Australian Securities and Investments Commission v Firstmac Limited

Case [2024] FCA 737

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Firstmac Limited [2024] FCA 737

File number(s): QUD 467 of 2022
Judgment of: DOWNES J
Date of judgment: 10 July 2024
Catchwords: CORPORATIONS – alleged contraventions of s994E(3) of the Corporations Act 2001 (Cth) concerning design and distribution obligations relating to financial products for retail clients – meaning of “reasonable steps” – meaning of “would have resulted in, or would have been reasonably likely to have resulted in…” – whether reasonable steps must be antecedent to retail product distribution conduct – whether distributor of financial product failed to take reasonable steps within meaning of ss994E(3) and 994E(5) of the Corporations Act 2001 (Cth)
Words & phrases: “reasonably likely”
Legislation:

Australian Securities and Investments Commission Act 2001 (Cth) s 33

Corporations Act 2001 (Cth) ss 761A, 761G, 912C, 961L, 963F, 994A, 994B, 994E

Evidence Act 1995 (Cth) s 140(2)

Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) Sch 1

Corporations Regulations 2001 (Cth) reg 7.1.19(2)
Cases cited:

Australian Competition and Consumer Commission v MetcashTrading Ltd (2011) 198 FCR 297; [2011] FCAFC 151

Australian Gas Light Company v Australian Competition and Consumer Commission (No 3) (2003) 137 FCR 317; [2003] FCA 1525

Australian Securities and Investments Commission v Daly (Liability Hearing) [2023] FCA 290

Australian Securities and Investments Commission v Diversa Trustees Limited [2023] FCA 1267

Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717

Australian Securities and Investments Commission v R M Capital Pty Ltd [2024] FCA 151

Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) (2021) 156 ACSR 371; [2021] FCA 877

Briginshaw v Briginshaw (1938) 60 CLR 336

Construction, Forestry, Maritime, Mining and Energy Union v Mechanical Maintenance Solutions Pty Ltd (2022) 289 FCR 508; [2022] FCAFC 15

Department of Agriculture & Rural Affairs v Binnie [1989] VR 836

Re Fenwick (2009) 76 NSWLR 22; [2009] NSWSC 530

Re The Will of Bridget [2018] NSWSC 1509

Seven Network Ltd v News Ltd (2009) 182 FCR 160; [2009] FCAFC 166

Sheen v Fields Pty Ltd (1984) 58 ALJR 93

Sportsbet Pty Ltd v State of New South Wales (No 9) [2010] FCA 31

Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367
Division: General Division
Registry: Queensland
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Number of paragraphs: 212
Date of hearing: 29–30 April, 1–3 & 6 May 2024
Counsel for the Plaintiff: Mr A Harding SC, Mr D Healey & Mr D Blazer
Solicitor for the Plaintiff: Maddocks
Counsel for the Defendant: Mr R Dick SC, Ms E Bathurst & Ms D Tay
Solicitor for the Defendant: King & Wood Mallesons

ORDERS

QUD 467 of 2022
BETWEEN:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Plaintiff
AND:

FIRSTMAC LIMITED (ACN 094 145 963)

Defendant

ORDER MADE BY:

DOWNES J

DATE OF ORDER:

10 JULY 2024

THE…

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Australian Securities and Investments Commission v Firstmac Limited [2024] FCA 737
Case
[2024] FCA 737
Decision Date

CaseChat Overview and Summary

In the matter of Australian Securities and Investments Commission v Firstmac Limited, the court examined the alleged contraventions of sections 994E(3) and 994E(5) of the Corporations Act 2001 (Cth) concerning the design and distribution obligations (DDO) of financial products for retail clients. The central issue was whether Firstmac Limited, a financial services provider, had failed to take reasonable steps as required by these sections. Specifically, the court had to determine the meaning of “reasonable steps” and the phrase “would have resulted in, or would have been reasonably likely to have resulted in…” in the context of financial product distribution. Additionally, the court explored whether these reasonable steps needed to precede the actual conduct of distributing the retail product and if Firstmac had indeed failed to comply with these obligations.

