Australian Securities and Investments Commission v R M Capital Pty Ltd
[2024] FCA 151
•29 February 2024
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v R M Capital Pty Ltd [2024] FCA 151
File number: NSD 906 of 2019 Judgment of: JACKSON J Date of judgment: 29 February 2024 Catchwords: CORPORATIONS - financial services regulation - first defendant Australian Financial Services Licence holder - second defendant authorised representative under s 916A of Corporations Act 2001 (Cth) - whether licensee took reasonable steps to ensure authorised representative did not receive conflicted remuneration as required by s 963F of Corporations Act - licensee first defendant found not to have taken reasonable steps Legislation: Acts Interpretation Act 1901 (Cth) s 13
Corporations Act 2001 (Cth) ss 52, 760A, 761A, 761G, 764A, 766B, 910A, 911A, 911B, 912A, 912C, 913B, 916A, 916B, 916F, 960, 961B, 961J, 961L, 963A, 963B, 963C, 963D, 963E, 963F, 963G, 963H, 963J, 963K, 963L, 967, 1317G, 1528, Chapter 7, Parts 7.6, 7.7A
Evidence Act 1995 (Cth) s 191
Corporations Regulations 2001 (Cth) reg 7.7A.16B
Cases cited: All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782
Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166
Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69
Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570
Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291
Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877
Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786
Berenguel v Minister for Immigration and Citizenship [2010] HCA 8; (2010) 264 ALR 417
Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969
Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (recs and mgrs apptd) (in liq) [2014] VSC 516
Construction, Forestry, Maritime, Mining and Energy Union v Mechanical Maintenance Solutions Pty Ltd [2022] FCAFC 15; (2022) 289 FCR 508
Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450
Department of Health v Multichem Laboratories Ltd [1987] 1 NZLR 334
Ngankiburka-Mekauwe (Senior Woman of Water) Georgina Williams v Minister for Aboriginal Affairs and Reconciliation [2018] SASC 163
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 359 Date of hearing: 1-2 March 2022 Counsel for the Plaintiff: Dr E Peden SC with Mr P Holmes Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the First Defendant: Mr J Giles SC with Mr C Williams Solicitor for the First Defendant: Solomon Brothers Lawyers Counsel for the Second Defendant: The second defendant did not appear ORDERS
NSD 906 of 2019 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff
AND: R M CAPITAL PTY LTD (ACN 065 412 820)
First Defendant
THE SMSF CLUB PTY LTD (ACN 162 328 501)
Second Defendant
ORDER MADE BY:
JACKSON J
DATE OF ORDER:
29 FEBRUARY 2024
THE COURT ORDERS THAT:
1.The answer to the separate question:
Whether the first defendant, in contravention of s 963F of the Corporations Act 2001 (Cth), during the period August 2013 to August 2016, failed to take reasonable steps to ensure that its representative, the second defendant, did not accept conflicted remuneration
is 'yes'.
2.The matter is listed for mention on 11.15 am AWST on 7 March 2024.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Table of Contents
I. Procedural history
[5]
II. Summary of agreed background facts
[16]
III. The parties' respective contentions and the issue that arises
[28]
The particulars of ASIC's case
[29]
A pleading point
[36]
RM Capital's contentions
[41]
The issue
[47]
IV. Statutory framework and principles
[48]
Licensing and representation of financial services providers
[49]
Part 7.7 Division 4 - Conflicted Remuneration
[55]
Enactment of Part 7.7A and transitional provisions
[66]
What s 963F requires
[68]
V. The evidence
[87]
James Richardson
[89]
RM Capital and its compliance personnel
[93]
SMSF Club's appointment as authorised representative
[101]
The Referral Agreement
[110]
SMSF Club's activities
[129]
Concerns about SMSF Club
[136]
The approved products list
[149]
RM Capital's Compliance Programme
[165]
RM Capital's policy on conflicts
[172]
RM Capital 's policies on the appointment of representatives
[183]
RM Capital's awareness of the introduction of the ban on conflicted remuneration
[189]
RM Capital's draft policy on conflicted remuneration
[194]
Training
[209]
Monitoring
[225]
ASIC investigation
[240]
VI. Consideration
[241]
What steps did RM Capital take against acceptance of conflicted remuneration?
[246]
Compliance personnel and a compliance programme
[246]
Selecting suitable personnel
[248]
Training
[250]
The Managing Conflicts of Interest policy and the Conflicted Remuneration draft policy
[256]
The approved products list
[262]
Monitoring and supervision
[270]
The steps ASIC says RM Capital should have taken
[281]
Policies
[283]
Procedures for the approval of arrangements
[290]
Termination or amendment of existing arrangements
[297]
Compliance Programme
[298]
Education and training
[301]
Monitoring
[303]
Whether RM Capital took reasonable steps against acceptance of conflicted remuneration
[307]
Risks specific to SMSF Club
[308]
RM Capital had the capacity to influence SMSF Club's behaviour
[312]
No legal advice on whether the Referral Agreement involved conflicted remuneration
[314]
Monitoring SMSF Club's compliance
[335]
More general steps
[343]
Conclusion
[358]
REASONS FOR JUDGMENT
JACKSON J:
These reasons determine an issue between the plaintiff (ASIC) and the first defendant, R M Capital Pty Ltd (RM Capital), which has been stated in an order for a separate question as follows:
Whether the first defendant, in contravention of s 963F of the Corporations Act 2001 (Cth), during the period August 2013 to August 2016, failed to take reasonable steps to ensure that its representative, the second defendant, did not accept conflicted remuneration.
The issue arises because RM Capital is and was the holder of an Australian Financial Services Licence (AFSL) and the second defendant, The SMSF Club Pty Ltd, was one of its authorised representatives pursuant to s 916A of the Corporations Act 2001 (Cth) (Act). As the statement of the separate question suggests, s 963F requires the licensee under an AFSL to 'take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration'. In broad terms, conflicted remuneration is, relevantly, a benefit given to the representative that could reasonably be expected to influence the choice of financial product recommended by the representative to retail clients or the financial product advice given to such clients: s 963A.
In overview, ASIC alleges that in the period referred to in the statement of the separate question (the relevant period) there were certain steps that would have been reasonable steps for RM Capital to have taken to ensure that its authorised representatives, particularly SMSF Club, did not accept conflicted remuneration. Those steps will be described below. ASIC says that RM Capital failed to take those steps, and that to the extent that RM Capital contends that it took other steps to seek to ensure that its representatives did not accept conflicted remuneration, they were insufficient to qualify as reasonable steps.
Before describing the background and ASIC's allegations in a little more detail, it is necessary to summarise the somewhat tortuous procedural history of the matter, so as to understand what these reasons do and do not cover, and why.
I. Procedural history
ASIC commenced this proceeding on 7 June 2019, with RM Capital and SMSF Club as the named defendants. On 27 June 2019 the Court ordered that all questions of liability in the proceedings were to be heard and determined separately, and in advance of any hearing and determination of questions of penalty or other relief.
In March 2021, ASIC asked for the hearing of the matter as against SMSF Club to be heard in advance of the matter as against RM Capital, because ASIC and SMSF Club were close to settling the substantive dispute between them. This raised the question of whether and how the issues of liability and relief as against SMSF Club could be heard in advance of the question of liability as against RM Capital, without findings of liability against SMSF Club prejudicing RM Capital's position. That is because ASIC's case against SMSF Club includes allegations that it breached the ban on authorised representatives of financial services licensees accepting conflicted remuneration in s 963G of the Act. So findings that SMSF Club had breached that prohibition may have been relevant to the issue of whether RM Capital had taken reasonable steps to prevent such breaches.
Nevertheless, the hearing of the dispute as between ASIC and SMSF Club was listed for 12 July 2021, before any hearing of the allegations against RM Capital. RM Capital did not oppose that, provided that no declarations were sought against SMSF Club that would prejudice RM Capital's position.
In May and June of 2021, ASIC and SMSF Club filed joint submissions and a statement of agreed facts. Both documents purported to address only the dispute as between ASIC and SMSF Club. The documents reflected an agreement reached between ASIC and SMSF Club as to the contraventions alleged against SMSF Club and the appropriate relief in the circumstances. ASIC and SMSF Club's statement of agreed facts included several admissions by SMSF Club, including of contraventions of s 963G of the Act. The joint submissions asked the Court to accept the agreed facts and consider ordering the relief sought.
The hearing as between ASIC and SMSF Club was held on 12 July 2021, as listed. Because of SMSF Club's admissions, the hearing primarily concerned the appropriate orders and relief to be made in respect of SMSF Club. However, after submissions made by senior counsel for ASIC, the hearing proceeded on the basis that while the Court would hear all it needed to hear to decide whether to grant relief against SMSF Club, it would not deliver judgment until after the contested hearing of the dispute as between ASIC and RM Capital.
Instead of formally reserving judgment as between ASIC and SMSF Club, the hearing on 12 July 2021 concluded on the basis that SMSF Club could make submissions at the subsequent contested hearing involving RM Capital on any question of law, or of mixed fact and law, that could ultimately bear upon the liability of SMSF Club and the orders against it (for example, a question of the proper construction of the relevant statutory provisions). SMSF Club agreed that this preserved procedural fairness for it. SMSF Club also submitted that any issue as to apprehended bias or prejudice, arising from the fact that the dispute as against RM Capital was to be heard subsequent to the hearing involving SMSF Club, was for RM Capital to agitate.
The dispute as to liability between ASIC and RM Capital was heard on 1 and 2 March 2022. SMSF Club did not appear or make submissions, and RM Capital did not suggest that the previous hearing involving SMSF Club's admissions in July 2021 gave rise to any issues of procedural fairness concerning RM Capital. Ahead of that hearing, ASIC and RM Capital filed a statement of agreed facts (SOAF) which avoided making reference to the contraventions alleged against SMSF Club.
Consistently with that, the hearing was conducted on the basis that the contravention of s 963F of the Act alleged against RM Capital did not require any finding of underlying breaches of s 963G of the Act, which SMSF Club had admitted to contravening in the hearing on 12 July 2021. As a matter of law, that is correct (see below [84]). To maintain procedural fairness for RM Capital, ASIC and RM Capital agreed that the statement of agreed facts between ASIC and SMSF Club would not be in evidence in the hearing of the dispute as between ASIC and RM Capital.
