10 Lessons From The First FOFA Case | imac legal & compliance


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10 Lessons from the first FOFA case

April 25, 2017 imaclegal 1 Comment

The race to the first post-FOFA ‘best interests’ case has been run and won, with ASIC taking the clear honours. On 30 March 2017, the Federal Court in Melbourne handed down its judgment in Australian Securities and Investments Commission v NSG Services Pty Ltd, in the matter of NSG Services Pty Ltd [2017] FCA 345.

Unfortunately, as the case involved fairly clear-cut poor advice practices and conduct (which are likely to have also have also fallen well-short of the pre-FOFA ‘reasonable basis’ advice requirements) it does not shed too many lights on how the courts will interpret the FOFA rules in more contentious circumstances.

Nonetheless, the case reinforces many of the expectations that ASIC and the courts have. It also includes some useful observations and lessons for financial services providers. In particular, there are many salient lessons for what NOT to do in an advice business. Here is imac legal’s take on the case including some tips on what it means for licensees and advisers.

Background and salient facts

NSG is an AFSL holder. It advised retail clients about and dealt in life risk insurance and superannuation products among other activities. It employed and contracted various representatives, including some ‘authorised representatives’.

NSG’s advice process involved offering prospective clients free financial planning advice and arranging a meeting with an NSG representative. During the initial phone call, an NSG administrative employee and/or an NSG representative asked the prospective client general information about their personal and financial circumstances in order to qualify the prospective client to determine whether it would be worthwhile for them to receive advice in relation to financial products.

If a prospective client agreed to a meeting during the initial phone call, then an NSG representative met with the client in person once, usually at the client’s home.

At the client meeting, the NSG representative would: take instructions (usually via a Fact Finder): take copies of the client’s recent superannuation statements and/or insurance documents as well as identification documents; provide oral advice; and, recommend one or more insurance and/or superannuation products.

The representative did not discuss alternative insurance or superannuation products or provide any comparisons between alternative products and/or the client’s existing products and recommended products. The representative would also get the client to sign incomplete forms and documents, including a Fact Finder, application forms and an Authority to Proceed.

NSG or one of its representatives would then complete the forms and documents them self. Where the client’s signature was required to be witnessed, NSG would at times arrange for the documents to be witnessed despite that witness not having seen the client or witnessed the actual signing by the client. The whole advice process was designed, so the court found, to be undertaken quickly with most of the client instructions being provided at the sole meeting between the client and NSG representative.

Representatives would submit completed documents, notes and quotes to an internal paraplanner who then prepared the SOA. NSG had no checks to ensure the client received the SOA prior to the implementation of the recommended products, or at all. Sometimes fact finds, authorities to proceed and SOA’s all had the same date on them.

Initial and ongoing training

Trainee advisers were provided with three months full-time training to become a representative. Initial training focused ostensibly on sales related skills and techniques. Trainee advisers had to learn a fact-finding script. Initial training did not cover financial products, SOAs or any of an adviser’s legal obligations.

Weekly training sessions were held, however these were focused mainly on sales related activities again and did not cover financial products themselves, SOA’s or any regulatory obligations. FOFA training was covered by three training sessions, each conducted by an external trainer.

NSG did not routinely monitor whether representatives had attended specific training sessions. NSG did not identify deficiencies in knowledge or skills of individual representatives. Nor did it establish annual training plans or keep complete records of training.

Monitoring and supervision

NSG did not conduct regular or substantive reviews of its representatives. It did not conduct regular internal audits or compliance checks on financial advice. While NSG had a monitoring and supervision policy and procedure from February 2014 however this was not followed (nor were other compliance policies). Also, the policy was not in place when FOFA was introduced.

Periodic external reviews were undertaken in relation to particular representatives’ advice as well as NSG’s broader compliance obligations and compliance framework. Each review identified a number of (mostly common) material issues however, most recommendations were never acted on. In addition, between May and December 2013, ASIC conducted a review of a number of client files and found that approximately 90% contained inappropriate advice. In response, NSG told ASIC that it would lodge breach reports in relation to a couple of issues identified, appoint two full-time compliance personnel, undertake a number of other compliance related activities and make some necessary changes to its SOA template. NSG did not do any of the things that it told ASIC it would do.

