Sherwal and Australian Securities and Investments Commission
[2022] AATA 4192
•7 December 2022
Sherwal and Australian Securities and Investments Commission [2022] AATA 4192 (7 December 2022)
Division:Taxation and Commercial Division
File Number(s)
2021/4586
Re
Ashok SHERWAL
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
Decision
Tribunal:Mr P W Taylor SC, Senior Member
Date:7 December 2022
Place:Adelaide
The June 2021 decision is varied in the following respects:
(a)the period of the ban, in relation to both providing any financial services and performing functions involved in the carrying on of a financial services business, is reduced from six year to five years
(b)the scope of the ban, in relation to the performance of functions, is reduced to restrain Mr Sherwal from performing any function as an officer or manager of an entity carrying on a financial services business.
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Catchwords CORPORATIONS – banning order under s 920A and 920B – banning an individual from providing financial services – lack of fitness, training competence to provide financial advice – reduction in the period of the ban – reduction in scope of ban – not a fit and proper person – decision varied.
Legislation –
Corporations Act 2001
Superannuation Industry (Supervision) Act 1993
Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012
The Corporations Amendment (Future of Financial Advice) Act 2012 Schedule 1
Cases
Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd (No 2) [2018] FCA 59
Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd [2017] FCA 477
Secondary Materials
Superannuation Industry (Supervision) Regulations 1994
REASONS FOR DECISION
Between 1996 and 2007 Mr Sherwal obtained various tertiary qualifications. They included a post graduate diploma and a Masters degree, in the disciplines of engineering and communications technology. In 2012 he became a formally qualified financial planner. Relevant details of his qualifications and roles as a financial planner are as follows:-
(c)31 December 2012:- Diploma of Financial Services (Financial Planning).
(d)7 October 2013 to 20 July 2015:- an authorised representative of The Complete Planner Pty Ltd (an Australian Financial Services licence (“AFSL”) holder) and also the sole shareholder and director of Coober Australia Pty Ltd.[1] Coober Australia was itself also an authorised representative of The Complete Planner.
(e)22 July 2015 to 4 May 2016:- an authorised representative of Wealth Resort Management Pty Ltd (“WRM”) and an employee or representative of Yes FP Pty Ltd (“Yes FP”). WRM was an AFSL holder and Yes FP was an authorised representative of WRM.[2]
(f)6 September 2016 to 8 February 2017:- as the principal of Coober Australia Pty Ltd (“Coober”) which, during this period, was an authorised representative of Investors Direct Financial Planning Pty Ltd.
(g)3 January 2017:- Advanced Diploma of Financial Planning.
(h)6 March 2017 to 23 October 2017:- as an authorised representative of Dover Financial Advisers Pty Ltd (“Dover”) and the principal of Coober Australia Pty Ltd (which was itself also an authorised representative of Dover during the same period).[3]
(i)6 March 2018 to 23 October 2018:- an authorised representative of CGF One Pty Ltd, another AFSL holder).[4] (On 27 August 2018 the company changed its name to State Advice Pty Ltd.)
(j)June / July / August 2019 to November 2019:- a contentiously characterised, and perhaps broken, period of involvement first with Ansa Finance Pty Ltd and then AFSL Group Pty Ltd. (Ansa Finance provided loans to financial services clients of AFSL Group Pty Ltd. ASIC claimed that Mr Sherwal provided financial advice to clients of AFSL Group. Mr Sherwal claimed that he only performed “back office” work for Ansa Finance Pty Ltd:- see paragraphs 39 to 48 below.)
(k)27 Nov 2019 to June 2020:- an authorised representative of AFSL Group Pty Ltd, another AFSL holder.
(l)22 June 2020:- Mr Sherwal ceased to operate as a financial planner.
[1]Mr Sherwal incorporated Coober Australia Pty Ltd in February 2011, and changed its name in October 2013. (Because of Mr Sherwal’s status as Coober’s sole director and shareholder, I will tend to refer to him, rather than to Coober, as the relevant “authorised representative” of each relevant AFSL holder.)
[2]WRM obtained its AFSL on 4 March 2013. A Mr Joshua Fuoco was a director, and the sole shareholder, of both WRM and Yes FP Pty Ltd. Mr Fuocco had been an Australian Financial Services Banned person and a Corporations Act Disqualified person from 13 January 2010 to 12 January 2015.
In December 2017, pending the determination of the WRM proceedings (see paragraphs 49 & 50 below) Mr Fuocco undertook not to carry on a financial services business. In February 2018, the determinative orders made in the WRM proceedings, restrained Mr Fuocco, until 21 December 2027, from carrying on a financial services business, and any business related to financial services or financial products.
On 13 May 2016 Mr Fuocco again became a Corporations Act Disqualified person, until 12 November 2018.
[3]In November and December 2017 Dover Financial Advisers Pty Ltd provided ASIC with a “breach report” (Corp Act s 912D), and additional related material, concerning to the conduct of Mr Sherwal and Coober Australia Pty Ltd. The details of this report were not the subject of evidence.
On 26 June 2018 Dover, and its sole director, each gave ASIC a formal undertaking not to carry on a financial services business after 6 July 2018. These undertakings followed ASIC’s criticism that, by promoting a particular “Client Protection Policy” Dover had engaged in deceptive conduct and had failed to comply with financial services laws. However, the limited evidence about this undertaking did not link the impugned “Client Protection Policy” to any “cash rebate” procedures.
[4]Mr Joshua Fuocco’s father had been the sole director State Advice in the early part of 2017.
In his oral evidence Mr Sherwal claimed that his appointment as an authorised representative of State Advice Pty Ltd was effected by Mr Fuocco, essentially without Mr Sherwal’s approval, and had been continued despite Mr Sherwal’s complaints. Mr Sherwal said he, in fact, had no active involvement with State Advice Pty Ltd. There was no specific evidentiary contradiction of that claim. However, there was evidence that on 15 May 2018 (ie., shortly after his State Advice appointment) Mr Sherwal had written to WRM requesting (apparently unsuccessfully) that it transfer to him some 129 of the clients he had previously advised.
ASIC’s investigations and decision
In April 2016 ASIC had begun to investigate WRM’s conduct as an AFSL holder and, in particular its participation in a “cash rebate” procedure. (The elements of the “cash rebate” procedure are discussed in paragraph 25 below.) That investigation ultimately culminated in Federal Court proceedings and, in February 2018, WRM being restrained from promoting or being involved in any such procedure:- see paragraphs 23 and 24 below.
Subsequently, on 29 April 2020, during the period of his status as an authorised representative of AFSL Group Pty Ltd, ASIC served Mr Sherwal with a concerns notice. The notice informed Mr Sherwal that it was considering making an order under sections 920A & 920B of the Corporations Act 2001 (“CorpAct”) banning him from providing financial services, because of apprehensions about (amongst other things) his fitness, training and competence to provide financial services advice.
The focus of ASIC’s April 2020 concerns notice was advice Mr Sherwal had given to three clients during the 9 month period in 2015 / 2016 when he had been an authorised representative of WRM, and to another three clients (and to a former WRM adviser colleague) during the 7 month period in 2017 when he was an authorised representative of Dover . Mr Sherwal had advised all six clients, and the former colleague, in the context of their participation in a “cash rebate” procedure.
ASIC elaborated upon its concerns in a 32 page annexure to the 29 April 2020 notice. That elaboration was itself referenced to the contents of some 72 accompanying documents. ASIC’s fundamental concern, as expressed in the notice, was that the “cash rebate” process had involved Mr Sherwal in both promoting, and deriving a personal financial benefit from, unauthorised superannuation fund payments, contrary to Superannuation Industry (Supervision) Act s 68B(1). ASIC regarded Mr Sherwal’s participation in the “cash rebate” process, specifically in the content of the advice he gave to the six specific clients, as demonstrating either a lack of awareness, or a failure to comply with, his obligations and, therefore calling into question both Mr Sherwal’s fitness, and his competence, to provide financial services.
In August and December 2020 Mr Sherwal responded to ASIC’s concerns notice, and provided brief written submissions. In those submissions Mr Sherwal:-
(a)outlined the substance of the history of his financial advice qualifications and activities (see paragraph 1 above),
(b)indicated that his association with Mr Joshua Fuocco, and a “cash rebate” process, dated back to 2012 / 2013 and his first activities as financial planner,
(c)explained that when he had become one of WRM’s authorised representatives (ie., in July 2015), the company already had a “cash rebate” procedure in place,
(d)asserted that, during Mr Sherwal’s time at WRM, Mr Fuocco supervised or “signed off” the cash rebate client transactions;
(e)said that it was only after the activities (in 2015 and 2017) outlined in ASIC’s concerns notice that he had become aware of Mr Joshua Fuocco’s status as a “banned” person (the details of which are set out in the footnotes to paragraph 1(c) above)
(f)attributed the impugned aspects of his client advice to the pressure of work, and limited assistance available, at WRM and Dover,
(g)asserted that whilst he had been adequately trained as an individual financial advisor, WRM[5] and Dover had not provided him with adequate training;
(h)claimed that his client advice was “appropriate given the circumstances and training” provided to him and had been, to his subjective belief, in the best interests of each client;
(i)asserted, that all his client advice had been limited to a 12 month prospective period and that, if he had been given the opportunity, he would, without additional charge, have provided each client with further advice, and would then have been able to remedy any matters that required attention;
(j)nevertheless (and perhaps somewhat inconsistently) conceded that he had failed to (i) provide the particular clients with appropriate advice, (ii) act in their best interests and, (iii) failed to prioritise their interests.
[5]The February 2018 judgment in the WRM proceedings (see paragraphs 23 and 24 below) included findings about serious deficiencies in WRM’s “compliance” arrangements, including dissatisfaction that they would have allowed WRM to “ensure” (see paragraph 13(h)(iv) below) that its authorised representatives were competent and appropriately trained:- see Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd (No 2) [2018] FCA 59 at [49] to [57] & [100] to [113]. However, as Mochinski J pointed out (at [108]) an AFSL holder can be found to have failed to comply with its CorpAct s 912S(1)(ca) obligations even in the absence of affirmative evidence of actual misconduct by any authorised representative, It follows that the obligations of an AFSL holder and its authorised representatives, though related and complementary, are in fact separate. Both that fact, and the fundamental nature of a financial adviser’s “best interests” obligation (see paragraphs 13(m) & 13(n) below), dictate the conclusion that an authorised representative possessing the usually required qualifications and competence, has extremely limited prospects of deflecting personal culpability for a failure to comply with their personal “best interests” obligation.
On 15 December 2020 Mr Sherwal attended, and was legally represented at, an oral hearing with an ASIC delegate. The transcript of that attendance reveals that the hearing took a conversational course and that some of Mr Sherwal’s contributions were not consistently focussed on the substance of ASIC’s concerns. There are also occasional passages where some words appear to have been missed. Both the conversational course of the hearing, and the occasional apparent omissions / inaccuracies, result in some parts of the transcript being not easy to follow. Nevertheless, the thrust of Mr Sherwal’s responses during the December 2020 hearing can be summarised as follows:-
(a)he acknowledged that he had completed formal training as a financial adviser[6] and was generally aware of his basic CorpAct responsibilities, including his obligation, as a financial adviser, to act in each client’s best interests
(b)he attributed his participation in the cash rebate procedure at WRM partly to assurances he was given by Mr Fuocco, partly to the fact that the procedure was already in place when he joined WRM, partly to the pressure to service a large number of clients, and partly to his own interests in having employment and income
(c)he asserted a past subjective belief that he had acted in client’s best interests, but conceded that the cash rebate procedure, when it typically involved clients reducing their superannuation balances, was “just not the right way to help clients”, and was not in the client’s best interests
(d)he acknowledged that proper advice relating to the cash rebate procedure probably should have included encouragement for clients to make additional concessional superannuation contributions,
(e)sought to minimise the significance of that apparent deficiency in his advices by suggesting that it could, or would, have been remedied in subsequent annual reviews, had the clients been allowed to follow him after he left WRM
(f)he attributed his continued participation in a cash rebate procedure after leaving WRM, and taking up appointment as an authorised representative of Dover, to assurances Dover gave him that it was a permissible process
(g)asserted that he had not used the cash rebate procedure during his time as an authorised representative of AFSL Group Pty Ltd.
[6]In January 2022, after the December 2021 hearing, Mr Sherwal provided ASIC with copies of his 2012 and 2017 financial planning diplomas.
