Australian Securities and Investments Commission v Westpac Banking Corporation
[2019] FCA 2147
•19 December 2019
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Westpac Banking Corporation [2019] FCA 2147
File number: NSD 1030 of 2018 Judge: WIGNEY J Date of judgment: 19 December 2019 Catchwords: CORPORATIONS – financial advice – obligation to act in the best interests of the client – where a representative of Westpac Banking Corporation gave deficient and defective advice to clients and failed to act in the best interests of those clients – where representative contravened ss 961B, 961G, 961H and 961J of the Corporations Act 2001 (Cth) – where Westpac Banking Corporation contravened s 961K and s 912A of the Corporations Act 2001 (Cth) – obligation of financial services licensee to take reasonable steps to ensure that its representatives comply with best interests obligations – where contraventions admitted – where dispute as to number of civil penalty contraventions – where dispute as to the knowledge of Westpac Banking Corporation concerning risk that representative would not comply with the best interests obligations – appropriate form of declarations – level of detail required in declarations – consideration of appropriate civil penalty to be awarded – consideration of course of conduct and totality principles Legislation: Corporations Act 2001 (Cth) ss 761A, 761G, 761GA, 763A, 764A, 764A(1)(d), 764A(1)(g), 766A, 766B(1), 766B(3), 769B(3), 910A, 910A(a), 912A, 912A(1), 912A(1)(a), 912A(1)(c), 912B(1), 912C, 913B, 916A, 960, 961, 961(1), 961(2), 961B, 961B(1), 961B(2), 961C, 961D, 961E, 961G, 961H, 961H(1), 961H(2), 961H(3), 961J, 961J(1), 961K, 961K(1), 961K(2), 961P, 1317E, 1317E(1), 1317E(2), 1317G(1E), 1317G(1E)(b), 1317G(1F), Ch 7, Pt 7.1 Div 3, Pt 7.1 Div 4, Part 7.6, Pt 7.7A Div 2
Evidence Act 1995 (Cth) ss 140, 191
Federal Court of Australia Act 1976 (Cth) s 21
Insurance Contracts Act 1984 (Cth) s 29(3)
Cases cited: Australian Competition and Consumer Commission v Apple Pty Ltd [2012] FCA 646
Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2015] FCA 330; 327 ALR 540
Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2006] FCA 1730; (2007) ATPR 42-140
Australian Competition and Consumer Commission v IMB Group Pty Limited [1999] FCA 313
Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) [2005] FCA 265; 215 ALR 301
Australian Competition and Consumer Commission v MSY Technology Pty Ltd (No 2) [2011] FCA 382; 279 ALR 609
Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25
Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640
Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; 262 FCR 243
Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187
Australian Securities and Investments Commission v Adler [2002] NSWSC 483; 42 ACSR 80
Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd (No 3) [2012] FCA 43; 213 FCR 380
Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; 336 ALR 209
Australian Securities and Investments Commission v Financial Circle Pty Ltd [2018] FCA 1644; 131 ACSR 484
Australian Securities and Investments Commission v GE Capital Finance Australia, in the matter of GE Capital Finance Australia [2014] FCA 701
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
Australian Securities and Investments Commission v Hochtief Aktiengesellschaft [2016] FCA 1489; 117 ACSR 589
Australian Securities and Investments Commission v Monarch FX Group Pty Ltd [2014] FCA 1387; 103 ACSR 453
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; 41 ACSR 561
Australian Securities and Investments Commission v Southcorp Ltd (No 2) [2003] FCA 1369; 130 FCR 406
Australian Securities and Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630; 205 FCR 120
Australian Securities and Investments Commission v Warrenmang Ltd [2007] FCA 973; 63 ACSR 623
Australian Securities and Investments Commission, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345; 122 ACSR 47
Australian Securities and Investments Commission, in the matter of Chemeq Limited (ACN 009 135 264) v Chemeq Limited (ACN 009 135 264) [2006] FCA 936; 234 ALR 511
Briginshaw v Briginshaw (1938) 60 CLR 336
Camilleri’s Stock Feeds Pty Ltd v Environment Protection Authority (1993) 32 NSWLR 683
Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; 258 CLR 482
Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner [2018] FCAFC 97; 264 FCR 155
Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner (The Broadway on Ann Case) [2018] FCAFC 126; 265 FCR 208
Construction, Forestry, Mining and Energy Union v Cahill [2010] FCAFC 39; 269 ALR 1
Construction, Forestry, Mining and Energy Union v Williams [2009] FCAFC 171; 262 ALR 417
Environment Protection Authority v Barnes [2006] NSWCCA 246
Forster v Jododex Australia Pty Limited (1972) 127 CLR 421
Jones v Dunkel (1959) 101 CLR 298
Markarian v The Queen [2005] HCA 25; 228 CLR 357
McDonald v AMP Financial Planning Pty Ltd [2018] QSC 195; 129 ACSR 605
Mill v The Queen (1988) 166 CLR 59
Minister for the Environment, Heritage and the Arts v PGP Developments Pty Limited [2010] FCA 58; 183 FCR 10
Mornington Inn Pty Ltd v Jordan [2008] FCAFC 70; 168 FCR 383
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285
R v Bibaoui [1997] 2 VR 600
R v Finnie [2002] NSWCCA 533
Royer v The State of Western Australia [2009] WASCA 139; 197 A Crim R 319
Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438
Singtel Optus Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 20; 287 ALR 249
The Attorney-General v Tichy (1982) 30 SASR 84
Thorn v The Queen [2009] NSWCCA 294; 198 A Crim R 135
Tobacco Institute of Australia Limited v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89
TPG Internet Pty Ltd v Australian Competition and Consumer Commission (2012) 210 FCR 277
Trade Practices Commission v CSR Limited [1990] FCA 521; (1991) ATPR 41-076
Trade Practices Commission v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091
Veen v The Queen (No 2) (1988) 164 CLR 465
Date of hearing: 15 April 2019 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 310 Counsel for the Plaintiff: Ms E Collins SC with Mr P Holmes and Mr R Davies Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Defendant: Dr RCA Higgins SC with Mr J J Hutton Solicitor for the Defendant: Ashurst Australia ORDERS
NSD 1030 of 2018 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff
AND: WESTPAC BANKING CORPORATION (ACN 007 457 141)
Defendant
JUDGE:
WIGNEY J
DATE OF ORDER:
19 DECEMBER 2019
THE COURT DECLARES THAT:
Mr and Mrs AA
1.On 2 July 2013, Westpac Banking Corporation contravened subs 961K(2) of the Corporations Act 2001 (Cth) by being the responsible licensee for the contravening conduct of its representative, Mr Sudhir Sinha, who contravened s 961B of the Act by failing to act in the best interests of his clients, Mr and Mrs AA when providing them with personal advice.
2.On 2 July 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mrs AA which included a recommendation that Mrs AA take out term life insurance under a BT Term Life Protection Plan which was not advice appropriate to Mrs AA.
3.On 2 July 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mr AA which included a recommendation that Mr AA take out income protection insurance under a BT income protection plan which was not advice appropriate to Mr AA.
4.On 2 July 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mrs AA which included a recommendation that Mrs AA take out term life insurance under a BT Term Life Protection Plan in circumstances where Mr Sinha failed to give priority to the interests of Mrs AA when giving that advice.
5.On 2 July 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mr AA which included a recommendation that Mr AA take out income protection insurance under a BT income protection plan in circumstances where Sinha failed to give priority to the interests of Mr AA.
6.On 2 July 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mrs AA which included a recommendation that Mrs AA consolidate her superannuation by rolling over the funds in accounts held with her existing superannuation funds into a BT Foundation Portfolio SuperWrap superannuation fund in circumstances where Mr Sinha failed to give priority to the interests of Mrs AA.
Mr and Mrs BB
7.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961B of the Act by failing to act in the best interests of his clients, Mr and Mrs BB, when providing them with personal advice.
8.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB each take out insurance under a BT Protection Plan with term life cover, total and permanent disability cover and trauma cover which was not advice appropriate to Mr and Mrs BB.
9.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB take out insurance under a BT Protection Plan with income protection cover which was not advice appropriate to Mr and Mrs BB.
10.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB roll-over their existing superannuation funds into a new self-managed superannuation fund and pursue a gearing strategy which would involve the self-managed superannuation fund borrow money to purchase residential property which was not advice appropriate to Mr and Mrs BB.
11.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB each take out insurance under a BT Protection Plan with term life cover, total and permanent disability cover and trauma cover in circumstances where Mr Sinha failed to give priority to the interests of Mr and Mrs BB when giving that advice.
12.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB each take out insurance under a BT Protection Plan with income protection cover in circumstances where Mr Sinha failed to give priority to Mr and Mrs BB when giving that advice.
13.On 10 December 2013, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the contravening conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mr and Mrs BB which included a recommendation that Mr and Mrs BB roll-over their existing superannuation funds into a new self-managed superannuation fund and pursue a gearing strategy which would involve the self-managed superannuation fund borrow money to purchase residential property in circumstances where Mr Sinha failed to give priority to the interests of Mr and Mrs BB when giving that advice.
Mr and Mrs CC
14.On 2 July 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961B of the Act by failing to act in the best interests of his clients, Mr and Mrs CC, when providing them with personal advice.
15.On 2 July 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Mr and Mrs CC which was not advice appropriate to Mr and Mrs CC.
16.On 2 July 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961H of the Act by providing advice to Mr and Mrs CC which was based on incomplete or inaccurate information relating to their relevant personal circumstances in circumstances where he did not warn Mr and Mrs CC that, because he had incomplete or inaccurate information, they should consider the appropriateness of the advice before acting on it.
17.On 2 July 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Mr CC which included a recommendation that Mr CC roll-over funds from his existing superannuation accounts into a new BT Foundation SuperWrap superannuation fund account in circumstances where Mr Sinha failed to give priority to the interests of Mr CC when giving that advice.
Dr DD and Mr EE
18.On 7 August 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961B of the Act by failing to act in the best interests of his clients, Dr DD and Mr EE, when providing them with personal advice.