However, at the hearing on 1 and 2 March 2022 I queried whether it was desirable for judgment to be given in relation to both defendants at the same time, since it did not seem possible to make findings of liability against SMSF Club (if that were the outcome) while at the same time ignoring those findings in relation to the case against RM Capital.
This culminated in orders being made, with the consent of all the parties, that the substantive dispute as between ASIC and RM Capital was to be treated as the hearing and determination of a separate question, being the question stated in the first paragraph of this judgment. The orders also provided that the evidence tendered on 1 and 2 March 2022 would constitute the evidence in the hearing of the separate question. The statement of agreed facts between ASIC and SMSF Club was therefore not part of the evidence for the determination of the separate question.
Therefore, these reasons only determine the issues of liability as between ASIC and RM Capital. It will be necessary to determine the case against SMSF Club at a later time.
II. Summary of agreed background facts
The matters summarised in this section are largely common ground between ASIC and RM Capital, as reflected in the SOAF signed on behalf of each of ASIC and RM Capital.
At all material times, RM Capital held an AFSL that authorised it to provide financial product advice within the meaning of s 766B of the Act for classes of financial product that included superannuation, and to deal in superannuation financial products.
SMSF Club carried on the business of providing financial product advice and accounting and administrative services for self‑managed superannuation funds (SMSFs). From 7 August 2013, but with effect from 29 July 2013, SMSF Club was an authorised representative of RM Capital in accordance with s 916A of the Act, authorised to provide financial product advice on behalf of RM Capital. At all material times Justin Beeton was a financial adviser at SMSF Club and its sole director.
A different company called Positive RealEstate Pty Ltd (PRE) was in the business of providing property investment services, including education, advice, and something called 'property mentoring'.
During the relevant period, SMSF Club provided to its paying clients a suite of services known as the 'SMSF Club'. These involved advising clients about SMSFs and administering them for the clients. Clients who signed up for the programme were known as SMSF Club members. SMSF Club helped club members to set up an SMSF, roll over existing superannuation funds to it, and make other investments through it. I will return to the detail of the services SMSF Club provided and how it provided them below.
It is common ground that if the clients did establish an SMSF with the assistance of SMSF Club, their interest in the SMSF would be a financial product within the meaning of s 766B of the Act: see in particular s 764A(1)(g). I accept that to be so; for present purposes it is not necessary to trace through the definitions in Part 7.1 of the Act or, more to the point, in the Superannuation Industry (Supervision) Act 1993 (Cth), in order to conclude that an interest in a superannuation fund is likely to be a financial product.
Throughout the relevant period, SMSF Club engaged in various activities that involved giving information to retail clients as defined in s 761G(6) of the Act. RM Capital knew about these activities in a general way at the time. The SOAF indicates that throughout the relevant period, SMSF Club regularly provided 'financial product advice' as defined in s 766B of the Act. It also indicates that throughout that period SMSF Club provided advice, including financial product advice, to clients as RM Capital's authorised representative. However, RM Capital does not admit that the particular conduct of SMSF Club on which ASIC relies constituted financial product advice.
There was a referral agreement between PRE and SMSF Club (Referral Agreement). It was in effect from shortly after the time SMSF Club became RM Capital's authorised representative (no later than late August 2013) until August 2016. It was oral at first, but from 18 July 2014, RM Capital asked for the Referral Agreement to be documented, and facilitated that. The Referral Agreement was reduced to writing and executed on 7 September 2015.
At all times during the relevant period, the Referral Agreement included a term to the effect that PRE would pay SMSF Club a fee of $5,000 (plus GST), or such other amount as may be negotiated between the parties, each time a client of PRE used the services of SMSF Club (and/or entities associated with SMSF Club) to establish a bare trust within an SMSF to purchase a property through PRE.
It is common ground between ASIC and RM Capital that throughout the relevant period, RM Capital knew of the Referral Agreement and the fees payable under it. Precisely what RM Capital knew, and when and how, will be described in the course of setting out the evidence below. It is also common ground that RM Capital approved, monitored and endorsed the Referral Agreement by taking various steps that will also be described below.
The SOAF identifies, in a schedule, approximately 170 instances during the relevant period of SMSF Club receiving referral fees under the Referral Agreement. These were paid because clients of SMSF Club purchased properties through PRE. Between February 2014 and July 2015, the fees were paid in the first instance to RM Capital, and ranged from $212.50 up to $4,950. There was then an on payment from RM Capital to SMSF Club of a portion of the fee received by RM Capital from PRE. That is, the referral fees were paid to RM Capital in the first instance, which deducted a percentage of the fee for itself and forwarded the balance to SMSF Club. After July 2015, SMSF Club received referral fees directly from PRE.
It appears that RM Capital became aware that ASIC was investigating the matter in June 2016, when it received a notice issued under s 912C of the Act, requiring information from it.
III. The parties' respective contentions and the issue that arises
I will now describe the case that ASIC puts against that largely agreed factual background, and address a pleading point that RM Capital raised about that case. I will then describe the principal bases on which RM Capital defends the matter. After that I will consider the statutory framework, before setting out the evidence in more detail. Finally I will decide whether ASIC has made out its case that will include consideration of the steps that RM Capital did take and the steps that ASIC says it should have taken, and an overall assessment of whether RM Capital did take reasonable steps to ensure that its authorised representative, SMSF Club, did not accept conflicted remuneration.
The particulars of ASIC's case
Broadly, ASIC's case is that in order for RM Capital to have discharged its obligation under s 963F of the Act during the relevant period, it should have taken a number of particular steps that would have been reasonable to ensure that its representatives, in particular SMSF Club, did not accept conflicted remuneration.
The steps said to have been required are set out in a letter dated 21 May 2021 from ASIC to RM Capital's solicitors, as follows (including one amendment made in a further letter of 8 November 2021):
The reasonable steps that ASIC contends RM Capital ought to have taken to ensure that SMSF Club did not accept conflicted remuneration (and avoid contravening s 963F of the Act as alleged in paragraph 21 of the 2FACS [ASIC's concise statement]) are as follows.
(a) From 1 July 2013, RM Capital:
(i)should have ensured that its 'Managing Conflicts of Interest Policy' (referred to in paragraph 16(c) of the 2FACS) included statements to the effect that:
(A)the Act prohibited authorised representatives of financial services licensees from accepting Conflicted Remuneration; and
(B)accepting commissions or soft dollar benefits could amount to accepting prohibited Conflicted Remuneration;
(ii)should have had in place a policy prohibiting the acceptance of Conflicted Remuneration by RM Capital or its representatives, which should, at a minimum, have correctly described:
(A)the prohibitions in the Act relating to the acceptance of Conflicted Remuneration;
(B)at a general level, what constitutes Conflicted Remuneration;
(C)relevant exceptions to the general description of Conflicted Remuneration; and
(D)by way of illustration, specific types of benefits that may constitute Conflicted Remuneration;
(iii)should have had in place procedures requiring:
(A)any proposed agreement or arrangement between an authorised representative of RM Capital and a third party (Third Party Arrangement) that would or might confer a (monetary or non-monetary) benefit on the authorised representative constituting Conflicted Remuneration (Conflicted Remuneration Arrangement) to be submitted to RM Capital for approval before being entered into by the authorised representative;
(B)RM Capital to review the proposed Third Party Arrangement, consider whether it would constitute a Conflicted Remuneration Arrangement, and take legal advice on that question if there was reason to doubt that the proposed Third Party Arrangement did not constitute a Conflicted Remuneration Arrangement;
(C)RM Capital, if it considered, upon review, that the proposed Third Party Arrangement would be a Conflicted Remuneration Arrangement, not to approve the Third Party Arrangement;
(D)RM Capital, by 1 July 2014, to review any Third Party Arrangement entered into before 1 July 2013, consider whether it constituted a Conflicted Remuneration Arrangement, and take legal advice on that question if there was reason to believe that the Third Party Arrangement might constitute a Conflicted Remuneration Arrangement;
(E)RM Capital, if it became aware that a Third Party Arrangement was a Conflicted Remuneration Arrangement, to require the relevant authorised representative (by 1 July 2014 if the Third Party Arrangement was entered into before 1 July 2013) to terminate the Conflicted Remuneration Arrangement or amend it so that it did not involve the acceptance of Conflicted Remuneration;
(iv) should have ensured that its Compliance Programme:
(A)included, in its RM Group Compliance Program Table, requirements, responsibilities, actions to be taken, and a training program with respect to, complying with the requirements of Division 4 of Part 7.7A of the Act; and
(B)did not countenance any conduct that could constitute accepting Conflicted Remuneration, such as accepting soft dollar benefits;
(v)should have provided, and ensured that its representatives (including SMSF Club representatives) attended, education and training sessions concerning the prohibitions under the Act on accepting Conflicted Remuneration, as part of an initial induction for any person first becoming a representative after 1 July 2013, and otherwise periodically while the representative remained a representative;
(vi)should have monitored SMSF Club's compliance with s 963G(1) of the Act, including by auditing the advice of its representatives (including SMSF Club) on a regular basis to enable RM Capital to ascertain the kinds of advice that SMSF Club representatives were providing and whether that advice was, or might be, affected by remuneration it accepted under any agreements or arrangements to which those representatives were party (including, in the case of SMSF Club, the Referral Agreement).
(b) With respect to the Referral Agreement specifically, RM Capital:
(i)should have applied the procedures referred to in paragraph (a)(iii)(A) and (B), alternatively (C) above;
(ii)upon so doing, should have concluded that the Referral Agreement was a Conflicted Remuneration Arrangement; and
(iii)thereafter, should have applied the procedure referred to in paragraph (a)(iii)(D), alternatively (E), above.
In broad terms, then, ASIC claims that RM Capital should have had in place a conflicts policy that explained and prohibited the acceptance of conflicted remuneration, procedures for RM Capital to approve (or withhold approval of) agreements under which its representatives might have received conflicted remuneration, and a compliance programme that addressed conflicted remuneration, including by way of training of representatives and monitoring of SMSF Club's compliance. ASIC specifically alleges that the approval procedure should have been applied to the Referral Agreement, and that this should have had the result that the agreement was terminated or amended to remove the possibility of conflicted remuneration.
ASIC alleges that RM Capital did not take any of those reasonable steps. To the extent that RM Capital contends that it took other steps that were reasonable to ensure that its representatives did not accept conflicted remuneration, ASIC says that those steps were insufficient in RM Capital's circumstances to satisfy the requirement in s 963F.
