ASIC Enforcement Action – Best Interests Duty and Conflicted Remuneration in the Spotlight

ASIC’s recent enforcement action in the financial advice industry has been targeting firms and advisers who do not meet the best interests duty and the requirements regarding conflicted remuneration set out in the Corporations Act 2001 (Cth).

ASIC’s most recent enforcement report, Report 688 ASIC Enforcement Update July to December 2020 (“Report”) notes that in the period, ASIC has achieved civil penalty outcomes totalling $159.8 million. ASIC considers these outcomes act as a deterrent to others in the industry, signalling that consumers must be treated fairly and that misconduct will be taken seriously by the regulator. 

ASIC continues to apply its “why not litigate” position.  In the financial services space, from the period 1 July to 31 December ASIC recorded 37 financial services related results.  As at 1 January 2021, a total of 61 civil matters were still before the courts. Particularly relevant, are the high number of outcomes achieved in relation to financial advice misconduct – a total of 13.

Case Examples

ASIC has continued its enforcement action into 2021, commencing proceedings against Equiti Financial Services and achieving a banning order in relation to a Hobart-based financial adviser.

ASIC commenced proceedings against Equiti Financial Services in relation to:

  • breaches of the conflicted remuneration provisions, and
  • its failure to provide appropriate financial advice and adhere to the bests interest duty in relation to advice provided to selected clients.

ASIC alleges that the payment of bonuses to three advisers in relation to purchases of property arranged by a related entity of Equiti Financial Services breach the ban on conflicted remuneration as they could reasonably be expected to influence the financial advice provided or the choice of products recommended to retail clients. Further ASIC contends that advice provided by Equiti Financial Services in relation to the establishment of an SMSF and purchase of property through the SMSF was not appropriate or in the best interests of the client.

In a June 2021 media release, ASIC reported it had issued a banning order against an adviser as a result of their failure to act in the best interests of their client by providing inappropriate advice. ASIC found the adviser:

  • recommended a double gearing strategy despite knowing the client had trouble servicing the arrangement;
  • did not have regard to the client’s relevant personal circumstances, including their cash flow position or ability to cover margin calls;
  • failed to consider an exit strategy;
  • failed to consider appropriate personal insurance cover for the client;
  • failed to keep proper records;
  • was not adequately trained; and
  • did not understand her legal and professional obligations as a financial adviser.

Implications for Financial Advice Licensees

It’s worth noting that ASIC can and does conduct reviews of the advice provided to the clients of retail financial product advice providers and the circumstances surrounding the provision of advice, including remuneration paid or received by the adviser.

Licensees should ensure they have adequately assessed their remuneration arrangements, including documenting any adviser performance benefits and how these are structured. Where licensees form part of a group of companies that provide a variety of services to retail clients, close attention must be paid to the structure of the remuneration arrangements and whether such arrangements could reasonably be expected to influence the advice provided to the retail client. In RG246, ASIC refers to the balanced scorecard approach and includes a variety of non-volume based criteria which could be included in evaluating an adviser’s performance benefit. Licensees should remember that if any part of the performance arrangement is volume based, this part is presumed to be conflicted remuneration under s963L of the Corporations Act.

Licensees should also consider reviewing their processes and procedures in place to obtain details regarding a client’s personal circumstances, financial situation and needs in order to meet the best interests duty. This should include a consideration of the advice process, including, but not limited to:

  • How you collect information about your clients;
  • How you document the advice;
  • The provision of any warning regarding the advice;
  • How you prioritise the interests of your clients;
  • Your record keeping processes in relation to research conducted, client correspondence, documentation provided.

Licensees are also responsible for ensuring their representatives are adequately trained and competent to provide financial advice to retail clients. Licensees should review their Continuing Professional Development (“CPD”) Policy, including the CPD plans for all advisers.

Further Reading

ASIC Report 688: ASIC enforcement update July to December 2020

ASIC Regulatory Guide 175: Financial product advisers—Conduct and disclosure (including guidance on the Best Interest Duty obligations)

ASIC Regulatory Guide 246: Conflicted and other banned remuneration

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