Duty to act in the best interest of the client
Litigation: 23 March 2019
The Federal Court has ordered that financial advice firm Golden Financial Group (formerly NSG Services) (NSG) pay a civil penalty of $1 million after it failed to act in the best interest of its clients and provide appropriate client specific advice. This was an ASIC test case and its outcome indicates that significant penalties are likely to flow from breaches of this duty.
Duty to act in client's best interest
The duty to act in the client's best interest is set out in section 961B(1) of the Corporations Act. Section 961B(2) sets out the steps required to prove that a provider to satisfy the duty. The section was included within the Act as part of the Future of Financial Advice (FOFA) reforms in 2012 with mandatory compliance required from 1 July 2013.
Proceeding against NSG
ASIC initiated proceedings against NSG in June 2016. The key allegation against NSG was that the firm failed to take reasonable steps to ensure that its advisors complied with the obligation to act in the best interest of the client when providing advice. As a result of this failure to take reasonable steps, advisors were able to give advice in the absence of relevant client information and without appropriate consideration of a client's position and objectives.
Outcome and civil penalty
NSG consented to declarations that it had contravened its obligation in March 2017. Justice Moshinsky accepted that NSG had failed to provide appropriate training, had inadequate policies in relation to compliance, failed to follow the recommendations of internal and external audits, and failed to appropriately review staff performance to ensure compliance. He noted further that commission-only based remuneration increased the risk of advisors not complying with their best interests obligations.
In October, a civil penalty of $1 million and cost orders of $100,000 were imposed ($50,000 for the investigation costs and $50,000 towards the legal proceeding). NSG agreed to the penalty and joint submissions were made to the Court. Factors that Moshinsky J had regard to in deciding if this penalty was appropriate were:
- the fact there was no suggestion that NSG had acted dishonestly;
- during the critical transition period as a result of a personal loss of one of the senior managers in the firm, senior managements was "substantially impaired€;
- NSG co-operated with ASIC throughout, including reaching agreement in relation to declarations of contraventions and penalties; and
- the agreement by NSG to a substantial penalty indicated recognition of the seriousness of its contraventions.
A penalty of $1 million for a firm of NGS' size is significant and indicates that ASIC will push for substantial penalties being imposed. The factors that Moshinsky J considered when deciding whether the penalty was appropriate also appear to indicate that the court may be willing to apply higher penalties.
Take aways
ASIC's approach indicates a focus on processes and procedures when considering potential breaches of the obligation to act in the best interests of the client. The case also highlights ASIC's push to recover investigation costs that result in successful prosecutions as well as the costs of the legal proceeding itself.
Financial services firms should ensure that:
- appropriate training is provided to all staff at regular intervals in relation to their obligations and duties;
- there are checks and balances in place to that require factors set out in section 961B(2) to be addressed in writing; and
- a component of advisors' performance review should address compliance with the duty to act in the best interests of their clients.