ASIC's case makes clear that it does not allege multiple failures and therefore multiple breaches during the relevant period. One contravention of s 963F is alleged.
The logic of ASIC's particulars concerning alleged steps specific to the Referral Agreement between SMSF Club and PRE is difficult to follow. This seems to be the result of misuse of the term 'alternatively' in paragraph (b), possibly coupled with errors in cross referencing. But RM Capital did not submit that these mistakes made the particulars embarrassing, or otherwise that it could not understand the case against it. If the particulars are read fairly, with due regard to inadvertent errors, it is clear that ASIC is alleging that RM Capital should, at a minimum, have required the Referral Agreement to have been submitted to RM Capital before approving it (which would have presumably have required it to be reduced to writing), and RM Capital should then have reviewed it to decide whether it would or might have involved conflicted remuneration and, if in any doubt, RM Capital should have taken legal advice. ASIC alleges that the outcome of that should have been to withhold approval of the Referral Agreement.
It is not clear how the review procedures for arrangements entered into before 1 July 2013 can apply to the Referral Agreement, which appears to have been entered into after that date, so I will have no further regard to paragraph (b)(iii) of the particulars.
A pleading point
It is convenient at this point to deal with a submission made by senior counsel for RM Capital to the effect that ASIC's case did not include any allegation that RM Capital learned anything during the relevant period which should have led it to act differently. He asserted that what was put against his client was a lack of policies and procedures. He also referred to Mr Richardson's view, explored below, that the referral fee that PRE was paying to SMSF Club was not conflicted remuneration, essentially because SMSF Club was not providing financial product advice. Senior counsel submitted that no case had been articulated that it came to learn of anything that required RM Capital to reconsider that view. This submission was put primarily by reference to ASIC's letter of particulars set out above.
I do not accept the submission. ASIC's letter of 21 May 2021 says that it gives particulars of reasonable steps that RM Capital should have taken to avoid the breach pleaded in paragraph 21 of ASIC's concise statement. It says that the general steps (that is, those not specific to the Referral Agreement) should have been taken 'from 1 July 2013'. It is not a snapshot of what should have been done as at that date.
Also, the letter is confined to a statement of the steps that should have been taken; it is not a complete statement of ASIC's case. It responds to a letter from RM Capital's solicitors seeking particularisation of steps, not knowledge. Therefore the lack of any mention in ASIC's letter of knowledge that RM Capital may have gained at any particular time does not imply that RM Capital's state of knowledge should be taken to be frozen throughout the period.
Further, paragraph 21 of ASIC's concise statement, as referred to in the letter, alleges a failure to take reasonable steps throughout the relevant period. This allegation relies on the matters set out in paragraph 16 of the concise statement which alleges, among other things, that during the relevant period:
(a)RM Capital knew that SMSF Club was providing financial product advice;
(b)RM Capital knew of the referral fees and the Referral Agreement, including by having asked for and facilitated the documentation of the agreement 'from 18 July 2014'; and
(c)on 4 January 2014 RM Capital received advice (considered further below) that its draft conflicted remuneration policy was erroneous and inadequate.
I therefore consider that RM Capital received fair notice that whether it took reasonable steps was to be assessed in all the circumstances, including knowledge it acquired during the relevant period. It cannot be the case that the Court should proceed solely on the basis of what RM Capital knew on 1 July 2013. Further, much of the evidence described below about things RM Capital learned during the relevant period was adduced by RM Capital itself, or comes from a statement of agreed facts which it signed. It is not unfair to have regard to that evidence.
RM Capital's contentions
RM Capital argued that it did take reasonable steps to ensure that its authorised representatives did not accept conflicted remuneration. It presented four arguments in this regard.
First, RM Capital only allowed authorised representatives to provide financial advice relating to products on its approved products list, and RM Capital reviewed financial products prior to adding them to that list for consistency with relevant legislation, including the conflicted remuneration ban.
Second, RM Capital only appointed 'apparently appropriate' persons as authorised representatives. It did this through its Representative and Human Resources Policy, which required various checks into those seeking to become authorised representatives, including checking that the applicants had industry knowledge. RM Capital noted that the conflicted remuneration ban was well-known, implying that if applicants had industry knowledge, then it was likely that they would be aware of the conflicted remuneration ban.
Third, RM Capital periodically audited its authorised representatives and also monitored their remuneration by having remuneration payments made to RM Capital, rather than directly to the authorised representatives, and reviewing those remuneration payments regularly.
Fourth, RM Capital had a requirement for ongoing training and education by representatives, which included specific training and education on the FOFA reforms and the conflicted remuneration ban.
RM Capital submitted that these constituted reasonable steps given the organisation's relatively small size and profitability. RM Capital also submitted that it took additional steps with SMSF Club specifically, including asking that the referral agreement between SMSF Club and PRE be reduced to writing and reviewing SMSF Club's marketing materials.
The issue
It is not necessary to restate the competing contentions in the form of specific issues for determination. There is really only one issue in the proceeding as between ASIC and RM Capital at the present stage of the proceeding, concerning whether s 963F of the Act was breached: during the relevant period, did RM Capital take reasonable steps to ensure that SMSF Club did not accept conflicted remuneration?
IV. Statutory framework and principles
The relevant statutory provisions appear in Chapter 7 of the Corporations Act, which regulates financial services and markets. The stated objectives of the chapter include the promotion of fairness, honesty and professionalism by those who provide financial services: s 760A(b). The provisions described below are as at the commencement of the relevant period, that is 1 August 2013. There were no significant amendments during the relevant period.
Licensing and representation of financial services providers
Part 7.6 provides for the licensing of providers of financial services. Under s 911A(1) and s 911A(2)(a)(i), a person who carries on a financial services business must hold an AFSL covering the provision of the financial services, unless the person provides the service as a representative of the holder of an AFSL that covers the provision of the service.
Relevantly to the relationship between RM Capital and SMSF Club, s 911B(1)(b) permits the provision of a financial service on behalf of a principal who carries on a financial services business if the principal holds an AFSL, the provider of the service is an authorised representative of the principal, and the authorisation covers the provision of the service. 'Authorised representative' of a financial services licensee is defined in s 761A to mean a person authorised in accordance with s 916A or s 916B of the Act to provide a financial service or financial services on behalf of the licensee. As has been said, SMSF Club was authorised by RM Capital to provide financial services, and so was its authorised representative under s 916A. Section 916B effectively permits authorised representatives to grant sub‑authorisations to individuals, such as their employees, with the financial services licensee's written consent: s 916B(3).
Section 912A(1) of the Act imposes general obligations on the holder of an AFSL, that is, a financial services licensee. Several of them should be noted, namely the obligations to:
(a)do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
(aa)have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and
…
(ca)take reasonable steps to ensure that its representatives comply with the financial services laws; and
(d)unless the licensee is a body regulated by APRA - have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and
…
(f)ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
…
(h)unless the licensee is a body regulated by APRA - have adequate risk management systems …
ASIC does not allege that RM Capital has breached any of these obligations, but they are relevant because they inform the proper construction and application of the provision that is alleged to have been breached, s 963F. One of the necessary criteria for the grant of an AFSL by ASIC is that ASIC has no reason to believe that the applicant for an AFSL is likely to contravene the obligations that will apply under s 912A if the licence is granted: s 913B(1)(b). The legislation therefore contemplates a certain level of confidence (albeit framed in negative terms) that the licensee will act in accordance with s 912A.
Under s 916A(1) of the Act, the financial services licensee may make a person an authorised representative by giving them a written notice authorising the person for the purposes of Chapter 7 to provide a specified financial service or financial services on behalf of the licensee. An authorisation may be revoked at any time by the licensee giving written notice to the authorised representative: s 916A(4). A potential authorised representative need satisfy no criteria in order to be appointed, and the financial services licensee need not obtain the approval of ASIC or anyone else in order to appoint a particular authorised representative, although it does need to notify ASIC of the appointment: s 916F(1). Part 7.6 Division 6 imposes liability on licensees for the conduct of their authorised representatives.
The point of describing these provisions is that they show that the overall scheme of Part 7.6 is that ASIC regulates applicants for AFSLs, including assessing their competence and integrity, and the Part then places on the approved licensee the principal responsibility of selecting appropriate authorised representatives and supervising their conduct. That informs the proper construction of the provision that RM Capital is alleged to have breached, s 963F.
Part 7.7 Division 4 - Conflicted Remuneration
Section 963F is in Part 7.7A of the Act, entitled 'Best interests obligations and remuneration'. The best interests obligations are obligations in Division 2 which includes s 961B(1), requiring providers of personal advice to act in the best interests of the client in relation to the advice, and s 961J, requiring that in a situation of conflict, priority must be given to the interests of the client when giving personal advice. Division 3 is about ongoing fee arrangements.
The directly relevant provisions are in Division 4, entitled 'Conflicted remuneration'. Section 963A provides that:
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.
There is a range of exceptions to this definition in s 963B to s 963D, which are not relevant to the proper construction of s 963F. They relate to insurance products and basic banking products.
'Representative' in this context is defined in a way that includes authorised representatives, directors, employees, or any other person acting on behalf of the financial services licensee: s 910A, s 960. 'Financial product', 'financial product advice' and 'retail client' are also defined elsewhere in the Act. It is not necessary to set those complicated definitions out. It is common ground that the business of SMSF Club involved giving financial product advice to retail clients, however as has been noted, RM Capital does not admit that the particular conduct of SMSF Club on which ASIC relies constituted financial product advice. I reconcile those two things by understanding that RM Capital wishes to keep in issue the question of whether, to the extent that clients of SMSF Club did use their SMSFs to buy property through PRE, that was the result of any financial product advice given by SMSF Club, as distinct from advice about acquiring real property received from PRE. Since, as discussed above, these reasons do not determine any question of contravention by SMSF Club, I need not determine that issue here.
Some comments on the definition of 'retail client' in s 761G should, however, be made. In broad terms, that section provides that certain financial products or services, such as superannuation products or some kinds of general insurance products, are provided to individuals as retail clients: see s761G(5), s 761G(6). Financial products or services that do not fall into these categories may be provided to a person as a retail client unless they exceed a certain value, or are provided in connection with a business that is not a small business, or they are provided to persons who have certificates from a qualified accountant that they have net assets or gross income of a certain value: s 761G(7).