Notwithstanding Mr Sherwal’s financial planning qualifications, and the various acknowledgements he had made in his responses to the 29 April 2020 notice, ASIC did make an order, under CorpAct ss 920A & 920B, banning Mr Sherwal from providing financial services. ASIC notified Mr Sherwal of the decision on 11 June 2021. The formal ASIC order banned Mr Sherwal from providing any financial services, and from performing, in any capacity, “any function involved in the carrying on of a financial services business”. The ban duration was for a period of six years. The substantive grounds for ASIC’s decision were set out in a statement of reasons that accompanied the 11 June 2021 notice. In its reasons ASIC expressed findings that to the following effect:-
(a)Mr Sherwal participated in a “cash rebate scheme” that he ought to have known was unlawful
(b)Mr Sherwal knew / had been warned that the superannuation and insurance “switching” involved resulted in unaffordable premiums that would erode the client’s superannuation balances / targets
(c)Mr Sherwal inadequately advised clients about the costs / risks involved in the “switching” that was part of the “cash rebate” scheme
(a)clients were “over insured”
(b)Mr Sherwal overcharged clients.
The ultimate substance of the grounds for ASIC’s 11 June 2021 decision was that
(a)Mr Sherwal had “put” the six specified clients into “the cash rebate scheme” and, in so doing, had failed to prioritise, and act in, their best interests[7]
(b)Mr Sherwal’s participation in the “cash rebate” procedure, particularly where he ought to have known it was unlawful, and where insurance commissions were properly payable to the client’s super fund, gave ASIC reason to believe that he was not a fit and proper person to provide financial services, and also to believe that he was likely to contravene a financial services law.
[7]More fully stated, ASIC found that Mr Sherwal had not complied with the following specific statutory obligations:- (i) best interests (CorpAct s 961B); (ii) appropriate advice (CorpAct s 961G); (iii) priority of client interests (CorpAct s 961J), (iv) adequate superannuation “switching” advice (CorpAct s 947D).
Mr Sherwal’s review application
ASIC’s 11 June 2021 order is the subject of the review application Mr Sherwal lodged on 8 July 2021. In that application Mr Sherwal did not dispute ASIC’s findings about the deficiencies in his client advice. Instead, he contested the length of the ban period, principally because of the asserted past influence of WRM and Mr Fuocco, but also because of the acknowledgments and explanations he had provided. Mr Sherwal also objected to the scope of the ban order. The basis of that objection was that the order was not limited to activities involving the provision of financial advice. In the absence of such a limitation, the order would exclude Mr Sherwal from any kind of employment within the financial services industry.
Corporations Act - provisions relating to financial services
The statutory scheme relevant to ASIC’s 11 June 2021 decision is relevantly set out in CorpAct Chapter 7 - Financial services and markets and, more particularly, in Parts 7.1 (ss 760A to 769C) & 7.6 to 7.9 (ss 910A to 1022C). The general objectives of the Chapter are expressed in s 760A - in the following terms:-
760A Object of Chapter
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
CorpAct Part 7.1 contains a range of definitional provisions. They include expansive definitions of “financial services” and “financial services laws”. Part 7.6 (ss 910A to 926B) deals with the licensing of financial services providers, their registration, liabilities and disqualification. Part 7.7 (ss 940A to 953C) deals with the required kinds and content of financial services information. Part 7.7A (ss 960 to 968 - inserted by legislative amendments that commenced on 1 July 2012[8]) imposes a general best interest obligation in the provision of personal financial advice:- see ss 961B to 961J. Part 7.8 (ss 980A to 993D) deals with general conduct relating to financial products and financial services). Part 7.9 (ss 1010A to 1022C) deals with disclosures required in relation to financial products.
[8] The Corporations Amendment (Future of Financial Advice) Act 2012 Schedule 1.
The CorpAct provisions of principal relevance to the present application are:-
(a)the general requirement for a person to hold an AFSL, or the status of an “authorised representative” of such a licensee, to be able to carry on a “financial services business”, or to be an employee of an entity involved in providing a “financial service” on its behalf:- see CorpAct ss 911A & 766A766D
(b)the prohibition on false claims to have an entitlement to provide financial services:- see CorpAct s 911C
(c)the requirement of an AFSL holder to (i) “do all things necessary to ensure” the efficient, honest and fair provision of their financial services, (ii) have in place “adequate arrangements” to manage conflicts of interest, (iii) comply with “financial services laws”, (iv) comply with their licence conditions (conditions that typically include ensuring the competence, training and individual assessment, of anyone who provides “financial product advice” on the licensee’s behalf) and, (v) have in place adequate arrangement to compensate retail clients for any obligation breach:- see CorpAct ss 912A(1)(a), (b), (c), (f) & 912B
(d)the declaration that “financial services laws” relevantly include duties “even if the provision imposing the duty is not an offence provision or a civil penalty provision”:- see CorpAct s 920A(1B)
(e)the requirement of an AFSL holder to report to ASIC any actual or apprehended significant breach of its obligations under s 912A (ie., including compliance with the licence conditions):- see CorpAct s 912D
(f)the authority of an AFSL holder to appoint as an “authorised representative” (and to revoke any such appointment) a person who meets certain stipulated educational and training standards (:- CorpAct ss 916A(3)-(5); 921C(2)
(g)a provision that the stipulated standards include (i) an approved academic qualification, (ii) satisfactory completion of an ASIC examination and, (iii) annual completion of required continuing professional development:- CorpAct s 921B
(h)the requirement of an AFSL holder who appoints a person (an “authorised representative”) to provide financial services on their behalf, to:-
(i)provide an appropriate written authority:- see CorpAct s 916A(1)
(ii)specify the services the person is authorised to provide:- see CorpAct s 916A(2)
(iii)formally notify ASIC of the appointment, its revocation or alteration:- see eg CorpAct s 916F
(iv)take reasonable steps to ensure that its representatives comply with financial services laws:- see CorpAct s 912A(1)(ca)
(v)ensure that its representatives are competent, and adequately trained, to provide their authorised financial services:- see CorpAct s 912A(1)(f)
(i)the general joint and several liability of AFSL holders and representatives, and the potential joint and several liability of licensees for the conduct of their common “representatives”:- see CorpAct s 917A-917F
(j)ASIC’s obligation to maintain a publicly accessible register of AFSL holders, authorised representatives, and persons subject to banning and disqualification orders:- see CorpAct s 922A & 922B
(k)the restriction on the use of certain terms (eg. claims of independence, impartiality or lack of bias) in relation to a financial services business:- see CorpAct s 923A
(l)the general obligation (of AFSL holders and authorised representatives) to provide retail clients with a current “Financial Services Guide”:- see CorpAct ss 941A, 941B, 941C & 941F
(m)the statutory obligation of a person who provides “personal” financial product advice to (i) act in the client’s best interests, (ii) provide appropriate advice to the client, (iii) warn the client where any advice is based on apparently incomplete or inaccurate information and, (iv) give priority to the client’s interests, whenever they conflict with those of the advice provider:- :- see CorpAct ss 961B(1), 961G, 961H & 961J
(n)the exegesis that acting in a client’s “best interest” involves identifying the clients particular objectives, needs and circumstances, and adherence to an objective standard of reasonable expertise, care, investigation and regard to the client’s circumstances:- see CorpAct ss 961B(2) to 961E
(o)the general obligation (of AFSL holders and authorised representatives) to provide retail clients with a formal “Statement of Advice” when they provide “personal advice” to a client:- CorpAct ss 944A-946C. (A person provides “personal advice” when their advice considers (or where a reasonable person might expect the adviser to have considered) the recipient’s “objectives, financial situation and needs”):- see CorpAct ss 766B(3) & (4)
(p)the requirement that an authorised representative’s Statement of Advice to clients include (amongst other things) any information about the representative’s remuneration that “might reasonably be expected to be, or to have been, capable of influencing (the representative) in providing the advice”:- see CorpAct s 947C
(q)a requirement that any recommendation to “switch” between financial products must be accompanied by specific additional advice about the costs, and any significant other consequences, of implementing the recommendation:- see CorpAct s 947D
(r)the potential client entitlement to compensation for any loss or damage caused by an adviser’s failure to comply with their “best interests” obligations in relation to the provision of “personal advice”:- see CorpAct s 961M.
Corporations Act – ASIC’s power to ban a person from providing financial services
ASIC has a conditional statutory power to ban a person (and specifically a person who was not a licensee) from providing financial services. The power is available where (amongst other things):-
(a)the person becomes insolvent, incurs a conviction for fraud, fails to comply with a financial services law, or is involved in another person’s failure to comply:- see CorpAct s 920A(1)(bb), (c), (e) & (g)
(b)ASIC has reason to believe the person is
(i)not “fit and proper” to provide one or more financial services, control a financial services business, or perform functions as an officer of a financial services business,
(ii)not adequately trained and competent to provide financial services, or to control or perform officer’s functions in, a financial services business ,
(iii)likely to fail to comply with financial services laws:- see CorpAct s 913BB, 920A(1)(d), (da), (f).
A banning order made by ASIC must be published (CorpAct s 920E), and may:-
(a)specify a particular financial service, or the circumstances of its provision
(b)specify particular financial services business functions
(c)extend to any financial services and to any function, involved in carrying on a financial services business,
(d)authorise the performance of specified conduct that would otherwise be subject to the ban,
(e)be expressed to be permanent, or to operate only for a specified period:- see CorpAct s 920(1)-(3).
Failure to comply with a banning order constitutes both an offence and exposes the person to a civil liability:- see Corp Act s 920C(1)-(4).
Where it has made a banning order, ASIC has a statutory authority to vary or cancel a banning order where it is satisfied, because of changed circumstances, that the change is appropriate:- see CorpAct s 920D(1).
Superannuation Industry (Supervision) Act – relevant provisions
The CorpAct definition of “financial services laws” includes any Australian legislation “relating to” the provision of “financial services” (ie., an opinion intended to influence another person’s decision “in relation to a particular financial product”):- see CorpAct ss 761A, 766A & 766B. The amplitude of that definition clearly includes the Superannuation Industry (Supervision) Act 1993 (“SIS Act”).
Under the SIS Act provisions, a person must not “promote” any “scheme” likely to result in non-complying payments being made from a “regulated superannuation fund”.[9] In that context “promote: includes carrying out, facilitating or inducing participation in a “scheme”. Furthermore, the meaning of “scheme” extends to any express or implied agreement, proposal, plan, action or course of conduct”:- see SIS Act s 68B.
[9]The “regulated” status of the superannuation funds relating to the ASIC’s concerns notice was uncontentious in the review proceedings.
A payment from a regulated superannuation fund is a complying payment if it has been made in accordance with prescribed payment standards:- SIS Act ss 31(1) & 68B(1). The prescribed payment standards are set out in the Superannuation Industry (Supervision) Regulations 1994 (“SISReg”) and, in particular, in SISReg Part 6, Division 6.2. The general effect of the prescribed payment standards can be summarised (sufficiently for present purposes) as having the effect that a fund member’s “benefits” (other than “insured benefits”) may only be paid
(a)by being “cashed” in accordance with SISReg 6.18 to 6.27A or Part Part 7A:- SIS Reg 6.17(2)&(2A)
(b)by being rolled over, transferred or allotted, in accordance with SISReg Part 6 Divisions 6.4, 6.5 or 6.7, or Part 7A:- SISReg 6.17(2)&(2A)
(c)in accordance with the Family Law (Superannuation) Regulations 2001:- SISReg 6.17(2B)
(d)as a result of a court forfeiture order under specified legislative provisions:- SIS Reg 6.17(2C)
(e)as a consequence of the member’s death:- SIS Reg 6.17A
(f)on compassionate grounds (including medical treatment, palliative care, home modifications for disability accommodation, prevention of mortgage sale or foreclosure) approved by ASIC or the ATO:- SIS Reg 6.19A.
However, the value of a superannuation fund member’s “benefit” is determined after taking into account permissible charges against the member’s superannuation account. A superannuation fund trustee may charge certain costs against a member’s account. Those permissibly chargeable costs include both financial product advice and also the costs of insurance “relating to” the establishment or operation of the fund:- SIS Act s 99F & SISReg 5.02.