The Advice Itself

As well as the factors listed above, a number of other facts contributed to NSG and its representatives not meeting the ‘best interests’ and ‘appropriate advice’ obligations. These include the fact that recommended products were sometimes more expensive than a client’s existing products. Also, as one of NSG’s external compliance reviewers, Assured Support, found in its report (which NSG agreed to in its “agreed statement of facts”), client files demonstrated the following issues:

  • SOA’s failed to adequately reflect the information collected and retained in the client file and failed to address the client stated objectives;
  • there was insufficient consideration of whether existing products could deliver an equivalent (or better benefit) to that recommended by the adviser;
  • where a more expensive replacement product was recommended, there was no or inadequate explanation for why this was appropriate for the client;
  • in at least one case, the cost of the recommended insurance monthly premiums was half the client’s monthly superannuation contributions, whereas the client’s main stated financial objective was to retire within 3 to 10 years.


Prior to FOFA, NSG paid its representatives entirely by commission on “sales” for superannuation rollovers and insurance. Although NSG introduced a base salary and performance-based bonus remuneration structure after FOFA started, some representatives were still paid only by way of commission.

What the court decided

Not surprisingly, given the poor conduct identified in the case, NSG agreed to a comprehensive statement of facts relating to the allegations put by ASIC. Reflecting the objectively poor standard of advice and compliance arrangements, NSG also agreed to the orders that ASIC sought as well as numerous declarations.

While it may have been a mere formality, the court found that NSG contravened section 961K(2) (i.e. the civil penalty provisions) of the Corporations Act (the Act) by virtue of the fact that a number of its representatives failed to meet the ‘best interests’ and ‘appropriate advice’ duties in s961B and s961G respectively.

Also, NSG breached section 961L of the Act by failing to take reasonable steps to ensure that its representatives complied with the best interests duty and the obligation to provide appropriate advice to a number of clients.

Interestingly, the court made no direct findings in relation to NSG or its representatives breaching the requirements in section 961H which relates to advice being based on incomplete or inaccurate information. It also made no findings in relation to breaches of section 961J which relate to the obligation of a provider to prioritise a client’s interests where it conflicts with their own. Indeed, these contraventions do not appear to have been alleged or argued. Perhaps that can be put down as a win for NSG’s lawyers!

Similarly, both parties agreed that section 961B is concerned with the process involved in providing advice that is in the best interests of the client whereas section 961G (the appropriate advice provisions) is concerned with the content or substance of that advice. Unfortunately, the court did not find it necessary to reach any conclusions on these matters either.

Something for the Legal Boffins

One of the interesting things that could have come out of the case was in relation to the licensee’s obligations under s961L – i.e. a licensee must take reasonable steps to ensure representatives comply with the best interests, appropriate advice, incomplete information and conflicts priority rules.

The parties had a different view on the application of this particular obligation. ASIC submitted that NSG was liable for contravening section 961L because: its representatives had contravened both the best interests obligation and appropriate advice obligation; NSG had failed to take reasonable steps to prevent those contraventions; and, there was a causal nexus between the two.

NSG, on the other hand, submitted that section 961L requires only consideration of the reasonableness of the conduct (i.e. the steps taken) by NSG. In other words, NSG was saying that it is neither necessary nor sufficient to show a contravention of another relevant provision in order for a licensee to breach its obligations under section 961L.

Ultimately however, the court found that it was not necessary to resolve this point. In any case, the facts did demonstrate a causal relationship between the failure by NSG to take reasonable steps and the contraventions by the NSG representatives of the best interests and appropriate advice duties.