It is also relevant to note a distinction drawn in s 766B(3) and s 766B(4) between 'personal advice' and 'general advice' as follows:
(3)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 … or
(b)a reasonable person might expect the provider to have considered one or more of those matters.
(4)For the purposes of this Chapter, general advice is financial product advice that is not personal advice.
Section 963E applies to both kinds of advice. It is found in Subdivision C, which is entitled 'Ban on conflicted remuneration'. The section provides, in as many words, that a 'financial services licensee must not accept conflicted remuneration'. It is relevant to appreciate that this is a simple ban, to which no specific defences or carveouts are attached (other than those inherent in the definition of conflicted remuneration mentioned above, and some grandfathering arrangements described below [67]). So disclosure of conflicted remuneration, for example, does not avoid the prohibition.
In that context, s 963F is as follows:
Licensee must ensure compliance
A financial services licensee must take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration.
Note: This section is a civil penalty provision (see section 1317E).
Section 963G prohibits authorised representatives from accepting conflicted remuneration. Again, subject to an irrelevant exception, this is a simple ban with no exception for disclosure to the client.
Section 963H prohibits other representatives (such as employees) from accepting conflicted renumeration. Section 963J and s 963K prohibit, respectively, employers and issuers or sellers of financial products from giving conflicted remuneration. Section 963L contains a presumption for the purposes of the division to the effect that certain 'volume-based benefits' are conflicted remuneration. An example is commissions calculated as a percentage of the total value of financial products acquired by retail clients: see s 963L(a)(ii).
Division 5 of Part 7.7A bans other kinds of remuneration. Division 6 contains an anti-avoidance provision.
Enactment of Part 7.7A and transitional provisions
Part 7.7A was introduced as part of a legislative package generally known as the 'future of financial advice' (FOFA) reforms. The Part commenced on 1 July 2012, but under s 1528, Division 4 did not apply to a benefit given to a financial services licensee or a representative if it was given under an arrangement made before 1 July 2013 (or earlier if the licensee chose to give a notice to ASIC under s 967 providing for earlier application of the Part).
Section 1528, however, provides that the regulations may prescribe circumstances in which Division 4 applies or does not apply. One regulation made for that purpose was reg 7.7A.16B of the Corporations Regulations 2001 (Cth), which came into effect on 1 July 2013. Broadly, its effect is to limit the grandfathering effect of s 1528, so that it expires on 1 July 2014. So benefits received after that date can breach the conflicted remuneration provisions, even if they were given under an arrangement made before 1 July 2013. Since there is no evidence that the Referral Agreement was in force before August 2013, this may not matter, but even if it did predate the commencement of the relevant period, any receipt of conflicted remuneration under it after 1 July 2014 would be a breach of the Act.
What s 963F requires
There is no case law specifically on the construction of s 963F of the Act. The section has been found to have been contravened in two decisions: Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570 at [78], [83]; and Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786 at [242], [250]. In the first of those cases, the contraventions were admitted and there was no occasion to consider the meaning and effect of the provision. In the second case, the contraventions were in dispute but, while the meaning of the prohibition on the acceptance of conflicted remuneration in s 963E was in issue, the construction of s 963F was not.
There have, however, been contested cases concerning s 961L of the Act, which requires financial services licensees to 'take reasonable steps to ensure that representatives of the licensee comply with' the best interests obligations in Part 7.7A Division 2. ASIC and RM Capital agreed that principles stated in those cases were applicable to the equivalently worded obligation in s 963F for financial services licensees to 'take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration'.
In particular, in Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69 at [105]‑[106], Lee J made a number of observations about s 961L, which can be summarised as follows, in so far as they are relevant to s 963F:
(a)the word 'ensure' is forward looking, being directed to the taking of steps to achieve compliance with statutory norms, including the best interest obligations, before any particular instance of non-compliance has arisen;
(b)although the seriousness of the obligation is amplified by the use of the word 'ensure', the onerousness of the standard is moderated by the requirement to take 'reasonable steps';
(c)the text of s 961L focusses on the conduct of the financial services licensee, not the representative, and whether the licensee has taken reasonable steps, albeit steps directed at the conduct of the representatives;
(d)there is nothing in the text of s 961L that makes a contravention of the best interests obligations (by the representative) a pre-requisite to a contravention of s 961L - the latter can occur without the former; and
(e)the converse may also be the case, that is, a conscientious licensee may have taken reasonable steps even though a representative has 'gone rogue' and contravened the best interests obligations, and in that instance the licensee would not be taken to have breached s 961L.
Moshinsky J accepted those observations in Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877 at [395]. His Honour also noted (at [392]) that the obligation imposed by s 961L is to take reasonable steps, not to find and to take optimal steps. As examples of steps that could be taken, his Honour said the following (at [396]):
Although the duty in s 961L is broad, the case law has begun to fill in the contours of what is expected of a licensee by way of compliance with the provision. The authorities indicate that s 961L may require a licensee to take steps to ensure representatives are competent, to monitor and supervise them (including in relation to advice processes, advice quality and conflicts of interest), to ensure compliance concerns are escalated, and to take action that is commensurate with the risks presented by such concerns: see, eg, Australian Securities and Investments Commission v Financial Circle Pty Ltd (2018) 131 ACSR 484 at [62], [67]; AMP Financial Planning at [57]-[62]; AGM Markets at [488]-[499].
These things were said in the context of an obligation to take reasonable steps to ensure compliance with different obligations to those in Division 4. But all the provisions appear in the same Part of the Act, a part that is evidently aimed at ensuring that those giving financial product advice to retail clients must give priority to the best interests of those clients. The conflicted remuneration provisions help achieve that aim by seeking to prevent those giving financial product advice to retail clients from being distracted from the best interests of those clients by incentives that could reasonably be expected to influence the financial product they recommend or the advice they give. And both s 963F and s 961L impose obligations on financial services licensees in connection with the conduct of their representatives which are part of the supervisory role already mentioned. I accept that the observations about s 961L set out above apply equally to the obligation in s 963F.
I would add that ASIC will not establish a contravention of s 963F merely by pointing to particular steps directed towards preventing acceptance of conflicted remuneration that were reasonable, and which RM Capital could have taken, but did not. The provision is not expressed as an obligation to take all reasonable steps to ensure that representatives do not accept conflicted remuneration. And even if it had been, it would probably not require identification and performance of either the universe of possible reasonable steps, or the 'one true path' that must be followed. In Construction, Forestry, Maritime, Mining and Energy Union v Mechanical Maintenance Solutions Pty Ltd [2022] FCAFC 15; (2022) 289 FCR 508 at [169], O'Callaghan and Wheelahan JJ made the following observations about the requirement in s 180(5) the Fair Work Act 2009 (Cth) for an employer to take 'all reasonable steps to ensure' that the terms and effect of a proposed enterprise agreement are explained to employees in an appropriate manner:
For the purposes of s 180(5), the Commission must be satisfied that 'all reasonable steps' were taken to ensure that the terms of the agreement and their effect were explained to the relevant employees. We do not consider that this requirement necessarily involves the identification of the universe of reasonable steps, and requires that the Commission be satisfied that every one of those steps was taken. Often, a requirement to take all reasonable steps to achieve a particular outcome may be met in different ways. The fact that one reasonable path is chosen over others need not result in a conclusion that all reasonable steps were not taken. For instance, it might be reasonable to explain the terms of an agreement by a written document, or by PowerPoint slides, or by face-to-face meetings as occurred here, or by a combination of those means. The choice of one form of words, or one reasonable medium of communication over others may be relevant to the evaluation that the Commission must make. But the legislation contemplates that there be flexibility. That flexibility arises particularly from s 180(5)(b) which requires that the employer take all reasonable steps to ensure that the explanation is provided in an appropriate manner taking into account the particular circumstances and needs of the employees. If an employer in a particular case pursues a path of explanation and mode of communication that is reasonable, the standard of reasonableness may not require that the employer pursue all parallel means of explanation and communication to achieve the same end.
This was obviously said in a different context, and the parts of the Act relevant here do not specifically contemplate flexibility. Nevertheless, I respectfully consider that a similar approach should be taken when applying s 963F of the Act. The section does not require a financial services licensee to take every reasonable step that could be taken. Nor, in any particular fact situation, is there necessarily one and only one set of reasonable steps which, if taken, would satisfy the requirement. To that extent, I accept a submission by RM Capital that the section leaves the question of precisely what to do to the financial services licensee, provided that what is done is reasonable. What constitutes reasonable steps to ensure that representatives do not accept conflicted remuneration will be a question of fact that depends on all the circumstances of the businesses and the activities carried on by the financial services licensee and its representatives: see by analogy Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 197‑198 (Lord Diplock).
By the same token, whichever path to compliance the financial services licensee has chosen, its sufficiency is not left entirely to its discretion. A licensee will not escape a finding of breach of the section merely by pointing to one or two reasonable steps that it did take. The words 'reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration' are to be read together. They require the licensee to take a set of steps that, in the circumstances, and if taken together, amount to reasonable steps to prevent the acceptance of conflicted remuneration by the representatives. I therefore accept a submission made by ASIC that it is the steps taken by a licensee in totality that must be reasonable.
Consistently with the approach the law invariably takes to inquiries of this kind, the question must be answered objectively, and not by reference to what the licensee thinks is reasonable: see Department of Health v Multichem Laboratories Ltd [1987] 1 NZLR 334 at 339 (Eichelbaum J); Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291 at [179] (Middleton J); Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (recs and mgrs apptd) (in liq) [2014] VSC 516 at [546] of the Appendix (Croft J); Ngankiburka-Mekauwe (Senior Woman of Water) Georgina Williams v Minister for Aboriginal Affairs and Reconciliation [2018] SASC 163 at [52] (Stanley J).
It must similarly be the case that the objective assessment is made on the assumption that the financial services licensee has a correct understanding of the law. If, for example, the financial services licensee had an erroneous understanding that the prohibition only applied in connection with personal advice and not general advice, that could not provide a defence. It is fundamental to the taking of reasonable steps under s 936F that the licensee inform itself adequately as to the nature of the ban.
Nevertheless, the state of the licensee's knowledge of all the circumstances will inform what it could reasonably have been expected to do. The inquiry may also require consideration of the degree of difficulty and practicability of any given steps, as well as the costs associated with them. The reasonableness of a given step must be assessed in all the relevant circumstances of the licensee in question. For example, a particular step may be reasonable, in the sense that it is easy to take and directed to the goal, but at the same time unnecessary, because the licensee has a comprehensive programme of other measures in place, to which the proposed additional step adds nothing. Or, there could be numerous steps that are reasonable when taken individually, but unreasonably burdensome if the licensee were required to take them all. Or there could be a step that appears reasonable in the abstract, but unreasonable or impossible in the circumstances of the particular licensee.
