No back door to “best interests” obligation, and no short-cut in proving ASIC’s case

Are you a financial services business that has representatives? If so, this week’s Federal Court decision in ASIC v Diversa Trustees Limited [2023] FCA 1267 is important. 

In a nutshell, the Federal Court found that Diversa Trustees Limited (Diversa) did not fail to act efficiently, honestly and fairly, or fail to take reasonable steps to ensure its representatives complied with financial services laws. 

Why is this decision important? Because it gives clarity to Australian Financial Services Licensees about:

• How the court views the level of knowledge required to establish a contravention of the s912A(1) Corporations Act 2001 (Cth) civil penalty provisions by the licensee (based on the conduct of a ‘downstream’ representative); and 
• What is expected of ASIC when bringing and prosecuting these cases.  

The Basic Facts 

• Diversa was trustee of a superannuation fund with contractual arrangements for the administration, promotion and provision of platform functions for YourChoice Super Fund.
• Entities associated with Nizi Bhandari, Australian Super Finder and Australian Dealer Group (Bhandari Entities), were offering a “free” search for lost super with the overall effect of signing up or rolling over customers into YourChoice Super, for which the Bhandari Entities earned fees. As a result customers became liable to pay additional fees and risked losing insurance benefits.

ASIC’s Allegations

ASIC alleged that Diversa:

• Knew or ought to have known of business practices of an adviser group that was joining members to the Super Fund;
• Knew or ought to have known of the conduct of the Bhandari Entities and of the risks that conduct posed to customers; and
• Breached its general duties as a licensee (under 912A) by failing to stop the Bhandari Entities’ access to the YourChoice Super Fund.

The Decision

• Section s 912A(1), the general obligations of licensees, is a civil penalty provision. Her Honour Justice Button noted that:
• It is especially important that those accused of contravention of a civil penalty provision (a quasi criminal contravention) know with some precision the case made against them and it is not appropriate for the regulator to plant “a forest of forensic contingencies”, or to alter the basis of the allegations on a rolling basis. 
• There is also a need to construe the legislation, and exercise caution, before accepting any “loose, albeit ‘practical’, construction”.

• Her Honour found in favour of Diversa, finding that the knowledge of ‘downstream’ entities could not be attributed to Diversa in the circumstances of the case. However, her Honour said that whether or not issues with downstream entities might result in a licensee’s breach of s 912A(1) will depend on what the licensee knew of those deficiencies, its relationships and contracts with the downstream entities, and how the deficiencies in question bear on the financial services that the licensee is providing.
• Her Honour noted that prior to trial ASIC had not identified what it contended Diversa should have done in order to comply with its general obligations and only ‘nailed its colours to the mast’ in the course of the trial.
• Further and importantly, Her Honour noted ASIC’s concerns were in part driven by the risk that placing customers in YourChoice was not in their best interests. Her Honour did not accept that a risk that Diversa’s product is not the best product for some customers of an adviser means Diversa should not have issued interests in the fund. In doing so, Her Honour noted the comments of Beach J in ASIC v AGM Markets Pty Ltd (in liq) (No 3) (2020) 275 FCR 57 at [522], that s 912A(1)(a) is “not a back door into an act in the [best] interests of’ obligation”.

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Final Thoughts

So, what should you take out of this? 

Section 912A(1)(a) should not be used as a back door for applying the best interests obligation more broadly than the legislation provides. 

1. Civil penalty actions require the Regulator to identify the contravention with precision and indicate what the alleged contravener ought to have done to comply, and well before the middle of the trial.
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2. There is an increasing prevalence of ASIC civil penalty actions, often alleging a breach of the ‘general obligations’ under section 912A based on a large number of alleged contraventions of other (non-civil penalty) provisions, and here based on the conduct of others. These cases sometimes appear to have an underlying approach of - given the number of other breaches there must also be a breach of ‘efficiently, honest and fair’, or the systems must be inadequate.  However, the mere reference to a myriad of other alleged breaches (often at a summary level) is not sufficient.  
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3. Licensees faced with under-particularised or unpleaded actions need their legal team to challenge ASIC on how it is proposing to make its case.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.