Another aspect of the case that had the potential to provide enlightened guidance was in relation to the safe harbour best interest provisions. In essence, NSG argued that, as a matter of legal construction, it is possible to meet the best interests requirement in section 961B (1) without demonstrating the safe harbour provisions in section 961B (2). While ASIC accepted that it may be possible for a person to satisfy the best interests duty in section 961B (1) even though they do not fall within the safe harbour of subsection 2, they contended that in a “real world” practical sense the safe harbour provisions were likely to cover all the ways of showing that person had complied with the best interests obligation. And, in that way, a failure to satisfy one or more of the limbs of the safe harbour is highly relevant to a court’s assessment of compliance with the best interests duty. However, the court did not find it necessary to make a definitive finding on this point. We will have to wait for judicial guidance on these and other points.

10 Lessons for licensees and advisers

Lesson No 1: Your Advice Processes Matter

Advisers and licensees need to ensure that their advice processes are robust and stand up to scrutiny. They should be designed to facilitate proper fact-finding and consideration of all relevant factors.

They should not be designed ostensibly as a “sales process” that seeks to corral clients into products as soon as possible. Advice processes should be designed with client considerations in mind as well as a consideration of the complexity of your offerings. They should promote engagement and understanding, not uninformed decision making.

Also, they should be designed with the knowledge, skills and experience of a licensee’s representatives in mind. For example, if a licensee deliberately recruits new, inexperienced advisers, then there are advice processes should include additional checks and balances.

Lesson No 2: Conflicts Need to be Identified and Managed

The court found that the commission based salary structures created an incentive for representatives to focus on sales over compliance requirements and a culture in which the best interest and appropriate advice duties were likely to be overlooked. NSG, by its various processes, created a sales environment that is not consistent with a professional’s obligation to always put their client’s interests first.

It is imperative that a licensee identify all potential conflicts that could impact on or influence the advice process or any part of it. Once identified, licensees need to effectively manage those conflicts.

Lesson No 3: Licensees need to have Compliance procedures AND use them

All licensees need written compliance policies and procedures. Of course, the level of detail and complexity a licensee needs will vary depending on the nature, scale and type of business. But it is critical that a licensee is able to demonstrate it has an ongoing compliance program.

However, policies and procedures that just sit on the shelf do not constitute an effective compliance program. Without being used regularly and effectively they are just a waste of money and a risk to you.

In NSG’s case, they had compliance policies and procedures but the evidence was that they were rarely used.

The best way to prove that you are meeting your compliance obligations is to have a structured, ongoing, comprehensive compliance program. An effective compliance program should clearly articulate in writing your regulatory obligations, how you will meet those obligations, and records what you are in fact doing to meet your compliance obligations.

Lesson No. 4: External compliance consultants matter

It is becoming commonplace for courts to take into account and rely on quality reports by external compliance experts on licensees’ compliance with the financial services laws. Both this NSG case and the recent Storm Financial case are examples where the court has referred to and relied on reports and conclusions provided by independent compliance experts.

Also, the courts accept it as common good practice that licensees will regularly engage the services of external compliance providers as a vital tool in measuring their compliance with their regulatory obligations and making improvements.

In NSG’s case, even though they had engaged a number of external compliance experts who had each produced reports highlighting a number of serious compliance issues, NSG failed to take adequate action to implement the recommendations and improve their practices.

Tip: undertake regular external compliance reviews by qualified professionals; act in good faith in implementing their recommendations; demonstrate a compliance culture and real commitment to improving your licence’s compliance practices; treat compliance as a dynamic thing that requires continual review and improvement.

Lesson No 5: Licensees need to think seriously about appointing employees as ‘authorised representatives’

As the case clearly showed, a licensee is responsible, under section 961K, for the conduct of its representatives who breach the best interests, appropriate advice, incomplete or inaccurate information requirements, or conflicts priority rules. But a licensee’s liability under this section does not extend to similar conduct by “authorised” representatives. This is because section 961K deems a licensee to have contravened the section if a representative, other than an authorised representative, contravenes the best interests, appropriate advice, incomplete or inaccurate information requirements, or conflicts priority rules.