The relevant circumstances may also include characteristics of the representative: an experienced representative with a good track record of compliance might require less intensive supervision than an inexperienced one, or one who has previously demonstrated ignorance or disregard of the requirements of Chapter 7 of the Act.
Having said all that, positing steps that could have been taken but were not can still be helpful. It is an obvious way of testing the reasonableness of what was (and was not) done. But the focus of the inquiry must always be on whether the steps that were taken in their totality were reasonable. That must be assessed having regard to the importance of the goal of preventing acceptance of conflicted remuneration, and having regard to the circumstances of the case.
As noted in AMP Financial Planning, the obligation is to take reasonable steps to 'ensure' something, thus amplifying the seriousness of the obligation. The title to the section further emphasises the importance of the goal, because it simply says that the licensee must ensure compliance, and makes no reference to reasonable steps. While of course the operative text of the provision takes precedence, the title of the section cannot be ignored: s 13(1) Acts Interpretation Act 1901 (Cth); Quikfund (Australia) Pty Limited v Airmark Consolidators Pty Limited [2014] FCAFC 70 (2014) 222 FCR 13 at [81]; Waensila v Minister for Immigration and Border Protection [2016] FCAFC 32; (2016) 241 FCR 121 at [41].. It is further amplified by the importance of the goal; in the context of the stated objectives of Chapter 7 and the evident objectives of Part 7.7A as a whole as canvassed above, the goal of preventing the acceptance of conflicted remuneration is an important one. That is reinforced by the fact that significant civil penalties may be imposed if it is breached: up to $200,000 for an individual and $1,000,000 for a body corporate (s 1317G(1E) and s 1317G(1F)).
The importance of the goal is also increased by the fact that the conflicted remuneration provisions only apply in relation to advice to retail clients. That concept, as described above at [59], implies a certain level of vulnerability in members of the class of retail clients that may require licensees to take greater pains to ensure that they are protected from conflicts of interest which, in the eyes of the legislature, are inherent in the acceptance of conflicted remuneration by financial advisers.
All of this means that steps that result in significant cost, inconvenience or difficulty to a licensee may still be reasonable ones to ensure that representatives do not accept conflicted remuneration. That is especially so given the relationship between licensees and representatives that emerges from the provisions of Chapter 7. As described above, the scheme of the licensing provisions of the chapter is, broadly, to give licensees relative freedom in whom they appoint as representatives, but to impose on the licensees a commensurate obligation to ensure the competence of the representatives and the lawfulness and propriety of their conduct.
Since the focus is on the conduct of the licensee, not the conduct of representatives, whether a contravention has occurred is to be determined independently of whether there have been particular contraventions by representatives: see AMP Financial Planning at [123]. ASIC expressly eschewed any attempt in its case against RM Capital to establish that SMSF Club contravened s 963G, so the separate question posed in the present case is to be answered on the basis that no actual breaches of s 963G by SMSF Club have been alleged or proven.
But that does not mean that instances in which conflicted remuneration may have been received are irrelevant. Those instances can shed light on both the extent of the risk and on the nature of steps that could be taken to prevent it. The exercise of assessing what is reasonable is not an abstract or entirely hypothetical one. It requires attention to the actual circumstances, which may include circumstances of proven or possible breach. Action must be taken that is commensurate with the risks presented by any compliance concerns: RI Advice Group at [396]. At the very least, if a licensee is aware of certain circumstances, this may require it to take more, or more onerous, steps if those steps are to be assessed as reasonable in the circumstances. It is, however, important not to assess this from a position of hindsight: Ngankiburka-Mekauwe at [52].
I am conscious that none of the above discussion produces hard and sharp rules to give specific guidance to licensees and ASIC as to what constitutes reasonable steps. But a provision such as s 963F is not susceptible to reduction to rules of that kind. It is a provision that applies across a wide range of licensees and representatives, from multi-billion dollar listed companies to small stockbrokers.
V. The evidence
I will now set out an account of the evidence, to the extent that it was relevant. Much of what follows appears in the SOAF and so is common ground between the parties. It is doubtful whether the SOAF is a statement of agreed facts for the purposes of s 191 of the Evidence Act, because SMSF Club has not signed it and so the facts in it may not have been agreed by 'the parties to a proceeding' for the purposes of the section. But unsigned statements of agreed facts can still be received as evidence by a court, consistent with the policy underlying s 191: see Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166 at [36] (Foster J). No issue arose in this case whereby the further effect of s 191 - that evidence cannot be adduced to contradict or qualify a statement of agreed facts that has effect under that section - became relevant. I will treat the SOAF as uncontradicted evidence admitted by the consent of the parties to the separate issue after, no doubt, significant negotiation and careful consideration by them. I will therefore give it substantial evidentiary weight.
I will commence with a brief general assessment of the evidence of the only witness who was cross examined, James Richardson. After that, the account can be broken into evidence specific to SMSF Club and RM Capital's relationship with it, and more general evidence as to what RM Capital did in relation to the FOFA reforms, including the policies and procedures that it did, and did not, have in place. Rather than set out the evidence strictly chronologically, it will be convenient, for the most part, to describe the SMSF Club-specific evidence first, as it provides context for the more general evidence.
James Richardson
Mr Richardson is a principal of RM Capital and was called as a witness by it. He has a Diploma of Financial Planning, and over 35 years' experience in financial services, including the provision of advice about listed and unlisted financial products. He has been a director of RM Capital since 1994. He is also an authorised representative of RM Capital.
I consider that Mr Richardson was giving his evidence as truthfully as he could. He displayed a level of wariness in the witness box which was only to be expected of someone who was being cross examined at the culmination of what he described as '[d]ealing on this matter for seven years'. That wariness frequently led him to ask the cross examiner to repeat the question or to indicate that he did not understand it. But I do not consider that this rose to the level of obstruction or evasion. Mr Richardson was willing to make concessions when the circumstances warranted it. While he often did not remember details, that is unsurprising, given that he was asked questions about whether he read particular policy and regulatory documents, and even different versions of the same document, up to nine years before he gave his evidence.
Mr Richardson did not, however, impress me as someone with a firm grasp on the details of the regulatory environment in which his business was operating. His oral evidence was often at an unhelpfully high level of generality that, as will be seen, was consistent with his affidavit evidence and the other affidavits that RM Capital relied on.
I will now turn to describe the relevant evidence. If no specific timing is given for any matter described below, it subsisted or took place within the relevant period.
RM Capital and its compliance personnel
When RM Capital was incorporated was not in evidence. Mr Richardson has been a director since at July 1994; when its other present director, Guy Le Page, became a director was also not in evidence. At all relevant times the company has carried on the business of providing financial services, including wealth management, securities trading and financial planning. It has held its AFSL since August 2002.
RM Capital's offices are in Perth. In addition, 17 corporations and approximately 39 individuals were authorised representatives of RM Capital at some point during the relevant period. These authorised representatives were based variously in Perth, Sydney and Melbourne.
RM Capital's financial statements do not reveal a large operation. In the three financial years that roughly correspond to the relevant period, its gross income rose from $2,291,403 to $3,719,368, its profit before income tax rose from $100,037 to $256,113 and its net assets (equity) rose from $738,008 to $921,983.
Mr Le Page held the position of RM Capital's 'responsible manager' within the meaning of ASIC's Regulatory Guide 105 (which was not in evidence). In that capacity, he was ultimately responsible for RM Capital's compliance with financial services laws. Mr Le Page swore an affidavit in the proceeding, but for reasons not explained RM Capital did not read that affidavit into evidence and so Mr Le Page was not cross examined.
Three other individuals are named in the SOAF as employees who had duties that included unspecified compliance matters, but it does not appear that any of those persons were solely devoted to a compliance role. They reported to the directors, Mr Richardson and Mr Le Page. Two of those individuals, who appear in the evidence discussed below, were Jenni Kosonen and Joseph Ho. Mr Ho also gave an affidavit which was admitted into evidence.
RM Capital also engaged two external consultancies to advise it about compliance (and other things). They were, first, GRC Essentials Ltd, and then Compliance Plus (WA) Pty Ltd. The services of both of those companies were principally provided by Reena Shah (who was called by RM Capital to give evidence) and her colleague, Jacqui Stewart. They assisted RM Capital with compliance, including by conducting compliance reviews and audits of client files of its representatives.
The agreement between RM Capital and each of those consultancies (the agreement with GRC Essentials was novated to Compliance Plus from 1 July 2014) provided for them to give RM Capital a minimum of 70 hours of compliance services per annum, excluding time spent on file audits. This could be increased to up to 200 hours if the consultancy was asked to help to respond to complaints or ASIC notices.
During the relevant period, RM Capital had a Compliance Committee, comprised of the directors, one or more of the employees mentioned above, and Ms Stewart and/or Ms Shah. The Compliance Committee held quarterly meetings, which were minuted.
SMSF Club's appointment as authorised representative
According to Mr Richardson, Mr Beeton had been a professional and personal friend of his since 2005. Mr Beeton and his brother had a company that was an authorised representative of RM Capital in 2005 and 2006. But in June 2013, Mr Beeton visited Perth and told Mr Richardson that he and his brother had fallen out, and so Mr Beeton wanted to establish a new corporate authorised representative with RM Capital.
In the discussions that ensued, Mr Beeton told Mr Richardson that his company, SMSF Club, was (among other things) providing advice and information pertaining to SMSFs, and that its 'business model was premised on servicing a market sector comprised of people wishing to operate and manage their own self-managed super fund': first affidavit of Mr Richardson sworn 3 July 2020 (Richardson I) para 98.
In an email to Mr Richardson on 24 July 2013, Mr Beeton said that SMSF Club's business plan was 'to provide general advice relating to everything SMSF related', including 'Direct property'. In the email he appeared to suggest that the giving of advice on some subjects would be 'outsourced especially that of direct property. I will have an internal lawyer who will establish smsf's and the bare trust if buying a property. This will be as an outsourced relationship though'. And, he said, 'If we refer a client to the property sourcing firm we may also receive a kick back. Still in discussions though'.
