“that game of consequences to which we all sit down, the hanger-back not least.”
— ASIC Delegate, Robert Louis Stevenson
The cost of “dodgy advice”
Licensees, and advisers, often bemoan “the cost of compliance”.
Thankfully, the resolution of Australian Securities and Investments Commission v RI Advice Group Pty Ltd provides both certainty and clarity; certainty in respect of a licensee’s obligation to have adequate arrangements and clarity about how penalties for these failures will be calculated and apportioned.
Over the past few years, ASIC and former-ANZ licensee, RI Advice, have been engaged in a series of engagements. While the most innovative might be in respect of cyber-security, the prolonged action in respect of authorised representative, Mr John Doyle, and the Licensee’s failure to appropriately monitor and supervise Mr Doyle, is perhaps the most immediately concerning.
We don’t intend to summarise Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2)  FCA 877 but, essentially, Mr Doyle’s non-compliance (and the licensee’s response to his misconduct) raised questions about advisers and Licensees obligations to comply, and ensure compliance, with the best interest duty.
You are, of course, aware that licensees are obliged to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly, but the practical limits of this obligation had never been properly explored (except in clearly defective businesses 18-362MR and 18-140MR).
RI Advice is, and was, an institutional licensee with professional management, an enviable reputation and overseen by ANZ’s group compliance function. For all intents and purposes, they had access to competency and compliance capability far beyond most licensees. However, none of these advantages prevented Moshinsky J from ordering the RI Advice Group to pay a $6 million in pecuniary penalties for Mr Doyle’s inappropriate advice, and RI’s failure to detect and prevent it. Essentially, RI Advice (a former ANZ subsidiary) was found to lack adequate measures, processes and procedures to ensure that the advisers operating under its licence were providing appropriate advice and acting in the best interests of their clients.
Six million reasons to comply
“A financial services licensee must take reasonable steps to ensure that representatives of the licensee comply with sections 961B, 961G, 961H and 961J.”
— s961L Corporations Act
We’ve already addressed both ineffective compliance arrangements and licensee obligations for monitoring and supervision, so we won’t waste time exploring s961L beyond noting that it is a significant obligation and one that extends beyond the minimalism, formalism and tokenism exposed by Commissioner Hayne and ASIC Report 515.
In our licensee reviews, we often need to emphasise the difference between form and substance; the operational effectiveness of compliance arrangements is more important than their formal design. Further, gaps, complacency and work-arounds will emerge over time to undermine compliance arrangements that were both well designed and effective.
Qualifications aside, s961L requires Licensees to ensure that their representatives act in their clients best interests, provide appropriate advice, warn clients and prioritise their clients’ interests over their own. Section 961Q imposes similar obligations on authorised representatives in respect of their own conduct. In terms of penalties, under s1317G(1E)(b) the maximum financial penalty for a corporation contravening s961L is $1,000,000. An individual contravening s961Q can receive a maximum penalty of $200,000.
These are significant financial penalties, but they become even more significant once you realise that s961L contains four distinct obligations (s961B, 961G, 961H and 961J) so a contravention of s961L could, for example, include multiple contraventions. Given their inter-related nature, it can often be difficult to assess precisely how many contraventions occurred.
In this case, ASIC alleged that there were twenty (20) contraventions while RI Advice contended that there were only four (4). Given the $16,000,000 gap between the parties’ positions, it’s no surprise that both parties spent considerable time haggling over the specifics and persuading the others that their contention was correct.
A matter of discretion
“those engaged in trade and commerce must be deterred from the cynical calculation involved in weighing up the risk of penalty against the profits to be made from contravention.”
— Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249
Ultimately, Moshinsky J ordered RI Advice to pay $6,000,000; 50% more than RI Advice offered but 70% less than the maximum penalty that could be sought by ASIC.
John Doyle was ordered to pay $80,000.
If you’re a licensee, or an adviser, you might wonder whether, given the level of discretion allowed, it is possible to understand the penalties you might face. The Corporations Act provides maximums (surely designed for the worst conduct) but how can you accurately quantify the financial risks you face as a result of your own conduct or decisions?
It is important to appreciate that pecuniary penalties are, at their core, personal and general deterrence measures; a penalty should not so prohibitive that its impact is greater than necessary, but nor should it be so insignificant that the penalty is simply seen as the “cost of doing business”. This reconciliation may be as much art as science, but the Courts also need to ensure that final penalty is just and appropriate.
Beyond the totality principle, in the exercise of his discretion, Moshinsky J needed to consider:
- The seriousness of the conduct;
- Whether the conduct was dishonest;
- Whether further contraventions are likely;
- The character of the defendant;
- Whether the defendant intended to deprive persons of funds;
- The quantum of any losses;
- Whether the defendant has shown remorse;
- The defendant’s conduct in the proceedings;
- The capacity of the defendant to pay;
- Whether the penalty will prejudice the rehabilitation of the defendant; and
- Whether a disqualification order has been made that has significant consequences.