19.On 7 August 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Dr DD and Mr EE which included a recommendation that Dr DD and Mr EE each roll over some of the funds from their existing superannuation accounts into new BT SuperWrap Pension Plan+ superannuation accounts which was not advice appropriate to Dr DD and Mr EE.
20.On 7 August 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961G of the Act by providing advice to Dr DD and Mr EE which included a recommendation that Dr DD and Mr EE each draw a pension from the recommended BT SuperWrap Pension Plan+ superannuation account which was not advice appropriate to Dr DD and Mr EE.
21.On 7 August 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961H of the Act by providing advice to Dr DD and Mr EE which was based on incomplete or inaccurate information relating to their relevant personal circumstances in circumstances where he did not warn Dr DD and Mr EE that, because he had incomplete or inaccurate information, they should consider the appropriateness of the advice before acting on it.
22.On 7 August 2014, Westpac contravened subs 961K(2) of the Act by being the responsible licensee for the conduct of its representative, Mr Sinha, who contravened s 961J of the Act by providing advice to Dr DD and Mr EE which included a recommendation that Dr DD and Mr EE each roll over some of the funds from their existing superannuation accounts into new BT SuperWrap Pension Plan+ superannuation accounts in circumstances where Mr Sinha failed to give priority to the interests of Dr DD and Mr EE when giving that advice.
Contraventions of s 912A of the Act
23.Westpac contravened subs 912A(1)(a) of the Act by failing to do all things necessary to ensure that the financial services covered by its AFS licence were provided efficiently, honestly and fairly in that it:
(a)awarded Mr Sinha high achievement ratings despite the deficiencies identified by Westpac in compliance reviews conducted in relation to Mr Sinha in 2011, 2012 and 2013 and that Mr Sinha was subject to pre-vetting of his advices in the period between May and July 2010; and
(b)it ought reasonably to have known, from 1 July 2013, that there was a significant risk that Mr Sinha would not comply with the best interests obligations on and from 1 July 2013.
24.Westpac contravened subs 912A(1)(c) of the Act by failing to comply with the financial services laws, including s 961K of the Act.
THE COURT ORDERS THAT:
1.The defendant pay to the Commonwealth a pecuniary penalty of $350,000 in respect of the contravention the subject of declaration 1.
2.The defendant pay to the Commonwealth a pecuniary penalty of $425,000 in respect of the contravention the subject of declaration 2.
3.The defendant pay to the Commonwealth a pecuniary penalty of $425,000 in respect of the contravention the subject of declaration 3.
4.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 4.
5.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 5.
6.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 6.
7.The defendant pay to the Commonwealth a pecuniary penalty of $350,000 in respect of the contravention the subject of declaration 7.
8.The defendant pay to the Commonwealth a pecuniary penalty of $400,000 in respect of the contravention the subject of declaration 8.
9.The defendant pay to the Commonwealth a pecuniary penalty of $400,000 in respect of the contravention the subject of declaration 9.
10.The defendant pay to the Commonwealth a pecuniary penalty of $400,000 in respect of the contravention the subject of declaration 10.
11.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 11.
12.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 12.
13.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 13.
14.The defendant pay to the Commonwealth a pecuniary penalty of $350,000 in respect of the contravention the subject of declaration 14.
15.The defendant pay to the Commonwealth a pecuniary penalty of $450,000 in respect of the contravention the subject of declaration 15.
16.The defendant pay to the Commonwealth a pecuniary penalty of $300,000 in respect of the contravention the subject of declaration 16.
17.The defendant pay to the Commonwealth a pecuniary penalty of $550,000 in respect of the contravention the subject of declaration 17.
18.The defendant pay to the Commonwealth a pecuniary penalty of $350,000 in respect of the contravention the subject of declaration 18.
19.The defendant pay to the Commonwealth a pecuniary penalty of $425,000 in respect of the contravention the subject of declaration 19.
20.The defendant pay to the Commonwealth a pecuniary penalty of $425,000 in respect of the contravention the subject of declaration 20.
21.The defendant pay to the Commonwealth a pecuniary penalty of $300,000 in respect of the contravention the subject of declaration 21.
22.The defendant pay to the Commonwealth a pecuniary penalty of $550,000 in respect of the contravention the subject of declaration 22.
23.The defendant pay the plaintiff’s costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
WIGNEY J:
This case concerns the liability of one of Australia’s big four banks for the failure by one of its representatives to comply with the “best interests obligations” in Div 2 of Pt 7.7A of the Corporations Act 2001 (Cth) when he provided personal advice concerning financial products to certain retail clients.
In addition to its banking business, Westpac Banking Corporation engaged in a financial services business which included the provision of advice to individuals about financial products, including insurance and superannuation products. Between 2001 and late 2014, Westpac employed the services of Mr Sudhir Sinha in its financial services business. The relationship between Westpac and Mr Sinha was structured so that Mr Sinha was able to share in the commissions and fees earned or derived when, as a result of his advice or recommendations, clients signed-up for financial products in which Westpac or associated companies had an interest. As will be seen, that rather cosy arrangement turned out to be fruitful for both Mr Sinha and Westpac, but not always for their clients.
The facts of this case focus on advice and recommendations that Mr Sinha, as a representative of Westpac, gave to four domestic couples during 2013 and 2014. As a result of the advice and recommendations given by Mr Sinha, each of the couples altered their existing superannuation or insurance arrangements and acquired interests in or took out superannuation or insurance products or policies with companies or entities associated with Westpac. Both Westpac or its associated companies and, indirectly, Mr Sinha earned not insubstantial fees and commissions from the implementation of Mr Sinha’s recommendations.
Unfortunately for the four couples, it was subsequently discovered that the recommendations that Mr Sinha made, and the circumstances in which he made them, were deficient and defective, both as a matter of process and in substance. That should not have been a complete surprise to Westpac because Mr Sinha’s less than satisfactory conduct as a financial adviser had previously come to the attention of certain senior officers of Westpac as a result of various internal compliance reviews, audits or investigations. In any event, upon investigation and scrutiny of the advice and recommendations that Mr Sinha had provided to the four client couples in question, it was ascertained that Mr Sinha had failed to act in the best interests of those clients, had provided advice which was inappropriate to them and, in circumstances where there was an obvious conflict between his interests and the interests of the clients, had failed to give priority to the clients’ interests. In respect of two of the couples, Mr Sinha had failed to warn them that his advice was, or may have been, based on incomplete or inaccurate information.
In 2018, the Australian Securities and Investments Commission commenced proceedings in this Court against Westpac. The Commission alleged that Mr Sinha, in providing the advice and recommendations to the four couples in question, had contravened ss 961B, 961G, 961H and 961J of the Act and that Westpac, as the “responsible licensee” in relation to Mr Sinha’s contraventions, had contravened subs 961K(2) of the Act. The Commission sought declarations and the imposition of civil penalties in respect of Westpac’s contraventions. The Commission also alleged that Westpac had contravened s 912A of the Act because, as the holder of a financial services licence, it had failed to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly and had failed to comply with the “financial services laws”, which include 961K of the Act.
Westpac admitted that it had contravened the various provisions of the Act as alleged by the Commission. It did not dispute that declarations should be made in respect of those contraventions. Nor did it dispute that it was liable to pay civil penalties in respect of its contravention of subs 961K(2) of the Act. There was, however, a dispute between the Commission and Westpac concerning the number those contraventions and an issue concerning one of the factual findings that the Commission urged upon the Court in respect of Westpac’s knowledge that there was a risk that Mr Sinha would not comply with the relevant provisions of the Act. Those issues will need to be resolved. The main issue for the Court, however, is the size of the civil penalties that should be imposed in respect of Westpac’s contraventions of subs 961K(2) of the Act.
In order to resolve the outstanding issues it will be necessary in due course to spell out in some more detail the relevant facts in relation to Westpac’s contraventions of the Act. Before doing so, however, the relevant statutory provisions should be identified and outlined. That task is not as easy as it should be. The relevant provisions are mainly to be found in Div 2 of Pt 7.7A of the Act, which is entitled “Best Interests Obligations”. Like much of Ch 7 of the Act, which deals with financial services and markets, Pt 7.7A contains provisions which are not always easy to comprehend, particularly given the complex and prolix, if not labyrinthine, statutory definitions of many of the key concepts or expressions that are employed in the provisions.
RELEVANT STATUTORY PROVISIONS
Pt 7.7A was inserted in the Act in June 2012 and came into effect for most advisers on 1 July 2013. The insertion of Pt 7.7A was part of the so-called “FoFA” (Future of Financial Advice) reforms. The following summary of the relevant provisions is based on the provisions of the Act which were in effect from July 2013 to December 2014.
Subsection 961(1) of the Act provided that Div 2 of Pt 7.7A “applies in relation to the provision of personal advice (the advice) to a person (the client) as a retail client”. Subsection 961(2) of the Act helpfully pointed out that the individual who provides the advice is referred to as the “provider”. The balance of s 961 contained other explanations of who may be a “provider”. It is unnecessary to consider those provisions. It suffices to note that the provider in this case was Mr Sinha.
The definitions of many words, expressions or concepts referred to throughout Ch 7 of the Act are contained in, or are adverted to in, s 761A of the Act. Relevantly, s 761A provided that the expression “personal advice” has the meaning given in subs 766B(3) and that “retail client” has the meaning given by ss 761G and 761GA of the Act. As promised, subs 766B(3) defined “personal advice” in the following terms:
For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
(a)the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
(b)a reasonable person might expect the provider to have considered one or more of those matters.
It is fortunately unnecessary to consider the intricacies and subtleties of this definition. That is because there is no dispute that the advice that was given to the relevant clients in this matter was “personal advice” within the meaning of subs 766B(3) of the Act. Interested readers may nonetheless care to consider what was said about the meaning of “personal advice” in the judgment of the Full Court in Australian Securities and Investment Commission v Westpac Securities AdministrationLimited [2019] FCAFC 187 (ASIC v Westpac Securities). It should also be noted that “financial product advice”, of which “personal advice” is a subset, is defined in the following terms in subs 766B(1) of the Act:
For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)could reasonably be regarded as being intended to have such an influence.