RM Capital appointed SMSF Club as its authorised representative by way of a written Corporate Authorised Representative Agreement dated 7 August 2013. The operative clause of the agreement, clause 2.1, appointed SMSF Club:
to act as an authorised representative of RM Capital within the meaning of Chapter 7 of the [Corporations Act] for the duration of the Term and to carry out the following activities in connection with the Business:
2.1.1to promote investments in, or the acquisition of, Authorised Financial Products;
2.1.2to advise Clients in relation to Authorised Financial Products on the basis of the product information supplied to, or arranged to be supplied to, the Corporate Authorised Representative by RM Capital from time to time; or
2.1.3to arrange investment in, or the acquisition of, Financial Products which are Unauthorised Financial Products but only in accordance with clause 2.2.
Authorised Financial Products were defined as follows (cl 1.1.7):
those Financial Products determined by RM Capital from time to time as the Financial Products which may be promoted to Clients, as advised to the Corporate Authorised Representative in RM Capital's approved products list (as amended from time to time).
RM Capital's case placed great reliance on the approved products list mentioned here, and the subject was addressed in evidence that will be described further below.
Clause 2.2 of the Corporate Authorised Representative Agreement required the prior written approval of RM Capital before SMSF Club was permitted to arrange investments in, or advise in relation to, 'Unauthorised Financial Products', unless the client selected the product without any advice from SMSF Club.
Under clause 4.2.1 of the Corporate Authorised Representative Agreement, SMSF Club agreed to 'have a sound working knowledge of, and to comply with, the [Corporations Act], ASIC Regulatory Guides and Practice Notices and all other Applicable Laws, standards, orders, regulations, directives and policies in force from time to time'. It also agreed to comply with 'Manuals' (a defined term which included 'compliance manuals of policies and procedures' provided by RM Capital), policies and procedures and all legislative and ASIC requirements and to obtain and maintain an up to date knowledge and understanding of the terms and materials contained in the Manuals, policies and procedures: cl 4.2.4. SMSF Club was further required to comply with 'all of RM Capital's policies and procedures which are in place as amended from time to time and all reasonable and lawful directions of RM Capital': cl 4.2.5. There was no reference to the prohibition on receipt of conflicted remuneration in the agreement.
RM Capital was able to terminate the Corporate Authorised Representative Agreement at any time on giving written notice: cl 15.1.
SMSF Club was obliged to pay RM Capital 30% of any fees earned by it on Corporate Finance Transactions: cl 7.3.2 and Schedule Item 12. Corporate Finance was defined very widely: cl 1.1.15.
The Referral Agreement
According to Mr Richardson's evidence, in 2013, sometime after the appointment of SMSF Club as an authorised representative of RM Capital, he had a conversation with Mr Beeton in which Mr Beeton said that there was a referral arrangement between SMSF Club and PRE. Mr Beeton's description of the arrangement, according to Mr Richardson's evidence (Richardson I para 110) was that:
110.1. PRE was a property developer based in Sydney;
110.2. the agreement involved:
110.2.1.PRE referring to SMSF Club persons who PRE considered may want to acquire real property by the vehicle of a SMSF;
110.2.2.SMSF Club then facilitating the establishment of a SMSF and the establishment of a bare trust; and
110.2.3.SMSF Club providing to persons referred by PRE only those services and not providing those persons with any advice;
110.3.SMSF Club's clients paid a $2,500 fee to SMSF Club, for the services of SMSF Club in establishing a SMSF and a bare trust, which fee was purely for administration and other costs associated with the SMSF fund, rather than associated with the bare trust;
110.4.if those clients then subsequently acquired a property through PRE, a referral fee of $5,000 would be paid to SMSF Club; and
110.5.the referral agreement was a mechanism for him to acquire new clients, rather than prospecting in the marketplace.
Mr Richardson's evidence about the reference here to a bare trust was that, at the time, he 'understood a bare trust to be an arrangement that sat inside a SMSF that the trustees of the SMSF had to initiate in order to be able to acquire a property, which operated as a requirement … that had to be met before the SMSF could purchase property' (Richardson I para 111).
Mr Richardson had a number of conversations in which he asked Mr Beeton whether he was giving advice about buying property. These occurred 'at and later on from when he first told me about the referral agreement with PRE' (Richardson I para 112). Mr Beeton told Mr Richardson that 'he was not giving advice about specific or direct property investment'. Mr Richardson saw no reason to doubt what Mr Beeton told him. He thought it was not inconsistent with what he had seen at a seminar he had attended, at which Mr Beeton had spoken. According to Mr Richardson (Richardson I para 108), Mr Beeton had 'conducted an informative presentation on information regarding self-managed super funds'. He attended the seminar (in Melbourne) in 2014, so presumably the conversations with Mr Beeton, and the views Mr Richardson formed, extended into that year.
Mr Richardson's evidence about those views was as follows (Richardson I):
114.I did not consider that the referral fees constituted conflicted remuneration, which the FOFA reforms prohibited. I knew that property was not a financial product. The arrangement described by Mr Beeton did not involve SMSF Club giving any advice. Consequently, there was no financial product advice, or any other financial services, that SMSF Club would be providing which could be influenced by the payment of the referral fees. The other services which SMSF Club provided were independent of, and had no relationship with, the referral fees or the acquisition of property by an SMSF.
115.I also believed that other activities undertaken by SMSF Club fell outside the scope of that referral arrangement and would not be influenced by the referral agreement.
116.In all matters pertaining to RM Capital's obligations as a licensee, in forming a view as to what is and what is not appropriate, I seek internal advice and external advice. After becoming aware of the referral agreement, I would have sought advice internally and externally.
117.I received advice internally within RM Capital from Mr Le Page, and externally from Ms Stewart or Ms Shah of GRC Essentials. Nobody suggested that the fees payable to SMSF Club by PRE constituted, or the referral agreement involved, conflicted remuneration.
118.Specifically, I recall having a meeting with Ms Stewart and Ms Shah from GRC Essentials at RM Capital's offices in late 2013 or early 2014, during which I asked them to the effect if the referral agreement had any potential implications regarding FOFA. Neither Ms Stewart nor Ms Shah raised any issues.
119.RM Capital did not seek legal advice about the referral agreement. I did not perceive any need to do so. Nobody from whom I sought advice, internally within RM Capital or externally, suggested to me that there were any issues which may warrant legal advice. Also, I was aware (I cannot now recall exactly when and how I became aware) that both Ms Stewart and Ms Shah, although they were not lawyers, had qualifications that involved some legal qualification. They operated a professional compliance advisory business. I expected that both Ms Stewart and Ms Shah would be able to identify any potential legal issues, and at least advise me if legal advice should be obtained.
Senior counsel for RM Capital properly accepted that Mr Richardson's evidence in paragraph 116 of his affidavit that he 'would have sought advice internally and externally' may be understood as being about following a general practice, rather than a specific recollection, and that is indeed how I understand it.
Ms Shah gave the following evidence in her affidavit:
125.In 2014, I attended a meeting at RM Capital. Mr Richardson was running late for the meeting. Consequently, prior to the meeting starting, Ms Kosonen and I had a discussion about anything she was aware of that we could start ticking off before Mr Richardson arrived. Ms Kosonen said to me words to the effect that there was an approved arrangement between SMSF Club and a property group. She did not know the name.
126.I asked Ms Kosonen about the details of the arrangement.
127.Ms Kosonen said to me words to the effect that there was a flat fee to be paid to SMSF Club by the property group for the property referral. She told me that she was not aware of the exact dollar amount. She said words to the effect that she knew it was a flat fee, but she would get the details from Mr Richardson when he arrived.
128.This was the first time the arrangement was brought to my attention.
129.When Mr Richardson arrived, he said that Justin (a reference to Justin Beeton) was working on an arrangement, and he would let me know the details once it was put in place.
130.I said words to the effect that, if there was financial remuneration being exchanged, there should be a formalised agreement in place. I also suggested updating the FSGs [financial services guides provided to clients] and the SOA [statement of advice] template for the disclosures of any payments. I also said words to the effect that, because general advice clients may not necessarily receive SOAs, those clients needed to be specifically notified via a letter so that they were aware of the payments.
The respective accounts of Ms Shah and Mr Richardson are difficult to reconcile. It will be necessary to analyse them, and make findings, below.
In any event, it appears that Ms Shah's advice that there should be a formalised agreement in place was accepted, as eventually SMSF Club and PRE entered into a written Referral Agreement. But it took until 7 September 2015 for this to happen. Mr Richardson said in his affidavit that it took some time, and passed on an explanation he received from Mr Beeton that it had been difficult to get agreement from PRE about formalising the arrangement.
Clause 1 of the written Referral Agreement provides:
From time to time, the Referrer [PRE] may refer Client(s) to Entity [SMSF Club] on the terms contained in this Agreement.
The referral fee will be calculated as a $5,000 AUD fee to be negotiated between the parties when clients of the referrer use the services of the entity and associated entities for the establishment of a Bare Trust within an SMSF and purchase property through the Referrer.
Mr Richardson assumed that the terms of the written agreement and the previous oral agreement were the same. The SOAF stipulates that the written agreement was in materially the same terms as the oral agreement.
It may be observed that the written agreement does not say who should pay the fee to whom, and it might be thought that since PRE is in name and in substance the party doing the referring, the fee would be payable to it. But it was common ground in this proceeding that under both the written Referral Agreement and its unwritten predecessor, it was PRE who was liable to pay and did pay the referral fees to SMSF Club. The crux of the arrangement, as expressed in the closing words of clause 1, was that the client would purchase real property through PRE.
Mr Richardson's affidavit described a meeting with Ms Stewart and Ms Shah in 2013 or 2014. Ms Shah's affidavit described a meeting with Mr Richardson and Ms Kosonen in 2014. Mr Richardson's affidavit states that he asked them whether the Referral Agreement had any potential implications regarding FOFA. This implies that he told Ms Stewart and Ms Shah what the Referral Agreement involved, or that somehow he already knew that they knew what it involved. But Ms Shah's evidence is that at the meeting she speaks of, Mr Richardson said he would give her the details of the arrangement later. Ms Shah's affidavit makes no reference to Mr Richardson asking her for advice about the Referral Agreement.
