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. 

Background

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.  

ASIC argued:

• The Act imposed a ‘forward‑looking’ duty on RI Advice to take reasonable steps to ensure Mr Doyle complied with his best interests obligations. This required RI Advice to take proactive steps to ensure Mr Doyle was competent, monitor him adequately, and escalate compliance concerns about him to a sufficient level of seniority within the organisation.
• There was a substantial risk Mr Doyle was not complying with the best interests obligations, and RI Advice knew, or ought to have known, about that risk, yet failed to take reasonable steps to address it. This was supported by the fact ANZ had reviewed Mr Doyle’s advice files and awarded them the lowest possible rating on its ‘advice scorecard’ yet continued to retain Mr Doyle as an AR for another year.

Decision

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.  

Lessons for licensees

The Court highlighted the need for licensees to—

• take steps to ensure ARs are competent
• monitor and supervise ARs, including in relation to advice processes, advice quality, and conflicts of interest
• ensure compliance concerns are escalated.

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.

Next steps?

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.

RI Advice also fails to manage cybersecurity risk 

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