation the effect of which was to override this conclusion (s 766A(2)(b)).
Division 3 of Part 7.1 of the Regulations contained various regulations made for the purposes of s 766A(2)(b). Of these regulations, only regs 7.1.29(1) and 7.1.33A self-evidently was not inapplicable.
3.4.1 Regulation 7.1.29(1)
Regulation 7.1.29(1) provided:
(1) For paragraph 766A(2)(b) of the Act, a person who provides an eligible service is taken not to provide a financial service if:
(a) the person provides the eligible service in the course of conducting an exempt service; and
(b) it is reasonably necessary to provide the eligible service in order to conduct the exempt service; and
(c) the eligible service is provided as an integral part of the exempt service.
(2)For this regulation, a person provides an eligible service if the person engages in conduct mentioned in paragraphs 766A(1)(a) to (f) of the Act.
(emphasis in original)
As the defendant, in providing the SOAs, provided “financial product advice”, it engaged in conduct mentioned in s 766A(1)(a) of the Act, and thereby provided an “eligible service” within the meaning of that term in reg 7.1.29(2).
As is apparent from reg 7.1.29(1)(a), (b) and (c), reg 7.1.29 applied if the provision of the “eligible service”, i.e. the provision of SOAs: occurred in the course of conducting an “exempt service”; was reasonably necessary in order to conduct the exempt service; and occurred as an integral part of the exempt service. In this regard, reg 7.1.29(3), (3A), (4) and (5) provided circumstances in which a person was taken to have provided an “exempt service”. Of these, regs 7.1.29(3A) and (4) self-evidently were inapplicable. However, it is necessary to consider whether regs 7.1.29(3) and (5) applied.
3.4.1.1 Regulation 7.1.29(3)
Regulation 7.1.29(3) described eight types of conduct, which if engaged in, would have involved the provision of an “exempt service”. Of these, only reg 7.1.29(3)(f) self‑evidently was not inapplicable. Regulation 7.1.29(3)(f) was in the following terms:
For this regulation, a person who does any of the following provides an exempt service:
…
(f) arranges for another person to engage in conduct referred to in subsection 766C(1) in relation to interests in a self managed superannuation fund in the circumstances in paragraphs (5)(b) and (c);
…
(emphasis in original)
Thus, it is also necessary to consider s 766C(1) and reg 7.1.29(5)(b) and (c). In so far as is presently relevant:
(1)s 766C relevantly provided:
766C Meaning of dealing
(1) For the purposes of this Chapter, the following conduct (whether engaged in as principal or agent) constitutes dealing in a financial product:
(a) applying for or acquiring a financial product;
...
(emphasis in original)
(2)reg 7.1.29(5) relevantly provided:
(5) For this regulation, a person also provides an exempt service if:
...
(b) the person advised is, or is likely to become:
(i) a trustee; or
(ii) a director of a trustee; or
(iii) an employer sponsor; or
(iv) a person who controls the management;
of the superannuation fund; and
(c) except for advice that is given for the sole purpose, and only to the extent reasonably necessary for the purpose, of ensuring compliance by the person advised with the SIS Act (other than paragraph 52(2)(f)), the SIS Regulations (other than regulation 4.09) or the Superannuation Guarantee (Administration) Act 1992—the advice:
(i) does not relate to the acquisition or disposal by the superannuation fund of specific financial products or classes of financial products; and
(ii) does not include a recommendation that a person acquire or dispose of a superannuation product; and
(iii) does not include a recommendation in relation to a person’s existing holding in a superannuation product to modify an investment strategy or a contribution level; and
...
(emphasis in original)
The effect of reg 7.1.29(3)(f) – considered by reference to s 766C(1)(a) and reg 7.1.29(5)(b) and (c) – was that a person provided an “exempt service” if they: “arranged for another person to … apply for or acquire a financial product … in relation to interests in a self-managed superannuation fund …” in the circumstances:
(1)set out in reg 7.1.29(5)(b), namely that the person advised is, or is likely to become: (a) a trustee; (b) a director of a trustee; (c) an employer sponsor; or (d) a person who controls the management of the superannuation fund; and
(2)set out in reg 7.1.29(5)(c), namely that – except for advice that is given for the sole purpose, and only to the extent reasonably necessary for the purpose, of ensuring compliance by the person advised with the SIS Act (other than s 52(2)(f)), the SIS Regulations (i.e. the Superannuation Industry (Supervision) Regulation 1994) (other than reg 4.09) or the Superannuation Guarantee (Administration) Act 1992 – the advice: (a) does not relate to the acquisition or disposal by the superannuation fund of specific financial products or classes of financial products; (b) does not include a recommendation that a person acquire or dispose of a superannuation product; and (c) does not include a recommendation in relation to a person’s existing holding in a superannuation product to modify an investment strategy or a contribution level.
It is plain on the evidence that the defendant arranged for the clients to apply for or acquire a financial product in relation to an SMSF and that the person advised was likely to become a director of the SMSF. It follows that the expression used in reg 7.2.29(3)(f) was satisfied and a circumstance set out in reg 7.1.29(5)(b) existed.
Turning to reg 7.1.29(5)(c), the exception in the chapeau is not satisfied in the present case, so it is necessary to determine whether all of sub-paragraphs (i), (ii) and (iii) were satisfied.
As noted at [11] and [23] above, the advice given to the 159 clients who did not already have an SMSF included a recommendation that they acquire a superannuation product. It follows that reg 7.1.29(5)(c)(ii) and thus reg 7.1.29(5)(c) were not satisfied and that the defendant did not provide an “exempt service” to those clients. It follows that the SOAs were not: provided in the course of conducting an exempt service; reasonably necessary in order to conduct an exempt service; or provided as an integral part of an exempt service and that reg 7.1.29(1) was not engaged, with respect to the 159 clients who did not have an extant SMSF.
For the six extant SMSF clients, the SOAs each included a recommendation to modify an investment strategy. Thus, reg 7.1.29(5)(c)(iii) was not satisfied, from which it follows that reg 7.1.29(5) was not satisfied.
3.4.1.2 Regulation 7.1.29(5)
I turn now to consider reg 7.1.29(5). That regulation provided:
(5) For this regulation, a person also provides an exempt service if:
(a) the person provides advice in relation to the establishment, operation, structuring or valuation of a superannuation fund, other than advice for inclusion in an exempt document or statement; and
(b) the person advised is, or is likely to become:
(i) a trustee; or
(ii) a director of a trustee; or
(iii) an employer sponsor; or
(iv) a person who controls the management;
of the superannuation fund; and
(c) except for advice that is given for the sole purpose, and only to the extent reasonably necessary for the purpose, of ensuring compliance by the person advised with the SIS Act (other than paragraph 52(2)(f)), the SIS Regulations (other than regulation 4.09) or the Superannuation Guarantee (Administration) Act 1992—the advice:
(i) does not relate to the acquisition or disposal by the superannuation fund of specific financial products or classes of financial products; and
(ii) does not include a recommendation that a person acquire or dispose of a superannuation product; and
(iii) does not include a recommendation in relation to a person’s existing holding in a superannuation product to modify an investment strategy or a contribution level; and
(d) if the advice constitutes financial product advice provided to a retail client—the advice includes, or is accompanied by, a written statement that:
(i) the person providing the advice is not licensed to provide financial product advice under the Act; and
(ii) the client should consider taking advice from the holder of an Australian Financial Services Licence before making a decision on a financial product.
(emphasis in original)
Regulation 7.1.29(5) was satisfied only if each of sub-paragraphs (a), (b), (c) and (d) was satisfied. Sub-paragraph (c) required satisfaction of each of its sub-paragraphs (i) to (iii). For the reasons set out at [41] and [42] above, reg 7.1.29(5)(c)(ii) was not satisfied with respect to the 159 clients who did not have an extant SMSF; and reg 7.1.29(5)(c)(iii) was not satisfied with respect to the six extant SMSF clients. Thus reg 7.1.29(5)(c) was not satisfied.
