Lessons from ASIC v AMP Financial Planning

February 2020
Regulatory & Governance
Disputes & Litigation
Financial Advice
Financial Planning
Regulatory Action

This Federal Court decision, handed down on 5 February 2020, relates to breaches of the Corporations Act arising from the “churning” of insurance policies by an adviser to generate commissions.  The case is interesting, not because of the behaviour of the planner, which was clearly unethical and breached the law, or because AMP was found to be liable as the licensee, but because of a number of issues that are addressed in the judgment that have broader application than the specific circumstances of this case.

For the purposes of this article, the relevant facts are briefly summarised as follows:

February 2013:  Internal investigation identifies a number of “very suspicious” applications for insurance made by the adviser on behalf of clients.

Same period:   AMPFP audit gives the adviser “a green 4” rating (the second highest possible).

September 2014:   Adviser’s authorised representative status revoked.

October 2014:   Internal Issues Panel determines there has been a reportable breach.  Approximately two weeks later, a reconstituted Insurance Panel (with more senior panel members) determines there has been no breach of the law because:

  • “due process” was followed
  • the matter was closed
  • the adviser was terminated
  • the adviser would be reported to ASIC as a “bad apple”.            

November 2014:  AMPFP notifies ASIC of “bad apple” but does not name him and does not mention the scale of the conduct (at this time it was estimated to be 161 clients).

Amongst other things, the case involves the obligations of a licensee to ensure that its authorised representatives comply with certain requirements of the law.  In this case, the authorised representatives were advisers who provided personal advice to retail clients and, as such, were required to comply with the following provisions of the Corporations Act (the following are summaries only of the relevant provisions):

  • 961B:      the advice provider must act in the best interests of the client
  • 961G:      the advice must be appropriate to the client
  • 961J:      in the event of a conflict of interest, the advice provider must give priority to the client’s interests

A corresponding obligation is imposed on the licensee:

     961L:      A financial services licensee must take reasonable steps to ensure that a representative of the licensee complies with sections 961B, 961G and 961J

What does section 961L require?

First, the word “ensure” is forward-looking. It is directed to the taking of steps to achieve compliance with certain statutory norms (including the relevant “best interests” obligations) before any non-compliance has arisen.

Second, section 961L is concerned with the conduct of the licensee (not the representative) and whether the licensee has taken “reasonable steps”.  There is nothing in the section that makes a contravention of the relevant best interests obligations a pre-requisite to a contravention of s 961L (ie a contravention of s 961L may arise even if there has been no contravention of the relevant best interests obligations by a representative).

Third, the relevant best interests obligations to which s 961L refers fall under separate subdivision headings and each prescribe distinct statutory norms of conduct for the providers of financial advice.  Although the obligations relate to one another and breach of one may amount to a breach of another, their particular content and focus differs.  For this reason, a licensee may be required to take separate “reasonable steps” in respect of each underlying “best interests” obligation of the representatives.

The third point means that there can be a number of related contraventions arising from the same circumstances.  This was an issue that the Court had to consider because the number of contraventions that the licensee had committed affects the maximum penalty that can be imposed.  In the case of a corporation, the maximum penalty is $1m for each contravention of section 961L.

ASIC argued that section 961L requires the licensee to be alive to the possibility of non-compliance each and every time a representative provides advice and to calibrate the steps taken having regard to their knowledge of the particular circumstances.

ASIC’s approach would potentially mean that a licensee would breach its obligation under 961L each time a representative breached one of its obligations under 961B, 961G or 961H. In this case, ASIC’s approach would have resulted in 120 contraventions of section 961L (a contravention of each of 961B, 961G and 961H multiplied by 40 clients).  The maximum penalty would be $120m.

AMP, not surprisingly, argued for a different approach that would have resulted in just 2 contraventions.  It argued that particular acts that are connected in their circumstances and linked by a common purpose constitute a single act (similar to the approach taken in criminal law).  And as ASIC had identified two sets of “circumstances” in its case (the first relating to the adviser who was initially identified and the second relating to other advisers who were later identified as having also engaged in “churning”), AMP argued that there were only 2 contraventions of the law. On this basis, the maximum penalty would be $2m.

In fact, the Court found that there had been 6 contraventions of section 961L (although it was initially attracted to the prospect that there had been 18). The 6 contraventions were as follows:

  1. Failing to take reasonable steps to ensure Panganiban (the first adviser who was identified as having “churned”) complied with s961B
  2. Failing to take reasonable steps to ensure Panganiban complied with s961G
  3. Failing to take reasonable steps to ensure Panganiban complied with s961J
  4. Failing to take reasonable steps to ensure that other authorised representatives complied with s961B
  5. Failing to take reasonable steps to ensure that other authorised representatives complied with s961G
  6. Failing to take reasonable steps to ensure that other authorised representatives complied with s961J

The Court also found that AMPFP contravened section 912A(1)(a) [the duty to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly], section 912A(c) [the duty to comply with the financial services laws] and 912A(1)(ca) [the duty to take reasonable steps to ensure that it representatives comply with the financial services laws].  However, at the relevant times, these were not civil penalty provisions.

It is important to note that licensees are required to “take reasonable steps” under a number of provisions in Chapter 7 of the Corporations Act including (for example):

  1. 912A(1)(ca) [to ensure that representatives comply with the financial services laws]
  2. 949A(5) [to ensure an authorised representative provides a general advice warning where relevant]
  3. 963F [to ensure that representatives do not accept conflicted remuneration

This decision reminds us that:

  • licensees need to have in place processes and procedures that satisfy the various obligations to take “reasonable steps” to ensure compliance with the relevant obligations. It is not enough to rely on auditing procedures to identify contraventions after they occur (ie audit processes are insufficient);
  • additional “reasonable steps” may be necessary after a contravention is identified (to identify or avoid additional contraventions);
  • procedures and processes need to be supported and reinforced by a compliance culture.

Interestingly, ASIC did not ask the Court to consider whether AMP contravened the breach reporting obligation under section 912D.  However, the following extract from the judgment makes it pretty clear which way the Court would have gone if it had:

It was evidently obvious to the first Issues Panel that there was a “gap in effectiveness” in being able to “identify and bring to an end any undesirable actions by an adviser”.  In these circumstances, and given the first Issues Panel was of the view “that the matter [was] reportable” to ASIC under s 912D and recommended accordingly, and yet it was apparently thought, by those at the top of the organisation, that it was appropriate to revisit this course, it might be said that this incident raises some important questions.

Coincidentally, Treasury recently released exposure draft legislation (Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC rec 1.6, 2.7, 2.8, 2.9 and 7.2 (Reference checking and information sharing, breach reporting and remediation)) intended to strengthen the breach reporting obligations. Included in the changes would be a requirement to report when the licensee has “…commenced an investigation into whether the financial services licensee has breached a core obligation”, and the breach or likely breach is significant.  The draft legislation also imposes some objective tests that would result in certain breaches being significant by default.  For example, a breach or likely breach of a core obligation is taken to be significant if it constitutes the contravention of a civil penalty provision or is likely to result in loss or damage to clients.

For these purposes, a core obligation is defined to include an obligation under section 912A or 912B and the obligation to comply with certain financial services law.

Clearly, ASIC believes that there is under-reporting of breaches and this legislation, if passed, will almost certainly result in a significant increase in breach notices.

To download the judgment, click here.

Subscribe for news alerts

Sign up for informative emails and blog posts.