Of course, it is not clear that the witnesses are talking about the same meeting, especially given the difference in attendees. The relevant cross examination of Mr Richardson about his dealings with Ms Shah in 2013 or 2014 concerning the Referral Agreement was as follows (ts 88-89):
Now, sir, you say in your affidavit that you first raised this referral agreement with your consultants in late 2013 or early 2014, and they didn't raise any concerns; do you recall that? That's your evidence?---Yes, Dr Peden.
And by the time you raised the referral agreement, it had already been approved, hadn't it, but you were just checking?---Dr Peden, what do you mean by approved?
You had found out about it from Mr Beeton, and you were content for that arrangement to continue?---Dr Peden, I discussed it with Mr Le Page and Ms Pavlinovich internally, and I believe I discussed it with Jacquie Stewart, and then someone gave advice to Mr Beeton that we were comfortable with the arrangement, provided it was as per the referral agreement - verbal referral agreement that he advised me that it was.
…
So from what you've said earlier, do I take it that you're - you are not aware that Ms Shah says in her affidavit that you did not provide the detail of this referral agreement to her; are you aware of that or not?---No, Dr Peden, I'm not aware of that. At the time - Dr Peden, at the time Mr Beeton became a corporate authorised rep of RM Capital, my primary dealings were still with Ms Jackie Stewart of GRC, and Ms Shah was a consultant to GRC. My dealings with Ms Shah were amplified following Ms Stewart selling the business to people moving from GRC and Compliance Plus taking over.
So Ms Shah's evidence is that her recommendation to you was in circumstances where she was not provided the detail of the agreement, but she recommended that the agreement be documented, and that pay - if payments were being received, they needed to be disclosed to clients?---Yes.
Do you recall that?---Yes, Dr Peden.
And do you agree with that?---Yes, Dr Peden.
And so it could well be the case that you never gave Ms Shah the full information about the agreement, couldn't it, because you told Ms Stewart?---Yes, Dr Peden.
Thus, a third account of the advice Mr Richardson received about the Referral Agreement emerged. According to this account, he discussed it internally with Mr Le Page and Ms Pavlinovich (Karla Pavlinovich, an accountant employed by RM Capital). And he discussed it externally (he believed) with Ms Stewart. And then someone told Mr Beeton, likely orally, that RM Capital was comfortable with the (unwritten) Referral Agreement, provided that it was as Mr Beeton had described it to Mr Richardson. This evidence suggests that Mr Richardson did not discuss the Referral Agreement with Ms Shah before this verbal approval was given.
I am satisfied that the cross examination set out above was sufficient to put Mr Richardson on notice that his evidence that he had a meeting with Ms Stewart and Ms Shah where he asked for advice about the Referral Agreement might not be believed. He was told that Ms Shah's evidence was that he had not given her details about the Referral Agreement, tending to contradict the implication in his evidence that she knew enough about it to give him advice about it. Mr Richardson had the opportunity to offer an explanation and did provide one, albeit one that was inconsistent with the suggestion in his affidavit evidence that he sought advice about the Referral Agreement from both Ms Shah and Ms Stewart. The explanation was to the effect that he was not dealing much, if at all, with Ms Shah at the relevant time and that he is likely to have asked for advice from Ms Stewart.
ASIC submitted that there was no reason to doubt the evidence of Ms Shah and that to the extent that Mr Richardson's evidence differs, it ought not be preferred. In my view, the cross examination just described means that it is indeed open to me not to accept Mr Richardson's affidavit evidence that he had a meeting with Ms Shah and Ms Stewart where he asked for advice. That does not involve unfairness to Mr Richardson, particularly where, as here, there is no suggestion that his evidence was given dishonestly.
Further, I accept ASIC's submission. Mr Richardson's evidence was vague and he contradicted himself, while Ms Shah's evidence is specific and more detailed and, as a compliance professional, she can be expected to have recalled those details accurately. Mr Richardson himself accepted that he did not give Ms Shah full information about the Referral Agreement, albeit because he had told Ms Stewart. Mr Richardson said that he 'would have' sought advice internally and externally but, as I have said, senior counsel for RM Capital accepted, properly, that this was probably evidence of a general practice rather than a specific recollection [114].
I therefore find that a meeting did occur as Ms Shah recalls it. I also find that at some point, someone told Mr Beeton that RM Capital was comfortable with the Referral Agreement. That can be inferred from the fact that PRE was added to the approved products list in July 2014. That timing, and the fact that referral fees started to be received in February 2014, indicates that the verbal approval was given in early to mid‑2014.
Ms Shah's evidence, which I accept, was that Mr Richardson told her that Mr Beeton was 'working on an arrangement' and that he would let her know the details once it was put in place. This suggests that the terms of the referral agreement were not firm at that stage, so that it was before the time when RM Capital's (seemingly informal) approval was given. Ms Shah's evidence also indicates that it was she who said that there should be a 'formalised agreement in place', further suggesting that the arrangement Mr Beeton was 'working on' was the unwritten one; he was not at that stage trying to obtain a written agreement. This means that the meeting Ms Shah recalls, and which I accept took place, probably took place before the verbal approval of the (still nascent) arrangement was given.
I have no reason to doubt that Mr Richardson had discussions about the Referral Agreement with Mr Le Page, Ms Pavlinovich, and Ms Stewart before that. But Mr Richardson's imprecise, generally expressed and internally contradictory evidence does not persuade me that, before the informal approval (or at any time), he asked Ms Shah or Ms Stewart for advice about the Referral Agreement at a meeting where, before or after that meeting, they had details of the arrangement.
Indeed, Mr Richardson's evidence at paragraphs 114-115 of his affidavit suggests that he did not seek advice specifically about whether the Referral Agreement involved conflicted remuneration, because he had already formed the view for himself that it did not. If, despite that view, he decided to take advice about that particular subject, one would expect him to have said so in his affidavit. His omission to say so specifically is therefore telling. His evidence is only that he asked whether 'the referral agreement had any potential implications regarding FOFA'. So the fact that, as Mr Richardson says, no one suggested to him that the arrangement did involve conflicted remuneration means little in the absence of evidence that they were specifically asked about that and where, I have found, in early 2014 Ms Shah at least did not have details of the arrangement. That does not provide any good explanation for why RM Capital did not obtain legal advice about the arrangement.
In any event, Mr Richardson took comfort in the fact that none of the persons with whom he discussed the arrangement, none of whom were practising lawyers, raised any issues. But a financial services licensee in RM Capital's circumstances taking reasonable steps to ensure that SMSF Club did not accept conflicted remuneration would have sought specific legal advice on that specific question.
Mr Richardson's affidavit stated, in typically vague terms, that he was aware that while Ms Stewart and Ms Shah were not lawyers, they 'had qualifications that involved some legal qualification' and operated a professional compliance business [113]. He therefore expected that they would be able to identify any potential legal issues and at least advise him if legal advice should be obtained. But a licensee in RM Capital's position taking reasonable steps would not have rested there, at least not without having put the specific area of potential concern to the non-lawyer from whom he was taking advice, and being assured that there was no need to obtain legal advice. It is notable that Mr Richardson's evidence is framed in terms that no one suggested to him that they should get legal advice. This is only evidence of absence. It is not evidence that anyone even responded to his general query, let alone that they actually told him that there was no need to get legal advice.
In short, Mr Richardson's evidence, while honestly given, was unsatisfactorily general and inconsistent with the evidence that RM Capital adduced from Ms Shah. It does nothing to dispel the need that arises on the face of the circumstances canvassed above to obtain specific legal advice on the concern that arose, in my view quite obviously, from those circumstances. There is no suggestion that RM Capital was not able to take legal advice on the subject or that the cost of doing so was prohibitive. And yet, instead, RM Capital told SMSF Club after unsatisfactory internal discussions and discussions with its consultants, that it was comfortable with the arrangement embodied in the (then oral) Referral Agreement. A financial services licensee in RM Capital's circumstances taking reasonable steps would not have done that.
Further, and in any event, I have found that RM Capital did not seek advice on the Referral Agreement even after it was reduced to writing in September 2015 [123]. While legal advice should have been taken before then, a financial services licensee taking reasonable steps who had not already taken that advice would have obtained it once the Referral Agreement was in written form.
It also follows from these conclusions that the mechanism of the approved products list did not serve as a reasonable step to ensure that SMSF Club did not accept conflicted remuneration. The only evidence of any real consideration of the issue at around that time is Mr Richardson's evidence of why, subjectively, he formed the view. As I have explained, I do not consider that a licensee taking reasonable steps would have rested there.
Monitoring SMSF Club's compliance
The matters I have set out above under the heading of risks specific to SMSF Club would have prompted a financial services licensee taking reasonable steps to monitor SMSF Club more intensively than would be required in relation to other authorised representatives who had not presented such concerns. That arises from the increased risk that SMSF Club was accepting conflicted remuneration. As just explained, a financial services licensee taking reasonable steps would not have been discounted that risk for the reasons that Mr Richardson discounted it.
The risks became more acute once Mr Richardson became aware in December 2014 of the apparently close relationship between SMSF Club and PRE and the possible lack of candour Mr Beeton had displayed towards RM Capital about that relationship. This spoke specifically to the need to monitor SMSF Club more closely. Mr Richardson implicitly acknowledged this in his evidence that RM Capital did indeed increase its monitoring and supervision of the relationship between SMSF Club and PRE after the visit [139].
The risks became even more clearly apparent after the advice that Ms Shah and Ms Kosonen gave to Mr Richardson in September and October 2015 [142]-[144]. All this would have led a financial services licensee taking reasonable steps to engage in intensive monitoring of SMSF Club.
An oddity might be perceived in ASIC's argument that RM Capital should have monitored SMSF Club more intensively to detect whether it was receiving conflicted remuneration. After all, RM Capital knew that SMSF Club was receiving referral fees from PRE, and for a significant period it was the conduit for those fees itself. The rhetorical question could be asked: what more did it need to know?
But it must be recalled that the ultimate issue is whether, more generally, RM Capital took reasonable steps to ensure that SMSF Club did not accept conflicted remuneration. The matters set out above would have led a person taking reasonable steps to appreciate that they did not know enough about SMSF Club's activities to be confident that it was not accepting conflicted remuneration from other parties or, after August 2015, continuing to accept conflicted remuneration directly from PRE without informing RM Capital.
