Licensees should heed some important lessons about the obligation to monitor authorised representatives (ARs) following a recent Federal Court decision where RI Advice Group (RI Advice) was ordered to pay a $6 million penalty for failing to adequately supervise the conduct of one of its ARs.
RI Advice holds an AFSL and is a former subsidiary of ANZ. Mr John Doyle was an AR of RI Advice from May 2013 to June 2016.
ASIC commenced proceedings against RI Advice following an investigation into the conduct of Mr Doyle who was found to have breached his best interests obligations under the Corporations Act (Act) by repeatedly providing inappropriate advice and failing to prioritise clients’ interests.
ASIC alleged RI Advice had breached the Act by failing to take reasonable steps to ensure Mr Doyle, as its AR, complied with the best interest obligations.
The Court accepted ASIC’s argument, finding RI Advice had breached the Act by failing to have adequate policies or processes to ensure advisers operating under its licence were providing appropriate advice and acting in the best interests of their clients. RI Advice was also found to have breached the Act by failing to do all things necessary to ensure the efficient, honest, and fair provision of financial services under its AFSL.
In particular, RI Advice failed to adequately monitor whether Mr Doyle was avoiding internal advice quality checks, including whether he was circumventing RI Advice’s pre‑vetting program, or whether he was recommending financial products that were not on RI Advice’s approved product list. These were serious flaws in RI Advice’s processes and should have been apparent to it at the relevant time.
The Court highlighted the need for licensees to—
In imposing the $6 million penalty, the Court said although RI Advice’s conduct was not deliberate and it had paid compensation to the affected clients in the realm of $6.4 million, the breaches of the law by Mr Doyle were serious and sustained, and the monitoring flaws should have been apparent to RI Advice.
The decision provides insight into financial services laws and what does, or in this case, what does not, amount to reasonable steps by licensees to ensure ARs comply with those laws.
Contact our team if you need more information about these obligations and what you should do to ensure ARs are competent and adequately monitored.
The Federal Court also said RI Advice failed to act efficiently and fairly and failed to have in place adequate risk management systems for managing cybersecurity. Read our Alert which explains why AFS licensees should have robust cybersecurity procedures in place to ensure their obligations as a licensee are met, and their business is not jeopardised.