3.4.2 Regulation 7.1.33A
I turn now to consider reg 7.1.33A. That regulation provided:
7.1.33A Allocation of funds available for investment
For paragraph 766A(2)(b) of the Act, a circumstance in which a person is taken not to provide a financial service within the meaning of paragraph 766A(1)(a) of the Act is the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person’s funds that are available for investment among 1 or more of the following:
(a) shares;
(b) debentures;
(c) debentures, stocks or bonds issued, or proposed to be issued, by a government;
(d) deposit products;
(e) managed investment products;
(f) investment life insurance products;
(g) superannuation products;
(h) other types of asset.
Note: This regulation does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products.
The SOAs did not fit this description. They did not contain only a recommendation or statement of opinion about the allocation of the clients’ funds that were available for investment among one or more of the assets classes in (a) to (g).
For the reasons set out at [30] to [46] above the defendant, by providing the SOAs, provided a “financial service”.
3.5 Personal advice
“Personal advice” was defined in s 761A of the Act as having the meaning given by s 766B(3) of the Act, namely:
For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
(a)the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
(b)a reasonable person might expect the provider to have considered one or more of those matters.
It is plain on the face of the SOAs that some of the particular clients’ objectives, financial situation and needs were set out therein. It is also plain that a reasonable person might have expected the Adviser to have considered those matters. This was sufficient to have rendered the “financial product advice” given in the SOAs “personal advice”. Further, the text of the SOAs suggests that the Advisers did subjectively consider these matters, again rendering the “financial product advice” given in the SOAs “personal advice”. I note in this regard that the expression “has considered” in s 766B(3)(a) should be understood as meaning “took account of” and does not import a requirement of an active and comprehensive process of evaluation: Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3; (2021) 270 CLR 118 at 132 ([15] to [17]).
3.6 Retail client
The expression “retail client” was defined in s 761A of the Act as having the meaning given by ss 761G and 761GA of the Act. Section 761G provided, in so far as is presently relevant:
761G Meaning of retail client and wholesale client
Providing a financial product or financial service to a person as a retail client
(1)For the purposes of this Chapter, a financial product or a financial service is provided to a person as a retail client unless subsection (5), (6), (6A) or (7), or section 761GA, provides otherwise.
…
General insurance products
(5)For the purposes of this Chapter, if a financial product is, or a financial service provided to a person relates to, a general insurance product, the product or service is provided to the person as a retail client if:
(a)either:
(i)the person is an individual; or
(ii)the insurance product is or would be for use in connection with a small business (see subsection (12)); and
(b)the general insurance product is:
(i)a motor vehicle insurance product (as defined in the regulations); or
(ii)a home building insurance product (as defined in the regulations); or
(iii)a home contents insurance product (as defined in the regulations); or
(iv)a sickness and accident insurance product (as defined in the regulations); or
(v)a consumer credit insurance product (as defined in the regulations); or
(vi)a travel insurance product (as defined in the regulations); or
(vii)a personal and domestic property insurance product (as defined in the regulations); or
(viii)a kind of general insurance product prescribed by regulations made for the purposes of this subparagraph.
In any other cases, the provision to a person of a financial product that is, or a financial service that relates to, a general insurance product does not constitute the provision of a financial product or financial service to the person as a retail client.
Superannuation products and RSA products
(6)For the purposes of this Chapter:
(a)if a financial product provided to a person is a superannuation product or an RSA product, the product is provided to the person as a retail client; and
(aa)however, if a trustee of a pooled superannuation trust (within the meaning of the Superannuation Industry (Supervision) Act 1993) provides a financial product that is an interest in the trust to a person covered by subparagraph (c)(i), the product is not provided to the person as a retail client; and
(b)if a financial service (other than the provision of a financial product) provided to a person who is not covered by subparagraph (c)(i) or (ii) relates to a superannuation product or an RSA product, the service is provided to the person as a retail client; and
(c)if a financial service (other than the provision of a financial product) provided to a person who is:
(i)the trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme (within the meaning of the Superannuation Industry (Supervision) Act 1993) that has net assets of at least $10 million; or
(ii)an RSA provider (within the meaning of the Retirement Savings Accounts Act 1997);
relates to a superannuation product or an RSA product, that does not constitute the provision of a financial service to the person as a retail client.
Traditional trustee company services
(6A)For the purpose of this Chapter, if a financial service provided to a person is a traditional trustee company service, the service is provided to the person as a retail client unless regulations made for the purpose of this subsection provide otherwise.
Other kinds of financial product
(7)For the purposes of this Chapter, if a financial product is not, or a financial service (other than a traditional trustee company service) provided to a person does not relate to, a general insurance product, a superannuation product or an RSA product, the product or service is provided to the person as a retail client unless one or more of the following paragraphs apply:
(a)the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds the amount specified in regulations made for the purposes of this paragraph as being applicable in the circumstances (but see also subsection (10)); or
(b)the financial product, or the financial service, is provided for use in connection with a business that is not a small business (see subsection (12));
(c)the financial product, or the financial service, is not provided for use in connection with a business, and the person who acquires the product or service gives the provider of the product or service, before the provision of the product or service, a copy of a certificate given within the preceding 6 months by a qualified accountant (as defined in section 9) that states that the person:
(i)has net assets of at least the amount specified in regulations made for the purposes of this subparagraph; or
(ii)has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for the purposes of this subparagraph a year;
(d)the person is a professional investor.
…
(emphasis in original)
Section 761GA provided:
761GA Meaning of retail client—sophisticated investors
For the purposes of this Chapter, a financial product, or a financial service (other than a traditional trustee company service) in relation to a financial product, is not provided by one person to another person as a retail client if:
(a) the first person (the licensee) is a financial services licensee; and
(b) the financial product is not a general insurance product, a superannuation product or an RSA product; and
(c) the financial product or service is not provided for use in connection with a business; and
(d) the licensee is satisfied on reasonable grounds that the other person (the client) has previous experience in using financial services and investing in financial products that allows the client to assess:
(i) the merits of the product or service; and
(ii) the value of the product or service; and
(iii) the risks associated with holding the product; and
(iv) the client’s own information needs; and
(v) the adequacy of the information given by the licensee and the product issuer; and
(e) the licensee gives the client before, or at the time when, the product or advice is provided a written statement of the licensee’s reasons for being satisfied as to those matters; and
(f) the client signs a written acknowledgment before, or at the time when, the product or service is provided that:
(i) the licensee has not given the client a Product Disclosure Statement; and
(ii) the licensee has not given the client any other document that would be required to be given to the client under this Chapter if the product or service were provided to the client as a retail client; and
(iii) the licensee does not have any other obligation to the client under this Chapter that the licensee would have if the product or service were provided to the client as a retail client.
(emphasis in original)
I am satisfied that the provision of an SOA to each client involved the provision of a “financial product or a financial service” to that client as a “retail client”, for the following reasons.
First, the provision of an SOA was the provision of a “financial service” for the reasons set out at 3.4 above.
Secondly, the effect of 761G(1) was that a “financial service” was provided to a person as a retail client “unless subsection (5), (6), (6A), or (7), or section 761GA, provides otherwise”.
Thirdly, s 761G(5) did not provide otherwise because the financial product was not and the financial service provided did not relate to a general insurance product (as defined in s 764A(1)(d) of the Act).
Fourthly, s 761G(6) did not apply because that sub-section provided two circumstances – s 761G(6)(aa) and (c) – in which a product was not to be treated as having been provided to the recipient as a retail client, and neither circumstance existed in the present case. In particular:
(1)s 761G(6)(aa) did not apply because the financial product was not provided by the trustee of a pooled superannuation trust; and
(2)s 761G(6)(c) did not apply because any financial service provided to the clients was not provided to the trustee of a superannuation fund with assets of at least $10 million or to an “RSA provider” (as defined in s 12 of the Retirement Savings Accounts Act 1997 (Cth)).
Fifthly, s 761G(6A) did not apply because: (1) it was predicated upon the “financial service” that was provided being a “traditional trustee company service”; and (2) “traditional trustee company service” was defined in s 601RAC(1) of the Act in terms which are not applicable to the facts in the present case.
Sixthly, s 761G(7) did not apply because: (1) for the exceptions in that sub-section to have been engaged, the chapeau must first have been engaged; and (2) the chapeau was not engaged when the “financial service” provided related to a “superannuation product” and here there was such a relationship (see 3.2 and 3.3 above).