It is perhaps even more fortunate that it is unnecessary to give any detailed consideration to the rather tortuous definition of “retail client” (and the converse expression “wholesale client”) in ss 761G and 761GA of the Act. Those provisions extended to over five pages and in turn require one to go to the detailed definitions of various other words or expressions, including “financial product” (see ss 763A and 764A), “financial service” (see s 766A), “general insurance product” (see ss 761A and 764A(1)(d)) and “superannuation product” (see ss 761A and 764A(1)(g)). It suffices to note that it is common ground that each of the clients in this matter was a “retail client”. It should also perhaps be noted, in this context, that all of Mr Sinha’s recommendations which were in due course taken up by the relevant clients in this matter concerned products which were “financial products” as defined in Div 3 of Pt 7.1 of the Act.
Having ascertained that Div 2 of Pt 7.7A applied to the facts of this case, it is necessary to have regard to the various provisions that were contravened by Mr Sinha and Westpac. The first of those provisions is s 961B. Subsections 961B(1) and (2) of the Act provided as follows:
(1) The provider must act in the best interests of the client in relation to the advice.
(2)The provider satisfies the duty in subsection (1), if the provider proves that the provider has done each of the following:
(a)identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
(b) identified:
(i)the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
(ii)the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances);
(c)where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
(d)assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
(e)if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
(i)conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
(ii) assessed the information gathered in the investigation;
(f)based all judgements in advising the client on the client’s relevant circumstances;
(g)taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.
Note:The matters that must be proved under subsection (2) relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to the advice sought.
It may be observed that the overarching duty imposed on a provider by subs 961B(1) is to act in the best interests of the client in relation to the advice. Subsection 961B(2), which various commentators and other boffins appear to have dubbed the “safe-harbour defence”, provided a list of actions which, if proved by a provider to have been “done”, would establish that the provider satisfied the duty to act in the best interests of the client in relation to the advice. The fact that a provider may establish that he or she had satisfied the duty to act in the best interests of the client by proving that he or she did the things listed in subs 961B(2), tends to suggest that the duty in subs 961B(1) is more concerned with “process or procedure”, or the conduct of the provider, as opposed to the content or substance of the advice given: Australian Securities and Investments Commission, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345; 122 ACSR 47 at [21]; Australian Securities and Investments Commission v Financial Circle Pty Ltd [2018] FCA 1644; 131 ACSR 484 at [129]; ASIC v Westpac Securities at [404]-[410] (O’Bryan J; cf. Allsop CJ at [151]); cf. McDonald v AMP Financial Planning Pty Ltd [2018] QSC 195; 129 ACSR 605 at [48].
Even if the list of actions in the so-called safe-harbour defence in subs 961B(2) may suggest that the duty to act in a client’s best interests is more about process than the content of the advice, it does not necessarily follow that a failure by a provider to do one or more of the things listed in subs 961B(2) would establish a breach of the duty in subs 961B(1). There is also nothing definitive in the text or context of s 961B to suggest that the duty imposed by subs 961B(1) should necessarily be approached solely by reference to failures in process or procedure, let alone solely by reference to the procedural check-list in subs 961B(2). As will be seen, however, that is not an issue which is necessary to decide on the facts of this matter. That is because it was common ground that Mr Sinha did not act in the best interests of the clients in relation to the advice he provided to them. It was also common ground that he did not do a number of the things listed in subs 961B(2), so the “safe-harbour” defence was not available to him.
It is also unnecessary, in those circumstances, to consider the terms of ss 961C, 961D and 961E of the Act, which respectively helpfully explain (in case that was not otherwise reasonably apparent) the circumstances in which something can be taken to be “reasonably apparent”, what constitutes a “reasonable investigation” and what would “reasonably be regarded as in the best interests of the client”.
The next section to consider is s 961G of the Act, which is plainly about the substance or content of the advice provided to the client. It provided as follows:
The provider must only provide the advice to the client if it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the duty under section 961B to act in the best interests of the client.
Note:A responsible licensee or an authorised representative may contravene a civil penalty provision if a provider fails to comply with this section (see sections 961K and 961Q). The provider may be subject to a banning order (see section 920A).
As can be seen, s 961G assumes that the provider satisfied the duty under s 961B to act in his or her client’s best interests. The question, in those circumstances, is whether it would be reasonable to conclude that the advice given to the client was “appropriate to the client”. The words “reasonable to conclude” indicate that the question must be approached objectively. It is unnecessary to further explore the circumstances in which it might be concluded that it was not reasonable to conclude that the advice given to a client was not appropriate to the client. As will be seen, in this case there is no dispute that it was not, or would not have been, reasonable to conclude that the advice given by Mr Sinha to the relevant clients was appropriate to those clients.
Section 961H of the Act, which is the next provision which was contravened by Mr Sinha, set out what a provider was required to do where the provider had incomplete or inaccurate information about the objectives, financial situation and needs of the client. Subsection 961H(1) provided as follows:
If it is reasonably apparent that information relating to the objectives, financial situation and needs of the client on which the advice is based is incomplete or inaccurate, the provider must, in accordance with subsections (2) and (3), warn the client that:
(a)the advice is, or may be, based on incomplete or inaccurate information relating to the client’s relevant personal circumstances; and
(b)because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs.
Subsections 961H(2) and (3) of the Act set out the time at which, and the means by which, the warning was required to be given.
The final relevant civil penalty provision to consider is s 961J of the Act, which relates to the situation where there is a conflict between the interests of the client and the provider, amongst others. Subsection 961J(1) of the Act provided as follows:
If the provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of:
(a) the provider; or
(b) an associate of the provider; or
(c)a financial services licensee of whom the provider is a representative; or
(d)an associate of a financial services licensee of whom the provider is a representative; or
(e)an authorised representative who has authorised the provider, under subsection 916B(3), to provide a specified financial service or financial services on behalf of a financial services licensee; or
(f)an associate of an authorised representative who has authorised the provider, under subsection 916B(3), to provide a specified financial service or financial services on behalf of a financial services licensee;
the provider must give priority to the client’s interests when giving the advice.
Note:A responsible licensee or an authorised representative may contravene a civil penalty provision if a provider fails to comply with this section (see sections 961K and 961Q). The provider may be subject to a banning order (see section 920A).
As adverted to earlier, Westpac’s liability in respect of Mr Sinha’s contraventions of ss 961B, 961G, 961H and 961J arose by reason of subs 961K(2), which provided as follows:
A financial services licensee contravenes this section if:
(a)a representative, other than an authorised representative, of the licensee contravenes section 961B, 961G, 961H or 961J; and
(b)the licensee is the, or a, responsible licensee in relation to that contravention.
Section 761A of the Act provided that a “financial services licensee” means “a person who holds an Australian financial services licence”, that an “Australian financial services licence” means “a licence under section 913B that authorises a person who carries on a financial services business to provide financial services”, that (again in case it was not otherwise obvious) a “financial services business” means “a business of providing financial services” and that a “financial service” has the meaning given by Div 4 of Pt 7.1 of the Act. It is unnecessary to go to Div 4 of Pt 7.1 of the Act because it was common ground that Westpac was a financial services licensee because it held an Australian financial services licence.
As for whether Westpac was the “responsible licensee” in relation to Mr Sinha’s contraventions, s 960 of the Act provided that the expression “responsible licensee” in relation to a contravention of a provision of Pt 7.7A has the meaning given by s 961P. Section 961P of the Act provided as follows:
For the purposes of this Part, the, or a, responsible licensee, in relation to a contravention of a provision of this Part, is:
(a)if the person who contravenes the provision is a representative of only one financial services licensee—that financial services licensee; or
(b)if the person who contravenes the provision is a representative of more than one financial services licensee:
(i)if, under the rules in section 917C, one of those licensees is responsible for the person’s conduct—that licensee; or
(ii)if, under the rules in section 917C, 2 or more of those licensees are jointly and severally responsible for the person’s conduct—each of those licensees.
Section 960 of the Act also provided that, in Pt 7.7A, “representative” of a financial services licensee “has the same meaning as in Part 7.6 (see section 910A)”. Subsection 910A(a) of the Act provided that “representative” of a person means, if the person is a financial services licensee, an authorised representative of the licensee, an employee or director of the licensee, or an employee or director of a related body corporate of the licensee, or any other person acting on behalf of the licensee. It was common ground that Mr Sinha was a “representative” of Westpac within the meaning of subs 910A(a) of the Act and was not a representative of any other financial services licensee.
It was also common ground that Mr Sinha was not an “authorised representative” of Westpac as defined in s 761A of the Act. It is accordingly unnecessary to go to s 761A of the Act, which in any event simply directed the reader to s 916A of the Act. Section 916A indicated that a person is an authorised representative of a financial services licensee if the licensee gives the person a written notice authorising the person, for the purposes of Ch 7 of the Act, to provide a specified financial service or financial services on behalf of the licensee. It would seem that Westpac did not give Mr Sinha such a written notice.
The final provision that was contravened by Westpac is subs 912A(1)(a) of the Act. Subsection 912A(1) provided as follows:
A financial services licensee must:
(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
(b) comply with the conditions on the licence; and
(c) comply with the financial services laws; 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
(e) maintain the competence to provide those financial services; and
(f)ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
(g)if those financial services are provided to persons as retail clients—have a dispute resolution system complying with subsection (2); and
(h)unless the licensee is a body regulated by APRA—have adequate risk management systems; and
(j)comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.
The paragraphs of subs 912A(1) relevant to this case are subparagraphs (a) and (c). Section 761A of the Act defined “financial services law” as including a provision of Ch 7 of the Act, which relevantly includes s 961K.
As for the orders that the Court must, or may, make if a person has been found to have contravened, relevantly, s 961K, subs 1317E(1) of the Act provided that if a Court is satisfied that a person has contravened one of the provisions listed in the table incorporated in that section, it must make a declaration of contravention. The provisions in the table are defined as civil penalty provisions. Subsections 961K(1) and (2) of the Act are listed in the table at item 18. Subsection 1317E(2) of the Act relevantly provided that a declaration of contravention must specify the Court that made the declaration, the civil penalty provision that was contravened, the person who contravened the provision, the conduct that constituted the contravention and, if the contravention is of a corporation/scheme civil penalty provision – the corporation or registered scheme to which the conduct related.
