“One step ahead of you
stay in motion, keep an open mind”
— Split Enz, “One step ahead”
Suddenly, see more
There’s little doubt that advisers, and licensees, generally fail to accurately assess their regulatory risk.
In most cases, over-estimating their impact and influence, they anticipate imminent regulatory intervention with catastrophic financial and reputation costs.
In other cases, they underestimate the real risks they assume by taking reckless approaches or trivialising compliance.
Whether motivated by conservatism, fear, ignorance or recklessness, too many advisers take positions that work to their, and their clients’, detriment.
It’s reasonable to appreciate regulatory risk, but irrational to allow it to be the prime driver for all decisions.
ASIC are active, but neither capricious nor unpredictable. In fact, we can learn a lot by considering where ASIC are focusing and what matters are important to them.
It may not surprise you to learn that ASIC are still focused on “the big end of town” but you might be surprised why.
1. ASIC and Westpac: Deja vu all over again
We were recently criticised for suggesting that product issuers and institutional licensees should, given their conduct to date, decline to offer suggestions for the reform of the advice industry.
We were criticised for living in the past and re-litigating settled matters. We respectfully disagreed particularly since ASIC had, at the time, commenced six civil penalty proceedings against Westpac in the Federal Court. It’s tempting to dismiss this as a bank issue, but the actions involve allegations against:
- Westpac Banking Corporation
- Advance Asset Management Limited
- Asgard Capital Management Limited
- BT Funds Management Limited
- BT Funds Management No. 2 Limited
- BT Portfolio Services Limited
- Securitor Financial Group Pty Limited
- Magnitude Group Pty Ltd
Importantly, these proceedings, which follow individual ASIC investigations, allege widespread compliance failures across multiple Westpac businesses, that occurred over many years and affected many thousands of consumers.
- Fees for no service: ASIC alleges that Westpac charged over $10 million in advice fees to over 11,000 deceased customers for financial advice services that were not provided.
- General insurance: ASIC alleges that Westpac distributed duplicate and unnecessary insurance policies to over 7,000 customers and sought payment of premiums from customers who had not agreed to take out insurance policies.
- Insurance in super: ASIC alleges that Westpac subsidiary BT Funds Management charged members insurance premiums that included commission payments, despite commissions having been banned under the Future of Financial Advice reforms. Some members also paid commissions to financial advisers via their premiums even though they had elected to have the financial adviser component removed from their account. BT Funds is currently remediating over $12 million to over 8,000 affected members who were incorrectly charged.
- Inadequate fee disclosure: ASIC alleges that Westpac licensees BT Financial Advice, Securitor and Magnitude (all no longer operating) charged ongoing contribution fees for financial advice to at least 25,000 customers without proper disclosure.
- Deregistered company accounts: ASIC alleges that Westpac did not have appropriate processes to manage accounts held in the names of deregistered companies. As a result, Westpac allowed approximately 21,000 deregistered company accounts to remain open. Westpac charged, and continued to charge fees, on deregistered companies and allowed transactions to continue instead of remitting funds to ASIC or the Commonwealth.
- Debt onsale: ASIC alleges that Westpac sold consumer credit card and flexi-loan debt to debt purchasers with incorrect interest rates and, as a result, more than 16,000 customers, some of whom were in financial distress, were overcharged interest. Westpac and/or the debt purchasers have already refunded over $17 million to the affected customers.
- Despite being frequently criticised for its timidity, ASIC has, and continues to, pursue civil actions that are consistent with its broad aims of effective conduct regulation.
- Despite the number of actions, Westpac/BT’s early admission and cooperation are likely to secure it a significant reduction of any penalties sought by ASIC.
- The actions reinforce both the limitations of disclosure and the importance of client consent and engagement.
Further reading – “Fear, surprise and ruthless efficiency: ASIC’s powers”
2. FDS Failures cost NAB $18.5 million
“NAB’s system failures resulted in significant fee disclosure failures over an extended period. This caused harm to customers as the inaccurate information meant they couldn’t make informed decisions about the financial services they were paying for”
— ASIC Deputy Chair, Sarah Court, 21-226MR
In an announcement that would have both thrilled and terrified advisers everywhere, in its media release dated 26 August 2021, ASIC confirmed that Davies J ordered the National Australia Bank to pay $18.5 million for fee disclosure statement failures.
Interestingly, this is the first penalty imposed by the Federal Court for contraventions of this type.
Davies J found that, on numerous occasions, NAB
- charged fees for personal advice without giving customers compliant fee disclosure statements;
- failed to provide fee disclosure statements to clients within the time required;
- made false or misleading representations to clients in fee disclosure statements about the amount clients had paid for services and the services which clients had received.
Beyond the fine and the novelty of the ruling, there are three important aspects to consider:
- NAB’s compliance arrangements were inadequate or ineffective because it lacked the measures, processes and procedures necessary to confirm whether services were provided in accordance with client service agreements, whether its fee disclosure statements were compliant or whether it was prohibited from charging service fees.
- NAB’s early admission (as well as its cooperation, contrition, remorse and remediation) were significant reasons why the final penalty (18.5 million) was significantly less than the penalty sought by ASIC ($40 million).
- Even though NAB has to pay ASIC’s cost, this result reiterates the importance of effective regulatory engagement and the importance of ensuring, on a regular basis, that your compliance arrangements are effective and properly designed.
Further reading – “Review and remediation: make it right”
3. ASIC, AMP and Corporate Superannuation Fees (for no services)
21-191MR confirmed that, on 30 July 202, ASIC commenced civil penalty proceedings in the Federal Court against six AMP entities alleging that they had charged fees for no service on corporate superannuation accounts. The case has been listed on 10 March 2022.
