“I came here for a good argument!”
— Michael Palin, Monty Python’s “Argument Sketch”
Regulatory action and Deja Vu
When we published our last summary of ASIC enforcement action, we seriously miscalculated advisers’ interest about ASIC and their activities and focus. We’ve previously asserted, against the contrary claims of other, that ASIC is a relatively transparent organisation that openly shares enforcement information.
The popular demand for more curated summaries took us a little by surprise but, desperate for validation, we’ve summarised October to December 2021. To provide additional context, we’ve linked each summary to the original release on the ASIC website.
Again, for everyone’s convenience, we’ve used the date of the ASIC media release as the date of the outcome or enforcement action.
21-278 adviser Banned for giving credit
In October 2021, ASIC banned Melbourne-based adviser for six years.
Financial Adviser, Ashok Sherwal (formerly of Wealth & Risk Management and Dover Financial Advisers) was banned from providing financial services, or performing any function in financial services, for 6 years as a result of his failure to act in the best interests of his clients or “follow fundamental and proper financial advice processes”.
Mr Sherwal funded cash payments to cash-strapped clients by replacing their current superannuation and insurance arrangements with new arrangements; specifically, he churned products to generate fees and commissions from which the “cash payment” was made. Quite apart from the unconscionable conduct, the advice he provided to his clients was generally poorly scoped, inappropriate and detrimental to his clients’ long term interests. Mr Sherwal was found to have prioritised his interests over those of his clients, failed to understand his best interest duty and inappropriately replaced financial products. The significant erosion of their superannuation balances, and these other failures, was seen to be a direct result of “his serious lack of professionalism and judgment.”
TAKE OUT: Solving clients’ needs is not an acceptable justification for conduct that delivers a short term-benefit at the cost of a profound long-term impact. All recommendations have consequences and implications that need to be identified, communicated and properly considered. Given clients’ dependancy on their adviser, professional advisers need to exercise critical judgement and recognise that they are advisers, order-takers. Further, they must demonstrably act in their clients interests and provide appropriate advice in a manner consistent with “the degree of professionalism and judgment demanded of financial advisers”. We can help with reviews and regulatory reporting. If you’re a licensee, consider engaging an external party to do a licensee review, review your compliance arrangements and the technology you use to ensure compliance.
21-290MR the missing link
In November 2021, ASIC banned QLD-based adviser Keith McDermott for three years.
An authorised representative of The FinancialLink Group Pty Ltd, Mr McDermott recommended high-risk investment products to clients that lacked the appropriate investment appetite, knowledge and tolerance. These inappropriate recommendations were, on some occasions, compounded by concentrated investments in these products – magnifying the investment risks to which these clients may have been (unknowingly) subject. So, a broad banning for three years for inappropriate advice, failures to prioritise clients interests, or act in their best interests, and failures to disclose charges, lost benefits and implications.
Interestingly, Mr McDermott is not only banned from providing financial product advice for three years BUT also prohibited from managing, supervising or auditing the provision of financial services or providing training about financial services and products.
TAKE OUT: This should be a clear warning that ASIC’s banning powers will not be so narrowly expressed as they may have been in the past; a banning in respect of financial services can close other avenues of employment. Licensees might also choose to interpret this as a recommendation to subject their trainers, auditors and key managers to the same reference checking protocols they apply to advisers (and for the same reasons). We can certainly help you with reference checking.
21-308MR Dishonest conduct & fake documents
In November 2021, the Downing Local Court a former NSW financial adviser plead guilty to dishonest conduct and the use of fabricated evidence. Sentencing has been reserved until 22 April 2022.
Gordon-based adviser, Mr Ezzat-Daniel Nesseim (Smart Financial Strategies) plead guilty to five criminal offences that mainly, but not exclusively, related to providing false documents, statements and evidence to ASIC to persuade ASIC to modify or cease its inquiries.
The offences carry penalties of up to 10 years imprisonment.
TAKE OUTS: We wont offer you legal advice but, in our experience, errors and failures are seldom as problematic for ASIC as deliberate attempts to conceal errors or failures. If you’re in a similar position, while you might seek to avoid making admissions, ensure that any communications, statements or responses you provide are neither false nor misleading. Perhaps engage an independent third-party to review your proposed responses before you provide them to ASIC.
21-311MR WA Adviser (and his company) charged
In November 2021, Former AMP adviser, David Michael Fong (and his company Fong Financial Planners Pty Ltd) were charged with dishonest conduct. The charges related to conduct that occurred in 2014 and Mr Fong was permanently banned by ASIC in 2017. This specific matter has been adjourned to 3 June 2022 for committal mention.
Prosecuted by the Commonwealth Director of Public Prosecutions, Mr Fong was charged with dishonest conduct such as:
- submitting false information in clients’ insurance applications;
- failing to disclose fees;
- acting without instructions;
- failing to identify, and disclose, relevant material consequences.
TAKE OUTS: You might, after reviewing this matter, consider that regulatory and criminal matters gestate far longer than you might consider reasonable; the corollary might be that apparent ASIC inaction might be anything but. A more interesting aspect of this matter is that maximum penalty that could be applied to an individual for dishonest conduct was either 10 years imprisonment, a fine of $765,000 (or 3x the benefits obtained) or both but the maximum penalty for the corporate entity is either $7,650,000 or 10x the turnover in the proceeding twelve months.
21-312MR the underbelly dress-rehearsal
In November 2021, the Federal Court found (after a three day hearing) that Melissa Caddick and her company, Maliver Pty Ltd, operated without a financial services licence from about October 2012 until about November 2020.