Subsection 1317G(1E) of the Act provided that a Court may order a person to pay the Commonwealth a pecuniary penalty if a declaration of contravention by the person has been made under s 1317E and the contravention was of one of the provisions listed in subs 1317G(1E)(b), which, at paragraph (b)(i), included subss 961K(1) and (2). Subsection 1317G(1F) provided that the maximum amount that the Court may order the person to pay for a contravention of a provision mentioned in subs 1317G(1E)(b), other than two provisions not relevant to this matter, was $200,000 for an individual or $1,000,000 for a body corporate.
SUMMARY OF FACTS RELEVANT TO THE CONTRAVENTIONS
Save for one matter, the facts relevant to Westpac’s contraventions were not in dispute. The facts were set out in a document entitled “Statement of Agreed Facts and Contraventions”, which was signed on behalf of both the Commission and Westpac and was tendered by consent by the Commission. The Commission also tendered a number of the documents referred to in the Agreed Facts.
The one factual matter that remained in dispute concerned Westpac’s knowledge that there was a significant risk that Mr Sinha would not comply with the “best interests obligations” in Div 2 of Pt 7.7A of the Act from 1 July 2013. Westpac admitted that it ought reasonably to have known of that risk. The Commission, however, contended that it could be inferred from the primary facts in the Agreed Facts and the documents referred to in it that Westpac had actual knowledge of that risk through two of its senior officers. That issue is addressed later in these reasons.
Following is a simplified summary of the material facts relevant to Westpac’s contraventions. The summary deliberately does not employ all of the terminology and defined terms that are used in the Agreed Facts. The excessive use of defined terms in the Agreed Facts not only makes the document excruciatingly tedious to read and in parts difficult to comprehend, but was ultimately productive of the ambiguity which was the root cause of the dispute between the parties concerning the number of contraventions. That dispute is addressed later in these reasons.
Unless stated otherwise, the summary of facts relates to the state of affairs during the period 1 July 2013 to 17 August 2014, being the period during which the contraventions were committed. It should not be inferred that the omission of any particular fact from the following summary means that the fact was overlooked or ignored, though it may suggest that the fact was not considered to be particularly important.
Westpac’s wealth management business and the employment of Mr Sinha
Westpac held an Australian financial services licence and carried on a financial services business. That business included a “wealth management” business the trading name of which was, at various times, “Westpac Financial Planning” and “BT Financial Advice”. Westpac or related corporate bodies employed advisers to provide financial advice and advice about financial products as part of its wealth management business.
Mr Sinha was employed by a subsidiary of Westpac, Westpac Financial Consultants Limited, in July 2001. He was seconded to Westpac and, in March 2012, entered into a partnership agreement under a partnership model employed by Westpac for the purposes of its wealth management business. The effect of the partnership agreement was that Mr Sinha was permitted to operate as a semi-autonomous business and supervise a team of Westpac or Westpac Financial Consultants’ employees consisting of senior or assistant financial planners and assistants. Mr Sinha and his team were referred to within Westpac as a partnership. Despite being a party to the partnership agreement, Mr Sinha remained an employee of Westpac Financial Consultants seconded to Westpac until that employment was terminated in November 2014.
Mr Sinha’s remuneration was partly fixed and partly variable. The variable component of his remuneration comprised money payable to Mr Sinha under the terms of the partnership agreement or Westpac’s partnership model. It was derived in the following way. The revenue generated by Mr Sinha and his team was paid to Westpac. A portion of that revenue, ranging from 48% to 53%, was allocated to Mr Sinha’s partnership. From that amount was deducted the fixed costs of employing Mr Sinha and the members of his team, together with certain other administrative, service and overhead costs incurred by the partnership and an amount referred to as the “partnership reserve”. The balance was paid to Mr Sinha as his “partner payout”.
Mr Sinha was a representative of Westpac, within the meaning of subs 910A(a) of the Act, throughout the period of his employment and partnership with Westpac. He was not, however, an “authorised representative” of Westpac within the meaning of s 761A of the Act. He was not a representative of any other person who held an Australian financial services licence.
Mr Sinha’s compliance history prior to the contraventions
Westpac conducted periodic reviews of Mr Sinha’s client files.
Westpac had three compliance ratings: “requires improvement” (rating of 2), “qualified” (rating of 3) and “effective” (rating of 4). Westpac did not have records of Mr Sinha’s compliance reviews in 2001 and 2002. A compliance review was undertaken in 2003, though no rating was awarded. The reports for each of Mr Sinha’s compliance reviews identified specific compliance issues and in some cases included action plans to rectify issues identified during the particular review. In 2002 and 2007, Mr Sinha was required to complete formal remedial action plans to address identified areas of concern and shortcomings.
Mr Sinha was subject to nine compliance audits between 2004 and 2010. He was rated “effective” on four of those occasions (2005, 2007, 2008 and 2010), “qualified” on two occasions (2006 and 2009) and “requires improvement” on three occasions (2004, 2007 and 2009). The issues identified during the audits included failure to identify client circumstances and objectives, failure to address alternative strategies (in 2004), lack of disclosure of fees, poor record keeping, failure to comply with Westpac’s policies and procedures and failure to ensure advice and products were appropriate.
Westpac conducted an investigation into Mr Sinha in 2010. The investigation involved interviews and a review of 24 of Mr Sinha’s files. A memorandum recording the results of the investigation recorded that of the files reviewed, all had the summary of costs table removed, 8% involved inappropriate advice, 42% disclosed no reasonable basis for the advice, 12.5% contained under-disclosure of fees and 28% contained blank forms signed by clients.
On 30 March 2010, an email which forwarded the memorandum concerning the 2010 investigation into Mr Sinha was sent to various senior officers, including Mr Mark Spiers, who was Head of Advice, BT Financial Group, and Mr Neville Price, Head of Advice WA, SA and NT, BT Financial Group and Mr Sinha’s state manager. The email recommended that Mr Price liaise with other officers “to determine whether the issues identified through the targeted review warrant the provision of a formal warning, suspension or further action” and that if it was intended that Mr Sinha be allowed to continue to provide financial services “a Remedial Action Plan for approval by Mark Spiers and that heightened PM supervision be implemented immediately”.
Email correspondence which followed the 30 March 2010 email suggested that Mr Spiers’ initial reaction to the findings of the investigation was that the termination of Mr Sinha was warranted, but that Mr Price was to meet with Mr Sinha so as to give him the opportunity to respond to the findings. Mr Price and another Westpac officer met with Mr Sinha on 1 April 2010 and shortly thereafter Mr Sinha provided a written response to the issues raised by the investigation. In a subsequent email that Mr Price sent to Mr Spiers, which attached a copy of Mr Sinha’s written response, Mr Price advised that, in his view, Westpac did not have “grounds for dismissal”, that he did not believe that Mr Sinha intended to deceive clients and that, given his long service, Westpac needed to give Mr Sinha “every chance” to prove that to be the case. The email included Mr Price’s recommendations, which included that various remedial steps be taken and a requirement that, for a period of time, Mr Sinha’s advice to clients be vetted by others prior to being provided to the clients.
It would appear that Mr Price’s recommendations were mostly accepted by senior managers at Westpac, including Mr Spiers. The final recommendations included that Mr Sinha be sent a “written warning”, that there would be another audit of Mr Sinha in six months, that the “investigations team” undertake a further “targeted file review” within six months and that Mr Sinha be placed on “Pre-vet” for three months, during which time he would be precluded from providing “execution only” services. Mr Sinha was subsequently placed on “pre-vet” in mid-April 2010 for three months. Various other remedial actions and restrictions were also imposed on Mr Sinha. Westpac’s “compliance risk rating” for Mr Sinha was increased to “high risk”, which had certain consequences for his remuneration.
During the period when Mr Sinha’s advices were vetted in May to July 2010, only six out of 17 advices were rated “effective”, with three rated “qualified” and eight rated “requires improvement”. The deficiencies revealed by the vetting process included: failures to meet all the client’s needs and goals; failures to explain the recommended strategy; failures to provide adequate reasons for recommendations; failures to link recommendations to the client’s needs; no reasonable basis for the advice; failures to include a financial product replacement statement; and failure to document the costs of exiting an existing financial product and acquiring a replacement product. Despite those deficiencies, Mr Sinha was released from pre-vetting in mid-July 2010.
Ten of Mr Sinha’s files were audited on 8 November 2010. The auditor noted that “[w]hile a number of the files held minimal issues, the remaining files held issues that were quite concerning and require further action”. As a result, a further discretionary bonus was withheld from Mr Sinha.
Compliance reviews of Mr Sinha were conducted in May 2011, May 2012 and August 2013. Mr Sinha was rated “effective” in each of those reviews, though the reports prepared in respect of each review nonetheless highlighted some not insignificant failures or issues. The August 2013 report, for example: identified missing documentation in relation to a customer; identified oversights in relation to the scope and subject matter of advice in relation to a customer; identified a “paraplanning error” in the disclosure of advice fees; referred to an instance when Mr Sinha did not recommend trauma insurance but did not provide an adequate explanation for why it was not recommended; recounted an instance where Mr Sinha provided advice which was not consistent with the research on file for that customer; identified an advice which appeared to be have been “cut and paste[d]” from a different file; and identified other advices which failed to identify the scope and subject matter of the advice, or failed to consider alternative strategies.
Westpac admitted that, by reason of the audits, investigations and compliance reviews conducted in respect of Mr Sinha over the preceding years, from 1 July 2013 it ought reasonably to have known that there was a significant risk that Mr Sinha would not comply with the obligations in ss 961B, 961G, 961H and 961J of the Act. The Commission contended, however, that at the very least Mr Spiers and Mr Price had actual knowledge of that risk and that their knowledge should be imputed to Westpac. That factual contention is addressed in detail later.
On 25 September 2014, Westpac completed a compliance review of Mr Sinha. The report of that review recorded a “requires improvement” rating and identified specific deficiencies in each of the four files that had been reviewed. Mr Sinha’s employment was suspended on 25 September 2014. His employment was terminated on or about 10 November 2014.