Finally, s 761GA did not apply because the exception created by that section required, inter alia, that the financial product was not a “superannuation product” (see s 761GA(b)); and as set out at 3.3 above the financial product in the present case was a “superannuation product”.
Thus, I am satisfied that each client who received an SOA did so as a “retail client”.
3.7 Platform operator
The term “platform operator” was defined at s 1526(1) of the Act as meaning “the provider of a custodial arrangement, or custodial arrangements”. “Custodial arrangement” was defined in s 1526(1) as having “the same meaning as it has in subsection 1012IA, subject to subsection (2)”. In s 1012IA(1), “custodial arrangement” was defined as follows:
custodial arrangement means an arrangement between a person (the provider) and another person (the client) (whether or not there are also other parties to the arrangement) under which:
(a) the client is, or is entitled, to give an instruction that a particular financial product, or a financial product of a particular kind, is to be acquired; and
(b) if the client gives such an instruction, a person (the acquirer), being the provider or a person with whom the provider has or will have an arrangement, must (subject to any discretion they have to refuse) acquire the financial product, or a financial product of that kind; and
(c) if the acquirer acquires the financial product, or a financial product of that kind, pursuant to an instruction given by the client, either:
(i) the product is to be held on trust for the client or another person nominated by the client; or
(ii) the client, or another person nominated by the client, is to have rights or benefits in relation to the product or a beneficial interest in the product, or in relation to, or calculated by reference to, dividends or other benefits derived from the product.
(emphasis in original)
The evidence suggests that there was no “custodial arrangement”. Section 1526(2) has no apparent relevance in the present case. Thus the defendant was not a “platform operator”.
3.8 Benefit
Central to the Division 4 case is the concept of “benefit” and whether each of the bonuses provided by the defendant to the Advisers was a benefit as defined. That concept was defined in s 9 of the Act, in so far as is presently relevant, as meaning: “any benefit, whether by way of payment of cash or otherwise”. The bonuses plainly fell within this definition.
3.9 Summary
Thus, in summary, the SOAs met the definition of “Statement of Advice”; there was a “financial product” in the form of the clients’ interests in their extant (as to 6) or to be formed (as to 159) SMSFs; the defendant provided “financial product advice” to the clients in the SOAs; in doing so, the defendant provided a “financial service”; the advice contained in the SOAs constituted “personal advice”; each of the clients who received an SOA was a “retail client”; the defendant was not a “platform operator”; and each of the bonuses received by the Advisers was a “benefit”.
4. THE DIVISION 2 CASE
4.1 Introduction
I turn now to consider the Division 2 case.
Section 961K(2) of the Act provided:
961K Civil penalty provision—sections 961B, 961G, 961H and 961J
…
(2) A financial services licensee contravenes this section if:
(a) a representative, other than an authorised representative, of the licensee contravenes section 961B, 961G, 961H or 961J; and
(b) the licensee is the, or a, responsible licensee in relation to that contravention.
Section 961K(2) imposed a direct form of liability on a licensee if a representative other than an authorised representative contravened, inter alia, s 961B or s 961G of the Act: Australian Securities and Investments Commission (ASIC) v RI Advice Group Pty Ltd (No 2) [2021] FCA 877; (2021) 156 ACSR 371 at 478 [391] (Moshinsky J). In contrast to s 961L, which focussed on the conduct of the licensee, s 961K imposed liability on a licensee as a result of the conduct of its representative: Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69; (2020) 377 ALR 55 at 89 [121] (Lee J); Australian Securities and Investments Commission v AGM Markets Pty Ltd (In Liq) (No 4) [2020] FCA 1499; (2020) 148 ACSR 511 at 526 [58(d)] (Beach J).
ASIC alleges that the Advisers (being representatives, but not authorised representatives, of the defendant – see [5] above) each contravened s 961B and 961G of the Act; the defendant was the responsible licensee in relation to those contraventions; and consequently, the defendant contravened s 961K of the Act.
4.2 Did Division 2 apply to the advice the subject of this proceeding?
Section 961 of the Act provided that Division 2 applied “in relation to” the provision of “personal advice” to a client as a “retail client”. For the reasons set out at 3.5 and 3.6 above the recommendations and statements of opinion set out in the SOAs involved the provision of personal advice to retail clients. Thus, Division 2 applied to the provision of the advice contained in the 12 SOAs the subject of the Division 2 case.
4.3 Findings of fact
4.3.1Generally
The findings of fact set out below are taken from the affidavit evidence provided by various clients, the expert report of Mr Richards, and the extensive documentary evidence tendered by ASIC. I have sought, in the findings below and with the assistance of submissions provided by ASIC, to identify only the central findings of fact.
As explained above: (1) none of the 12 individual or pairs of clients had an extant SMSF and each was advised to establish an SMSF; (2) each client or set of clients received advice in the form of an SOA; (3) the SOA contained the usual advice (see [11(3)] above); and (4) the advice in the SOA, including the usual advice, was implemented.
To this may be added that the evidence establishes that for each of the 12 individual or pairs of clients, the SOA and authority to proceed (signed by the clients) bore the same date, from which I infer that, in each case, the clients provided authority to proceed with the advice given in the SOA on the same day that the SOAs were provided to them. That inference is supported by evidence of a number of the clients, which is described below.
4.3.2 Mr and Mrs AA
As at July 2015, Mr and Mrs AA were aged 37 and 36 respectively and they had two children aged nine and seven. Mr AA was a full-time police officer and Mrs AA worked part-time with the New South Wales Police Force. Their salaries were $108,000 per annum and $56,500 per annum respectively. They owned their home, valued at $800,000 subject to a mortgage securing a loan of $555,000. They had funds in their superannuation accounts in the order of $250,000 but had no other investments.
A friend of Mr AA told him that he had dealt with the defendant in purchasing an investment property through an SMSF and provided Mr AA with contact details for Adviser YY. Mr AA had not previously heard of an SMSF.
On 24 July 2015, Mr AA met with Adviser YY for one to two hours. During that meeting Adviser YY asked Mr AA what his financial goals were. Mr AA indicated that he wished to review his superannuation and that his friend had recently set up an SMSF and purchased a property. Adviser YY then said words to the effect: “Ok, you want to buy a property, let’s do it. You can purchase a property through your super. Purchasing a property through super will make your super work harder”.
Around the same time, a document titled “Financial Needs Analysis” (FNA) was completed. It is not clear whether it was completed by Mr and Mrs AA or by Adviser YY or by some combination thereof.
On or about 14 August 2015, Mr AA and Adviser YY met again. Adviser YY provided him with an SOA. The SOA:
(1)recorded Mr and Mrs AA’s short term goals as including “Reduce existing debt” and “Build wealth towards a comfortable retirement” and as a long term goal “Aim to have the option of retirement by age 55-60 on an income of $80,000 p.a. in today’s dollars”;
(2)deferred the provision of advice concerning salary sacrificing;
(3)included statements that the defendant had classified Mr and Mrs AA as “assertive” style investors for whom it was appropriate to have 27 per cent of their assets in real property, yet also contained advice, the effect of which, if implemented, was that 82 per cent of their assets would be in real property;
(4)stated that “Putting in place the recommended investments outside of the superannuation fund is in line with your goals of building your wealth and assisting with your taxable income”. Despite that statement the SOA did not contain any recommendations for investments “outside of the superannuation fund”;
(5)contained the usual advice, and as part of the usual advice, advice to Mr AA to rollover only part of his superannuation funds held by First State Super.
The SOA did not address the quantum of the costs of establishing, and the ongoing costs of maintaining, an SMSF or the extent to which those costs represented a reasonable proportion of the level of funds likely to be held by Mr and Mrs AA within an SMSF if they established one.
An authority to proceed was signed by Mr and Mrs AA and by Adviser YY.
Mr AA’s evidence is that he had not read the SOA when he signed the authority to proceed and that he signed the authority to proceed immediately after Adviser YY explained certain pages of the SOA to him during the meeting. He signed because he trusted Adviser YY’s recommendation and wanted to implement his advice to set up an SMSF and purchase a property.
At no time was an explanation provided to Mr AA as to the expenses involved in owning the investment property, including strata fees, council rates, management and administrative fees and water bills.
