The principles behind the Future of Financial Advice legislation may be emphasised by powers given to ASIC, writes Bob Baxt.
When the Labor Party was in government from 2007 to 2013, a key area of interest pursued by it was the area of corporate and securities law. It wished to implement a program whereby companies that lent money to investors, especially less sophisticated or experienced investors, were under an obligation to ensure those investors or borrowers better understood the implications of their obligations in agreeing to accept loans in pursuit of purchase of properties. The Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth), (collectively known as the Future of Financial Advice Act (FoFA)) legislation was pursued through parliament. Provisions which were concerned with the imposition of these new obligations on lenders, especially in the light of an increasing number of loan defaults, with millions of dollars being left unpaid to lending companies, were strongly opposed by the Liberal National Party opposition. However, with the help of the splinter parties in the Senate, the government was able to ensure the passage of the legislation.
When the Labor Party lost office in the 2013 election, one of the immediate acts pursued by the new Liberal National Party government was to repeal certain aspects of the FoFA legislation. In particular, section 961 and the related subsections of the Corporations Act 2001 (Cth) (the Act) were challenged. With support from the splinter parties in the Senate the Labor Party was again able to defend its pursuit of this legislation.
These provisions, or rather some aspects of them, are currently subject to a Post Implementation Review by Treasury (submissions closed early in June). But it is unlikely this review will impact matters discussed in this article.
Of further interest is the fact the Financial System Inquiry Report (the Murray Report) recommended the Australian Securities and Investments Commission (ASIC) be given specific powers to intervene in the wording and format of documents that sought funds from investors, both institutional investors and also consumer investors. ASIC will be given power to assist relevant companies to rephrase documentation so it was more easily complied with and better understood by borrowers. The format of the relevant legislation is yet to be seen. However, this initiative will emphasise the principles behind the FoFA legislation.
Recently, ASIC has brought a number of cases against financial institutions in which aspects of the FoFA legislation have been at the heart of the case. In ASIC v NSG Services Pty Ltd  FCA 345, in the Federal Court Justice Moshinsky issued final orders interpreting sections 961B, 961G, 961K(2) and 961L of the Act. He ruled the relevant company had breached its duty to act in clients’ best interests, as well as the duty to provide appropriate advice after clients had been sold services that were costly, arguably unsuitable and unnecessary.
The decision provides important statements by the court on the need for the lending company to ensure the underlying principles in the FoFA legislation are embraced. In issuing his final judgment against the company, Justice Moshinsky stated, “while [the company] took some steps to address issues as they arose, [the company] failed adequately to address the systemic problems with its practices and policies that enabled representatives to provide advice in contravention of the best interests duty and the appropriate advice duty”. He noted, “whilst [the company] had a number of written policies relating to legal and regulatory compliance and risk management, [the policies prepared by their lawyers] were inadequate, and in many cases, not followed or enforced by [the company].
“This failure meant [the company] did not have an adequate system in place to monitor compliance by its representatives with their statutory obligations, and accordingly, was not able to and did not identify systemic problems with these policies and seek to remedy these problems” (at paragraph 62).
In the second of these cases, ASIC v Wealth and Risk Management Pty Ltd  FCA 477(another decision of Justice Moshinsky in the Federal Court), the judge granted interlocutory relief to the regulator with respect to transactions, which once again raised the question of the ability of the borrower to fully appreciate the nature of the obligations that were being entered into. As a result, the financial services business was ordered to amend the way it dealt with clients, by prohibiting its ability to promote or make offers of cash payments to prospective clients in certain circumstances, in light of the best interests duty, until the trial. The orders were made on the basis that there were “serious shortcomings in the standard of financial advice being provided” and there was an “appreciable risk of future contraventions” of the Act (at paragraph 9). Additionally, Justice Moshinsky found it, “somewhat surprising, to say the least, given the history of ASIC’s investigation, that the defendants [had] not taken all possible steps to put their ‘house in order’. This [did] not instil confidence that the defendants [appreciated] the seriousness of the matters that [had] been raised by ASIC and [had] taken sufficient steps to address them” (at paragraph 57). It is anticipated this particular proceeding will return to court for trial in October 2017.
The third case is as yet in a more formative stage. ASIC has sued the Westpac Banking Corporation. ASIC is arguing subsidiaries of the bank did not embrace the obligations that are imposed on it by the relevant sections of the Act in providing guidance and an explanation to borrowers. ASIC has alleged a series of telephone campaigns between 2013 and 2016 provided personal financial product advice that contravened the best interests duty and appropriate advice duty under the Act. That action has been the subject of severe challenge from the Westpac Banking Corporation, that suggests that the cause of action has not been properly formulated by the regulator, and that it would be very difficult or impossible for the regulator to obtain relief. At issue is whether the staff at Westpac gave sufficient regard to the clients’ financial situations and needs before providing the advice. Because the action is still in its formative stage the details of the particular allegations suggesting the alleged failure on the part of the lender to ensure that the relevant provisions of the Act, at the heart of the FoFA legislation, have been properly understood and embraced have not been publicised.
The outcome of this case is being awaited with great interest. It should be a landmark decision in relation to the best interests duty. It will pose significance for other banks and industry organisations marketing similar products.
Finally, while not exploring the FoFA reforms in great detail, Justice Davies in the decision of ASIC v Ostrava Equities Pty Ltd  FCA 1064 made orders against the relevant companies for contravening various provisions of the Act, including failing to act in the clients’ best interests, after directors had “engaged in deliberate courses of conduct to enrich [themselves] and the corporate group that [they] established at others’ expense” (at paragraph 55).
Once ASIC has the power to review and amend documentation issued by major lending institutions, it will be interesting to see how these changes will impact some of the obligations underpinning the FoFA legislation. These early decisions on FoFA may be of some additional significance.
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