Performance ratings
In addition to compliance ratings, Westpac also gave employees in Mr Sinha’s position performance review ratings. In September 2010, 2011, 2012 and 2013 Mr Sinha received “high achievement” review ratings by Westpac. That was despite the fact that between May and July 2010 Mr Sinha’s advices were subject to pre-vetting and despite the deficiencies identified in his compliance reviews for 2011, 2012 and 2013.
Mr Sinha’s advice to four clients
Mr Sinha’s contraventions of ss 961B, 961G, 961H and 961J of the Act, and the resulting contraventions by Westpac of s 961K of the Act, arose from advice that Mr Sinha gave to four sets of clients between July 2013 and August 2014. The names of those clients have been anonymised. The first two clients are referred to as Mr and Mrs AA; the second are referred to as Mr and Mrs BB; the third are referred to as Mr and Mrs CC; and the fourth are referred to as Dr DD and Mr EE.
Advice given to Mr and Mrs AA
Mr Sinha met with Mr and Mrs AA in early June 2013 and agreed to provide them with financial advice.
At the time she met Mr Sinha, Mrs AA was 46 years old and worked as a shopkeeper. Her proposed retirement age was 65. Her annual salary was approximately $30,000. She held relatively small amounts in three superannuation funds: AXA Tailored Super roll over ($13,912); BT Business Super 1 fund ($8,985) and BT Business Super 2 fund ($4,864). She had coverage and paid premiums under three life insurance policies: $620,698 term life coverage under Westpac Term Life with annual premiums of $729; $145,000 term life coverage and $145,000 total and permanent disability coverage under BT Super Term Life with annual premiums of $515; and $16,200 life coverage and $16,200 total and permanent disability under BT Business Super Term Life with annual premiums of $68.
Mr AA was 42 years old and worked as a plant operator. His proposed retirement age was 65. His annual salary was approximately $150,000. He had superannuation funds of $165,987 in a BT Portfolio SuperWrap superannuation fund and had the benefit of term life coverage of $1,063,990 under BT Term Life with annual premiums of $900.
The advice that Mr Sinha gave to Mr and Mrs AA included three recommendations.
The first recommendation was that Mrs AA consolidate her superannuation by rolling over the funds in her existing accounts into a BT Foundation Portfolio SuperWrap superannuation fund.
The second recommendation was that Mrs AA cancel her existing life insurance policies and take out, within the new superannuation fund, term life cover of $750,000 under a BT Term Life Protection Plan.
The third recommendation was that Mr AA take out income protection insurance, with a monthly benefit of $9,380 and a five-year benefit period, under a BT income protection plan to be held within his existing superannuation account.
Each of the three recommendations to Mr and Mrs AA comprised or constituted “financial product advice” within the meaning of subs 766B(1) of the Act and “personal advice” within the meaning of subs 766B(3) of the Act. The advice given to Mr and Mrs AA was a “financial service” provided to them as retail clients for the purposes of s 761G of the Act. Division 2 of Pt 7.7A of the Act accordingly applied to the advice.
The process by which the advice was given to Mr and Mrs AA, and the advice itself, was defective or deficient in a number of respects.
First, Mr Sinha did not adequately ascertain and record in the customer profile booklet the objectives, financial situation and needs for Mr and Mrs AA. Large sections of the booklet were incomplete or lacking analysis and there was no record that Mr Sinha explored various relevant topics with Mr and Mrs AA.
Second, the life insurance recommendation to Mrs AA and the income protection recommendation to Mr AA were made without conducting an analysis of the insurance needs of Mr and Mrs AA. Mr Sinha did not meaningfully or adequately consider any alternative strategies to the courses of action recommended, or adequately set out the advantages and disadvantages of each.
Mrs AA’s existing life insurance policies contained total and permanent disability coverage, whereas the recommended life insurance policy did not. Mr Sinha did not consider whether Mrs AA needed total and permanent disability coverage. The recommended life insurance policies had a higher annual premium than the combined premiums of the existing policies and provided less cover than the existing policies combined. Mr Sinha did not advise Mrs AA that there was an intrinsic benefit in retaining her existing policies, and a risk in replacing them with the recommended policy, by reason of s 29(3) of the Insurance Contracts Act 1984 (Cth). Nor did he adequately advise Mrs AA in respect of funding the recommended life insurance policies through superannuation, including that doing so would erode her superannuation savings.
In relation to the recommendations to Mr AA concerning income protection insurance, Mr Sinha failed to consider the alternative strategy of holding income protection outside superannuation. Mr AA had sufficient cash flow to fund income protection insurance premiums outside superannuation and would have obtained a greater tax advantage by holding that insurance outside superannuation because the premiums would have been deductable at his highest marginal tax rate rather than the lower concessional tax rate applicable to income within superannuation.
Third, in respect of the recommendation to Mrs AA concerning the consolidation of her superannuation funds, Mr Sinha’s advice did not meaningfully or adequately consider any alternative strategies to the recommended courses of action, or adequately set out the advantages and disadvantages of each. There was, for example, no consideration of the possible strategy of rolling the balance of the two BT funds into the AXA fund. Mr Sinha appears not to have conducted a proper review of the existing superannuation funds or a proper comparison between those funds and the recommended one.
As a result of the implementation of the recommendations, Mr Sinha was eligible to receive up to $3,018 arising from the commission payable in respect of the recommended financial products. Total commissions payable were up to $5,694.
The advice Mr Sinha gave to Mr and Mrs AA was given other than in good faith and with a view to providing the most appropriate financial advice. He was influenced in making the recommendation by the prospect of receiving variable remuneration based on the commission and implementation fees payable by Mr and Mrs AA.
Contravention of s 961B(1) of the Act
Mr Sinha failed to act in the best interests of Mr and Mrs AA in relation to the advice he gave them.
Mr Sinha did not do a number of the things referred to in subs 961B(2) of the Act. He did not identify the subject matter of the advice that had been sought by Mr and Mrs AA, or identify the objectives, financial situation and needs of Mr and Mrs AA that would reasonably be considered to be relevant to the advice. He did not make reasonable inquiries to obtain complete and accurate information where it was reasonably apparent that information relating to Mr and Mrs AA’s circumstance was incomplete and inaccurate. He did not conduct a reasonable investigation into the financial products that might achieve the objectives and needs of Mr and Mrs AA, or assess the information gathered in respect of any such investigation. He did not base all judgments on Mr and Mrs AA’s relevant circumstances.
It was common ground that there was only one relevant contravention of s 961B(1) by Mr Sinha arising from the advice given to Mr and Mrs AA.
Contravention of s 961G of the Act
It would not have been reasonable in all the circumstances to conclude that the advice given to Mrs AA in relation to life insurance, and the advice given to Mr AA in relation to income protection, was appropriate to Mrs AA and Mr AA respectively, had Mr Sinha satisfied the duty under s 961B to act in the best interests of Mr and Mrs AA.
The Commission contended that there were two contraventions of s 961G by Mr Sinha: one in respect of the life insurance recommendation given to Mrs AA and one in relation to the income protection insurance recommendation given to Mr AA. Westpac maintained that there was only one contravention arising from the overall advice given to Mr and Mrs AA. That issue will be addressed later.
Contravention of s 961J of the Act
There was a conflict between the interests of Mr and Mrs AA, on the one hand, and Westpac, or one of its associates, and Mr Sinha, on the other. Mr Sinha knew, or ought reasonably to have known, of that conflict of interest.
Mr and Mrs AA had an interest in Mr Sinha acting in their best interests in relation to the advice that he was to provide to them, and an interest in that advice being appropriate to them in their circumstances.
Westpac, or one of its associates, and Mr Sinha had a pecuniary interest in the implementation of the recommendations Mr Sinha made to Mr and Mrs AA.
Westpac, or one of its associates, had a pecuniary interest in the implementation of the recommendation to Mrs AA to consolidate her superannuation funds because an implementation fee of $833 and product fees and charges would be payable by Mrs AA. Mr Sinha had a pecuniary interest in the implementation of this recommendation because he would earn variable remuneration under his partnership agreement with Westpac arising from the payment of the implementation fee.
Westpac, or one of its associates, had a pecuniary interest in the implementation of the recommendation to Mrs AA concerning her life insurance policies because, if implemented, an initial commission of about $1,441 and ongoing commission of about $131 per annum would have been payable by Mrs AA. Mr Sinha had a pecuniary interest in the implementation of this recommendation because he would earn variable remuneration under his partnership agreement with Westpac arising from the payment of that commission.
Westpac, or one of its associates, had a pecuniary interest in the implementation of the recommendation to Mr AA concerning his income protection policy because, if implemented, an initial commission of about $4,253 and ongoing commission of $387 per annum would have been payable by Mr AA. Mr Sinha had a pecuniary interest in the implementation of this recommendation because he would earn variable remuneration under his partnership agreement with Westpac arising from the payment of that commission.
Mr Sinha failed to give priority to the interests of Mr and Mrs AA over his and Westpac’s interests.
The Commission contended that there were three contraventions of s 961J by Mr Sinha: one in respect of the superannuation consolidation advice given to Mrs AA, one in respect of the life insurance recommendation given to Mrs AA and one in relation to the income protection insurance recommendation given to Mr AA. Westpac maintained that there was only one contravention arising from the overall advice given to Mr and Mrs AA. That issue will be addressed later.
Advice given to Mr and Mrs BB
Mr Sinha met with Mr and Mrs BB in early November 2013 and agreed to provide them with financial advice.
At the time he met Mr Sinha, Mr BB was 50 years old and worked as a mining supervisor. His proposed retirement age was 65. His annual salary was approximately $116,000. He had superannuation funds of $204,122 in a Rest superannuation fund and had the benefit of term life coverage of $327,000 within that fund.
Mrs BB was 48 years old and worked as a bus driver. Her proposed retirement age was 65. Her annual salary was $40,000. She held $10,562 in a TWU superannuation fund and had the benefit of term life and total and permanent disability coverage of $107,025 under that fund. She paid annual premiums of $484.
The advice that Mr Sinha gave to Mr and Mrs BB included three main recommendations.