Consistent with that permission, the provision of insurance cover for superannuation fund members may be authorised by a fund’s (statutorily required) investment strategy:- SISReg 4.09(2). Furthermore, since the 2012 introduction of the “MySuper” provisions[10], superannuation funds approved to offer MySuper products have been conditionally required to provide insurance cover for members:- SIS Act s 68AA. Consistent with those provisions, where insurance arrangements provide for “insured benefits” to members, trustees are authorised (typically subject to conditions relating to death, terminal illness or incapacity) to pay those benefits to members:- SISReg 4.07D & Schedule 1.
[10] See the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012.
The elements of the “cash rebate” procedure at WRM
The cash rebate procedure WRM employed was the focus of the Federal Court of Australia proceedings that ASIC brought against three companies in March 2017. The three defendant companies were WRM, Yes FP and Jeca Holdings Pty Ltd (“Jeca”). Mr Fuocco was the sole shareholder of each company and, prior to his May 2016 disqualification, had been their sole director.
ASIC’s Federal Court proceedings culminated, on 5 February 2018, in a range of declarations, injunctions and orders that were made against the various defendants. The substance of the declarations was that (i) Jeca, which operated under the name “Yes FS”, had published misleading advertisements for “loans” and had provided financial services without a licence, (ii) each of the companies had provided misleading information about the “cash rebate” procedure and had provided self interested financial advice that was both inappropriate and not in the clients’ best interests and, (iii) Mr Fuocco had been “knowingly concerned” in the contraventions of the three companies. The substance of the injunctions was to restrain the three companies from offering “cash payments” in connection with financial advice, entering into insurance contracts, or “switching” superannuation fund membership.
The combination of financial advice, superannuation “switching” and insurance contracts provided the essential aspect of the “cash rebate” procedure. The key to WRM’s use of the procedure was the initial step of attracting clients who were interested in obtaining cash funds. This attraction was achieved (at least after about December 2015) through advertising on Jeca’s “Yes FS” web site and other on line platforms. The precise content of this advertising changed over time, but its basic thrust promoted the ability of Yes FS to assist with debt management and, in particular, to provide a “cash flow” without applicants having to satisfy a “conventional credit check”. Some of the content of Jeca’s online advertising conveyed the impression that it provided loans, and inaccurately asserted that Yes FS had, or was affiliated with the holder of, an Australian Credit Licence. Contrary to that impression, at least some of the later versions of Jeca’s advertising stated that it did not provide loans. Nevertheless, the consistent overall thrust of Jeca’s advertising was to appeal to particular kinds of online search enquiries, including searches relating to “cash loans”, “fast cash loans”, “and “no credit check loans”.
Fund seekers who responded to Jeca’s advertising (by completing an online application form) were followed up by "Customer Service Operators" employed by either Jeca Holdings or YesFP. However, before contacting the fund seeker applicant, the Customer Service Operator would send the application to one of WRM’s authorised representatives, and they would obtain insurance quotations for the applicant. Those quotations provided a basis for assessing both the likelihood, and the amount, of any potential “cash rebate”. When a Customer Service Operator contacted a fund seeking applicant, their role was to inform them that the applicant’s superannuation could be used to fund life and disability insurance, that commissions would be paid by insurers in relation to any new or replacement insurance, and that any commission paid by insurers could / would be at least partly "rebated" to provide cash to the applicant.[11] If that information encouraged an applicant to proceed, they would be sent an explanatory email, with copies of a range of documents, including a financial questionnaire, an authorisation and a form of agreement.
[11]The evidence was not entirely clear about the insurance commission payee. In some instances the correspondence suggests that insurance commission was to be paid to Coober Australia Pty Ltd (see T3.31 at ~467, 468). In other instances, the commission was payable to WRM:- see paragraph 30 below. However, and apparently irrespective of the “proper” commission recipient, Coober Australia / Mr Sherwal had a standard practice to “rebate at least 50% insurance commissions to all of our clients” – see Mr Sherwal’s 5 July 2017 email at T3.31 ~466.
The contents of the explanatory email sent to interested enquirers[12] by YesFS changed somewhat over time. However, they typically had the following elements
(a)a statement that YesFS offered a “financial restructure” and did not provide loans or credit
(b)an explanation that the “restructure” involved “recommending changes to your super and insurances”
(c)a statement that “we” charge the enquirer’s superannuation fund a “once-only” fee for the proposed restructure recommendations.
(d)a disclosure that “we receive a commission” for changed insurance[13], and a statement that “we rebate that commission to you”
(e)a statement that any rebate payment was “strictly subject to insurance”
(f)an explanation that the enquirer’s file had been referred to a nominated “Licensed Financial Planner”, because it was necessary that the recommended changes process would have to be “overseen” by the planner
(g)a copy of the financial planner’s financial services guide
(h)a request for identification documents, an authority for disclosure of current superannuation information, a form of financial circumstances questionnaire, a form of medical history disclosure and, forms of agreement relating to the “cash rebate”.
[12]The evidence in ASIC’s 2017 proceedings against WRM suggested that, over time, somewhere between about 33% and 55% of WRM’s enquirers (including those who did actually progress to obtain a Statement of Advice) did not ultimately proceed to complete the “cash rebate” procedure.
[13]In opening submissions at the review hearing ASIC’s counsel referred, perhaps imprecisely, to this commission as a “switching fee”. It was perhaps implicit in that description, and in the “cash rebate” procedure, that the commission would only be paid by a “new” insurer. However, when asked specifically whether commission would have been payable by an existing insurer, in relation to the mere variation of a client’s existing (superannuation funded) insurance contract, ASIC’s counsel was agnostic.
It appears also to have been typical for a copy of each explanatory email to be sent to the nominated financial planner. The evidence certainly included instances where some of these typical explanatory emails both nominated Mr Sherwal as the financial planner, and had been sent to his email address. In addition, in the case of the three WRM clients that were the subject of ASIC’s criticism of Mr Sherwal, each questionnaire actually named Mr Sherwal as the financial adviser for the client.
Consistent with the content of WRM’s explanatory email, it seems also to have been usual for the “financial planner” nominated in the explanatory email, to then contact the client, obtain material details of their financial circumstances, and then prepare (or organise the preparation of) a formal Statement of Advice. Typically, such a Statement of Advice
(a)was explicitly characterised as a “limited” advice, confined to superannuation, personal insurance and investment planning
(b)expressly excluded advice on “debt management”, retirement planning and estate planning
(c)recommended a “switch” from the enquirer’s current superannuation provider to another provider
(d)recommended some form of new or replacement insurance (life, disability or income protection insurance)
(e)disclosed an obligation to inform the client that making additional “non-concessional” contribution was likely to improve the client’s fund balance at retirement[14]
(f)contained a declaration that the financial planner’s “first and foremost” responsibility was to “recognise the important (sic) of the “best interest test”
(g)contained a statement of the financial planners belief that the advice was (i) in the client’s best interest, (ii) appropriate, (iii) likely to satisfy the client’s objectives and, (iii) likely to better the client’s position
(h)included a disclosure of the financial adviser’s employee status, and their eligibility for a performance bonus, limited to a maximum of 10% of the advice fee.
[14]It is notable that this disclosure (i) stopped short of positive advice to make any additional contribution, (ii) did not attempt any quantification of the potential benefit of additional contributions and, (iii) perhaps most significantly, did not address “concessional” contributions.
Where the cash rebate procedure was fully implemented:-
(a)the WRM / Yes FS client “switched” to a new superannuation fund
(b)the new fund paid WRM a fee for providing the financial advice to the client;
(c)the client acquired “new” (life, disability or income protection) insurance
(d)the “new” insurer paid a commission to WRM
(e)WRM paid a referral fee to Jeca (Yes FS)
(f)the client entered into agreements (i) undertaking not to cancel the new insurance for a specific period (the period varied between 12 and 36 months) and, (ii) agreeing, in the event of premature insurance policy cancellation, to accept liability for any insurance commission reversal, and to repay the amount of any cash rebate
(g)Jeca (Yes FS) paid the cash rebate amount to the applicant client (in some cases part or all of the “rebate” may have been previously advanced to the client, - in anticipation of the proposed insurance and associated commission payment).
The elements of the “cash rebate” procedure at Dover
31.The findings made in the Federal Court proceedings (see paragraphs 23 and 24) record that in June 2016 (ie., shortly after the period of Mr Sherwal’s status as one of its authorised representatives), WRM commissioned an independent compliance review of its operations. Following that review, WRM briefly suspended its “cash rebate” activity and, to some extent, thereafter altered its practices. However, in mid August 2016, WRM submitted breach reports to ASIC. Those reports presumably related (having regard to the later findings in the Federal Court proceedings) to aspects of the “cash rebate” procedure.
In the meantime, as is apparent from the details summarised earlier in these reasons (see paragraph 1(c) above) Mr Sherwal had left WRM. Later in 2016, as the principal of Coober, he worked as an authorised representative of Investors Direct Financial Planning Pty Ltd. In early 2017 he completed his Advanced Diploma in Financial Planning, before joining Dover as an authorised representative:- see paragraphs 1(d) to 1(f) above.
There was no evidence about the nature and extent of Mr Sherwal’s activities during the period of his association with Investors Direct Financial Planning Pty Ltd. Indeed, ASIC was agnostic about, and thus articulated no criticism of, Mr Sherwal’s conduct in that period.
Nor was there specific evidence of the way in which Dover operated.[15] On the one hand, there was nothing to suggest that Dover actively promoted the use of a “cash rebate” procedure. On the other hand, it is clear, and uncontentious, that Mr Sherwal continued to use a "cash rebate" procedure at least during the bulk of the period of his activities during which Coober Australia was one of Dover's authorised representatives.[16]
[15]I have previously noted (see the footnote to paragraph above) that in May 2018 Dover gave ASIC an enforceable undertaking not to carry on a financial services business after 6 July 2018. That undertaking was proffered in response to ASIC’s criticism of Dover’s conduct in promoting and using a “Client Protection Policy”. There was, however, little evidence about the details of ASIC’s criticisms of that policy, and no evidence to establish that ASIC’s criticisms related to the use of a cash rebate procedure.
[16]Mr Sherwal said that he did not use the “cash rebate” procedure after about September 2017. He attributed this date partly to media publicity about the May 2017 interlocutory injunction in ASIC’s Federal Court proceedings against WRM, and partly to information Mr Fuocco gave him about that decision.
In dealing with its clients Dover did use a standard form of “Fact Finder”. It was apparently completed by an “adviser” and then submitted to, and declared to be accurate by, the client. Mr Sherwal used this “Fact Finder” template in his initial dealings with the three “Dover” clients identified by ASIC in its concerns notice, and in its subsequent decision reasons.
None of the three Fact Finders relating to the three “Dover period” clients that were the subject of ASIC’s criticisms expressly stated that client was only seeking a limited scope of financial advice. Neither did they specifically refer to the need for either a loan or a cash rebate. However, they did indicate “short term” objectives that at least suggested a desire to be able to either “consolidate debt” or fund some anticipated expenditure. In relation to the former point, each of the Statements of Advice that Mr Sherwal provided to these three clients began by attributing to each client an agreed acknowledgement that the advice in fact only addressed “risk insurance and superannuation needs”.[17] In relation to the second point, each of the three people had previously been clients of WRM, and had participated in its cash rebate procedure. Consistent with the use of that procedure, each Statement of Advice recommended either new or replacement insurance and, in disclosing the costs of that recommendation, stated the amount of the insurance commission that would be “rebated” to the client.
[17] In contrast to the typical WRM Statement of Advice, there was no reference to “investment planning”.
The evidence about both the extent of Mr Sherwal’s use of the cash rebate procedure, and the mechanism for insurance commission and rebate payments, whilst he was at Dover was not entirely clear. In relation to the extent of the use of the cash rebate procedure, internal emails Mr Sherwal wrote on 3, 5 and 18 July 2017 and 14 August 2017 suggest that (i) the cash rebate procedure was something he regularly used, (ii) it was used to provide clients with short term funding for current debts, (iii) his practice was to rebate “at least 50% insurance commissions to all clients, (iv) at least in some instances, the client would only proceed with the insurance and superannuation advice if the rebate was paid, (v) his then usual advice fee was 10% of a client’s superannuation fund balance, (vi) the advice fee was to ameliorate the risk (to Coober / Mr Sherwal) of commission “claw back” as a consequence of a client cancelling their insurance and, (vi) Mr Sherwal was well aware that the cash rebate could only be made from the commission paid by the insurer, rather than from the “adviser fee” paid by the superannuation trustee from the client’s superannuation account.