The court found that the term “reasonable steps” in the context of the DDO should be interpreted as steps that are required to be taken prior to the conduct of distributing financial products to retail clients. This interpretation aligns with the statutory language and the necessity of ensuring that the distribution of financial products is appropriate for the target market. The court emphasised that the failure to take such antecedent steps could potentially result in the contravention of the statutory obligations. Furthermore, the court held that Firstmac had not adequately implemented the necessary steps to ascertain the investment objectives and timeframes of the retail clients, thereby failing to comply with the DDO provisions.

As a result, the court concluded that there was a real possibility that some of the term deposit holders, who were the recipients of the distribution conduct, may have had investment objectives and timeframes that made the High Livez product inappropriate for them. This finding was based on the evidence provided by Firstmac's witnesses and ASIC's expert, which indicated that Firstmac had not sufficiently identified or considered the potential investment objectives and timeframes of the term deposit holders before distributing the High Livez product. Consequently, the court determined that Firstmac had failed to take the necessary reasonable steps as required by the Corporations Act.

The court ordered the parties to prepare minutes of order reflecting the reasons for the decision and to submit these to the associate to Downes J by 4:00 pm on Wednesday, 17 July 2024. If the parties could not agree on the form of order, each party was required to prepare their own draft order and submit it by the same deadline. The proceeding was scheduled for a case management hearing at 9:30 am on Friday, 19 July 2024. The entry of orders was governed by Rule 39.32 of the Federal Court Rules 2011.

Orders

Orders of the court

1. The parties are to confer and prepare short minutes of order which reflect these reasons and which contain directions as to the further conduct of this proceeding, and provide these to the associate to Downes J by 4.00 pm on Wednesday, 17 July 2024.

2. If the parties are unable to agree on a form of order as referred to in Order 1, each party prepare their own version of a draft order and provide this to the associate to Downes J by 4.00 pm on Wednesday, 17 July 2024.

3. The proceeding be listed for a case management hearing at 9.30 am on Friday, 19 July 2024.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

This position appears to be the correct one, as it is consistent with the evidence of Firstmac’s witnesses who were familiar with the characteristics of their customers (as referred to above and in more detail in section 5.1 below).3.4 Conclusion For these reasons, there is a real chance (that is, a real possibility) that some of the TD Holders who were the recipients of the Distribution Conduct may have held either or both a capital guaranteed objective and a short investment timeframe objective and were therefore outside of the target market for High Livez.4. ASIC’S FIRST LEVEL CASE4.1 The pleaded allegations By [23] and [24] of the Amended Statement of Claim, ASIC pleads a list of processes and procedures which it alleges that Firstmac “ought to have taken prior to the Distribution Conduct”. In summary, these alleged reasonable steps were that Firstmac ought to have:(1)considered which of the consumer’s investment objectives and consumer’s intended timeframes in the TMD which the TD Holders were likely to have held;(2)come to the conclusion that the TD Holders may have been consumers with a capital guaranteed investment objective and held an investment with a “Short (≤ 2 years)” intended investment timeframe and that an investment in High Livez may not have been appropriate to this objective and timeframe, such that there was a likelihood that they were outside the target market for High Livez as described in the High Livez TMD;(3)recognised and come to the conclusion that it either did not have information about TD Holders to contradict such conclusions or, if it did have such information, had not considered and analysed the information to determine whether it contradicted such conclusions;(4)not given the PDS to any TD Holder unless and until Firstmac had already:(a)obtained information from the relevant TD Holder to the effect that they did not, then, hold a capital guaranteed objective or a short investment timeframe objective; or (b)directly communicated to the relevant TD Holder that, generally, the High Livez product was unlikely to be appropriate for investors with a capital guaranteed objective or a short investment timeframe objective, and did so explicitly and in a manner that was reasonably likely to come to the attention of, and be understood by, the TD Holder;(5)prepared and implemented a written “DDO Policy” specific to or incorporating the cross-selling strategy of High Livez which listed the steps outlined in subparagraphs (1) to (4) above and required Firstmac to engage in retail product distribution conduct which was consistent with the DDO Policy; (6)prepared and implemented a written marketing and distribution strategy for High Livez;(7)identified relevant staff to be instructed and trained in the operation of that policy and instructed and trained them;(8)prepared and provided to relevant staff written mandatory support materials which:(a)would include sales scripts for inbound and outbound calls with guidance on their use and which would incorporate mandatory questions, warnings and disclosures, checklists or operating guidelines, customer call centre procedures, customer complaint management procedures and processes, and a statement of governance and compliance responsibilities for each level of relevant staff involved in the distribution of High Livez;(b)would be consistent with the DDO and the DDO Policy;(c)would require relevant staff, in communications with potential investors, to ascertain from those potential investors their consumer attributes; and/or inform consumers that generally the High Livez product was unlikely to be appropriate for investors with a capital guaranteed objective or a short investment timeframe objective;(9)identified which staff members ought to be instructed and trained in the operation of the written DDO Policy; and(10)instructed and trained relevant staff members in the operation of the DDO Policy.4.2 Mr Whyntie’s expert evidence