The first main recommendation was that they establish a self-managed superannuation fund and, once that fund was established, roll over the money in their existing superannuation funds into the self-managed superannuation fund and redirect their superannuation guarantee contributions into the self-managed superannuation fund.
The second main recommendation was that Mr and Mrs BB both take out insurance under a BT protection plan with term life cover of $445,000, total and permanent disability cover of $445,000 and trauma cover in the amount of $195,000 for each of them. Once those recommended policies were established, Mr and Mrs BB were to cancel their existing life insurance policies.
The third main recommendation was that Mr and Mrs BB take out insurance under a BT protection plan with income protection cover of $8,450 per month for Mr BB and $2,920 per month for Mrs BB.
Each of those three main recommendations to Mr and Mrs BB comprised or constituted “financial product advice” within the meaning of subs 766B(1) of the Act and “personal advice” within the meaning of subs 766B(3) of the Act. The advice given to Mr and Mrs BB was a “financial service” provided to them as retail clients for the purposes of s 761G of the Act. Division 2 of Pt 7.7A of the Act accordingly applied to the advice.
Mr Sinha made two other recommendations to Mr and Mrs BB which did not directly or separately relate to separate financial products. Those recommendations were that both Mr and Mrs BB salary sacrifice certain amounts per year into the self-managed superannuation fund and that they pursue a ‘gearing strategy’ which involved them having their self-managed superannuation fund borrow $250,000 and purchase residential property worth $400,000.
The process by which the advice was given to Mr and Mrs BB, and the advice itself, was defective or deficient in a number of respects.
First, Mr Sinha did not adequately ascertain and record in the customer profile booklet the objectives, financial situation and needs for Mr and Mrs BB. In particular, the customer profile booklet contained little, if any, information about Mr and Mrs BB’s circumstances, including their objectives, financial situation and needs, of the kind that each section of the booklet was designed to elucidate.
Second, the recommendation that Mr Sinha made concerning life insurance to Mr and Mrs BB was made without considering or having regard to whether life insurance and total and permanent disability coverage could be increased under Mr and Mrs BB’s respective existing life insurance policies and whether that would be more cost-effective or preferable given that Mr and Mrs BB would not have been exposed to the risk of losing cover by operation of s 29(3) of the Insurance Contracts Act.
Mr Sinha made that recommendation without conducting a proper review of Mr and Mrs BB’s existing life insurance policies or a proper comparison between them and the policies that Mr Sinha recommended they take up. The recommended life insurance policies were more expensive per dollar of cover than the existing life insurance policies. Mr Sinha did not tell Mr and Mrs BB that there was an intrinsic benefit in retaining their existing life insurance policies or adequately advise them that there was a risk of replacing the existing policies with the recommended policies having regard to the potential application of s 29(3) of the Insurance Contracts Act. Mr Sinha also did not properly advise Mr and Mrs BB on the appropriateness of the levels of term life, total and permanent disability and trauma cover that he recommended they take out.
Third, Mr Sinha did not properly consider whether Mr and Mrs BB’s objective to establish a self-managed superannuation fund was appropriate for their circumstances. Nor did he consider whether Mr and Mrs BB had an adequate understanding of the responsibilities and risks of an investment strategy involving the establishment of a self-managed superannuation fund and investment into direct property.
The recommendations concerning the self-managed superannuation fund and the gearing strategy were made without conducting a proper review of Mr and Mrs BB’s existing superannuation funds, or a proper comparison between, on the one hand, remaining invested in the existing funds and, on the other, the strategy of setting up a self-managed superannuation fund and pursuing the attendant recommended rollover, loan and property purchase. Mr Sinha also did not properly advise Mr and Mrs BB of the advantages and disadvantages of implementing the recommendations and did not meaningfully or adequately consider any alternative strategies or set out the advantages and disadvantages of those strategies. Finally, Mr Sinha did not consider or warn Mr BB that there was a risk that the rollover of the funds in his existing superannuation fund into the self-managed superannuation fund may incur a potential tax liability in the United Kingdom.
Fourth, in relation to the recommendation concerning salary sacrifice, Mr Sinha did not properly consider whether that recommendation was appropriate for Mr and Mrs BB’s circumstances.
Fifth, in relation to the recommendation that Mr and Mrs BB take out insurance with income protection cover, Mr Sinha did not properly advise Mr and Mrs BB on the appropriateness of the levels of income protection insurance that he recommended they take out.
Mr Sinha proposed to charge a fee of $3,000 for implementing the self-managed superannuation fund recommendation and the gearing strategy. Mr Sinha was eligible to receive variable remuneration based upon up to 53% of those fees.
As a result of the implementation of the recommendations, Mr Sinha was also eligible to receive additional variable remuneration arising from the commissions payable to Westpac or its associates in respect of the recommended financial products. The total commissions payable are detailed later.
The advice Mr Sinha gave to Mr and Mrs BB was given other than in good faith and with a view to providing the most appropriate financial advice. He was influenced in making the recommendation by the prospect of receiving variable remuneration based on initial and ongoing commissions and the implementation fees payable by Mr and Mrs BB.
Contravention of s 961B(1) of the Act
Mr Sinha failed to act in the best interests of Mr and Mrs BB in relation to the advice he gave them.
Mr Sinha did not do a number of the things referred to in subs 961B(2) of the Act. He did not identify the subject matter of the advice that had been sought by Mr and Mrs BB, or identify the objectives, financial situation and needs of Mr and Mrs BB that would reasonably be considered to be relevant to the advice. He did not make reasonable inquiries to obtain complete and accurate information where it was reasonably apparent that the information he had obtained relating to Mr and Mrs BB’s circumstance was incomplete and inaccurate. He did not conduct a reasonable investigation into the financial products that might achieve the objectives and needs of Mr and Mrs BB, or assess the information gathered in respect of any such investigation. He did not base all judgments on Mr and Mrs BB’s relevant circumstances.
It was common ground that there was only one relevant contravention of s 961B(1) by Mr Sinha arising from the advice given to Mr and Mrs BB.
Contravention of s 961G of the Act
It would not have been reasonable in all the circumstances to conclude that the advice given to Mr and Mrs BB in relation to life insurance, income protection insurance, the establishment of a self-managed superannuation fund and the “gearing” strategy, was appropriate to Mr and Mrs BB, had Mr Sinha satisfied the duty under s 961B to act in the best interests of Mr and Mrs BB.
The Commission contended that there were three contraventions of s 961G of the Act by Mr Sinha: one in respect of each of the separate recommendations relating to financial products which were given to Mr and Mrs BB. Westpac maintained that there was only one contravention arising from the overall advice given to Mr and Mrs BB. That issue will be addressed later.
Contravention of s 961J of the Act
There was a conflict between the interests of Mr and Mrs BB, on the one hand, and Westpac, or one of its associates, and Mr Sinha, on the other. Mr Sinha knew, or ought reasonably to have known, of that conflict of interest.
Mr and Mrs BB had an interest in the advice that was given to them by Mr Sinha being appropriate to them and its content of not being affected, or potentially affected, by any pecuniary interest of Westpac, Mr Sinha or their associates.
Westpac, or one of its associates, and Mr Sinha had a pecuniary interest in the implementation of the recommendations that Mr Sinha made to Mr and Mrs BB.
If the recommendation concerning the self-managed superannuation fund was implemented, Westpac or one of its associates would receive an implementation fee of $3,000. Mr Sinha would also receive a portion of the implementation fee as part of his variable remuneration.
Westpac, or one of its associates, had a pecuniary interest in the implementation of the recommendation to Mr and Mrs BB concerning their life insurance policies because, if implemented, initial commissions totalling about $7,317 and ongoing commissions totalling about $665 per annum would have been payable by Mr and Mrs BB. Mr Sinha had a pecuniary interest in the implementation of this recommendation because he would earn variable remuneration under his partnership agreement with Westpac arising from the payment of that commission.
Westpac, or one of its associates, had a pecuniary interest in the implementation of the recommendation to Mr and Mrs BB concerning their income protection policies because, if implemented, initial commissions totalling about $6,445 and ongoing commission totalling $586 per annum would have been payable by Mr and Mrs BB. Mr Sinha had a pecuniary interest in the implementation of this recommendation because he would earn variable remuneration under his partnership agreement with Westpac arising from the payment of that commission.
It is important to emphasise, however, that the course of conduct principle, in the criminal context at least, does not operate to permit a sentencing judge to impose a single sentence in respect of multiple offences on the basis that the offences formed part of a course of conduct. Absent a statutory provision that provides otherwise, a sentencing judge is required to impose a separate sentence for each offence, albeit with the option of concurrency.
The single course of conduct principle has been applied in the civil pecuniary penalty context: see for example Construction, Forestry, Mining and Energy Union v Williams [2009] FCAFC 171; 262 ALR 417; Construction, Forestry, Mining and Energy Union v Cahill [2010] FCAFC 39; 269 ALR 1. That is despite the fact that it is largely based on the need to avoid double punishment, whereas, as discussed earlier, the primary, if not sole, purpose of imposing pecuniary penalties is said to be to deter, not to punish.
There would also appear to be cases where the court has, purportedly pursuant to the course of conduct principle, grouped together separate contraventions which were considered to be part of a single course of conduct and imposed a single penalty for that course of conduct. Ordinarily, however, other than where there is a specific statutory provision which permits the imposition of a single penalty in respect of multiple contraventions, or perhaps in cases where the parties agree to the imposition of a single penalty for practical or pragmatic reasons, separate penalties should be imposed for each contravention: Director, FWBII v CFMEU; Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; 262 FCR 243 at [227]. The application of the course of conduct principle, which is really just a tool to assist the Court in arriving at the appropriate penalty for the contraventions, involves the adjustment of the individual penalties to take into account the single course of conduct and to avoid double punishment, not the imposition of a single penalty: Yazaki at [226]-[227] and [236].
