Insights / October 31st, 2017

$1 million fine for breach of best interests duty

Future of Financial Advice (FOFA) reforms

Since the introduction of FOFA reforms on 1 July 2013, this is the first civil penalty imposed on a financial services licensee for breaches of best interests duties.

The Court found that during the period July 2013 and August 2015, NSG’s clients were commonly sold insurance and advised to roll over superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements, which Justice Moshinsky regarded as very serious contraventions.

The best interests obligations provide that Australian Financial Services (AFS) Licensees must take reasonable steps to ensure that the best interests of the client are taken into consideration when offering advice, and that resulting advice must be appropriate to the client.

The Court’s declaration was based on systemic deficiencies in NSG’s processes and procedures, which included:

  • insufficient training on legal and regulatory obligations to ensure NSG’s clients received advice which was in their best interests

  • not conducting regular or substantive performance reviews of its representatives

  • inadequacy of NSG’s compliance policies, which did not address its representatives’ legal or regulatory duties, and in any event, were not followed or enforced by NSG

  • an absence of regular internal audits. Further, the external audits conducted identified issues which were not adequately addressed nor recommended changes implemented

  • NSG having a “commission only” remuneration model, which meant that representatives would be paid by way of commission for sales of personal risk insurance products and superannuation rollovers.

ASIC Deputy Chairman Peter Kell said, “This outcome makes clear to the industry the serious consequences of financial services licensees failing to comply with their FOFA obligations. ASIC will continue to pursue licensees who fail to do so.”

AFS Licensees must ensure that they have procedures and processes in place to ensure compliance with their obligations under the FOFA reforms. The severity of this penalty shows that ASIC and the Courts take these obligations very seriously and, with ASIC pursuing further suspected breaches of the best interests duties, Licensees who do not comply risk heavy penalties.

If you need more information, or you require support to comply with your obligations, please contact Hillary Ray in our Financial Services team.

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