Ratio Decidendi

Legal Principle Established

Firstmac accepts that there was a chance that some TD Holders held a capital guaranteed objective or a short investment timeframe objective but submits that the evidence established that that chance did not rise above a possibility.3.3 Consideration Investments in all Firstmac Term Deposits were ‘capital guaranteed’ by the Australian Government up to $250,000 per account. Capital invested in a Firstmac Term Deposit did not fluctuate in value, and TD Holders received the full amount of capital invested at maturity plus any return. Capital invested in High Livez, on the other hand, did not have a capital guarantee (of any kind), and the unit price of High Livez was subject to volatility. This had the consequence that unitholders may suffer a loss or gain in capital on exit from the fund. Firstmac marketed Firstmac Term Deposits by reference to, amongst other things, the availability of the Australian Government guarantee, and it did so because it considered that feature would be of interest to term deposit holders. Further, at all relevant times, Firstmac did not offer a Firstmac Term Deposit with a term greater than two years unless an investor requested a longer term and that was agreed to by Firstmac, whereas the recommended investment timeframe for High Livez was three to five years. It is common ground that from about 2012, Firstmac adopted a cross-selling strategy of marketing and distributing investments in High Livez to TD Holders. It is also common ground that the recipients of the Distribution Conduct were, at all relevant times, TD Holders. It follows that these recipients were investors in a financial product (namely, Firstmac Term Deposits) which had two ‘key’ characteristics – namely, a capital guarantee and a short investment timeframe. That a group of customers invests in a particular financial product which has certain characteristics does not mean that all such customers will necessarily have particular investment objectives which are aligned with those characteristics. They might or might not have those objectives, depending on the circumstances. For example, they might have an investment in a financial product as part of a diverse portfolio, each segment of which reflects different objectives for that segment. Further, an investor’s objectives can change over time (including between the commencement date and the end date of the term associated with a term deposit). Mr Austin agreed: T370/40–44. This conclusion accords with the evidence adduced at trial. The TD TMD contained no reference to a “key consumer attribute” of the target market being a capital guaranteed objective or a short investment timeframe objective. If TD Holders as a market had such investment objectives, one would have expected to see that identified in those TMDs. Mr Whyntie (ASIC’s expert) was shown the TD TMD for the Stow It Term Deposit and agreed that what the TD TMD exposed was that, just because features such as a fixed term or a government guarantee might be attributes of the financial product, it does not necessarily follow that they will be objectives of the target market for that product: T99/14–19.