Therefore a financial services licensee in RM Capital's position taking reasonable steps to ensure that SMSF Club did not accept conflicted remuneration would have engaged in reasonably intensive monitoring of SMSF Club to that end. This should have gone beyond the 'consultation and dialogue' and reminders about the importance of the importance of 'tight processes surrounding the provision of financial product advice' that were the subject of Mr Richardson's vague evidence [139]-[140]. RM Capital should have audited a random selection of SMSF Club files. The acceptance of conflicted remuneration should have been one of the specific matters covered by the audits. Given the need for increased monitoring of SMSF Club, the audits should have occurred more often than annually, say, every six months. For each financial product in relation to which SMSF Club gave advice, it should have been asked at the time of each audit for details of all payments and other benefits received from the promoters of the products.
Instead, there were no regular audits. Only a small number of SMSF Club client files were reviewed during the relevant period, on two occasions [235]. The reviews were approximately two years apart. The first review revealed an incorrect understanding of the prohibition on conflicted remuneration by at least two advisers, one of whom was Mr Beeton. But there was no follow up. The second review did not deal with conflicted remuneration. Reviews of this kind, having no apparent consequences in connection with conflicted remuneration, did not help fulfil RM Capital's obligation to take reasonable steps. The intensive monitoring of SMSF Club that was called for did not occur.
I therefore do not accept RM Capital's contention that periodic audits of its authorised representatives, and monitoring of their remuneration, amounted to reasonable steps, in so far as the general need to monitor compliance with the ban was concerned.
More general steps
Turning from risks specific to SMSF Club to RM Capital's compliance activities more generally, it can be said that, at a minimum, a financial services licensee in RM Capital's circumstances, taking reasonable steps to ensure that its representatives did not accept conflicted remuneration would have, at least:
(a)formally adopted a clear written policy prohibiting the acceptance of conflicted remuneration, at least by the time that ban came into effect in July 2013 or soon thereafter (acknowledging the grandfathering that lasted until July 2014);
(b)informed new representatives (individuals and corporations) of that policy and its contents at induction or training sessions;
(c)adopted written procedures to check whether new products proposed to be the subject of authorisation that would or might constitute conflicted remuneration came with arrangements under which the promotors of the products offered monetary or soft dollar benefits to representatives, and if so to ascertain the details of those arrangements;
(d)if there was room for reasonable doubt about whether any such arrangements constituted conflicted remuneration, obtained legal advice on the subject;
(e)if it had determined that the arrangement did involve conflicted remuneration, refused to authorise the promotion of or advice in relation to the product until the aspect of the arrangement that involved conflicted remuneration was removed;
(f)documented and implemented a training program which, as well as the induction session for new representatives already mentioned, gave representatives at least annual reminders of the existence and content of the prohibition on conflicted remuneration, and RM Capital's policy on the subject, preferably with examples; and
(g)annually conducted audits of a random selection of client files, along with annual checks as to what benefits, if any, representatives had received from the promoters of financial products, with any benefits of concern to be further investigated.
In relation to the procedure under which the steps at (c), (d) and (e) above were required, it would be reasonable to break it down into what was required to be done, who was responsible for doing it and the specific actions to be taken. That does not mean that it would need to be elaborate; it might have contained little more detail than is set out in relation to those steps, along with assigning responsibility to, say, Mr Richardson. Generally speaking, it would not be appropriate or possible to be more prescriptive than the above.
Collected together like that, these steps may seem unduly onerous, particularly for a small organisation. But I do not think that they are. The prohibition on conflicted remuneration is important and, as has been explained, in the scheme of the legislation financial services licensees are assigned a key role in ensuring compliance with the prohibition and with other obligations under Chapter 7 of the Act more broadly. If steps are to be taken to ensure that something is not done, it seems that an organisation with that role must at least: state clearly its position on the matter; communicate that position to new recruits; not give its authorisation to the promotion of or advice in relation to a product without checking that the product does not involve conflicted remuneration; follow through if the check gives cause for concern; periodically remind representatives about the existence and content of the prohibition; and check to see whether it is being breached.
Further, and contrary to a submission RM Capital made, the steps posited by ASIC, which broadly map onto the steps just listed, are not infected by hindsight. The analysis undertaken above shows that they emerge as reasonable steps from the circumstances that confronted RM Capital at the time, that is, during the relevant period.
When this is compared with what RM Capital actually did, the conclusion is inescapable that its conduct, as a whole, fell short of the standard of reasonable steps to ensure that its representatives did not accept conflicted remuneration.
RM Capital had the framework for taking such steps, in that it had compliance personnel and the Compliance Programme. But to the extent that it had any written policy on conflicted remuneration, namely in the Compliance Programme, it was rudimentary. It appeared in a row in a table in a schedule to the programme that was inherently unsuitable for communication of the ban to authorised representatives. It stated that there was a ban, but did not say what was, or what would be considered to be, conflicted remuneration. It did not say how frequently monitoring would occur or what it would involve. Similarly, it lacked any detail at all as to what would be involved in training. It was adopted some nine months after the ban came into effect, which was unreasonably tardy. And, given the general lack of activity to ensure compliance with the ban that is described throughout this judgment, it was not a policy that was actually applied or followed during the relevant period. Other than that, the only policy that (incorrectly) addressed the ban on conflicted remuneration was a draft which was not adopted during the relevant period.
The explanations proffered in the evidence as to why there was no policy about conflicted remuneration [261] were unsatisfactory. Mr Richardson's explanation that he did not chase it up once the deal with Saxo fell through, while truthful, is obviously inadequate. And for the reasons just given, Ms Shah's explanation, that conflicted remuneration was caught by the existing policies, was incorrect.
There was also no process, either written down or actually followed, for informing new personnel of the ban. I do not accept RM Capital's contention that the evidence that it generally selected people with appropriate qualifications who were of good character fulfilled the purpose of an appropriate induction. The prohibition on conflicted remuneration was a new measure that was part of a raft of reforms and it could not be assumed that all representatives were familiar with it, even if they had the necessary formal qualifications. Therefore, while selecting people who were appropriately qualified and of good character was one reasonable step, it fell short of the reasonable steps necessary to ensure that personnel were sufficiently conversant with the ban to be able to avoid contravening it.
Importantly, RM Capital had no policy, procedure or consistent practice, written or unwritten, to ensure that products that involved conflicted remuneration were not on the approved products list. To the extent that RM Capital relied on its ability to use the approved products list as a filter to guard against conflicted remuneration, I find that it did not use that ability on any consistent or continuous basis, in part because it had no such policy, procedure or consistent practice. The Research and Benefits Policy made no reference to compliance with the Corporations Act as a precondition of approval, let alone to conflicted remuneration. So no consistent procedure was followed, even in connection with the review of existing arrangements that RM Capital undertook when the FOFA reforms came into effect, where conflicted remuneration was at least a subject of consideration (albeit how consistently and thoroughly is unknown) [162]. It is even more so for new products that came onto the list later, one of which was PRE. RM Capital's approach therefore fell short of the reasonable steps required in this respect.
As for the reasonable step of reviewing what I have called legacy arrangements in force as at 1 July 2013, it does appear that a review of such arrangements was conducted [162]-[164]. But while questions about conflicted remuneration appear to have come up in the course of the review, they did not come up because there was any systematic, consistent or thorough attempt to ascertain whether any of the arrangements involved conflicted remuneration. There is nothing to suggest that this was one of the things that the review concerned. So it did not constitute reasonable steps concerning products that were already on the approved products list as at that date.
ASIC submits, and I accept, that even if there had been an adequate approvals process in place, it would have been insufficient by itself to have constituted reasonable steps. As ASIC submitted (ASIC's closing written submissions para 102):
There are myriad readily foreseeable ways in which advisers could receive benefits in connection with selling or advising on a product aside from any remuneration to which they are formally entitled under the terms and conditions of the product, such as 'soft dollar' benefits, informal referral fees and other kickbacks. A formal product review process does nothing to guard against benefits of that kind that might constitute conflicted remuneration. Preventing conflicted remuneration of that kind relies on things such as well-articulated policies and training of advisers to ensure they have a proper understanding of what conflicted remuneration is, as well as monitoring of their advice.
To that I would add that remuneration arrangements could change even though the product itself, and so its position as an approved product, did not. But that is all academic in this case, because RM Capital did not even have an adequate formal approvals process in place. Hence I do not accept RM Capital's first main contention, that the approved products list was an adequate safeguard against representatives advising in relation to products that involved conflicted remuneration.
As for training, the sessions conducted when the FOFA reforms came into effect were inadequate because they did not make it clear that the ban on conflicted remuneration was a ban. However while the lack of any proper records of who attended the training is unsatisfactory, I do not consider that this is an independent reason to conclude that RM Capital fell short of reasonable steps. What is important is whether the training occurred, what the training covered, and whether everyone attended.
The context is not such that the absence of good records of who attended leads to an inference that not everyone did. However for reasons I have given, representatives of SMSF Club, including Mr Beeton, did not receive training on conflicted remuneration, because they came on board shortly after the FOFA training that was rolled out more generally. And there was simply no regular training thereafter, and no subsequent training about conflicted remuneration. So the reasonable steps of giving new representatives an induction that included training on conflicted remuneration, and ensuring that training on the subject was given to all representatives periodically, were steps that RM Capital failed to take. So I do not accept RM Capital's contention that it engaged in ongoing training and education which included specific training and education on the FOFA reforms and the conflicted remuneration ban.
It follows from all the above that the capacity that RM Capital had under its standard form agreement to prevent authorised representatives from promoting or advising on unsuitable financial products, to require them to comply with its policies and procedures, and to require representatives to have a sound working knowledge of the law, was insufficient to constitute reasonable steps, either by itself or together with the other measures taken. The absence of the other reasonable steps identified above meant that that capacity was not exercised effectively.
Conclusion
Taking all the above together, ASIC has established that, during the relevant period, the steps that RM Capital took to ensure that its authorised representatives did not accept conflicted remuneration fell short of the reasonable steps that s 963F of the Corporations Act required of a financial services licensee in RM Capital's circumstances, at least in respect of the specific circumstances concerning SMSF Club.
The separate question will be answered accordingly. In light of the procedural position summarised at the outset of these reasons, there will be a mention hearing for the purpose of considering the appropriate next steps in the proceeding, in particular to ensure that the order in which the proceeding is now resolved (outstanding, albeit agreed, findings as to liability and consequent remedies as against SMSF Club, and remedies as against RM Capital) provides procedural fairness to both defendants.
I certify that the preceding three hundred and fifty-nine (359) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson. Associate:
Dated: 29 February 2024
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