In relation to the mechanism for rebate payments, there are some instances, where Dover “paraplanning” personnel conveyed to Mr Sherwal that insurance commission rebates should be paid to the client’s superannuation fund trustee, rather than to the client. (Those instances appear to have prompted ASIC’s apparent adoption of the same view:- see paragraph 9(b) above.) However, the accuracy of this proposition is doubtful. It had not been the practice in place at WRM – see paragraph 30 above. Furthermore, the fact of the subsequent approval (by Dover personnel) of Mr Sherwal’s Statements of Advice indicates that Dover did not maintain the position that commission could not be rebated to clients. Indeed, other evidence shows that commission payments were made, as had been the case at WRM (see paragraph 30 above) and as one would inherently expect, to Dover, rather than to the superannuation fund trustee as the policy holder. In particular, an 18 October 2017 email from a member of Dover’s “compliance team” records that it was Dover that received commission payments, including commission payments relating to insurance for Mr Sherwal’s clients. It is unclear whether Dover was merely the initial recipient of the insurer’s payments, and did not retain any of the commission for its own benefit. In that regard, the emails referred to in the preceding paragraph suggest that insurance commission was ultimately paid to Coober Australia Pty Ltd, and provided the source of funding for the rebates Coober made to clients. Whether that occurred because of a contractual arrangement between Dover and Coober, or reflected a merely informal understanding, there is no evidentiary basis for concluding that the superannuation trustee policy holder was entitled to any part of the insurance commission.
The procedures at AFSL Group
In his August 2020 response to ASIC’s concerns notice Mr Sherwal had disclosed the fact of his role, during 1919, as a financial advisor at AFSL Group. Nevertheless, during the 15 December 2020 hearing ASIC did not articulate any criticism of Mr Sherwal’s conduct during the (June 2019 to June 2020) period when he was employed by (or associated with) AFSL Group Pty Ltd. Nor did ASIC articulate any such criticism in either the contents of its 11 June 2021 decision reasons, or in the 2 December 2021 contention document it lodged in connection with the review proceedings.
However, in written submissions he provided in October and November 2021, and in apparent repetition of his previous assertions of inadequate training at WRM and Dover (see paragraph 6(g) above) Mr Sherwal complained that Mr Fuocco had continued to operate a financial services business. He also provided a witness statement, from a person who had been employed for a short period by AFSL Group and who described his role as that of a financial planner.[18] That witness described his role at AFSL Group as involving informing clients of the available loan, its conditional nature (see paragraph 42 below) and obtaining “fact find” information about the particular client. His role had not included either the preparation, or the scrutiny, of formal Statements of Advice. They were prepared by others and sent direct to the clients. Despite his apparently limited involvement in (and perhaps knowledge of) the formal advice AFSL Group provided, the witness was extremely critical of AFSL Group’s practices, both in relation to it financial advice procedures and the quality of that advice. He described AFSL Group’s activities as directed at providing loans to clients who were “coerced” into rolling over their superannuation and taking out new insurance.
[18]There is some uncertainty about the details of this person’s involvement at AFSL Group. In his witness statement he stated that Mr Fuocco offered him employment at AFSL Group in “early 2019”. He also said that he left after only 5 weeks. ASIC’s “authorised representative” records show that the person was one of AFSL Group’s representatives from 17 January 2020 to 16 February 2020. Those records, whilst they are consistent with a 5 week period of employment, would suggest the witness’ time at AFSL was in 2020, rather than 2019.
Several months later, in March 2022, ASIC provided a witness statement from another of AFSL Group’s financial advisers. In that statement the witness recorded the fact of his engagement by Mr Fuocco, in about April 2019, as a financial adviser at State Advice (see paragraph 1(g) above) and his subsequent role (from June to August 2019, after State Advice stopped operating) as a financial adviser at AFSL Group. He stated that State Advice and AFSL Group had operated essentially the same type of business and had been managed by Mr Fuocco.
The precise nature of the business State Advice and AFSL Group operated was not explored in detail at the hearing, but the brief outline provided by ASIC’s witness seems to have been uncontroversial. Both entities operated in association with Ansa Finance Pty Ltd, another company apparently managed by Mr Fuocco. Ansa Finance’s online advertising solicited loan applicants.[19] However, Ansa’s loans were only available to persons who took out insurance, funded from their superannuation accounts. Ansa’s activities were therefore reminiscent of the activity of Yes FS (see paragraphs 25 & 27(e) above). Applicants who responded to Ansa’s advertising were then contacted by AFSL Group agents or employees, who undertook the explanation and information gathering procedures that were necessary precursors to implementation of the contemplated superannuation “switch” and insurance transactions. Those procedures involved providing “risk” advice (ie. insurance advice) to the applicants, and completing “fact finder” types of questionnaires. In particular, the ASIC witness said that his role had been to “persuade people to take out insurance” and had not included the preparation of formal Statements of Advice. That aspect of AFSL Group’s work was done by an external third party.
[19]The limited evidence suggested that Ansa Finance’s loans were typically for small amounts, typically in the range from about $5,000 to $20,000 – the latter being the absolute maximum.
Mr Sherwal acknowledged that Ansa Finance and AFSL Group’s activities were as outlined in the preceding paragraph. He was insistent that AFSL Group did not provide any cash rebates to clients. However, it is tolerably clear that the superannuation and insurance transaction that were an essential part of the “loan” transaction procedure promoted by Ansa Finance and AFSL Group paralleled the procedure (described earlier in these reasons) that had been used at WRM and, to some extent, at Dover in providing “cash rebates” to clients. Because of that parallel, it is possible that, under the AFSL Group practices, any insurance commissions that were payable (presumably to AFSL Group) contributed, in some unspecified way, to the funding of the loans provided by Ansa Finance. However, apart from an apparent denial by Mr Sherwal, that possibility was not explored in the evidence. Moreover, it does not seem likely to fully explain the AFSL Group / Ansa Finance business model – IF the Ansa loan range was as suggested by ASIC’s witness (up to $20,000) and any insurance commission amounts were similar to those involved at WRM and Dover (ie., apparently less than $8,000 – see the Schedule to these reasons).
The precise nature and extent of Mr Sherwal’s activities during the period of his association with Ansa Finance / AFSL Group was a matter of some contest. ASIC’s witness, who variously described his role as that of “selling insurance” and as a “risk adviser” certainly involved providing financial advice, said Mr Sherwal had become a co-worker in about June 2019 and had performed essentially the same work, including providing advice to clients about their superannuation and insurance arrangements. For his part, Mr Sherwal said that, prior to his November 2019 appointment, he had not provided any personal financial advice. In particular, he denied having advised clients to take out insurance. He said he had only done “back office work” (lodging loan application forms) for Ansa Finance. This controversy is unnecessary to resolve, at least in the absence of specific criticism of Mr Sherwal’s conduct in relation to any particular Ansa Finance / AFSL Group client. It is unnecessary because Mr Sherwal did concede the fact of his November 2019 appointment as an authorised representative of AFSL Group, the fact of his activity, in that capacity, as a financial adviser to Ansa’s loan clients, and the nature of AFSL Group’s activity in relation to both superannuation rollover advice and arranging superannuation funded insurance.
Against that background, but despite the absence of any specific criticism of Mr Sherwal’s conduct in connection with AFSL Group Pty Ptd, during the course of the hearing ASIC put to Mr Sherwal that he had displayed “poor judgment”, in continuing to associate with Mr Fuocco, in the context of the operation of a financial services business that used a “substantially similar business model” to that in place at WRM.
However, the significance of the proposition that AFSL Group Pty Ltd operated a “substantially similar” business model to WRM depends on an accurate understanding and evaluation of the asserted similarity. It also requires an accurate understanding of Mr Fuocco’s role, the actual scope of his May 2018 ban, and the regularity of the status of Ansa Finance and AFSL Group. The evidence, in relation to each of those matters, was limited, but apparently to the following effect:-
(a)Substantial similarity:- Unlike the findings that were made in the WRM proceedings, there was no evidence to justify a conclusion that the advertising for the Ansa Finance / AFSL Group business was misleading. AFSL Group did not provide any “cash rebate”. There was no evidence to elucidate what insurance commissions were generated, or as to how they were dealt with. Finally, and perhaps most importantly Statements of Advice were not prepared by AFSL’s “advisers” such as Mr Sherwal (or the ASIC witness). They were all prepared by a third party, who provided them direct to clients.
(b)The scope of Mr Fuocco’s role:- ASIC’s witness variously, and somewhat imprecisely, described Mr Fuocco as (i) acting like the manager of State Advice / AFSL Group, (ii) being in charge of the day to day running of Ansa Finance, (iii) doing the advertising for Ansa Finance and (iv) “representing” that company. Mr Sherwal, on the other hand, said Mr Fuocco told him that he was the marketing manager for Ansa Finance.
(c)The scope of the May 2018 banning order:- The order restrained Mr Fuocco from carrying on a financial services business (and any business related to financial products or services). It also restrained him from providing financial product advice and from dealing in financial products. The order did not expressly ban Mr Fuocco from a role as an employee of any particular kind of business.
(d)The status of Ansa Finance:- Ansa Finance had been incorporated in 2009. It changed its name in September 2018, shortly after all its issued shares were acquired by Mr Fuocco’s parents. Since August 2018 it has had a succession of sole directors, none of whom had any substantiated association with Mr Fuocco. Ansa Finance was described by Mr Sherwal as being the holder of an Australian Credit Licence.
(e)The status of AFSL Group:- AFSL Group had been incorporated in June 2002, and changed its name in October 2012. Prior to June 2019 its principal place of business had been in Ascot, Queensland. In June 2019 its principal place of business changed to Mr Fuocco’s residence in Toorak, Victoria. At the same it had a, recently appointed, sole director (the nature of whose connection to Mr Fuocco was not established). Also in June 2019, all of the issued shares in AFSL Group had been acquired by a company of which Mr Fuocco’s father was the sole director and shareholder. AFSL Group Pty Ltd held an AFSL licence as at November 2019 and continued to hold that licence until, at least, February 2022.
The appearance that advice to clients to “switch” superannuation funds, and to obtain new insurance, characterised AFSL’s activities does present a degree of similarity with WRM’s conduct, and that of Mr Sherwal at Dover. Furthermore, the criticisms of Ansa Finance and AFSL Group voiced by each of ASIC and Mr Sherwal’s witnesses, highlight the risk of some financial services law contravention arising in the course of its activities. However, neither that apparent similarity, nor the apparent risk, suffice, given the imprecision of the evidence, and the matters noted in the preceding paragraph, to elevate ASIC’s “poor judgment” criticism into an independent or additional basis for affirming the 11 June 2021 banning decision. That is so, notwithstanding ASIC’s limited success in demonstrating (in written submissions provided after the hearing) that Mr Sherwal knew that Mr Fuocco could no longer “run any more business”. ASIC’s success on this score was limited because (i) Mr Sherwal placed that knowledge as having been imparted to him in about September 2017 (ie., more than a year after Mr Sherwal had left WRM), (ii) the relevant restraint order was not made against Mr Fuocco until February 2018, (iii) the precise content, and meaning, of the February 2018 order was never put to Mr Sherwal and, (iv) Mr Sherwal gave evidence that, before he joined AFSL Mr Fuooco assured him that he had “checked with ASIC” and that there was nothing to preclude Mr Sherwal taking up a role as a financial adviser at AFSL Group.
On the other hand, and despite a degree of imprecision, the evidence does point to a degree of similarity between elements of the “cash rebate” procedure at WRM, and the superannuation “switch” and new insurance transactions encouraged at AFSL Group. Proper regard to that appearance, and to the criticisms and risk referred to in the preceding paragraph, requires the conclusion that Mr Sherwal’s period of association with Ansa Finance and AFSL Group does not provide an evidentiary basis for discounting or contradicting the assessment otherwise appropriate to draw from his earlier conduct whilst (in effect) an authorised representative of WRM and Dover.
