Federal Court case provides lessons for AFS licensees

Last year, the Federal Court found that RI Advice Group failed to take reasonable steps to ensure that its former financial adviser, John Doyle, provided appropriate advice to clients, acted in the clients’ best interests and put the clients’ interests ahead of his own. 

Following an ASIC investigation, the company was found to not have had “adequate” processes in place to ensure if its advisers were avoiding quality checks or recommending non-approved products.

In February this year, RI Advice Group was also ordered to pay a $6 million penalty for failing to take reasonable steps to ensure that its authorised representative, John Doyle, provided appropriate financial advice, acted in his clients’ best interests and put clients’ interests ahead of his own.

The Fold partner Simon Carrodus and senior associate Glenjon Aligiannis explained that ASIC commenced proceedings against RI Advice Group Pty Ltd for an alleged failure to comply with section 961L of the Corporations Act 2001 (Cth).

ASIC submitted that RI Advice had failed to take ‘reasonable steps’ to ensure that its authorised representative, Mr John Doyle, complied with his obligation to act in the best interests of the client, provide personal advice that is appropriate for the client, warn the client where personal advice is based on incomplete or inaccurate information and prioritise the client’s interests where there is a conflict of interest between the interests of the adviser and the client, the law firm explained.

“In summary, ASIC’s case against RI Advice was that RI Advice knew or ought to have known that Mr Doyle was not meeting RI Advice’s standards and was not complying with its business rules, and that there was a substantial risk that he was breaching his legal obligations,” the fold said.

“Despite repeated warning signs, RI Advice failed to take any significant steps to investigate Mr Doyle until mid-2015, after ANZ, which owned RI Advice at the time, reviewed a selection of Mr Doyle’s advice files and gave them the worst possible rating on its advice scorecard. As a result, ANZ undertook further file reviews, which identified similar issues with Mr Doyle’s other client.”

By failing to take reasonable steps, RI Advice effectively ensured that Mr Doyle’s clients and their investments would stay with RI Advice as Mr Doyle’s clients would not be made aware of the inappropriate advice they had received; and RI Advice permitted Mr Doyle to keep advising clients where there was a substantial risk that he would breach the best interest obligation, the law firm explained.

“In making its decision, the Federal Court supported the proposition that whilst AFS licensees are legally obliged under section 961L to take reasonable steps to ensure that their representatives (including authorised representatives) comply with sections 961B, 961G, 961H and 961J (Relevant Sections), they are not required to take optimal steps in ensuring compliance with those sections,” it said.

“This is a particularly interesting statement from the Federal Court as it creates a scale that the Federal court will use when assessing the steps taken by an AFS licensee to comply with the Relevant Sections.”

The law firm said this scale is divided into four parts:

1. Steps at the higher end, considered "optimal" (read as best practice);
2. Steps which, although not optimal, are reasonable;
3. Steps which are not reasonable in ensuring that representatives comply with the Relevant Sections; and
4. Steps which were not taken by the AFS licensee but, had they been taken, would have been reasonable in ensuring that representatives complied with the Relevant Sections.

“With this in mind, The Fold Legal considers it to be of significant importance for AFS licensees to be able to distinguish between steps that are reasonable, and those that are not reasonable, in ensuring that representatives comply with the relevant sections [and] on an ongoing basis, consider whether a step that was once reasonable may no longer be reasonable as the business evolves, particularly as the business grows or down-sizes,” it said.

“[Licensees should] consider which steps they are not taking, which, had they been taken, may be reasonable in ensuring that their representatives comply with the Relevant Sections.”

The law firm noted that the Federal Court also outlined that the steps an AFS licensee must take to ensure its representatives are complying with the relevant sections are dependent on the specific obligation that the AFS licensee is attempting to comply with.

“This means that what is reasonable in ensuring that a representative complies with the best interest duty may not be reasonable in ensuring that a representative prioritises the client’s interests over their own,” it explained.

“Unlike the safe harbour steps outlined in section 961B(2) of the Corporations Act, there is no clear pathway for compliance for section 961L, which makes it still particularly tricky for AFS licensees to navigate safely.”