TAKE OUT: No compliance regime can prevent reckless indifference or deliberate non-compliance but, if you are a Licensee, you should take steps to identify conduct of this nature; for example, undertake regular sweeps of social media (and industry sites) to identify uses of your brand, corporate identity or AFSL. Appreciate that both under the FASEA Code of Ethics (Standard 12) and the new breach reporting regime, you have an obligation to the profession to report and escalate to ASIC any material contraventions of the law (regardless of your relationship (if any) with the contravening party).
21-314MR Adviser jailed for deception
Also in November 2021, former Victorian adviser, Ahmed Saad (Saad Wealth Management Pty Ltd), was jailed for obtaining a financial advantage by deception.
While an authorised representative of Apogee Financial Planning Pty Ltd, Mr Saad charged clients one-off advice fees for advice on their superannuation (which he did not, in fact, provide) and paid his clients the fees he received from the Trustee; this is the unlawful early release of superannuation.
TAKE OUTS: The concurrent sentences totalling nine-months, in addition to a permanent ban, might highlight the consequences of 168 contraventions involving over $1,600,000 in fees. This deliberate growth strategy of scaled-misconduct is unlikely to be implemented by many advice professionals, but, consider how similar contraventions could inadvertently occur.
21-345 Bad influence
In December 2021, ASIC addressed #finfluence head-on by seeking orders restraining Tyson Scholz (Influencer @ASXWOLF_TS) from providing financial services without a licence. The matter has been listed for a case management hearing on May 23, 2022.
ASIC sought final and interlocutory orders prohibiting Mr Scholz from promoting or carrying on a financial services business, providing recommendations or receiving, soliciting, transferring or disposing of client funds for recommendations or opinions on shares.
TAKE OUT: We’ve addressed ASIC, social media and influence elsewhere, but it’s worth considering both generally and, specifically, in respect of your marketing strategies and your representatives’ social media activity. BTW TikTok, unlike financial advice associations, has 60% of its members aged under 40.
21-347MR Non-compliance and complicity
Directors, advisers and Responsible Managers should take note of the 14 December 2021 release banning sydney-based financial advisers for five years.
ASIC banned Gerald Cummings (Director and Authorised Representative) and Craig Allen (Director, Authorised Representative and Responsible Manager) from “performing any function involved in the carrying on of a financial services business, and controlling an entity that carries on a financial services business”. Both engaged in misleading and deceptive conduct in relation to checklists on client files (Mr Allen had also audited his own files) and both failed to refund any client overpayments. Further, ASIC found that both demonstrated “prolonged, wide ranging and ongoing incompetence and lacked compliance mentality”.
TAKE OUT: “Trust, and verify” should be a core principle of your compliance arrangements and, consistent with your obligation to act “efficiently, honestly and fairly” your arrangements should be robust, effective and resistant to abuse. Undertake a licensee review on a regular basis to test its operational effectiveness. Be careful about relying on untested attestations. If you are a Responsible Manager, or you appoint Responsible Managers, concentrate on demonstrating the skills, knowledge and expertise to perform the duties of a responsible manager to the standard ASIC require.
21-358 Banned for inappropriate advice
Mr Betalli, an authorised representative of HNW Planning Pty Ltd, was banned because he could not demonstrate that the advice he provided was in the best interests of his clients and was appropriate for them.
It’s common for advisers to rate outcomes over process, but ASIC banned Mr Betalli after finding that he had failed to keep adequate records and gave non-compliant advice documents (that overlooked the basis of his advice). ASIC found it was not reasonable to conclude that the advice was appropriate. ASIC considered that these failures “showed a disregard of compliance obligations and an absence of the competence required to provide one or more financial services.”
TAKE OUT: Former-Distribution Heads may consider that neither poor record keeping nor a disregard of compliance obligations are material business concerns, but ASIC (and indeed most advice professionals) disagree. Review your monitoring and supervision methodology to be more contextual and risk based and ensure that fundamental failures are not internally dismissed as immaterial process issues.
21-261 Banned for BID failures
Just before Christmas 2021, ASIC banned two Tweed-Heads advisers for five and seven years.
Formerly associated with the failed United Wealth Group, James Furnell (Director and Authorised Representative) and Adrian Summers (Director, Authorised Representative and Responsible Manager) were banned from providing any financial services, performing any function involved in the carrying on of a financial services business and controlling an entity that carries on a financial services business. Mr Summers was, in addition, also banned from managing, supervising or auditing the provision of financial services and providing training about financial services or products.
The various failures identified by ASIC include
- failures to act in clients’ best interests by failing to conduct reasonable investigations of products,
- failures to provide appropriate advice,
- engaging in misleading or deceptive conduct by failing to disclose association with product provider,
- engaging in misleading or deceptive conduct by failing to disclose referral fees and misleading clients about product and ongoing fees.
TAKE OUTS: As previously mentioned, even a small number of best interest failures (over a relatively short period) can be disastrous which is why advisers need to ensure that (a) their advice is regularly, robustly and objectively reviewed (b) they properly understand their professional obligations when recommending the replacement of financial products and (c) any identified process failures are quickly rectified and remediated (and conduct failures quickly reported). If you are a Licensee, particularly a small licensee, consider engaging an external party to do a licensee review, review your compliance arrangements and the technology you use to ensure compliance, and pay attention to your financial adequacy and reporting requirements.
There but for the grace of God
There’s no doubt that these situations don’t represent the vast majority of advice businesses, there’s equally no doubt that ASIC will actively pursue contraventions of the best interest duty and related obligations (s961B, s961G, s961H and s961J). While recklessness and deliberate intent were factors in some of these actions, the vast majority of these issues were caused by preventable process failures and easily identifiable contraventions.
Most compliance issues are preventable and easily identifiable, it just requires the willingness and capability to do so. If you need help, reach out to us.