On the same day, Mr and Mrs AA signed documents for the establishment of an SMSF and a company which would be the trustee of the SMSF.
4.3.3 Mr and Mrs BB
Mrs BB first dealt with the defendant when she attended a seminar that it hosted at the North Ryde RSL Club in 2010. She and her husband, Mr BB, then obtained financial advisory services from the defendant, principally from Adviser ZZ. At about this time, they purchased two investment properties in the name of Mr BB, one in Victoria and the other in Queensland, in connection with advice provided via the defendant.
By July 2015, when they received an SOA from Adviser ZZ which is the subject of this proceeding, Mr and Mrs BB were in their late 40s. Mr BB was earning $150,000 per annum. Mrs BB was earning $10,000 per annum as an office assistant. Their two children were aged nine and 12. They were living in Sydney in a property valued at $1,100,000. They had an amount of $471,000 from the sale of their former home and wanted to invest in property, preferably in New South Wales.
At that time, their joint savings were $130,000 and Mrs BB had $136,402 in superannuation assets and shares worth approximately $112,700. Mr BB had superannuation assets of $185,800 and the two investment properties referred to at [83] above. The Victorian property was valued at $350,000 and the Queensland property was valued at $460,000. Mr BB had two mortgages securing a combined loan balance, in respect of borrowings undertaken when the properties were acquired, in the sum of approximately $530,000.
On 17 June 2015, Mr and Mrs BB attended an annual review meeting with Adviser ZZ. A file note of that meeting records: “They would like to upgrade their home within 2 years”.
On 8 July 2015, they met again with Adviser ZZ. He provided them with an SOA dated 8 July 2015. The SOA:
(1)recorded Mr and Mrs BB’s goal or objective as “Reduce existing debt”;
(2)failed to mention or address Mr and Mrs BB’s goal of upgrading their home within two years;
(3)included a statement that the defendant had classified Mr and Mrs BB as “assertive” style investors for whom it was appropriate to have 27 per cent of their investments in property; together with advice to the effect of which, if implemented, was that approximately 80 per cent of their assets would be in real property;
(4)did not contain any advice in relation to government co-contribution strategies despite Mrs BB’s income being $10,000 per annum; and
(5)contained the usual advice.
At the same meeting, Mr and Mrs BB committed to proceeding with the course recommended in the SOA.
On the same day (8 July 2015), Mr and Mrs BB completed an authority to proceed.
4.3.4 Mr and Mrs CC
In 2017, Mr and Mrs CC were both aged 47, and the parents of three children. They did not own a home and were trying to save for a house deposit. They had no substantial investments other than the superannuation accounts which each of them had with First State Super.
In October 2017, they met with Adviser YY. His note of that meeting includes: “They are both currently renting. They are happy to keep renting for now but they would ideally like to by (sic) a home to live in eventually because they still need to save a deposit, etc”.
On 14 December 2017, Adviser YY provided Mr and Mrs CC with an SOA. The SOA:
(1)recorded Mr and Mrs CC’s objectives as including a short term objective to “build wealth towards a comfortable retirement” and a long term objective “Aim to have the option of retirement by age 60-65 on an income of $90,000 per annum in todays dollars”;
(2)did not address how Mr and Mrs CC might achieve their goals of saving a deposit for a home and building wealth outside superannuation;
(3)contained statements that the defendant had classified them as “assertive” style investors for whom it was appropriate to have 27 per cent of their investments in real property; together with advice to the effect of which, if implemented, was that Mr and Mrs CC would have 78 per cent of their assets in real property;
(4)contained the usual advice.
On the same day, Mr and Mrs CC signed an authority to proceed. The next day they signed application forms to establish their SMSF and a family company which became the trustee of their SMSF.
4.3.5 Mr and Mrs DD
In 2013, Mrs DD attended a seminar hosted by the defendant at the Sharks Leagues Club in Sydney. They were introduced to Adviser ZZ and, in response to advice provided by him, purchased a vacant block of land at Cessnock in the Hunter Valley, New South Wales. They subsequently attended annual reviews with Adviser ZZ.
In 2016, Mr and Mrs DD requested to meet with a different adviser in the employ of the defendant after losing confidence in Adviser ZZ. They were referred to Adviser XX, who raised with them the idea of setting up an SMSF for property investment purposes. At that time, Mr and Mrs DD were aged 58 and 56 respectively, and their 22 year old daughter was living with them. They had a combined superannuation balance of approximately $210,000.
A month or so later, Mr and Mrs DD met again with Adviser XX. He presented an SOA to them. The SOA:
(1)recorded that retirement planning was an objective of Mr and Mrs DD;
(2)did not provide details of when Mr and Mrs DD wanted to retire or specify a retirement income target;
(3)“scoped out” advice concerning transition to retirement strategies;
(4)included a statement that Mr and Mrs DD had not provided the defendant with a budget;
(5)did not refer to the fact that Mr and Mrs DD’s 22 year old daughter was living with them;
(6)included statements that the defendant had classified them as “assertive” style investors for whom it was appropriate to have 29 per cent of their investments in real property; together with advice the effect of which, if implemented, would be that they would have about 72 per cent of their assets in real property; and
(7)included the usual advice.
Mr and Mrs DD accepted the advice and signed an authority to proceed.
A few minutes later were taken to another room in the office and introduced to a Mr E, of Equiti Property. Mr E presented to them some details about an apartment development at Blue Haven, New South Wales.
Mr and Mrs DD then indicated that they wished to proceed with that property and signed application forms for the SMSF, the SMSF trustee company and SMSF Trust Deed.
4.3.6 Mr and Mrs EE
In 2018, Mr and Mrs EE were both aged in their mid-40s and they had two young children. Their only significant assets were a house and funds in superannuation. At that time they had an annual income of $165,000 and annual living expenses of $133,200 and Mr Richards inferred (from this and their high credit card debt), negative cashflow.
Mr EE attended a seminar hosted by the defendant. A number of the speakers spoke about investing in property and one of the speakers spoke about how to buy a property through an SMSF. Mr EE did not know much about SMSFs prior to the seminar.
Sometime later, Mr EE was contacted by someone from the defendant. On 8 November 2017, Mr and Mrs EE spoke to a client manager of the defendant, at their home. The client manager filled out a pro-forma questionnaire titled “Discovery Fact Find” (DFF) which Mr and Mrs EE signed. The client manager told Mr and Mrs EE that he was not an adviser, and recommended that they speak with an adviser employed by the defendant. He told them that it was likely that based on their finances they would be advised to buy a property directly and another one through superannuation. Mr EE then paid a fee of $1,650 to book an appointment with a financial adviser employed by the defendant.
Shortly afterwards, Mr and Mrs EE met with Adviser YY to discuss their financial situation and goals. Mr and Mrs EE agreed to engage Adviser YY to provide them with a comprehensive advice. An FNA recorded that one of their explicit goals was to “help with children’s education in the future”.
Approximately two weeks later, Mr and Mrs EE were notified that Adviser YY’s advice had been prepared. They met with Adviser YY for around three hours and Mr YY presented an SOA to them. During that meeting Mr EE told Adviser YY that the SOA had a number of errors (including in relation to assets and liabilities) and Adviser YY then amended the document.
The SOA:
(1)recorded Mr and Mrs EE’s objectives including a short term objective “Build wealth towards a comfortable retirement” and a long term objective “Aim to have the option of retirement in 20 years and aim to retire on an income of $90,000 per annum in today’s dollars”;
(2)contained statements that the defendant had classified them as “assertive” style investors for whom it was appropriate to have 29 per cent of their investments in real property; together with advice the effect of which, if implemented, was that they would have 90 per cent of their assets in real property;
(3)indicated that retirement planning was not part of the advice;
(4)indicated that advice on salary sacrificing would be deferred;
(5)did not address Mr and Mrs EE’s negative cashflow position, or present strategies in relation to educating their children; and
(6)contained the usual advice.
After a lunch break, Mr and Mrs EE decided to go ahead with Adviser YY’s recommendations. On that day they signed an authority to proceed and application forms to establish their SMSF and two family companies which became the trustees of that SMSF.
Later that day, they met with Mr E from Equiti Property and agreed to cause the trustees of their soon to be established SMSF to purchase a particular property in Queensland that Mr E recommended.