- The size of the contravening company;
- The deliberateness of the contravention and the period over which it extended;
- Whether the contravention arose out of the conduct of senior management or at a lower level;
- Whether the contravenor has a corporate culture conducive to compliance as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention; and
- Whether the contravenor has shown a disposition to co-operate with the authorities responsible for the enforcement of the legislation in relation to the contravention.
In this case, Moshinsky J observed that despite numerous failures over two-and-a-half years, RI Advice’s failures were neither discrete failures (as ASIC argued) nor singular failures (as RI Advice asserted). Instead, there were numerous failures over distinct phases and RI Advice’s culpability varied over time. Accordingly, Moshinsky J identified twelve (12) contraventions with a maximum penalty of $12,000,000.
ASIC contended that, based on this methodology, a penalty of $6,000,000 was appropriate. RI Advice argued that $500,000-$1,000,000 was appropriate.
Moshinsky J ordered RI Advice to pay $6,000,000 on the basis that:
- Although RI Advice routinely operated at a loss, it was a substantial company its commission and fee income;
- The fees generated by Mr Doyle’s practice were “modest”;
- RI Advice was, at all relevant times, a wholly owned subsidiary of ANZ;
- The contraventions did not involve dishonesty or deliberate contraventions;
- The problems were caused (or exacerbated) by RI Advice’s “measures, processes and procedures” and cultural failures to refer certain matters to senior management (although the previous judgment noted management’s failure to act on referred matters);
- RI Advice had made substantial remediation efforts and paid compensation to affected clients of over $6,400,000. (Although the remediation program was neither endorsed as accurate nor complete);
- RI Advice’s contraventions were “serious and sustained breaches .. by a sophisticated and experienced licensee”
“The $6 million penalty handed down by the court against RI Advice sends a strong message to financial services licensees to properly monitor the advice given by their advisers to make sure consumers are protected”
Mr Doyle initially sought relief from liability under s1317S but was unsuccessful, in large part, because of “a cavalier attitude to compliance with regulatory requirements and appropriate policies and processes.” With respect to Mr Doyle’s personal liability, Mr Doyle disagreed with ASIC’s submission that there were 52 distinct contraventions to consider. He offered, as an alternative, 13 contraventions being 13 instances of advice (with multiple contraventions).
Moshinsky J, pragmatically and appropriately, identified 52 contraventions (13 instances with four contraventions each) and calculated that the maximum applicable penalty was $10,400,000. [52*$200,000].
Neither ASIC nor Mr Doyle considered that the maximum penalty was appropriate in this case. ASIC proposed $250,000 and Mr Doyle countered with $50,000.
In the end, Moshinsky J ordered Mr Doyle to pay $80,000 on the basis that:
- The admitted conduct was serious and involved recommending complex products to unsophisticated investors and multiple breaches of the best interest duties;
- Mr Doyle is 80 years old, retired from the industry and unlikely to return to practise;
- Mr Doyle received $30,000 fees derived from eight clients;
- Mr Doyle has effectively paid for (or subsidised) the remediation paid to affected clients through funds retained by RI Advice;
- Mr Doyle admitted the contraventions although “rather late in the course of the litigation”.
It will be tempting for some to dismiss this case as simply an inevitable consequence of institutional ownership, poor management and aggressive efforts to grow distribution. Although these are all, no doubt, significant components of RI Advice’s contraventions, it’s important for licensees to consider the broader issues:
- Whether, and to what extent, do your compliance arrangements identify, detect or prevent advisers from circumventing your compliance arrangements? For example, side-stepping pre-vet by failing to submit documents for review or by classifying transactions as “client directed” or “execution only”;
- How, and how effectively, do you limit your advisers to the products listed on your Approved Product List? Can you identify non-APL recommendations or confirm whether specific approval was sought or given?
- Do you appropriately respond to information, or indications, that your advisers (or their staff) are not complying with your measures, processes and procedures? Are your arrangements focused on statutory failures and blind to cultural issues? Are concerns raised and effectively responded to by the Licensee?
- Do you reconcile compliance data with other business information to identify (possible) misconduct? For example, do you reconcile training records and complaints with audit results and adviser income with activity and document production?
- To what extent do you allow para-planning (advice coaches or support staff) to conceal, or mitigate, misconduct or an adviser’s lack of competency?
It would be dangerous to dismiss this case and fail to consider the broad obligations imposed on Licensees and advisers. While you should not over-react, it would be foolish to ignore the significant penalties that (and often are) imposed for compliance failures. While Financial Planning Software providers may continue to display cavalier attitudes to compliance (it is, after all, their raison d’être), both Licensees and advisers need to pay more attention to the design and effectiveness of their compliance arrangements.
Whatever you need, we can help.