The totality principle
The totality principle, like the course of conduct principle, has its origins in criminal sentencing. In simple terms, the principle is that when a court is imposing sentences for multiple offences, the court should, after imposing separate sentences for each offence and applying the principles concerning cumulative and consecutive sentences, review the aggregate sentence and consider whether it is just and appropriate. In doing so, the court must “look at the totality of the criminal behaviour and ask itself what is the appropriate sentence for all the offences”: Mill v The Queen (1988) 166 CLR 59 at 62-63, referring to Thomas, Principles of Sentencing, 2nd ed. (1979), pp. 56-57. Where the sentences involve periods of imprisonment, the appropriate aggregate sentence may again be achieved either by making sentences wholly or partially concurrent, though in some circumstances it may be appropriate to lower the individual sentences to below what would otherwise be appropriate in order to reflect the fact that a number of sentences are being imposed.
While, in the criminal sentencing context, the totality principle is generally applied in cases involving sentences of imprisonment, it has been held to apply to the fixing of fines: Camilleri’s Stock Feeds Pty Ltd v Environment Protection Authority (1993) 32 NSWLR 683 at 704; Environment Protection Authority v Barnes [2006] NSWCCA 246 at [43]-[50]. In the case of fines, the court must fix a fine for each offence and then review the aggregate to ensure that it is just and appropriate as a reflection of the overall criminality. If the result of the aggregation of multiple fines is that the penalty is excessive, that may lead to the moderation of the fine imposed in respect of each offence: Barnes at [49].
Once again, the important point to emphasise is that, in the criminal sentencing context, application of the totality principle does not authorise or permit the sentencing court to impose a single sentence for multiple offences: see R v Bibaoui [1997] 2 VR 600 at 603-604; R v Finnie [2002] NSWCCA 533 at [54]-[57]; Thorn v The Queen [2009] NSWCCA 294; 198 A Crim R 135 at [39]-[47].
The totality principle has been picked up and applied in the context of civil pecuniary penalty proceedings: see for example Mornington Inn Pty Ltd v Jordan [2008] FCAFC 70; 168 FCR 383 at [5]-[7] (Gyles J) and [41]-[43] (Stone and Buchanan JJ). Unfortunately, however, it is sometimes confused or conflated with the course of conduct principle. It has also, on occasion, erroneously been relied on to support the imposition of a single pecuniary penalty for multiple contraventions. The correct approach, however, is to first consider the course of conduct principle. If considered appropriate, the individual penalties should be adjusted to reflect that the contraventions occurred as part of a course or courses of conduct. The court should then review the aggregate sentence to ensure that it is just and appropriate. That may require a further adjustment of the sentences if the aggregate sentence is considered to be excessive or out of proportion to the contravening conduct considered as a whole.
Consideration of appropriate penalties
What, then, are the appropriate penalties to impose in respect of each of Westpac’s contraventions of subs 961K(2) of the Act? As has just been discussed, the answer to that question is arrived at by considering, weighing and balancing the relevant objective and subjective factors and, if considered appropriate in all the circumstances, applying the course of conduct and totality principles.
Objective seriousness of the contraventions
Westpac’s contraventions of subs 961K(2) are somewhat unusual because the contravening conduct was essentially engaged in entirely by Mr Sinha. Westpac is liable because Mr Sinha was its representative and it was the responsible licensee in connection with Mr Sinha’s contraventions. It is, in the circumstances, necessary to approach the objective seriousness of the contraventions by considering not only the objective seriousness of Mr Sinha’s contravening conduct, but also considering Westpac’s conduct as the responsible licensee for Mr Sinha.
There could be little doubt that Mr Sinha’s contravening conduct was objectively very serious. It occurred over a twelve month period and involved four separate sets of clients. The period over which the contravening conduct occurred was far from fleeting and the scale or scope of offending was far from confined or narrow. Mr Sinha’s conduct during the twelve month period in respect of those four sets of clients also should not be considered in isolation. It occurred against the backdrop of previous compliance breaches which resulted in the imposition of sanctions and remedial action against Mr Sinha by Westpac. It could scarcely be suggested that Mr Sinha was not aware of his obligations. Nor could it be suggested that Mr Sinha’s contraventions were isolated or out of character.
Mr Sinha had also received training in respect of the best interests obligations introduced by the FoFA reforms. The fact that Mr Sinha had received that training, coupled with the fact that Mr Sinha had previously faced sanctions and remedial action as a result of compliance breaches, suggests that Mr Sinha’s contraventions were not the product of ignorance or mere carelessness. Rather, the available inference is that Mr Sinha was apparently prepared to ignore or disregard his obligations.
Why? The obvious, if not inescapable, inference is that Mr Sinha was prepared to ignore or disregard his best interests obligations because he stood to gain personally from most of the recommendations he made to the four sets of clients. The variable remuneration which he received by virtue of his partnership arrangement with Westpac provided him with an incentive to make recommendations to clients which involved them switching to financial products provided by Westpac or its associates, or rolling-over existing funds or policies into new funds or policies provided by Westpac or its associates. It is readily apparent that the financial incentive to make such recommendations was such that Mr Sinha was prepared to make them even if they were not in his clients’ best interests, or even if they were not appropriate to the clients’ objectives, financial situations and needs, or even if he had incomplete or inaccurate information concerning those matters. He was plainly prepared to give priority to his interests rather than the clients’ interests when giving advice.
Westpac also stood to gain from Mr Sinha’s actions. That perhaps explains why Mr Sinha was permitted to continue as Westpac’s representative and partner despite the serious compliance breaches which were exposed by the 2010 investigation. It is tolerably clear that, at least prior to the commencement of the FoFA reforms, some officers or employees at Westpac were either unable or unwilling to terminate the services of a representative who achieved high achievement ratings and was plainly proficient and successful at promoting the financial products of Westpac and its associates. It may readily be inferred that Westpac’s compliance systems and practices were less than rigorously applied, at least in Mr Sinha’s case.
To be fair, as discussed later, systems introduced by Westpac in conjunction with the FoFA reforms ultimately led to the exposure of Mr Sinha’s contravening conduct and his termination. Most of Mr Sinha’s contravening conduct also occurred during the first twelve months after the relevant commencement date of the FoFA reforms. The Commission had advised that it would take a “facilitative” approach to compliance during that period, no doubt recognising that the reforms were fairly major reforms and that it would take some time for many in the industry to come to terms with the changes and adjust their conduct and practices accordingly. It appears that some, like Mr Sinha, were unwilling to adjust their conduct and practices despite being well aware of the changes.
The contraventions were also undoubtedly serious because they caused real detriment to the four sets of clients. The contraventions were by no means simply technical or process related breaches. As discussed later, however, Westpac has since acted to compensate the clients in respect of the loss or detriment they suffered as a result of Mr Sinha’s contravening conduct.
Mitigating and other subjective considerations
Westpac spent approximately $43.7 million on regulatory change projects associated with the FoFA reforms. As part of that program, representatives, including Mr Sinha, were required to attend training sessions, including training in respect of the best interests obligations.
The Commission submitted that Westpac’s expenditure associated with the FoFA reforms had not been deployed effectively. That submission is not, however, supported by the evidence. Given the scale of Westpac’s financial services business, the fact that one representative has been found to have engaged in contravening conduct within the first twelve months of the commencement of the FoFA reforms does not support the proposition advanced by the Commission. It should also be reiterated, in this context, that it was one of the systems introduced by Westpac following the FoFA reforms which identified Mr Sinha for review and investigation in mid-2014 and ultimately led to his termination some months later.
It was also Westpac which first notified the Commission of conduct by Mr Sinha which may have contravened the Act, albeit as part of Westpac’s notification obligations under s 912C of the Act. It was this notification which led to the investigation which ultimately exposed the contravening conduct the subject of this proceeding. Westpac also fully cooperated with the Commission’s investigation. Westpac should also be given credit for the fact that it ultimately did not defend or oppose the relief sought by the Commission in this proceeding and made appropriate admissions in the Agreed Facts. Westpac’s approach to the proceeding meant that it was heard efficiently and expeditiously and the administration of justice was facilitated.
Westpac has undertaken a remediation process in respect of Mr Sinha’s clients. That remediation process extended beyond the four sets of clients the subject of this proceeding and was not limited to compensation for losses arising from conduct that amounted to contraventions of the Act. It has paid approximately $12.7 million in compensation to clients of Mr Sinha. Mrs AA received a refund of just over $400; Mr AA received refunds totalling over $16,000; Mr and Mrs BB received refunds totalling over $6,000 and Mr BB received an indemnity in respect of potential taxation liabilities in the United Kingdom arising from the implementation of one of Mr Sinha’s recommendations; Mr CC received a refund of over $9,000; Dr DD received refunds totalling over $57,000 and Mr EE received a refund of just over $70,000.
Subsection 912B(1) of the Act provides that a financial services licensee, such as Westpac, who provides financial services to retail clients must have arrangements for compensating clients for loss or damage suffered because of breaches of the relevant obligations by its representatives. Westpac’s willingness to pay compensation to the clients involved in this proceeding must be considered in that context. It is nonetheless to Westpac’s credit that it appears to have acted relatively swiftly to compensate Mr Sinha’s clients, including those the subject of this proceeding. Those actions, considered together with Westpac’s cooperative approach to both the Commission’s investigation and this proceeding, demonstrate appropriate contrition.
Westpac is undoubtedly a very large company. Its profits in the years preceding the contravening conduct exceeded $6 billion. Westpac’s size and financial position suggests that the objective of deterrence may require the imposition of higher penalties than would be required for smaller and less well-resourced companies. Westpac has, however, in recent times announced that it will cease to provide personal financial advice through its salaried financial advisers and authorised representatives. That is a relevant consideration to the issue of specific deterrence.
Course of conduct
The Commission contended that the course of conduct principle had little if any role to play in the determination of the appropriate penalties in this matter. It submitted, in relation to the multiple contraventions of s 961G arising from separate financial product recommendations, that the inclusion of separate recommendations in the one statement of advice “does not convert separate recommendations into a single ‘course of conduct’”. In the Commission’s submission, “[a]pplying the course of conduct across distinct recommendations made in breach of s 961G would generalise the contraventions improperly, and fail to treat each distinct act constituting the contravening conduct in the contest of the legislative prohibitions”. The Commission also suggested that it had already “accommodated” the course of conduct principle because it had only proposed single contraventions of s 961B and s 961H of the Act in respect of each set of clients.
The Commission’s submissions concerning the course of conduct principle have little merit and largely misconceive the nature and operation of the principle.