4.3.7 Mr and Mrs FF
In 2017, Mr and Mrs FF were both in their early 40s. They owned an investment property in Denmark but did not own property in Australia. They had combined superannuation funds of about $218,000 and combined annual earnings of over $330,000.
On 28 June 2017, Mr FF attended a seminar hosted by the defendant. He was interested in real property investment and had heard about SMSFs through a colleague and from advertising.
At the seminar Mr FF was informed that rent on an investment property “could pay for everything” and that sometimes only $20,000 to $30,000 was required for a “cheap apartment”. After the seminar, Mr FF spoke to one of the presenters and took a $50 voucher that was offered to attendees.
On 3 July 2017, Mr and Mrs FF met with a client manager employed by the defendant at their home. The client manager completed a DFF which Mr and Mrs FF signed. The DFF included “own a home” in answer to the question “Do you have any concerns about your current situation” and a note “want family home ultimately”. At that meeting, Mrs FF stated that her “dream” was home ownership. Mr FF also stated an interest in home ownership.
On 6 July 2017, Mr and Mrs FF met with Adviser ZZ and agreed that Adviser ZZ should prepare an SOA for Mr and Mrs FF. During that meeting they signed an FNA which had been pre‑filled. It included as a short term goal “get a family home”. At about that time, they provided a “Household Expenditure” document to Adviser ZZ who stated: “I’ve looked at your budget, you two are like a Ferrari without wheels. You are making decent money but are not saving”.
On 24 July 2017, Mr and Mrs FF met with Adviser ZZ who presented an SOA. The SOA included:
(1)a summary of the financial objectives of Mr and Mrs FF which did not include their goal of home ownership;
(2)a deferral of advice concerning salary sacrificing;
(3)statements that the defendant had classified them as “aggressive” style investors for whom it was appropriate to have 30 per cent of their investments in property; together with advice the effect of which, if implemented, was that they would have 80 per cent of their investments in real property; and
(4)the usual advice.
At the end of the presentation, Adviser ZZ told Mr and Mrs FF to read the SOA and “come back in around half an hour”. That same evening, Mr and Mrs FF decided to proceed and signed an authority to proceed and other documents including an SMSF Application, Trustee Company Application and Trust Deed.
On the same evening they were introduced to a “property specialist”. Mr FF recognised him as one of the presenters at the seminar. The “property specialist” recommended to them a property located in Brisbane.
4.3.8 Ms GG
In 2015, Ms GG was a 48 year old divorcee with three adult children. She did not own a home and lived in social housing. She had $181,600 in superannuation and savings of $7,000. She was earning approximately $95,000 per annum (excluding superannuation) and saving approximately $400 per month.
In April 2015, Ms GG met with Adviser ZZ. During that meeting Ms GG said: “I am hoping to leave something to my children. I would like to own my own house which has been paid off…” and Adviser ZZ responded: “You can’t afford to purchase a property outside of superannuation. But you can buy one inside superannuation”. Adviser ZZ said words to the effect: “If you want to do the right thing by your children, you should set up an SMSF and buy property, and buy the property in Queensland”. Following her meeting, Ms GG felt that she had no options other than purchasing the property in Queensland and decided to proceed “based on what they were telling me because it was presented as though I would not provide for my children if I didn’t…”.
At about this time, a DFF and an FNA were prepared. The “Goals & Objectives” part of the FNA, included a statement: “get on the property ladder any way that I can”. A similar statement is attributed to her in the DFF. Ms GG denies making such a statement. She also denies saying the words: “Expand investment portfolio”. She did not have a portfolio and was not investing.
On 18 May 2015, Ms GG attended a meeting with Adviser ZZ in which he presented an SOA. The SOA:
(1)included as a short term goal: “Build wealth towards a comfortable retirement”;
(2)did not record some of Ms GG’s major goals, including home ownership, repayment of long term loans (which was implicit in Ms GG’s goal of giving something to her children) and retirement planning;
(3)included statements that the defendant had classified Ms GG as an “assertive” style investor for whom it was appropriate to have 47 per cent of her investments in real property; together with advice which, if implemented, would have the consequence that 92 per cent of her assets would be in real property; and
(4)included the usual advice.
At that meeting Ms GG completed a trustee company application and an SMSF application.
4.3.9 Mr HH and Ms JJ
In 2017, Mr HH and Ms JJ were married with two children under 10 years of age. Their principal asset was their home in Sydney valued at $1,900,000 in respect of which there was a mortgage securing a loan with a balance of approximately $710,000. Their combined annual income exceeded $371,000 and their superannuation assets were valued at $335,000. They had an investment property at Palm Beach in Queensland valued at $250,000 and in respect of which there was a mortgage securing a loan with a balance of approximately $85,000. Their living expenses totalled $130,200 per annum.
Their first dealings with the defendant came via a “cold call”. A short time later, a representative of the defendant attended their home for approximately two hours.
In mid-2017, Mr HH and Ms JJ met with Adviser YY. During that meeting, Adviser YY prepared an FNA. Following this, Mr HH and Ms JJ agreed to pay the fee of $880 to the defendant for Adviser YY to prepare a detailed advice.
On 10 June 2017, Mr HH and Ms JJ completed a DFF. The DFF included: “Might move to NZ & rent out our house”; “Clarity on implications of moving to NZ”; “Retirement – when can we & how comfortable?”; and “High school fees will start in 3-4 years”. Further information regarding Mr HH and Ms JJ’s goals of moving to New Zealand and funding their children’s education, such as the proposed timing, likely costs and funding and the importance of these goals, were not collected by Adviser YY.
On 13 July 2017, Mr HH and Ms JJ met again with Adviser YY. The meeting lasted approximately two hours. Adviser YY presented an SOA dated 13 July 2017, which:
(1)recorded the financial objectives of Mr HH and Ms JJ including:
(a)in the short term: “Minimise tax payable”; “Build wealth towards a comfortable retirement”; and “Look at existing loan structure and look at the options available to help reduce debt”;
(b)in the medium term: “help their children financially in the future”;
(c)in the long term, to have the “option of retirement by age 60 on an income of $100,000 per annum in today’s dollars”;
(2)included statements that the defendant had classified them as “assertive” style investors for whom it was appropriate to have 29 per cent of their investments in real property; together with advice which, if implemented, would have resulted in Mr HH and Ms JJ having approximately 89 per cent of their investments in real property;
(3)included the usual advice;
(4)contained no reference to a possible move to New Zealand or to high school fees;
(5)contained no specific reference to Mr HH and Ms JJ’s desire to fund their children’s education (as opposed to the generic statement described in (1)(b) above);
(6)indicated that advice on salary sacrificing would be deferred; and
(7)did not address the possibility of alternative investment strategies, such as investing in property outside of an SMSF.
Also on 13 July 2017, Mr HH and Ms JJ completed an authority to proceed. At about that time, Mr HH met with Mr E of Equiti Property who recommended particular properties for purchase.
4.3.10 Mr KK and Ms LL
In 2016, Mr KK and Ms LL were 64 and 57 years old, respectively. They were long term partners and were looking forward to retiring in the short term which for Mr KK was, he intended, to be less than 18 months away. They worked in administrative roles and had combined earnings of approximately $101,000 per annum, including Ms LL’s wages as a part‑time receptionist of $30,000 per annum. They lived in Ms LL’s unencumbered house valued at $600,000. They owned an investment property valued at $500,000, in respect of which there was a mortgage securing a loan with a balance of approximately $180,000. The value of their combined superannuation interests was $294,000.
Ms LL had recently inherited $320,000 from her parents. This prompted Mr KK and Ms LL to consider obtaining financial advice. They came into contact with the defendant and, in particular, Adviser XX. In Ms LL’s initial discussions with Adviser XX, she told Adviser XX that planning for her retirement was a priority.
Before her dealings with the defendant, Ms LL had no knowledge of SMSFs. Her evidence was that the idea of using an SMSF came from Adviser XX and that Adviser XX seemed to assume that Mr KK and Ms LL would establish an SMSF.
On 24 May 2016, Adviser XX completed an FNA with Mr KK and Ms LL. The FNA recorded their goals and objectives, including in the short term “Prepare for retirement towers (sic) end of this period”; in the medium term “Retire full time about now”; and in the long term “Enjoy retirement”.