The asserted unlawfulness of the “cash rebate” scheme
As I indicated earlier, both ASIC’s 29 April 2020 concerns notice and the 11 June 2021 decision reasons characterised the “cash rebate” scheme as unlawful:- see paragraphs 5, 8(a) & 9(b) above. That characterisation was influenced partly by (i) the inaccurate proposition that insurance commission rebates should have been paid to the superannuation trustee policy holder (see paragraph 38 above) (ii) a description of WRM’s practices as “non-compliant with the financial services laws” (per Mochinsky J in ASIC v Wealth & Risk Management Pty Ltd [2017] FCA 477 at [148]) and, (iii) the view that the practical effect of the scheme was to make, albeit “indirectly”, unauthorised payments from a superannuation fund. This characterisation of the scheme as unlawful, together with the perception that it had, to Mr Sherwal’s knowledge, been misleadingly marketed (at least by WRM) to financially disadvantaged people seeking loan funding, formed the principal basis for ASIC’s concern that Mr Sherwal was not a fit and proper person to provide financial services.
However, the accurate characterisation of activities involved in clients receiving a “rebate” requires a degree of discrimination. Careful regard to the circumstances and reasoning involved in ASIC v Wealth & Risk Management Pty Ltd [2017] FCA 477 (and the subsequent decision in ASIC v Wealth & Risk Management Pty Ltd (No 2) [2018] FCA 59) show that the non-compliance to which Mochinsky J alluded related to (i) the misleading promotion of the “cash rebate” scheme to people whose primary objective was to obtain loan funds (see paragraphs 24 & 25 above) and, (ii) to the inappropriate advice WRM gave to influence clients to participate in the scheme. Conversely, nothing in Mochinsky J’s reasons in either of the two WRM decisions supports the view that the mere fact of providing a partial “rebate” of commission that an insurer paid (in connection with an insurance policy funded by payment from a client’s superannuation benefit account) to the client’s insurance adviser was in any sense unlawful or improper.
Notwithstanding the doubtful accuracy of the proposition that the provision of a “cash rebate” was necessarily unlawful, it was a proposition to which ASIC adhered, perhaps somewhat ambiguously, in its 2 December 2021 contention document. In order to resolve any ambiguity I required ASIC to provide a specific articulation of the basis for the proposition. Subsequently, at the outset of the review hearing, ASIC explicitly disavowed any contention that the mere provision of a cash rebate (funded from commission paid by an insurer to a client’s financial services provider) was in any sense unlawful.
The specific advice complaints – sumary of parameters
Although Mr Sherwal was demonstrably aware (see paragraphs 26 to 29 above) of the basic procedures in place at WRM / Yes FP / Yes FS, and was thus aware of the typical client’s desire to receive a “cash rebate”, ASIC disavowed any contention that he had personally participated in, and had any culpable responsibility for, the promotion of the “cash rebate” procedure. The focus of ASIC’s 11 June 2021 decision, and its submissions in the review proceedings, was on (i) the quality of the advice he had given to six specific clients, (ii) the fees he charged for his advice and, (iii) the assistance he provided to a former WRM colleague in resorting to the “cash rebate” procedure.
The parties co-operated to produce a spreadsheet Table summarising the relevant particulars of the six clients. The spreadsheet Table also included particulars of Mr Sherwal’s former WRM colleague, and those of another person who was a client of Mr Sherwal both at WRM and at Dover. I have simplified, and re-organised, the parties Table, to (i) remove an apparent anomaly in the stated amount of “post advice” superannuation balances and, (ii) differentiate between the WRM and Dover period clients. I have also separately presented the particulars of some clients in relation to whose Statements of Advice ASIC advanced no specific criticism about Mr Sherwal’s conduct. That re-organised Table is Schedule 1 to these reasons.[20]
[20] In the Schedule I have assigned arbitrary identifiers to each of the people concerned.
The information summarised in Schedule 1 provides the basic factual background for the matters discussed in the following sections of these reasons.
Mr Sherwal’s “cash rebate” assistance to his former WRM colleague
Mr Sherwal’s former WRM colleague was the person identified as “K_M” in Schedule 1. He received a “cash rebate” in connection with a Statement of Advice that Mr Sherwal provided on 8 May 2017 and updated on 5 July 2017. On the first of those dates the Federal Court had made interlocutory orders restraining WRM from offering any “cash rebate” to clients. ASIC’s contention was that Mr Sherwal had improperly assisted K_M obtaining a cash rebate, when he knew that K_M was precluded from obtaining a rebate from WRM’s procedures. ASIC asserted that Mr Sherwal’s assistance to K_M demonstrated a serious lack of professionalism and judgment.
K_M’s circumstances, as indicated in Schedule 1 can be summarised as follows:
K_M - SoA elements Sherwal SoA Schedule 1 references May & July 2017 pre post row column Total Life & TPD Insurance cover 0 3,000,000 19 H, J, V & X Income protection cover (pm) 0 9,687 19 L & Z Total insurance premiums 0 5,299 19 O & AB Superannuation balance 12,859 7,560 19 G & S Advice fee 0 19 P Insurance commission 6,094 19 Q Commission rebate 4,250 19 R
Those details indicate that difficulties confront acceptance of ASIC’s contention. K_M had no relevant insurance cover prior to July 2017. He therefore had an objectively sound reason to institute insurance cover that would be funded from his superannuation account. Furthermore, significant additional difficulties confront acceptance of ASIC’s contention. They are (i) this was not a case where K_M changed his superannuation fund, (ii) ASIC ultimately conceded (see paragraph 51 above) that there was nothing unlawful in an adviser providing a cash rebate to a client, (iii) neither K_M nor Mr Sherwal was subject to the May 2017 Federal Court restraining order, (iv) the fact that WRM was restrained from offering or providing a “cash rebate” to clients is irrelevant to the ability of other entities to provide cash rebates funded from insurance commissions.
Having regard to the matters set out in the two preceding paragraphs, the fact of Mr Sherwal’s assistance to K_M provides no basis for criticism of his conduct. ASIC did not articulate any other basis for criticism of Mr Sherwal in relation to his dealings with K_M.
Mr Sherwal’s “cash rebate” assistance to “K-E” - his former WRM client
K_E was one of Mr Sherwal’s former WRM clients. On 26 June 2017, during his period at Dover, Mr Sherwal prepared a further Statement of Advice for K_E. The June 2017 Statement of Advice contemplated K_E receiving a “cash rebate” in connection with a “switch” of both superannuation funds, and insurer. The “switch” Mr Sherwal proposed in the June 2017 Statement of Adcive was away from entities that Mr Sherwal had recommended in an August 2015 Statement of Advice he had provided to K_E.
K_E’s circumstances, as indicated in Schedule 1 can be summarised as follows:-
K_E - SoA elements Sherwal SoA Schedule 1 references Aug-15 Jun-17 row column Total Life & TPD Insurance cover 2,960,000 2,000,000 5 & 18 H, J, V & X Income protection cover (pm) 5,075 5,187 5 & 18 L & Z Total insurance premiums 6,024 4,655 5 & 18 O & AB Premiums as % of SGC 76% 59% 18 E, O & AC Superannuation balance 64,926 54,271 5 & 18 G & S Advice fee 4,400 6,000 5 & 18 P Insurance commission 6,984 5,352 5 & 18 Q Commission rebate not stated 4,000 5 & 18 R
Those details indicate that the effect of Mr Sherwal’s June 2017 proposed advice to K_E was to reduce the level of his life and disability insurance, with a resultant significant reduction in the total premium cost. Despite that appearance the evidence shows that Mr Sherwal’s proposed Statement of Advice to K_E, based on the superannuation “switch” and change of insurer, was a matter of some controversy within Dover.
ASIC’s basic criticism of Mr Sherwal’s conduct in relation to K_E is illustrated by the content of email exchanges (in August and September 2017) between Mr Sherwal and various Dover personnel in relation to his proposed “switch” advice to K_E. This exchange highlighted Dover’s contemporaneous concerns that Mr Sherwal had recommended a “switch” from, rather than an alteration of, existing insurance, in circumstances where (i) there was no apparent insurance cover advantage in changing insurers, (ii) there was no material premium saving in moving to a new insurer, (iii) the proposed new insurance would involve “stepped” premiums and was of uncertain long term benefit to the client, (iii) the proposed level of life insurance cover was excessive and, (v) the proposed $6,000 advice fee was excessive (because the work involved should only have taken about an hour).
In the light of those criticisms, Dover had suggested that Mr Sherwal prepare a new Statement of Advice. Despite apparently acknowledging the force of Dover’s criticism of the cost of the proposed new insurance, Mr Sherwal adhered to his preference that K_E “switch” insurers, and asserted that there was some advantage to the client in the scope of cover offered by the proposed new insurer. But Mr Sherwal’s position was emphatically rejected. In late September 2017 Terry McMaster (Dover’s principal) emphatically rejected the proposal that K_E should “switch” insurer. His response to Mr Sherwal was “no switches permitted – non-negotiable”.
Following that emphatic rejection, Mr Sherwal did not proceed either to issue the June 2017 Statement of Advice, or to prepare a new advice, consistent with Dover’s instruction. Indeed, within a few weeks of Dover’s late September 2017 instruction, Mr Sherwal ended his relationship with Dover:- see paragraph 1(f) above.
The position taken by Mr Mc Master in relation to Mr Sherwal’s proposed advice to K_E followed earlier emails that McMaster had circulated to Dover personnel, in which he had expressed his concern about the advice criticisms ASIC had expressed in a recently released report on life insurance. In those earlier emails Mc Master had encouraged Dover advisers to read the ASIC report, described its contents as “a sobering read” and expressed the hope that “with all our efforts Dover is not one of the offending” financial service providers. Both those earlier emails, and Dover’s specific criticism of Mr Sherwal’s proposed advice to K_E, tend to undermine, and indeed establish as insubstantial, his complaint about inadequate training and supervision during the time of his involvement with Dover as an “authorised representative”:- see paragraphs 6(f) & 6(g) above.
Because the June 2017 Statement of Advice was not actually issued ASIC made no specific assertion that Mr Sherwal had contravened a financial services law in relation to the contents of the proposed advice. In its April 2020 notice of concerns ASIC had characterised Mr Sherwal’s conduct in relation to K_E as an illustration of a continuing attempt to “exploit” “financially disadvantaged and desperate people”. However, that characterisation was not repeated in the June 2021 decision reasons. Indeed, the ASIC delegate accepted that, in relation to his “cash rebate” clients generally, Mr Sherwal had genuinely believed that, by facilitating the client’s access to a “cash” payment, he was giving priority to their best interests. However the delegate considered that such a belief lacked objective foundation, and itself contributed, when regard was had to advice Mr Sherwal had given to other clients, to a conclusion that Mr Sherwal lacked sufficient professionalism and judgment to justify satisfaction that he was a fit and proper person to provide financial services. This was the substantial basis on which, at the review hearing, ASIC ultimately pressed reliance on Mr Sherwal’s proposed June 2017 advice to K_E. I will proceed on substantially the same basis – namely that (i) the Dover’s contemporaneously expressed criticisms of Mr Sherwal’s proposed advice to K_E tend to provide an objective basis for concluding that he failed to act objectively in client’s best interests in relation to the “switch” advice that he gave as a part of their participation in a “cash rebate” transaction, (ii) that objective appearance lends weight to the proposition, apparently conceded by Mr Sherwal (see paragraphs 6(j) & 7(c) above) that he had indeed failed to act in the best interests of his clients.
The “other” WRM clients - whether indicators of a pattern of conduct
ASIC made no specific criticism of Mr Sherwal’s conduct in relation to the five Statements of Advice whose parameters are summarised in Schedule 1 rows 1 to 5. Those five Statements are nevertheless relevant to consider, given ASIC’s contentions not only that Mr Sherwal is not a fit and proper person, but also that it has reason to believe in the likelihood of his future contravention of financial services laws. They are relevant, at least to the extent of considering whether Mr Sherwal’s conduct in relation to the client matters involving specific criticisms, should be treated as aberrant, and not meaningfully informative in the proper resolution of the review application.