There could be no doubt that the contraventions arising from Mr Sinha’s conduct all arose in the course of him giving advice to four sets of clients. As discussed earlier in the context of the issue concerning the number of contraventions, Mr Sinha met separately with each of the sets of clients and subsequently gave them a single statement of advice which contained an integrated financial plan or strategy. In the case of all the client groups other than Mr and Mrs CC, the financial plan that Mr Sinha proposed undoubtedly contained recommendations concerning more than one financial product. It is for that reason that the single financial plan for those client groups gave rise to multiple contraventions of s 961G and, except in the case of Dr DD and Mr EE, multiple contraventions of s 961J. There were also separate and distinct deficiencies and defects in Mr Sinha’s dealings with each of the sets of clients and the advice he gave them. It is for that reason that the advice he gave to each of the separate client groups gave rise to contraventions of different provisions of the Act.
The fact that the advice that Mr Sinha gave to each of the four sets of clients gave rise to multiple and separate and distinct contraventions does not, however, mean that the matter should not be approached on the basis that the multiple contraventions are interrelated and arose out of courses of conduct related to each of the sets of clients. All of the contraventions arising out of Mr Sinha’s dealings with, for example, Mr and Mrs AA, should properly be viewed as arising out of a course of action involving Mr Sinha meeting, obtaining information from and giving advice to Mr and Mrs AA. The same can be said of the other sets of clients.
That is not to say that the fixing of the appropriate penalties should be approached as if there were only four contraventions, one in respect of each of the sets of clients. As discussed earlier, separate penalties should be imposed in respect of each of the separate contraventions. Those penalties, however, should be adjusted to take into account that they arose out of courses of conduct in respect of each of the sets of clients and that there is accordingly some degree of overlap or interrelationship between the contraventions. That consideration must be taken into account to avoid doubly punishing Westpac in respect of what may have been essentially the same conduct.
The penalties should, however, still reflect the fact that the separate contraventions each involve some separate and distinct elements of wrongdoing. For example, an advice that involves three or four recommendations concerning different financial products involves a greater degree of wrongdoing than an advice that includes a recommendation about one financial product. Contraventions of different statutory provisions arising out of the one advice also involve some separate and distinct elements and different types of wrongdoing. A failure to act in the clients’ best interests is one thing; the provision of advice in circumstances where it would not be reasonable to conclude that the advice was appropriate to the client is another. The failure to give priority to the clients’ interests in circumstances where there is a conflict also involves different elements and a different type of wrongdoing. The penalties imposed should take that into account, even where the different contraventions arose out of the one course of conduct.
If this were a criminal matter involving custodial sentences, the course of conduct principle would require the Court to consider whether the separate custodial sentences should be served partly, or perhaps in some instances, wholly concurrently. That would be the appropriate way to take into account that the offending conduct occurred as part of a course or courses of action. As this is a civil penalty proceeding involving the imposition of monetary penalties, however, the appropriate way to reflect the fact that the contraventions arose from courses of conduct is to reduce the amount of the separate pecuniary penalties. It is important to emphasise, in that context, that the process of adjusting the penalties to take into account the course of conduct principle should not be approached as if the fixing of the appropriate penalties was simply a mathematical exercise. Sometimes it may be appropriate to quantify the appropriate reduction of the penalties, in either percentage or dollar terms, though that is not always necessary or appropriate.
The penalties for each contravention in this case have been adjusted downwards to reflect the fact that the contraventions arose out of courses of action involving the provision of advice to four sets of clients. Where there are multiple contraventions of ss 961G and 961J for particular sets of clients, the penalties for those contraventions have also been further adjusted downwards to reflect the fact that those multiple contraventions all arose out of the one advice.
The appropriate penalties
Westpac submitted that its contraventions which arose from Mr Sinha’s contraventions of s 961J were objectively the most serious contraventions. In Westpac’s submission, the facts showed that Mr Sinha’s contraventions of ss 961B and 961G followed from his contraventions of s 961J: that he was “influenced by receipt of fees and commissions” and that it was that influence or motivation which led him to fail to act in his clients’ best interests and to provide advice which was not appropriate to them. Westpac submitted that the appropriate penalty range for the s 961J contraventions was $600,000 to $800,000 and $300,000 to $400,000 for any further contravention of that section, when multiple contraventions of that provision were involved. Westpac’s proposed penalty range for the s 961G contraventions was $200,000 to $300,000 and $100,000 for any further contravention of that section, when multiple contraventions of that provision were involved. Its proposed penalty range for the s 961B contraventions was $100,000 to $200,000 and the penalty range for the s 961H contraventions was $100,000 to $200,000.
The Commission submitted that there was no statutory basis for treating a contravention of any of ss 961B, 961G, 961H or 961J of the Act as more serious than a contravention of any other of those provisions given that the maximum penalty is the same for each contravention. As for Westpac’s submission concerning the contraventions of s 961J, the Commission contended that it was not clear that there was any factual basis for Westpac’s assertion that its contraventions of s 961J were objectively the most serious contraventions because they led to the contraventions of s 961B. In the Commission’s submission, the contraventions of s 961B were “independent” contraventions and were not dependent on the contraventions of s 961J. Finally, ASIC submitted that Westpac’s suggested penalty range of $100,000 to $200,000 for s 961B offences was “completely inadequate” given that Westpac had acknowledged that those contraventions were serious.
The Commission proposed a penalty range of $400,000 to $600,000 for all of the contraventions.
There would appear to be some merit in Westpac’s submissions concerning the objective seriousness of the s 961J contraventions. As has already been discussed at some length, the particular facts and circumstances of this case revealed that the deficient and defective approach that Mr Sinha took to advising his clients was to a large extent a product of the fact that he was motivated by the prospect of increasing his own financial interests. He knew that he would receive a share of the commissions and implementation fees that Westpac or its associates would earn if he caused his clients to shift to Westpac associated financial products, or roll-over existing financial products into Westpac associated products. He put his own interests before the interests of his clients. That was the root cause of Mr Sinha’s resulting failure to act in the best interests of his clients and his failure to provide advice that was appropriate to his clients. It would also be fair to say that Westpac ought to have appreciated the conflict of interest that it placed representatives like Mr Sinha in when they entered into partnerships with them that involved variable remuneration based on a portion of the fees or commissions earnt by them.
That is not to say that the s 961B contraventions were not independent, or that the s 961B contraventions were somehow dependent on the s 961J contraventions. Nor does it mean that s 961J contraventions are, or always will be, more serious than s 961B contraventions. It is simply a recognition that, having regard to the particular facts of this case, Mr Sinha’s contraventions of s 961J were objectively more serious than his s 961B contraventions. That conclusion is reinforced when one considers the basis upon which it has been found that Mr Sinha failed to act in the best interests of his clients, most of which relate to his failure to follow correct or appropriate processes or procedures.
The Commission’s proposed penalty range, which involves the same range for each contravention, appears also to be somewhat mechanistic and to not fully reflect the particular facts and circumstances of this case. It appears to be based largely on the fact that each of the contraventions carried a maximum penalty of $1,000,000 and an implicit assertion that all of the contraventions were of the same slightly higher than mid-range objective seriousness. It also appears to take no account whatsoever of the course of conduct principle.
Having regard to the relevant principles, including the course of conduct principle, and all of the objective and subjective considerations to which reference has already been made, the appropriate penalties for each of Westpac’s contraventions of subs 961K(2) are as follows.
In relation to the contraventions that arose from the advice Mr Sinha, as Westpac’s representative, provided to Mr and Mrs AA:
·A penalty of $350,000 in respect of the contravention of s 961B of the Act
·A penalty of $425,000 in respect of each of the two contraventions of s 961G of the Act
·A penalty of $450,000 in respect of each of the three contraventions of s 961J of the Act
In relation to the contraventions that arose from the advice Mr Sinha, as Westpac’s representative, provided to Mr and Mrs BB:
·A penalty of $350,000 in respect of the contravention of s 961B of the Act
·A penalty of $400,000 in respect of each of the three contraventions of s 961G of the Act
·A penalty of $450,000 in respect of each of the three contraventions of s 961J of the Act
In relation to the contraventions that arose from the advice Mr Sinha, as Westpac’s representative, provided to Mr and Mrs CC:
·A penalty of $350,000 in respect of the contravention of s 961B of the Act
·A penalty of $450,000 in respect of the contravention of s 961G of the Act
·A penalty of $300,000 in respect of the contravention of s 961H of the Act
·A penalty of $550,000 in respect of the contravention of s 961J of the Act
In relation to the contraventions that arose from the advice Mr Sinha, as Westpac’s representative, provided to Dr DD and Mr EE:
·A penalty of $350,000 in respect of the contravention of s 961B of the Act
·A penalty of $425,000 in respect of each of the two contraventions of s 961G of the Act
·A penalty of $300,000 in respect of the contravention of s 961H of the Act
·A penalty of $550,000 in respect of the contravention of s 961J of the Act
It can be seen that these penalties reflect the view that the s 961J contraventions were objectively the most serious offences, followed by the s 961G, s 961B and s 961H contraventions in that order. These penalties also take into account the course of conduct principle as earlier explained.
Totality
It remains to address the so-called totality principle.
The total penalty to be imposed on Westpac, following the accumulation of the separate penalties imposed for each of its contraventions of subs 961K(2) of the Act, is $9,150,000. The question is whether that total penalty is just and appropriate and not excessive having regard to the totality of the relevant contravening conduct.
The short answer to that question is that the total penalty is not excessive and is a just and appropriate penalty in all the circumstances. While the total penalty is high, and that is to a certain extent the product of the large number of contraventions, it fairly reflects and is proportionate to the overall seriousness of the contravening conduct. It must also be recalled that Westpac is a very large corporation and the aggregate penalty must have an appropriate deterrent effect. Any significantly lesser aggregate penalty would be unlikely to achieve the appropriate deterrent effect.
OTHER ORDERS
The Commission’s originating application sought costs. The parties did not make any submissions in relation to costs. There does not appear to be any reason why costs should not follow the event.
I certify that the preceding three hundred and ten (310) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney. Associate:
Dated: 19 December 2019
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