Ms LL told Adviser XX: “I want to be well prepared for retirement and use my inheritance to provide for me in my retirement”. Adviser XX’s notes record: “You would like to have a stable income in retirement”.
On 26 July 2016, Mr KK and Ms LL met with Adviser XX for one and a half to two hours. He presented to them an SOA. The SOA:
(1)contained a summary of the financial objectives of Mr KK and Ms LL which included as a short term goal “Prepare for retirement”; “You would like to have a stable income in retirement”; and “Reduce existing debt” and as a medium term goal “Retire in the next 2-5 years”;
(2)contained statements that the defendant had classified Mr KK and Ms LL as balanced investors, for whom an allocation of 20 per cent of their investments in real property was appropriate, together with advice, the effect of which, if implemented, would be that Mr KK and Ms LL would have approximately 79 per cent of their investments in real property;
(3)under the heading “Your Income and Expenses” included a table of income and the notation “… you have not provided us with a current budget, however, you have informed us that your current income provides funds to cover your living expenses”;
(4)included a statement that the scope of the advice given included advice as to “Retirement Planning”, another statement excluding “Retirement Advance” from the scope of advice given, and a third statement indicating that retirement options would be discussed in greater detail as Mr KK and Ms LL approached their desired retirement age;
(5)contained no advice concerning government co-contribution strategies (which were applicable to Ms LL as a low income earner); and
(6)contained the usual advice.
Regulation 7.7A.16C (relevantly) prescribed two circumstances in which Division 4 “did not apply” to a benefit – reg 7.7A.16C(2) and (5).
Regulation 7.7A.16C(2) was not engaged on the present facts because the remuneration arrangements of the individuals did not relate to an “enterprise agreement” or a “collective agreement-based transitional instrument” (see [10(1)] above).
Regulation 7.7A.16C(5) had three elements all of which had to be satisfied to constitute a circumstance in which Division 4 did not apply to a benefit. As the third of these requirements – that the bonuses were payable in relation to a period that ended before 1 July 2015 – was not satisfied, reg 7.7A.16C(5) was not engaged.
Thus, the bonuses were not a benefit to which reg 7.7A.16C applied, for the purposes of reg 7.7A.16B(1)(c).
It follows that reg 7.7A.16B applied, as the circumstances prescribed therein were engaged on the facts for the reasons set out at [198] to [208] above with respect to all of the clients of YY and ZZ other than the six extant SMSF clients (see [203] above). As noted at [203] above, the evidence establishes that five of the six extant SMSF clients were clients of Adviser ZZ; and the remainder was a client of Adviser XX. As a result, the answer to the second question, as it applied to Adviser YY and ZZ, is “yes” for all clients, other than the five extant SMSF clients who were clients of Adviser ZZ, for whom the answer is “no”.
5.1.3 Third question – did a regulation made under s 1528(2) of the Act operate so as to make Division 4 applicable (Adviser XX)?
As noted [195] above, the first question was answered “no” with respect to Adviser XX with the result that Division 4 was prima facie applicable to the benefits paid to him; and it is necessary to consider whether a regulation made under s 1528(2) rendered Division 4 inapplicable. The relevant regulation was reg 7.7A.16C, however for the reasons set out at [204] to [208] above, reg 7.7A.16C was not engaged on the facts of the present case with respect to Adviser XX. It follows that the answer to the third question is “no”, with the consequence that Division 4 applied to the bonuses paid to Adviser XX. I note for completeness that this includes the bonus paid to him with respect to one of the six extant SMSF clients.
5.1.4 Conclusion as to the effect of s 1528 of the Act
For Advisers YY and ZZ, the answers to questions 1 and 2 are each “yes” with respect to all of their clients who did not have a pre-existing SMSF but for none of their clients (being five clients of Adviser ZZ) who had an extant SMSF. It follows that Division 4 applied to the bonuses received by Advisers YY and ZZ with respect only to those of their clients who did not have an extant SMSF.
For Adviser XX, the answers to questions 1 and 3 are “no” and “no”. It follows that Division 4 also applied to the bonuses received by him.
The analysis which follows is thus applicable to the bonuses paid with respect to the 165 clients save for the bonuses paid to Adviser ZZ with respect to five extant SMSF clients.
5.2 Findings of fact
I turn now to the salient facts.
The employment contracts for each of the Advisers are described at [6] to [10] above.
Bonuses were paid to and accepted by the Advisers. The individual bonus payments were amounts between $750 and $1,500. The salary and total bonus payments made by the defendant to the Advisers during the financial years ended 30 June 2016, 2017 and 2018 are summarised in the table below:
Year ended 30 June
Adviser
Salary and Wages
Bonus
Total remuneration
Bonus as a percentage of total remuneration
2016
XX
$18,750.03
-
$18,750.03
-
2016
YY
$147,692.29
$98,000
$245,692.29
39.89
2016
ZZ
$147,692.28
$81,750
$229,442.28
35.63
2017
XX
$74,134.72
$24,250
$98,384.72
24.65
2017
YY
$141,346.14
$94,500
$235,846.14
40.07
2017
ZZ
$147,692.29
$101,750
$249,442.29
40.79
2018
XX
$78,491.61
$30,000
$108,491.61
27.65
2018
YY
$145,075.23
$93,500
$238,575.23
39.19
2018
ZZ
$145,384.59
$92,500
$237,884.59
38.88
The impugned bonuses are highlighted in bold.
The defendant maintained a spreadsheet which included details of property sales where the defendant’s clients (including the corporate trustees of the SMSFs) were the purchasers (Property Sales Register). The information recorded on the Property Sales Register included the name of the client; details of the property; the sale price; the type of sale, including whether it was “direct” or via an “SMSF”; the date of the purchased sale; the status of the sale, including whether the sale had settled; and the details of the Adviser (being their name, “Amount” and “Date Paid”). It is clear from the Property Sales Register that the bonuses were paid regularly to the relevant Adviser after the sale of a property had settled, but not otherwise.
It is plain, objectively, that the payment of such bonuses – following the purchase of properties which purchases occurred by reason of the implementation of advice given by the Advisers recommending such purchases – likely created an expectation that future purchases of property upon the recommendations of the Advisers would also produce future bonus payments.
5.3 Section 963J case
I turn now to consider ASIC’s s 963J case. Section s 963J of the Act provided:
963J Employer must not give employees conflicted remuneration
An employer of a financial services licensee, or a representative of a financial services licensee, must not give the licensee or representative conflicted remuneration for work carried out, or to be carried out, by the licensee or representative as an employee of the employer.
Section 963J contained a prohibition. The persons the subject of the prohibition were those meeting the description: “An employer of a financial services licensee, or a representative of a financial services licensee”. The prohibited conduct was the giving to the licensee or representative “conflicted remuneration for work carried out, or to be carried out, by the licensee or representative as an employee of the employer”. These elements are considered in turn below.
5.3.1 “An employer of a financial services licensee, or a representative of a financial services licensee …”
ASIC submitted that the defendant was, in the case of each Adviser, an “employer of … a representative of a financial services licensee”. However, as ASIC fairly recognised, the expression “An employer of a financial services licensee, or a representative of a financial services licensee” contains an ambiguity. The constructional choice is between the persons subject to the prohibition being:
(1)an employer of a financial services licensee; and an employer of a representative of a financial services licensee (first construction); or
(2)an employer of a financial services licensee; and a representative of a financial services licensee (second construction).
Employers of representatives of financial services licensees would be subject to the prohibition on the first construction, but not on the second construction.
The first construction is preferable for the following reasons. First, the remaining text of s 963J supports the first construction. As noted at [221] above, the prohibited conduct is the giving of conflicted remuneration:
(1)to the “licensee or representative”. This suggests that the recipient of the remuneration is a different person than the person giving the remuneration and this is consistent with the first construction and not the second; and
(2)for work “by the licensee or representative as an employee of the employer”. Thus, the work undertaken by the representative is in the capacity as an employee of the employer. That employment relationship is present on the first construction but absent on the second.