Based on the information set out in Schedule 1, the circumstances of the three clients to which those Statements of Advice relate, can relevantly be summarised as follows:-
WRM clients - SoA elements Sherwal SoA Schedule 1 references pre post row column Total Life & TPD Insurance cover A_S 766,000 3,000,000 2 H, J, W & Y M_S 312,000 2,200,000 4 H, J, W & Y K_E 444,000 2,960,000 5 H, J, W & Y Income protection cover (pm) A_S 3,750 4,556 2 L & Z M_S 0 738 4 L & Z K_E 1,000 1,612 5 L & Z Insurance commission A_S 7,626 2 Q M_S 4,439 4 Q K_E 6,984 5 Q Advice fee A_S 5,500 2 P M_S 3,355 4 P K_E 4,400 5 P Total insurance premiums (pa) A_S 7,167 7,215 2 O & AB M_S 745 4,034 4 O & AB K_E 366 6,349 5 O & AB Insurance premium as % of SGC A_S 113% 114% 2 E, O & AB M_S 15% 82% 4 E, O & AB K_E 5% 90% 5 E, O & AB Superannuation balance A_S 60,136 47,663 2 G & S M_S 32,172 24,748 4 G & S K_E 61,886 51,137 5 G & S % reduction in super'n balance A_S 20.74% 2 G & S M_S 23.08% 4 G & S K_E 17.37% 5 G & S Commission rebate A_S not stated 2 R M_S not stated 4 R K_E not stated 5 R
The matters set out in the preceding Table permit the following observations:-
(a)each client substantially increased the amount of their life and tpd insurance cover, following which, their superannuation funded insurance premiums accounted for between 80% and 114% of the superannuation guarantee contribution payments required to be made by their respective employers
(b)in addition to the insurance premiums, each client incurred an advice fee (again funded from their superannuation member’s account) ranging from $3,355 to $5,500
(c)the advice fee and insurance premiums reduced each client’s (already modest) superannuation member balance - by something approximating 20% of the pre-advice account balance
(d)none of the statements of advice explicitly addressed the question of any “cash rebate”, despite disclosure of the fact, and the amount, of the insurance commission payment.
On one view, the fact that each Statement of Advice recommended a substantial increase in each client’s life and cover might be viewed as potentially consistent with pursuit of each client’s best interests. Perhaps that might have been most forcefully argued in the case of M-S, a client who had no income protection insurance. But a number of considerations caution against a sanguine acceptance of that view. First, the characteristic that each Statement of Advice recommended a change of insurers, rather than an increase or variation of existing insurance, when viewed against the background knowledge of WRM’s “cash rebate” procedures, cautions against uncritical acceptance of that possibility. Second, in the case of A_S, the $1.5m life and TPD insurance amount was sought to be justified in the Statement of Advice after an unexplained amount of $468,000 was added to the “capital required” to replace (in the event of total disability) the client’s reported income. That unexplained amount in itself gives rise to some doubt about the quality of the advice, and that doubt is not resolved by observing that, the insurance amounts involved in Mr Sherwal’s later Statements of Advice to the same client, are not readily reconcilable with his September 2015 advice:- see Schedule 1 rows 1, 2 & 23, 24, columns W, Y and H, J, W, Y. There is a similar dissonance between the insurance amounts relating to the client M_S:- see Schedule 1 rows 3, 4 & 25, columns W, Y and H, J, W, Y. There is yet another such dissonance in the recommended insurance amounts in the case of K_E:- see Schedule 1 rows 5 & 18, columns W, Y and H, J, W, Y.
A third consideration is that when regard is had to (i) each client’s modest superannuation balance, (ii) the projected significant decline in that balance, as a result of the advice and, (iii) the fact that the premium cost represented such a high proportion of the amount of each client’s employer funded superannuation guarantee contributions, one would have expected that each Statement of Advice would / should have included reference to the desirability of the client making additional superannuation contributions, to offset the impact of the projected costs of the Advice. But there was no such reference in the Statements of Advice given to A_S and M_S.
In the absence of specific focus on the content and parameters of the advice provided to the three clients identified in paragraph 67 above, it would not be appropriate to regard the considerations to which I have referred as adding to the substance of the criticisms that ASIC advanced in both the June 2021 decision reasons and in its submissions in the review proceedings. Conversely, however, those considerations do not provide an evidentiary basis for concluding that ASIC’s specific criticisms, to the extent that they are otherwise substantiated, should be regarded an instances of merely aberrant departures by Mr Sherwal from the standards of conduct otherwise required of a person authorised to provide financial services.
ASIC’s specific criticisms of Mr Sherwal’s WRM client advice
Earlier in these reasons I set out the typical process by which WRM attracted its clients and, in practical terms, required them to obtain financial advice before they could take advantage of its “cash rebate” procedure:- see paragraphs 25 to 29 above. An incident of the WRM process was that Mr Sherwal became involved with his allocated advice client from a very early stage of their interaction with WRM / Yes FS / Yes FP, and was well aware of both WRM’s business model and the financial circumstances or each of his individual clients.
It is only necessary to supplement those previously stated details with additional information about the typical process by which WRM’s Statements of Advice were prepared, and their typical contents. The process of preparation obviously started with the financial planner’s review of the client’s financial questionnaire, and a subsequent follow up discussion with the client:- see paragraphs 26 and 29 above. Typically, that follow up discussion would involve confirming and / or supplementing the client’s questionnaire responses, disclosure of the proposed advice fee, and then obtaining the client’s formal authorisation to proceed with the preparation of a formal statement of advice. Typically, the form of authorisation in use at WRM included a heading where the client had the option to indicate that the scope of the financial advice they were seeking was limited to specified topics.
Once a client signed their authorisation form, Mr Sherwal would submit a “para planning request”. This was done using a standard, three page WRM template. The template had various options, from which the requesting financial planner had to nominate what was required for the particular client. These options related to (i) the scope of the advice sought was “full” or limited to superannuation and insurance, (ii) the extent of detail required to be provided and, (iii) the fee basis (whether timed, set or asset based). The template also required the requesting financial planner to (i) confirm that they had properly identified each client’s objectives, (ii) provide the client’s personal and financial particulars and, (iii) outline the adviser’s proposed financial product recommendations.
Depending upon the scope and detail indicated in the para planning request, the formal Statement of Advice provided to each client could be a lengthy document, comprising in the vicinity of 50 pages.[21] Typically, each formal Statement of Advice had the features listed earlier in these reasons:- see paragraphs 29(a) to 29(h) above. Each Statement of Advice declared itself to have been prepared by Mr Sherwal (in the case of his clients) and was sent by him with a covering letter. Each Statement of Advice concluded with a form of acknowledgement and authority that was to be completed by each client, and countersigned by Mr Sherwal.
[21]The length and complexity of the Statements of Advice are partly attributable to the inclusion of comparisons and projections that were produced by the use of a third party software comparison program.
ASIC’s specific criticisms of Mr Sherwal in relation to the period of his involvement with WRM were limited to three clients. Those three clients each appear to have (i) completed a financial questionnaire, (ii) discussed their financial circumstances with Mr Sherwal and, (iii) been provided with a formal Statement of Advice. In each case, despite the fact that none of their completed authorisation forms indicated any such limitation, each of their Statements of Advice specifically excluded advice on debt management, retirement planning and estate planning. And declared itself to be limited to superannuation, personal insurance and investment planning. Each Statement of Advice then set out the client’s asserted goals, the requested focus of their financial advice, and a summary of that advice. The primary stated goal was retirement at age 65, sometimes supplemented by a desire to cover debts or own property. Despite any variation in the stated goals, the requested focus of the Statement of Advice was limited to insurance, tax minimisation of insurance costs and “review” of superannuation arrangements. Correspondingly, the advice summary was limited to superannuation rollover, and superannuation funded life, disability and income protection insurance. Apart from some discussion of the investment practices of the recommended superannuation fund, the Statement of Advice did not extend to contain any additional consideration of “investment planning”.
ASIC’s criticisms of the Mr Sherwal’s advice to the client M_R were as follows:-
(a)failure to address both his primary financial goal of obtaining a “small loan”, and his longer term financial goal – of being able to retire comfortably
(b)failure to adequately address the client’s family situation, where the client stated he had no dependants, but had expressed a desire to leave money to a particular family member
(c)mis-stating the cost of the client’s existing insurance (or the fee involved in “switching”)
(d)recommending insurance cover that substantially exceeded M_R’s needs, and involved a cost that would likely preclude achievement of M_R’s longer term objectives
(e)providing advice that resulted in an inappropriate reduction in the value of M_R’s superannuation account
I have derived the following summary of M_R’s circumstances from the financial questionnaire he provided to Mr Sherwal, from Mr Sherwal’s his para planning request document and from the Statement of Advice he provided to M_R.
M_R - SoA elements Sherwal SoA Sched 1 ref pre post row column Age 54 Dependants Divorced - none Income 38,000 9 D Expense surplus 17,793 New Worth (exc super) 1,400 Occupation removalist Life insurance 22,800 450,000 9 H, V TPD insurance 22,800 900,000 9 J, X Total Life & TPD cover 45,600 1,350,000 Income protection cover (pm) 0 0 9 L & Z Insurance commission 4,104 9 Q Advice fee 2,475 9 P Total insurance premiums (pa) 186 3,347 9 O & AB Insurance premium as % of SGC 5% 93% 9 E, O & AB Superannuation balance 12,894 6,953 9 G & S % reduction in super'n balance -46% 9 G & S Commission rebate 3,000 9 R
Those queries of Mr Sherwal’s proposed superannuation and insurance recommendations were raised on the basis that (i) the proposed insurance was unaffordably expensive, (ii) the ongoing superannuation fund fees would increase – albeit only marginally (1% as against 1.03%). The para planning personnel also queried whether Sherwal proposed to charge his (previously asserted as “usual”) 10% adviser fee. Mr Sherwal responded to those queries in an 18 July 2017 email, and provided the following information (i) a “needs analysis” and new insurance quotations (halving the previously quoted costs) (ii) a correction to the superannuation costs assessment, and a corresponding conclusion that the overall costs of the recommended fund would in fact be less than those of the existing fund and, (iii) disclosure of a $10,000 advice fee proposal. In late July 2017 Dover personnel then (i) suggested that the recommended insurance sums be reduced to $500,000 (from the $1.4m proposed by Mr Sherwal) and, (ii) requested justification for the proposed $10,000 advice fee. Mr Sherwal promptly responded, stating that (i) the proposed $1.4m sum insured was justified (by his previously provided needs analysis) and, (ii) his advice fee would remain at $10,000. Then, after further queries from the Dover personnel, Mr Sherwal (i) submitted revised quotations for a $0.5m sum insured, (ii) provided additional information about the superannuation fund management costs, (iii) said that his proposed fee was 6.5% of the superannuation fund balance, (iii) asserted that there was an “industry standard” fee rate of 5% of the superannuation fund balance, (iv) noted the previous recent correspondence with Dover about advice fees (see paragraph 127 above) and, (iv) said he would reduce his fee to $5,410, corresponding to 3.5% of the superannuation fund balance.
That information still did not satisfy the Dover personnel. They suggested that the $500,000 insured amount might still be excessive. They also requested substantiating justification for the proposed advice fee. Mr Sherwal promptly provided the requested additional insurance information, but asserted that his proposed fee was appropriate, because 60 hours of his time was involved in providing his advice to P_M. The Dover personnel then elevated their concerns, principally about the proposed advice fee, to Dover’s principal. He responded, contrary to Mr Sherwal’s “60 hour” claim, that the work involved should be able to be done in less than a day. However, whilst cautioning Mr Sherwal that his proposed fee was “very high” (and so high that he doubted the client would accept it) he authorised the release of the Statement of Advice.
That authorisation at least implicitly accepted that the Statement of Advice adequately and accurately addressed the reasoning and details underlying Mr Sherwal’s superannuation “switch” recommendation. The essence of that reasoning was to the same effect as, although more detailed than, that contained in the para planning request. The Statement of Advice contained a fee comparison table, which indicated (consistent with the information that Dover’s para planner’s queries had elicited) that the total costs involved in the switch to the new insurer would involve lower ongoing fees. Notwithstanding that appearance, ASIC’s specific criticism was that P_M’s Statement of Advice contained incorrect information about the fee impact of rolling over his superannuation, and that Mr Sherwal knew about the inaccuracy, because he had included the correct figures in the paraplanning request. A further criticism was that he had omitted information about exclusions or loadings that would apply upon switching. Those criticisms, quite elliptically expressed in the June 2021 decision reasons, apparently drew on the contents of the April 2020 concerns notice. However, as articulated in that document, ASIC’s criticisms were in fact either not substantiated or misconceived. So far at the fee complaint comparison is concerned, there was no demonstrated justification for ASIC’s assertion that the fee information in the para planning request was more accurate than the subsequent information in the Statement of Advice. Secondly, examination of the fee comparison information contained in the Statement of Advice reveals that it was information that originated from Dover’s para planner, and did demonstrate that the costs associated with the superannuation fund “switch” would be lower. So far as concerns ASIC’s oblique reference to “loadings and exclusions”, the content of the notice of concerns gives the impression that it was based on the misconception that M_P had existing insurance, and was being advised to change to a new insurer.
