Personal advice and the efficiently, honestly and fairly standard

February 2019

It was a long wait for the Federal Court's decision about ASIC's proceedings against Westpac and BT Funds Ltd concerning Westpac's Super Activation Team (Team). This decision was always going to be important in understanding what conduct crosses the line to 'personal advice'.

Partner Brit Ibanez reports that ultimately the court decided Westpac did not provide personal advice because its Team did not "consider" the objectives, financial situation and needs of the customers.

The court agreed the statements made by the Team were both statements of opinion and recommendations, and they were intended to influence the customer in making a decision. The decision therefore turns on the interpretation of the words "has considered".

Although the court determined that ASIC did not provide personal advice (in breach of its AFSL authorisations), it did however fail to provide financial services 'efficiently, honestly and fairly'. This requirement was discussed regularly by the recent Financial Services Royal Commission and having a recent higher court decision on its interpretation is very helpful.

Facts

The role of the Team was to contact customers, encouraging them to complete an electronic form authorising Westpac to search for lost superannuation and, to the extent the superannuation was held by the ATO, to roll it into the BT account. Then, once Westpac received information about the customer's other superannuation accounts, the Team made a phone call which ostensibly was designed to encourage customers to roll their superannuation into the BT account.

ASIC relied on phone calls made with 15 customers as evidence of the broader practice of the Team during the period May 2013 to September 2016. During that time the Team spoke with approximately 95,682 Westpac customers and approximately $646,719,225 in funds under management was generated.

The Team had received training about the difference between general advice and personal advice. A PowerPoint presentation detailed the difference and included the following statements:

  • Note – if you provide, suggest or imply an opinion/recommendation in relation to the factual information you present to a client, then you are giving advice.
  • The client needs to receive a general advice warning at the outset and at any time where you need to reinforce the nature of the engagement. However, be aware that providing a warning does not cover instances where you have provided personal advice (implied or actual) to the client.
  • General advice should NEVER be provided in such a way as to drive a particular outcome. Doing so is unlikely to provide a balanced view of the options available to the client and could in fact constitute personal advice i.e., the client need has been taken in to consideration in recommending the preferred outcome...

Importantly, members of the Team were instructed to follow the "QM Framework" which set out the risk and compliance obligations. This document was first introduced to staff during induction training and was used in a variety of ways to monitor the quality of calls and compliance. The Team was coached to structure their calls based on the QM Framework which involved a four-part structure:

  • Open – putting customers in a positive and receptive frame of mind and gaining permission to ask questions.
  • Gather – asking the customer questions to "gather, uncover, clarify and develop" an understanding of their requirements. For example:

    • "What do you look for in a super fund?"
    • "What's important to you in a super fund?"
    • "A lot of customers I speak to tell me that fees, investment options, online actions and insurance are important to them. Of these, which one is important to you?"
    These questions were designed to find out what is important to the customer and help develop a sense of urgency.
  • Presenting – conducting a persuasive interactive presentation based on the customer's responses, including social proofing and articulating the features as benefits.

    Social proofing is a sales technique intended to give the customer comfort and assurance they are in the same position as other customers. It includes phrases such as "I understand where you are coming from and many customers are also in a similar situation".
  • Objection handling/closing – overcoming objections raised by the customer and seeking a commitment for action to move closer to a sale.

What did "consideration" mean?

The judgment turned on an analysis of what "consideration" means. ASIC argued Westpac employees had "considered" the customer's financial situation on two bases:

  • The caller knew each customer had more than one superannuation account at the time the call was made, they knew the customer had requested a superannuation search, and they knew information about other funds held by the customer. ASIC argued the callers were clearly considering each of those matters and seeking to influence the customer to accept the rollover service.
  • ASIC also contended that engaging with the customers in accordance with the QM Framework demonstrated their "consideration" of the customer's various statements about their objectives, financial situation and needs.

The court did not accept either of these two arguments. Mere knowledge of facts about customers does not support an inference the caller engaged in any reflection upon the customer's position that amounted to "consideration". Active listening does not evidence an intellectual engagement with the information provided by a customer, such as would permit a finding the Westpac employee had "considered" the information: it simply demonstrates the information has been heard. The use of facts, apparently identified as matters that might be used to influence the customer, in the course of the call does not, without more, indicate the caller "considered" those facts.

The court determined the QM Framework did not require or encourage consideration of the customer's objectives, financial situation or needs. To the extent such information is elicited, the QM Framework encouraged the caller to use it to "drive an outcome" as ASIC put it. In particular, the QM Framework required the caller to make a disclaimer, early in each call, to the effect everything discussed would be general in nature and would not take into account the customer's personal financial needs. This requirement is inconsistent with an inference from the QM Framework that callers applying the framework "considered" the customer's objectives, financial situation and needs.