Secondly, s 963J was introduced as part of the Corporations Amendment (Future of Financial Advice Measures Act 2012 (Cth). The Explanatory Memorandum for the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) included, with respect to the proposed s 963J:
Treatment of benefits from employers to employees
2.46 An employer of a licensee, or of a representative of a licensee, is under an obligation not to pay the employee conflicted remuneration, rather than the employee being under an obligation not to accept conflicted remuneration from the employer. This is appropriate because in the majority of cases it is the employer, rather than the employee, that sets the terms and conditions of an employment contract, as well as being in control of remuneration payments.
(underline emphasis added)
It is clear, from the inclusion of the word “of” after the word “or” and from the heading to the quoted paragraph, that the legislative intention was consistent with the first construction.
On the construction which I prefer, the defendant was a person to whom s 963J applied as an employer of representatives of a financial services licensee because: (1) the defendant was a “financial services licensee” (see [4] above); and (2) each of the Advisers was its representative (see [5] above).
5.3.2 “representative”
For the reasons set out at [227] above, each of the Advisers was a representative of the defendant.
5.3.3 “…conflicted remuneration for work carried out, or to be carried out, by the licensee or representative as an employee of the employer”
Section 963J prohibited the defendant as the employer of the Advisers from giving those Advisers “conflicted remuneration for work carried out, or to be carried out, by the [Adviser] as an employee of the employer”. For the bonuses to have been “conflicted remuneration”: (1) the definition of that term in s 963A must have been satisfied; and (2) on the present facts, it must have been the case that none of ss 963B, 963C and 963D was engaged.
5.3.3.1 Section 963A
“Conflicted remuneration” was defined in s 963A of the Act as follows, prior to 1 January 2018:
963A Conflicted remuneration
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.
Note: A reference in this Subdivision (including sections 963A, 963B, 963C and 963D) to giving a benefit includes a reference to causing or authorising it to be given (see section 52).
From 1 January 2018, the note to s 963A was amended in a manner which is presently inconsequential.
Each of the bonuses was a “benefit” (see 3.8 above). Each of the advisers was a “representative of a financial services licensee” (see [5] above) who provided “financial product advice” (see 3.3 above) to persons as “retail clients” (see 3.6 above).
Thus, the question whether the definition in s 963A of the Act was satisfied requires consideration of whether, because of the nature of the bonuses or the circumstances in which the bonuses were given, the bonuses could reasonably have been expected to influence either: (1) the choice of financial product recommended to clients; or (2) the financial product advice given to the clients. The expression “could reasonably be expected to influence” is prospective in nature: ASIC v CBA (FFC) at [160] (O’Bryan J; Moshinsky and Jackman JJ agreeing). It posits an objective test, concerning the likelihood of the benefit affecting a future choice of financial product recommended or financial product advice given to retail clients (noting that “retail clients” means such clients generally and is not restricted to particular clients).
The nature of the benefit was a monetary amount payable to the Advisers. The circumstances in which the benefits were given included: (1) the employment contracts of the Advisers which contained cl 5.5 in the terms set out at [7] above; (2) the fact that the bonus payments were made regularly following the purchases of the properties which the Advisers recommended be purchased; (3) the quantum of the bonuses paid and that quantum as a proportion of the Advisors’ total remuneration; and (4) the volume of transactions required to generate the quantum of bonuses paid.
The quantum of the bonuses and that quantum as a proportion of the Adviser’s total remuneration are set out in the table at [216] above. As is evident from that table, the bonuses were substantial both in amount and when considered as a proportion of each Adviser’s total remuneration.
The number of transactions undertaken to generate the total bonus payments received by each Adviser is also noteworthy. As noted at [216] above, the bonuses were typically an amount between $750 and $1,500. The total annual bonuses paid ranged from $24,250 (Adviser XX in 2017) to $101,750 (Adviser ZZ in 2017). If one assumes that the average bonus paid was $1,125 (being the average of $750 and $1,500), then the number of individual payments made ranged from approximately 22 (24,250/1,125) per annum to approximately 91 (101,750/1,125) per annum. The payment of bonuses was hardly an isolated incident of the Advisers’ employment or remuneration and can reasonably be inferred to have played a significant role in both.
Taking all of the above matters into account I am comfortably satisfied that the availability of, and expectations to receive, the bonus payments could reasonably have been expected to have influenced both the choice of financial product recommended to, and the financial product advice given to, the defendant’s clients by the Advisers. In particular:
(1)the pattern of conduct of the payment of bonuses (including the number and quantum of such payments) following the purchase of properties where such purchases had been recommended by the Advisers could reasonably have been expected to have created an expectation on the part of the Advisers that future recommendations to purchase properties would similarly be rewarded by bonus payments; and
(2)the conclusion that there was a reasonable expectation that the existence of the bonuses could reasonably have been expected to influence the Advisers’ recommendations and advice is strengthened by the evidence as to the proportion of the bonus payments to the Advisers’ total income. As the table at [216] above illustrates, in many instances the bonuses comprised approximately 40 per cent of the Adviser’s total remuneration. It could reasonably have been expected that the Advisers would have been influenced to favour a course which created (or maintained) a higher income for themselves.
As the actual operation of the bonus scheme provides a sufficient basis for the conclusion that the availability of bonus payments could reasonably have been expected to have influenced both the choice of financial product recommended to, and the financial product advice given to the defendant’s clients by the Advisers, it is not necessary to consider the proper construction of cl 5.5 of the employment contracts (and in particular the extent to which there was a contractual right to receive payment in circumstances where the clause purported to provide the defendant with a discretion).
5.3.3.2 Sections 963B, 963C and 963D
Whilst satisfaction of s 963A was necessary it was not sufficient to establish that the bonuses were “conflicted remuneration”. As noted at [229] above, it is also necessary to be satisfied that none of ss 963B to 963D of the Act applied.
Section 963C concerned non-monetary benefits and need not be considered further. Section 963D concerned (relevantly) benefits provided to persons working for Australian ADIs (as defined in s 9 of the Act) whose access to the benefit is solely dependent on their recommendation of a “basic banking product” (as defined in s 961F of the Act) and was not engaged on the present facts.
That leaves s 963B which provided, in so far as is presently relevant, prior to 1 January 2018:
963BMonetary benefit given in certain circumstances not conflicted remuneration
(1)Despite section 963A, a monetary benefit given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients is not conflicted remuneration in the circumstances set out in any of the following paragraphs:
(a) the benefit is given to the licensee or representative solely in relation to a general insurance product;
(b) the benefit is given to the licensee or representative solely in relation to a life risk insurance product, other than:
(i) a group life policy for members of a superannuation entity (see subsection (2)); or
(ii) a life policy for a member of a default superannuation fund (see subsection (3));
(c) each of the following is satisfied:
(i) the benefit is given to the licensee or representative in relation to the issue or sale of a financial product to a person;
(ii) financial product advice in relation to the product, or products of that class, has not been given to the person as a retail client by the licensee or representative in the 12 months immediately before the benefit is given;
(d) the benefit is given to the licensee or representative by a retail client in relation to:
(i) the issue or sale of a financial product by the licensee or representative to the client; or
(ii) financial product advice given by the licensee or representative to the client;
(e) the benefit is a prescribed benefit or is given in prescribed circumstances.
(emphasis in original)
From 1 January 2018, s 963B provided in so far as is presently relevant:
963BMonetary benefit given in certain circumstances not conflicted remuneration
(1) A monetary benefit given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients is not conflicted remuneration in the circumstances set out in any of the following paragraphs:
(a) the benefit is given to the licensee or representative solely in relation to a general insurance product;
(b) each of the following is satisfied in relation to the benefit:
(i) the benefit is given to the licensee or representative in relation to a life risk insurance product or life risk insurance products;
(ii) none of the products is a group life policy for members of a superannuation entity (see subsection (2)) or a life policy for a member of a default superannuation fund (see subsection (3));
(iii) either:
(A) the benefit ratio for the benefit is the same for the year in which the product or products are issued as it is for each year in which the product or products are continued; or
(B) the benefit ratio requirements and clawback requirements in section 963BA are satisfied in relation to the benefit;
(ba) the benefit is given to the licensee or representative in relation to consumer credit insurance;
(c) each of the following is satisfied in relation to a financial product other than a life risk insurance product:
(i) the benefit is given to the licensee or representative in relation to the issue or sale of the financial product to a person;
(ii) financial product advice in relation to the product, or products of that class, has not been given to the person as a retail client by the licensee or representative in the 12 months immediately before the benefit is given;
(d) the benefit is given to the licensee or representative by a retail client in relation to:
(i) the issue or sale of a financial product by the licensee or representative to the client; or
(ii) financial product advice given by the licensee or representative to the client;
(e) the benefit is a prescribed benefit or is given in prescribed circumstances.