Also, when you consider that authorised representatives (as opposed to representatives more generally) are subject to civil penalty under section 961Q if they breach the best interests, appropriate advice, incomplete or inaccurate information requirements or conflicts priority rules, licensees should give serious thought to whether they wish to appoint any employee representatives as authorised representatives or not.

As authorised representatives face potential penalty under section 961Q that other representatives do not, we think there would be serious legal questions to be tried as to why a licensee would expose its employees to potential liability as authorised representatives under section 961Q when it is clear that the employee would not face that liability if they were merely a representative.

Lesson No 6: Licensees need to monitor and supervise the representatives effectively

A licensee’s monitoring and supervision program should be active, ongoing and risk-based (i.e. it should identify and rank high risk activities, products, situations, people and the like and focus greater time and attention on those higher risk areas). It needs to identify and respond to high-risk activities and identify compliance with underlying obligations.

Replacement product advice should typically always be treated as high-risk and monitored accordingly. In NSG’s case, effective monitoring should have stopped the poor advice.

The monitoring and supervision program should be integrated into a licensee’s overall compliance program. And all of the individual components should work together. For example, a breach of the best interests requirement that is identified under the monitoring and supervision activities should feed into a licensee’s breach procedures as well as training requirements.

The monitoring and supervision program should be tailored to the licensee’s particular advice procedures. Importantly, any non-compliance or other issues identified should be acted on and reported, as appropriate.

In imac legal’s experience, the best way to run monitoring and supervision programs is to ensure the right values and objectives are attached to it. For example, client file reviews should not be confronting, they should be designed and accepted as mentoring and learning opportunities.

Lesson No 7: You need to consider more than just one product.

When FOFA was introduced, it was clear that there was now a regulatory obligation to consider more than one financial product when providing personal advice. This is because section 961B (2)(e) provides that if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product, an adviser needs to conduct a reasonable investigation into the “financial products” that might achieve those objectives and needs.

Therefore, licensees and advisers need to have procedures to investigate more than just the one suitable financial product solution. They also need to ensure that there is an effective written audit trail of what activities were undertaken in that investigation and what led to the final recommendation.

Also, on this best interests point, it is worthwhile reiterating that FOFA makes it clear that strategic advice may in fact be the most appropriate advice for a client. This is because of the way the safe harbour test is constructed. That is, a financial product as a solution for a client only needs to be considered where it would be reasonable to do so.

Lesson No 8: Training needs to cover regulatory knowledge as well as other technical and ‘soft’ skills.

Licensees need to ensure that both their induction training and ongoing training covers regulatory obligations and not just product related knowledge, technical skills and other soft skills such as communication and sales techniques.

Licensees should be very aware of the level of skills and experience of the representatives and plan their training (and advice procedures) accordingly.

Lesson No 9: Never make ASIC a Promise you don’t Deliver on.

In NSG’s case, it told ASIC that it was going to do a number of things, including reporting certain behaviour as significant breaches, taking on additional compliance resources, and undertaking various other compliance related activities. It did not do any of those things. Needless to say, NSG made life considerably harder for itself.

Lesson No 10: Culture really does matter.

All the transgressions and poor behaviours identified above could have been tackled. Advice processes could have been improved, monitoring and supervision activities could have and should have been enhanced, conflicts should have been dealt with, procedures should have been followed, breaches should have been reported, training deficiencies should have been remedied.

The fact that most, if not all of the issues were already identified to senior management, indicates that there was a poor compliance culture within the NSG business.

The culture of an organisation effectively sets the parameters of acceptable conduct. A poor culture, not surprisingly, leads to poor conduct and typically poor outcomes for clients.

It sounds twee, but it really is true that culture starts at the top. It is also not something that is set and forget, it needs constant revisiting and reinforcement. But the rewards can be worth it.

Ian McDermott is Principal Lawyer with imac legal & compliance pty ltd, a legal and compliance advisory firm helping small-to-medium financial services businesses.

imac legal provides this update for educational purposes only. It is not intended to be legal advice.

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