ASIC relied on the fact the Westpac employee had called to speak to the customer personally about the consolidation of their superannuation accounts. In the context of the campaigns pursuant to which the calls were made, the court did not accept that fact evidences there was any relevant "consideration". To the contrary, the context suggests the callers were not engaging in a process of consideration. Instead, they were engaged in a highly structured marketing activity requiring them to call customers directly to seek consolidation of their accounts. None of the elements of the phone calls revealed any consideration of the customer's objectives or financial situation. They reveal no more than the caller elicited from the customer certain objectives and the caller heard what the customer said.

In looking at the second aspect of the provision relating to "consideration", which provides personal advice will be given or directed to a person in circumstances where a reasonable person might expect the provider to have considered one or more of those matters, the court said:

"In my view the following circumstances would suggest to a reasonable person that the caller who provided the "financial product advice" did not consider any of the customer's objectives and financial situation (identified above):

  • The call containing the "financial product advice" was not preceded by the provision of information from the customer to Westpac about their objectives, financial situation and needs.
  • The "financial product advice" was offered proactively by members of the Super Activation Team, who had no previous relationship to the customer, and was not known or understood by the customer as their advisor so that they were not obviously in a position to consider one or more of the customer's objectives and financial situation.
  • The callers did not present themselves as making statements on the basis of their consideration of the customer's objectives or financial situation. To the contrary, they presented themselves as offering the rollover service on the basis the calls would not take into account the customer's individual situation. In my view, this would strongly suggest to the reasonable person that, regardless of whether the callers should consider the customer's objectives and financial situation, they were not doing so.
  • The "financial product advice" was provided free of charge. This fact would raise a doubt in the mind of the reasonable person as to whether the advice provider had considered one or more of the customer's objectives and financial situation.
  • To the extent that the customers identified "objectives", it occurred during the course of the calls so that the callers did not have an opportunity to consider those objectives prior to making the calls.
  • In some cases, the callers revealed a lack of knowledge about the customer's situation that was inconsistent with the capacity to consider or have considered one or more of the customer's objectives and financial situation.
  • The "social proofing" technique emphasises a comparison between the customer's reasons and the reasons of others, which is not a comparison involving a consideration of the customer's particular circumstances."

The court conceded where calls were expressly made in relation to particular accounts tends to suggest consideration of one or more of the customer's objectives and financial situation, but then found that was a weak factor in the face of the other circumstances.

Efficiently, honestly and fairly

We have previously written about the 'efficiently, honestly and fairly' requirement for financial services. 

Here, the court held the implementation of the QM Framework involved a failure by Westpac to ensure the financial services were provided efficiently, honestly and fairly.

Westpac did not explain to the customers it called that a prudent customer might wish to consider matters of the kind that would be considered if the recommendation was given as personal advice. The use of social proofing would not have provided a basis for the recommendation if it had been given as personal advice, it was not a sound basis for decision making, and should not have been used to provide assurances to the customer to influence them to accept the rollover service.

By making the recommendation in an unsolicited call using an informal style and a structure likely to be perceived generic, where consolidation of superannuation accounts had obvious benefits, and by offering to effect a rollover on the telephone, Westpac conveyed the impression the recommendation was an obvious and uncontroversial course of action for the particular customer when it may well not have been the case. The impression was arguably reinforced by the social proofing content of the calls.

The caller's attitude of helpfulness reinforced the impression the recommendation was appropriate for the particular customer and there was no possible lack of alignment between the interest of the customers and Westpac.

Although Westpac asserted emphatically the calls revealed its self-interest, Westpac did not explicitly identify its interest in influencing customers to accept the rollover. The QM Framework approach was admittedly self-interested and did not promote the best interests of the customer, but the approach did not draw the customer's attention to either of those matters. It strongly conveyed the impression Westpac was assisting the customer through its rollover service and the customer should feel comfortable. In fact, as Westpac knew, they were matters (of the kind that should be considered if the financial product advice was given as personal advice) where acceptance of the rollover service might have adverse consequences for the customer.

The court held while this was not dishonest it did fail to ensure the financial product advice was provided efficiently, honestly and fairly.

The court ultimately concluded if it was wrong about the advice not being personal advice, then Westpac will have breached the obligation to act in the best interests of the customer.

Conclusion

Our lawyers understand the implications of this decision and can answer your questions about how it impacts the financial services industry.