Note:Under the governing rules of some regulated superannuation funds, a member may seek advice on the basis that the trustee of the fund will pay the licensee or representative for the advice and then recover the amount paid from the assets of the fund attributed to that member. In that case, the member has caused or authorised the amount to be paid to the licensee or representative and so, because of section 52 of this Act, paragraph (1)(d) would apply to that amount. This does not affect the trustee’s obligations under section 62 of the Superannuation Industry (Supervision) Act 1993 (which deals with the purposes for which a trustee may act in maintaining a regulated superannuation fund).
(2) A life risk insurance product is a group life policy for members of a superannuation entity if the product is issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, for the benefit of a class of members of the entity.
(3) A life risk insurance product is a life policy for a member of a default superannuation fund if:
(a) the product is issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, for the benefit of a person who is a member of the entity; and
(b) the person has not given written notice to an employer of the person that the fund is the person’s chosen fund, but the employer of the person makes contributions to the fund for the benefit of the person.
Note:Superannuation guarantee surcharge may be imposed on an employer if the employer does not make contributions to a superannuation fund for the benefit of its employees. If an employee does not notify the employer of the employee’s chosen fund, the employer is still able to satisfy its obligations by making contributions to certain funds (see the Superannuation Guarantee (Administration) Act 1992).
(3A) The benefit ratio for a benefit given to a financial services licensee, or a representative of a financial services licensee, in relation to a life risk insurance product, or life risk insurance products, for a year is the ratio between:
(a) the benefit; and
(b) the policy cost payable for the product or products, or that part of the policy cost payable for the product or products to which the benefit relates, for the year.
(3B) The policy cost for a life risk insurance product, or products, for a year is the sum of:
(a) the premiums payable for the product, or products, for that year; and
(b) any fees payable for that year to the issuer of the product or products for that issue; and
(c) any additional fees payable because the premium for the product, or products, is paid periodically rather than in a lump sum; and
(d) any other amount prescribed by the regulations for the purposes of this paragraph.
(3C) However, the policy cost for a life risk insurance product, or products, does not include any amount prescribed by the regulations for the purposes of this subsection.
(4) The regulations may prescribe circumstances in which, despite a provision of this section, all or part of a benefit is to be treated as conflicted remuneration.
(5) This section applies despite section 963A and any regulations made for the purposes of section 963AA.
Note:The expression intrafund advice is often used to describe financial product advice given by a trustee (or an employee of, or another person acting under arrangement with, the trustee) of a regulated superannuation fundto its members, where that advice is not of a kind to which the prohibition in section 99F of the Superannuation Industry (Supervision) Act 1993 applies. (Section 99F of that Act prohibits trustees of regulated superannuation funds from passing on the cost of providing certain kinds of financial product advice in relation to one member of the fund to another.)
(emphasis in original)
The chapeau of s 963B(1) at all relevant times provided that satisfaction of any of sub-sections 963B(1)(a) to (e) was sufficient to produce the result that a monetary benefit given to an Adviser was not conflicted remuneration.
Sub-sections 963B(1)(a), (b) (both prior to and subsequent to its amendment), (ba) (from its inception on 1 January 2018) and (d) self-evidently were inapplicable on the facts of the present case. However, it is necessary to consider s 963B(1)(c) and (e).
Sub-section 963B(1)(c) at all relevant times required that each of s 963B(1)(c)(i) and (ii) be satisfied.
Section 963B(1)(c)(i) requires consideration of the connection between the benefits (i.e. the bonuses) and the “issue or sale of a financial product to a person”. In the present case, the financial product was the beneficial interest in the SMSF (see 3.2 above). The connection between the payment of the bonuses and such an interest was at best remote – the bonuses were payable by reference to the purchases of property, regardless of whether such a purchase occurred in connection with an SMSF. In these circumstances, I am not satisfied that the payments of the bonuses were made “in relation to the issue or sale of” the beneficial interests in the SMSFs. Thus, s 963B(1)(c)(i) was not satisfied. It follows that s 963B(1)(c) was not satisfied and it is unnecessary to consider s 963B(1)(c)(ii).
Section 963B(1)(e) at all relevant times applied if the bonus was a “prescribed benefit” or it was given in “prescribed circumstances”.
Sub-divisions 1 and 2 of Division 4 of Part 7.7A of the Regulations prescribed for the purposes of s 963B(1)(e) the circumstances in which a monetary benefit (such as the impugned bonuses) given (relevantly) to a representative of a financial services licence, who provides financial product advice to persons as retail clients was not conflicted remuneration. However, each of these regulations was self-evidently not engaged on the present facts.
For the reasons set out at [240] to [248] above, none of ss 963B to 963D applied so as to exclude the bonuses from the concept of conflicted remuneration. Thus, the bonuses were conflicted remuneration by dint of the operation of s 963A of the Act.
5.3.4 “… for work carried out, or to be carried out, by the [Adviser] as an employee of the employer”
The next requirement of s 963J was that the conflicted remuneration was provided for work carried out, or to be carried out by the Adviser as an employee of the defendant. The word “for” suggests a connection between the conflicted remuneration and the work performed or to be performed by the Adviser. I am comfortably satisfied that the requisite connection exists in the present case, in circumstances where the bonuses paid to the Advisers were paid by reference to property purchases where such purchases were a central and recurring feature of the advice given as part of the work undertaken by the Advisers for the defendant. As noted at [6] above, the Advisers’ responsibilities included analysis and evaluation of clients’ current financial status with the aim of preparing structured SOAs and the presentation of such SOAs to clients; and the implementation of steps in accordance with authorities to proceed provided by such clients.
5.3.5 Conclusions as to the s 963J case
Each of the elements of s 963J has been proven. ASIC has established that the defendant contravened s 963J with respect to each of the impugned bonuses.
5.4 Section 963E case
I turn now to consider ASIC’s s 963E case.
Section 963E(2) of the Act provided:
963E Licensee must not accept conflicted remuneration
…
(2) A financial services licensee contravenes this section if:
(a) a representative, other than an authorised representative, of the licensee accepts conflicted remuneration; and
(b) the licensee is the, or a, responsible licensee in relation to the contravention.
A contravention occurred only if each of s 963E(2)(a) and (b) was satisfied.
Section 963E(2)(a) was satisfied because each of the Advisers was a representative, but not an “authorised representative”, of the defendant (see [5] above); the bonuses were “conflicted remuneration” (see 5.3.3 above); and the Advisers accepted the bonuses (see [14] above).
Section 963E(2)(b) was satisfied if the defendant was “the, or a, responsible licensee in relation to the contravention”. As noted at [181] above, the defendant was the only financial services licensee that employed Adviser XX during the financial years ended 30 June 2018; and Advisers YY and ZZ during the financial years ended 30 June 2017 and 30 June 2018. Thus, s 963E(2)(b) was satisfied.
As both s 963E(2)(a) and (b) were satisfied, the defendant contravened s 963E with respect to each of the impugned bonuses.
6. CONCLUSION
For the reasons set out above I am satisfied that the defendant contravened: (1) s 961K of the Act with respect to each of the 12 individual or pairs of clients the subject of the Division 2 case; and (2) ss 963J and 963E of the Act with respect to the bonuses paid to and received by (a) Adviser XX in the financial year ended 30 June 2018; (b) Adviser YY for financial years ended 30 June 2017 and 30 June 2018; and (c) Adviser ZZ for financial years ended 30 June 2017 and 30 June 2018 (save to the extent that such bonuses relate to the five extant SMSF clients to whom Adviser ZZ gave advice).
I will direct the plaintiff to approach my Associate for the purpose of scheduling a further hearing as to the appropriate form of relief.
I certify that the preceding two hundred and fifty-nine (259) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman. Associate:
Dated: 20 December 2023
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