The Federal Court of Australia proceeding allege that the following entities charged advice fees to more than 1,500 customers, and received more than $600,00 in fees, despite being notified that those customers were no longer able to access the relevant advice. The six entities which were, or are, associated with AMP Limited Group include:
- AMP Superannuation Limited;
- AMP Life Limited, which is now part of the Resolution Life Group but was part of AMP when the conduct occurred;
- AMP Financial Planning Proprietary Limited;
- AMP Services Limited;
- Charter Financial Planning Limited; and
- Hillross Financial Services Limited.
In addition, ASIC further alleges that from July 2015 to April 2019, the AMP companies
- deducted financial advice fees from 1,540 customers’ superannuation accounts despite being aware that the customer had left their employer-sponsored superannuation account and therefore could not access the advice for which those fees were paid;
- failed to ensure that a system was in place that did not charge customers who had left their employer-sponsored account; and
- contravened their general obligations as Australian financial services licensees to act efficiently, honestly and fairly.
It’s worth noting that any penalties ordered by the Court will be in addition to the $153.7 million AMP has already paid to over 200,000 customers (21-023MR).
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- By engaging in this conduct, ASIC alleges that the AMP companies contravened both s 12DI(3) of the ASIC Act ss 912A(1)(a) and (c) of the Corporations Act, which might be surprising given the need to establish the intent not to supply services or to supply materially different services (whereas contraventions of s 912A merely requires the act or omission linked to regulated services).
- Given that the acts of representatives, and authorised representatives, can be interpreted as the Licensee’s failure (of potentially a core obligation) consider whether, and to what extent, your monitoring and supervision framework and your breach reporting processes, address this risk.
Further reading – “ASIC Update: Fees for no service”
4. Questionable but not criminal: DPP declines to prosecute AMP
It may have been a false dawn for AMP Limited given the Federal Court proceedings (21-191MR ) but on 16 July 2021, ASIC announced that it had finalised its investigation into AMP Financial Planning and that no further action would be taken.
You may recall that during the course of the Financial Services Royal Commission, concerns were raised in respect of AMP Financial Planning Pty Limited (“AMPFP”) Buyer of Last Resort Policy (“BOLR Policy”) and its impact on adviser conduct.
In the rush of the ‘why not litigate’ philosophy, ASIC commenced an investigation into ‘fees for no service’ and suspected criminal conduct regarding the charging of fees for no service for BOLR benefits in breach of s1041G (prohibition on dishonest conduct) and s1308(2) (prohibition on making misleading statements).
In the wake of what some have described as “regulatory overreach”, ASIC confirmed in 21-173MR that the the Commonwealth Director of Public Prosecutions had decided not to prosecute. ASIC’s announcement no further action will be taken in relation to this investigation seems to reflect the CDPP’s unwillingness to pursue criminal charges for matters with appropriate civil penalties. The CDPP took this position notwithstanding that two briefs of evidence were referred to them in mid-2020.
“The CDPP has now determined, on the basis of the available evidence and weighing the relevant public interest factors, that no charges should be brought for that conduct.”
— 21-173MR ASIC finalises investigation into AMP Financial Planning ‘fees for no service’ criminal conduct
- ASIC have recently publicly confirmed a retreat from the ‘why not litigate’ mantra to re-embracing the negotiated settlements and enforceable undertakings so heavily criticised by Commissioner Hayne. ASIC’s shift in emphasis is often attributed to political pressure and/or regulatory capture, but it may simply reflect the reality that the CDPP lack the resources or will to pursue criminal charges for certain commercial crimes.
- Licensees might infer that, given this approach, ASIC are more likely to pursue civil penalties and negotiated outcomes and therefore Licensees’ regulatory strategies should reflect this new reality.
5. The cost of underinvesting in compliance
“72% of respondents agree on some level that it is more financially viable to invest in a contingency [or remediation] fund than to proactively invest in compliance training.” Only 6% strongly disagreed. Despite this, 91% of respondents agree on some level that their organisation has a culture of compliance. ”
— “Thinking outside the tick box”, Thomson Reuters 2020
Advisers and small licensees are already suffering the consequences of the Australia’s largest banking and financial services institutions’ systemic under-investment in compliance.
The staggering amount of $1.86 billion in compensation paid to customers who suffered loss or detriment, either because of fees for no service misconduct or non-compliant advice by AMP, ANZ, CBA, Macquarie, NAB and Westpac, drove increasing costs, onerous look-back programs and the rapid retreat of the institutional licensees from advice. While their retreat might ultimately facilitate the emergence of an advice profession, it has led led to increased casualties and costs.
The relevant remediation programs to compensate affected customers commenced following two major ASIC reviews focused on (i) the extent of failure by institutions to deliver ongoing advice services to financial advice customers who were paying fees to receive those services; and (ii) how effectively institutions supervised their financial advisers to identify and deal with ‘non-compliant advice’ (i.e., personal advice provided to a retail client by an adviser who did not comply with the relevant conduct obligations in the Corporations Act, such as the obligations to give appropriate advice or to act in the best interests of the clients, at the time the advice was given).
- The costs of remediation – particularly when ancillary and non-financial costs are added – significantly outweigh the immediate benefits from sales-based decision making.
- Review your organisational capacity to ensure that you have adequate resources to quickly identify, escalate and manage misconduct.
- Ensure that your monitoring and supervision framework adequately highlights cultural and conduct failures.
Further Reading – “Contrasting views: Thinking, training and technology”