In that context, it is informative to set out a summary of P_M’s circumstances, both as they appeared from the 8 June 2017 Fact Finder, and from the August 2017 Statement of Advice. That summary is evident in the following Table.
P_M - SoA elements Para Plan Sherwal SoA Sched 1 ref 8-Jun-17 14-Aug-17 row column pre post Age 47 Dependants 0 Income 75,000 26 D Expense surplus not stated in SoA New Worth (exc super) -16000 Occupation Plumbing estimator Life insurance 1,400,000 0 500,000 26 H, V TPD insurance 1,400,000 0 500,000 26 J, X Total Life & TPD cover 2,800,000 0 1,000,000 Income protection cover (pm) 4,687 0 4,687 26 L & Z Insurance commission 10,364 6,094 26 Q Advice fee 10,000 5,410 26 P as a % of prior super balance 6.5% 3.5% as a % of post super balance 3.8% Total insurance premiums (pa) 9,013 0 5,299 26 O & AB Insurance premium as % of SGC 126% 74% 26 E, O & AB Insurance premium as % of income 12% 7% Superannuation balance 154,579 154,579 143,870 26 G & S % reduction in super'n balance -7% 26 G & S Commission rebate 1,800 26 R
It is also necessary to note that Mr Sherwal’s TPD and income protection advice recommendations were frustrated by the insurer’s subsequent refusal to accept those policies. That occurred in late September 2017. At that time, Mr Sherwal informed M_P of the refusal, confirmed that he would not charge any additional advice fee and indicated that the previously proposed commission rebate ($5,410) would be reduced to $1,800.
The apparent primary thrust of ASIC’s criticism of the fee Mr Sherwal charged M_P was (as in the case of A_S – see paragraph 127 above) that the cash rebate procedure involved a 10% advice fee that contained some buffer element against the risk of insurance commission “claw back” if clients subsequently cancelled recommended insurance. However, as the Table shows, M_P’s Statement of Advice was completed after the July 2017 fee discussion between Dover and Mr Sherwal. The Table also shows that, having initially proposed a $10,000 advice fee (apparently reflecting 6.5% of M_P’s superannuation balance) Mr Sherwal ultimately charged a $5,410 fee (reflecting 3.5% of the client’s superannuation balance). It obvious that, in pursuing fees in that range Mr Sherwal was moving away from his previously asserted 10% fee. It is also apparent, from the contemporaneous correspondence to which I have referred, that fees within those percentage ranges were within the range of industry practice / reasonable opinion. That is not to say that a percentage based fee was necessarily proper. Indeed, Dover’s previously communicated view that the usual starting reference fee for an uncomplicated advice was in the order of $2,200, necessarily contradicts such a proposition. However, it does tend to remove the substance of ASIC’s primary fee advice criticism. The ultimate basis Mr Sherwal asserted for the fee he proposed to charge M_P was the time he claimed to have spent in attending to the client’s affairs. The reaction of Dover’s chief executive to that assertion gives reason to question its factual accuracy. But there is not, in my opinion, a sufficient evidentiary basis to require an answer that is adverse to Mr Sherwal. Part of the reasoning influencing that opinion is Dover’s ultimate acquiescence in the fee charged. Another part is the absence of full details of M_P’s dealings with Mr Sherwal. Another part is the fact, not explored in the evidence, that M_P’s recommended insurance was ultimately refused by the proposed insurer. A final aspect, related to the latter circumstance, is the apparent absence of full details of the nature and extent of M_P’s dealings with Mr Sherwal.[31]
[31]ASIC”s evidence suggested that although ASIC had obtained the totality of the client files from Dover, only selected material had been provided in the section 37 documents, and had been addressed in the evidence. Part of that selected evidence alluded to the apparent fact that M_P was bankrupt, and at least implied that this may have had some relevance to his failed insurance application.
The details in the Table point to a degree of justification for ASIC’s criticism that Mr Sherwal was prepared to recommend a level of insurance cover that greatly exceeded the M-P’s reasonable needs. That pointer derives from applying the underlying logic discussed earlier (see paragraphs 94 & 137 above) to the insurance recommendations Mr Sherwal originally proposed in his para planning request. The vastly reduced TPD insurance benefit recommendations ultimately included in the 14 August 2017 Statement of Advice were made only in response to the concerns persistently expressed by Dover para planning personnel. Even then, there is a logical basis for concluding that the $500,000 TPD insured sum included in the Statement of Advice was still excessive. That logical basis appears from the following Table.
M_P - TPD benefit analysis Income protection - annual benefit 56,244 Income protection benefit (% of income) 75% Income shortfall (if disabled) 18,756 Proposed retirement age 65 Years to retirement 18 TPD benefit (req'd) - to age 65 337,608 Actual TPD benefit 500,000 TPD benefit "surplus" 162,392 Post retirement years fundable from TPD benefit 9
If the TPD insured sum “surplus” suggested in the immediately preceding Table, were the only basis for criticism of Mr Sherwal’s recommendation, I doubt that there is a sufficient evidentiary foundation for an affirmative conclusion that the recommendation was not in M_P’s best interests. The mere fact of the apparent “surplus” is only one of the relevant considerations. Other permissible considerations would include (i) the client’s subjective intentions in relation to retirement, (ii) an allowance for uncertainty, and (iii) the premium cost significance of the apparent “surplus”, particularly having regard to a client’s overall and longer term objectives.
In that context, it is very material to note that the Dover para planning personnel had persistently expressed concern about both the TPD sum insured and the premium affordability. In particular, they had encouraged Mr Sherwal to pursue “stepped” rather than “level” premium payments. Despite that concern, Mr Sherwal maintained the insurance recommendation involving level premiums – on the dual bases that (i) the overall cost would be less and, (ii) the predictability of level premiums. At the same time he included in the Statement of Advice information indicating that stepped premiums would be less expensive for between 4 and 9 years, depending on the particular type of insurance.
When one bears in mind M_P’s principal objective (of comfortable retirement), his age (47 as at 14 August 2017) and the proportion of his employer funder superannuation contributions that would be absorbed by the recommended insurance premiums 74%) there is force in ASIC’s criticism that appropriate advice to M_P should have included a more disciplined and detailed assessment of the impact of the insurance recommendations (and the advice fee) on M_P’s current and projected superannuation balance. In that context, it is notable and significant that the Statement of Advice, despite concluding with a disclosure about the current concessional superannuation contribution limits, and alluding to possibility of additional superannuation contributions, did not (i) distinguish between concessional and no-concessional contributions, (ii) quantify the permissible amount of M_P’s additional concessional contributions and, (iii) contain any recommendation that it was either “imperative” or even desirable for M_P to make any additional superannuation contributions:- compare the observation in paragraphs 113 & 120 above.
The combined significance of the matters referred to in the preceding paragraphs does not satisfy me that there is a sound evidentiary basis for a conclusion that Mr Sherwal’s Statement of Advice was not in the best interests of M_P. The evidence does not fully reveal the ultimate quantitative significance of the disputable insurance premium costs. Furthermore, despite the persistent anxiety that Mr Sherwal’s originally proposed advice had provoked withing Dover, the final content of his Statement of Advice was approved, and that approval points towards the advice being within the range of reasonable judgment that it did accord with the client’s best interests. On the other hand, and recognising that such a conclusion involves some degree of apparent inconsistency, I am inclined to the view that the Statement of Advice was not sufficiently appropriate for M_P. I am inclined to that view because it did not fully articulate and quantify the consequences of the insurance advice on M_P’s projected superannuation balance. Neither did it adequately advise M_P about the desirability, given his longer term retirement objective, of making additional superannuation contributions. The deficiencies of the advice, in those respects, were primarily those of Mr Sherwal, and they are not relevantly ameliorated by the fact of Dover’s apparent internal approval of the contents of the Statement of Advice. I am also inclined to the view, given the content of Mr Sherwal’s initially proposed fee, and insured sum advice, and his reluctant acquiescence to Dover’s criticisms, that there is reason to believe in M_P’s future failure to comply with financial services laws.
Summary of client Findings
ASIC contended Mr Sherwal had failed to act in his clients best interests in a number of different respects, namely (i) failure to identify the client’s desired advice subject matter, (ii) failure to make appropriate enquiries about the client’s affairs, (iii) failure to adequately investigate or assess potentially suitable products and, (iv) failure to base his advice on the client’s circumstances. These criticisms were expressed at a level of generality, and in their generality, somewhat overlapped. They were advanced solely on the basis of a review of client files, and were not supported by any evidence, of complaint, criticism or dissatisfaction, from any of the individual clients. Furthermore, the section 37 documents ASIC lodged in support of the June 2021 decision appeared to be less extensive than the client file to which it had had regard in the course of its investigation and decision making. Those limitations in the material have resulted in my reservations about the justification for ASIC’s criticisms particularly where they were primarily based on the assertions about the limited nature of the advice provided to the individual clients:- see paragraphs 80, 91, 100, 119, 132, 141 above. Nevertheless, there is an adequate evidentiary basis for concluding that Mr Sherwal failed to act in client’s best interests, where he advised them to place new superannuation funded insurance, as part of their participation in a cash rebate procedure:- see the findings I have made in paragraphs 83 to 86, 95, 104 to 109, 125 & 126 and 138 above. The same evidentiary basis, complemented by the circumstances of Mr Sherwal’s commission entitlement at WRM, and his receipt of commission rebates whilst at Dover, justifies the further conclusion that Mr Sherwal failed to prioritise his client’s interests in the advice he gave. That evidentiary basis is further complemented, and indeed emphasised by the concessions Mr Sherwal made in his various responses to ASIC, and to which his legal representative (necessarily acting on instructions) at the outset of the review proceedings:- see paragraphs 6(j), 7(c) above.[32]
[32]Despite those concessions, in his oral evidence at the review hearing Mr Sherwal asserted that he in fact gave priority to his client’s interests. He asserted that this was probatively established by the “% of SGC” values in the Spreadsheet the parties provided. Those values appear in column AC of Schedule 1. Mr Sherwal was personally responsible for all but one (ie., the value in cell AC:6) of those values. They provide no evidentiary support for, and I reject, his self serving assertion.
There are at least some instances where the content of Mr Sherwal’s advice to clients was not appropriate:- see the findings I have made in paragraphs 89 & 90 and 153 above.
There are also instances where the content of Mr Sherwal’s advice failed to comply with the “additional advice” obligation in CorpAct s 947D:- see the finding I have made in paragraph 109 above.
In four instances ASIC contended that Mr Sherwal’s formal advice had failed to adequately address matters significant to the advice to change the client’s existing superannuation and / or insurance. In two instances, I am not satisfied that ASIC made out the substance of its criticism. Those client matters, and the paragraphs of these reasons where I have addressed them, are as follows:-
(a)M_L – see paragraph 134 above
(b)P_J – see paragraph 145 above.
In one instance, the evidence tends to support ASIC’s criticism, but I am not satisfied that it is sufficiently clear to warrant an affirmative conclusion that Mr Sherwal separately failed to comply with his obligations under CorpAct s 947D. This relates to P_J:- see paragraph 92 above.
The last of the four matters concerns W_L. In that instance, and for those reasons, I am satisfied that it is appropriate to conclude that Mr Sherwal failed to comply with his obligations under CorpAct s 947D:- see paragraph 109 above.
Although specific demonstration of Mr Sherwal’s objective failures focussed principally on only six clients, the evidence established that Mr Sherwal regularly used the cash rebate procedure both at WRM and during his time at Dover. There is no evidentiary basis to conclude that the demonstrated failings in the content of his advice were merely episodic instances of aberrant behaviour in his use of a cash rebate procedure:- see in particular paragraphs 37, 67 to 72 above.
The specifically demonstrated failings in aspects of Mr Sherwal’s financial advice to particular clients, when viewed against both the advice criteria in the template Statements of Advice, and the critical comments he received from Dover personnel about aspects of his practices and advice, justify reasonable apprehension about his underlying competence as an adviser, and about the likelihood of future contravention of financial services laws, were he to have a role as a financial adviser. See paras relating to K_E 59 to 66ff
Mr Sherwal’s submission that deficiencies in the training and support provided to him at WRM and Dover, relevantly diminish the force of criticism of his financial advice, and the justification for apprehension of future financial services laws non-compliance, should not be accepted. There are several reasons for coming to that conclusion.
First of all, despite the concessions to which I have referred, in his oral evidence Mr Sherwal insisted that he had not in fact deviated much from his proper advising role and had in fact complied with all the regulations. This was a positive assertion. It was inconsistent with an assertion of failure whose significance was diminished by a lack of training. Second, no special knowledge or training was required to alert Mr Sherwal to his bests interests obligation, or to his client priority obligation. The Statement of Advice template at WRM was very explicit in its statement of those obligations, and in corresponding declarations of their discharge in relation to the particular client:- see paragraphs 29(f) & 29(g) above. The Dover Statement of Advice template, though less specific, was similar in effect and, more importantly, the Dover procedures (illustrated by the exchanges of correspondence between Mr Sherwal and other Dover personnel) could only have served to bring awareness of those obligations to the forefront of the considerations of a reasonably competent and careful financial adviser:- see paragraphs 112 & 113. In those circumstances Mr Sherwal’s attempt to deflect criticism onto WRM and Dover is unpersuasive. Mr Sherwal’s advice failures were personal failures, in no meaningful sense attributable to lack of knowledge, training or support. If he succumbed into, or was circumstantially influenced to adopt, a formulaic, pressured and uncritical approach to his responsibilities as a financial adviser, that was a personal failure to discharge his basic obligations.
In particular, I am not satisfied that any significance, favourable to Mr Sherwal, should be drawn from his concession that proper advice to cash rebate clients should have included encouragement to make additional superannuation contributions:- see paragraph 7(d) above. Neither am I satisfied that any favourable significance should be given to Mr Sherwal’s assertions, in his oral evidence at the hearing, that (i) the WRM Statements of Advice did include advice to make additional superannuation contributions and, (ii) that the Dover para planning personnel refused to include similar statements, apparently despite his suggestion or complaint.
So far as concerns the concession, the desirability of specific advice to that effect was patently obvious from the specific statements in the WRM Statement of Advice templates:- see paragraph 29(e) above. However, those statements were themselves deficient, in the respects I have previously noted:- see the footnote to paragraph 29 above. Second, the suggestion that Dover personnel rejected the inclusion of superannuation contribution advice in the Dover Statemen of Advice template is difficult to reconcile with, and in my view is relevantly contradicted by, the available documents. Mr Sherwal’s own conduct, in relation to his Statement of Advice to A_S tends to demonstrate that fact, and is eloquent testimony to his contemporaneous awareness of the importance of specific advice in relation to concessional superannuation contributions:- see paragraph 120 above. Against that background, the apparent absence of similarly specific material advice from other (Dover) Statements of Advice, complemented by the implication from his concession, justifies a conclusion that Mr Sherwal’s personal failure to provide advice of that kind, betokens a lack of reliable care and attention in the consideration of client’s affairs.
The specific advice failures I have identified, when viewed against the content of the Statement of Advice templates, give rise to a doubt as to whether Mr Sherwal did subjectively believe that his advice was genuinely in the best interests of clients, and that he had properly accorded priority to the client’s interests:- see for example the matters discussed in paragraphs 37, 85, 94 & 95, 126 and 137 above. However, in its decision reasons ASIC accepted that Mr Shewal had held such a belief, and it is neither necessary nor appropriate to now resolve that doubt adversely to Mr Sherwal.
Nevertheless, the objectively established, though inconsistently conceded, fact of Mr Sherwal’s failure to act in the client’s best interests and to prioritise their interests, does question both Mr Sherwal’s competence and his fitness to provide financial services. So far as the question of technical competence is concerned, I think the better view is that Mr Sherwal has the required qualifications, experience, training and ability to provide financial services, at least in the capacity of an authorised representative of and AFSL holder. I am influenced to that conclusion by (i) his considerable substantive qualifications (see paragraph 1 above), (ii) my overall impression (derived from a reading of all the “fact finder” and advice documents relating to the clients referred to in the Schedule) that he has an appropriate breadth of knowledge, (iii) the impression, derived from the same background information, that his impugned conduct resulted from a circumstantially influenced lack of judgement rather than lack of competence, (iv) Mr Sherwal’s concessions (despite the degree of apparent inconsistency I have noted) about the shortcomings in his advice and conduct.
So far as the question of Mr Sherwal’s underlying fitness is concerned the criterion is the existence of reason to believe in the absence of fitness, rather than positive satisfaction of lack of fitness. Nevertheless, I am inclined to the view that a contemporary finding adverse to Mr Sherwal is not appropriate. I am of that view for these reasons:- (i) much of the thrust of ASIC’s initial criticism of Mr Sherwal’s conduct was based on the asserted unlawfulness of the “cash rebate” procedure, but that criticism was misconceived and ultimately abandoned, (ii) another aspect of the criticism of Mr Sherwal was that he had taken advantage of financially disadvantaged clients, but that criticism, if it was intended to colour the significance of his failure to act in the clients best interests, was undermined by disavowal of any suggestion that Mr Sherwal had played any part in WRM’s marketing of the cash rebate procedure, (iii) another misconceived criticism was directed at the assistance Mr Sherwal provided to K_E (see paragraphs 59 to 66 above), (iv) my finding that Mr Sherwal has the requisite competence and training contributes towards a satisfaction of his fitness to provide financial services, (v) Mr Sherwal’s expressed concessions, together with his disavowal of any future participation in any “cash rebate” procedure, also contribute to satisfaction that, given his competence and training, he is a “proper” person to be permitted to provide financial services, (vi) Mr Sherwal’s last demonstrable failure to comply with a financial services law occurred more than five years ago, (vii) no finding relating to unfitness is necessary to enliven the ban decision discretion and, (viii) the public interest is best served by addressing the question of Mr Sherwal’s fitness to provide financial services in a contemporary (and necessarily future) setting where he is not otherwise subject to an impediment to his ability to provide services of that kind.
The length of the ban period
The findings I have made enliven the statutory ban discretion, and no contrary submission has been advanced on Mr Sherwal’s behalf. His primary complaint was that the six year duration of the June 2021 decision was unwarranted.
The primary consideration in the exercise of the ban discretion are its appropriateness in contributing to fulfillment of the CorpAct Chapter 7 objectives:- see paragraph 11 above. The appropriateness of any particular order must depend on the particular grounds found to enliven the exercise of the ban power, the extent to which the contemplated ban period sanction is regarded as likely to contribute to achievement of the Chapter 7 objectives, the extent to which the contemplated ban would not be consistent with those objectives, and the extent to which, absent a ban, achievement of those objectives would be put at risk.
The multifactor considerations relevant to the selection of an appropriate ban period are extensively discussed in ASIC’s regulatory guide 98. That discussion is amenable to summarisation to the following effect:-
(a)conduct involving mere lack of knowledge or lack of care, involving no substantiated loss to others, might attract a ban period of less than three years, particularly where the person had conceded or displayed awareness of their fault and had not inappropriately sought to deflect responsibility for it:-
(b)conduct involving a disregard for financial services laws, self interested preference for personal advantage (particularly involving repeated conduct) and conduct involving significant loss or disadvantage to others, will likely merit a ban period in the (wide) range between three and ten years:-
(c)a ban period greater than ten years is likely to be appropriate in cases involving dishonest conduct, intentional fraud, deliberate or sustained knowing conventions.
The generalities derived from Regulatory Guide 98 are not prescriptive limitations. Each exercise of the discretion, whilst permissibly informed by those generalities must be informed and disciplined by regard to, and evaluation of, all the relevant circumstances both of the person’s conduct and their current situation at the time the discretion is required to be exercised. ASIC pressed for affirmation of the six year ban period on the bases that Mr Sherwal’s impugned conduct (a) was neither minor, inadvertent nor merely careless and, (b) was better characterised as participation in an unlawful, exploitative scheme that resulted in substantial diminution of client’s modest superannuation means. ASIC contended that the six year period was appropriate because Mr Sherwal’s conduct should be regarded as within the mid range of seriousness contemplated as generally appropriate to ban periods involving more than mere carelessness.
There is a degree of force in ASIC’s contention. As I have found, the deficiencies in Mr Sherwal’s advice involved more than mere carelessness. In making my various findings, I have gone to some length to demonstrate the nature of Mr Sherwal’s errors, the extent to which they result from formulaic reasoning, sometimes lack demonstrably rational justification, and are objectively incompatible with “best interests” assertions and declarations in the Statements of Advice. To that extent, Mr Sherwal’s established financial services laws non-compliance are not matters of mere inadvertence or lack of care. They betray a significant and sustained failure to afford priority to client interests. On the other hand, ASIC’s contention that Mr Sherwal participated in an “unlawful and exploitative cash rebate scheme” has not been established. I say that because (a) as ASIC ultimately acknowledged, the cash rebate procedure was not itself unlawful, (b) ASIC disavowed any contention that Mr Sherwal had any role in the marketing of the “scheme” by WRM, (c) in making the June 2021 decision the ASIC delegate accepted that Mr Sherwal had actually believed he was acting in the particular client’s best interests and, (d) for the reasons previously addressed, I do not consider it appropriate, given the matters addressed in the review proceedings, to make a finding that contradicts that positive finding by the delegate:- see paragraph above.
Necessarily the selection of the appropriate banning period is a matter of impression. Minds can reasonably differ in the degree of significance they attach to particular considerations, and the appearance of consistency, though desirable, is a difficult to achieve ideal. In the present case, there is a rational and reasonable basis for regarding ASIC’s 6 year ban period as appropriate. However, the preferable course, in my view, is to recognise that some aspects of ASIC’s decision reasoning were misconceived, likely influenced ASIC’s selection of the six year period, and should be discounted in exercising the review function. When those matters are discounted, I consider that the preferable course is to impose a five year ban period. Such a period has the co-incidental advantage of being about half the period of the ban that was imposed on Mr Fuocco and, to my impression, being apparently more proportionate to the respectively culpability of the two individuals:- see the footnote to paragraph 1(c) above.
The scope of the ban period
ASIC’s June 2021 ban decision extended to ban Mr Sherwal from “performing any performing any function involved in the carrying on of a financial services business (including as an officer, manager, employee, contractor or in some other capacity)”. This decision was supported partly on the basis of the nature of the contravention findings made against Mr Sherwal, partly on the basis of an express finding that he was not a fit and proper person “to participate in the financial services industry” and partly because of the related proposition that Mr Sherwal had “no place in the financial services industry”.
The scope of the June 2021 ban decision was specifically authorised by CorpAct s 920(1)(d). However it is notable, and in my view significant, that ASIC’s banning power is only available (relevant to the present topic) where ASIC has reason to believe the person is not fit and proper (or lacks training or competence) to perform functions “as an officer” of an entity that carried on a financial services business. It is also significant that neither kind of ban was imposed on Mr Joshua Fuocco in the 2018 Federal Court decision in the WRM proceedings:- see paragraph above.
There may be circumstances where the conduct of a particular person, and the apprehensions about their honesty and future compliance with financial services laws, is so serious that they should be precluded from any function involved in carrying on a financial services business. But those circumstances are likely to be extreme, and they do not exist in the present case. It would be unacceptably ironic, and inappropriate, to preclude Mr Sherwal from “any function” in volved in the carrying on of a financial services business, when no such preclusion applied to Mr Joshua Fuocco, given his apparent role as the influential mind behind the implementation of the cash rebate “scheme”, at least at WRM.
In my view, given the nature of the findings I have made, and the extent of Mr Sherwal’s past activities in the conduct of a financial services business, it is both appropriate and sufficient for achievement of the Chapter 7 objectives if the scope of the ban extends only to the provision of financial services and to the performance of any function “as an officer or manager of an entity that carries on a financial services business”.
Decision
The June 2021 decision is varied in the following respects:-
(a)the period of the ban is reduced from six year to five years
(b)the scope of the ban is reduced to restrain Mr Sherwal from performing any function as an officer or manager of an entity carrying on a financial services business.
I certify that the preceding forty-eight (180) paragraphs are a true copy of the reasons for the decision herein of Senior Member Peter Taylor.
.................................SGD.....................................
Associate
Dated: 7 December 2022
Date(s) of hearing: 9 December 2021; 5 April 2022; 6 April 2022 Solicitors for the Applicant: Midwinters Lawyers Counsel for the Respondent: Ms E Levine Solicitors for the Respondent: Self Represented Schedule 1
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