Court finds AFSL liable for conflicted remuneration breach

The case relates to proceedings brought by the Australian Securities and Investments Commission (ASIC) against RM Capital and its authorised representative, The SMSF Club, in 2019, with the corporate regulator at the time contending that the businesses contravened the Corporations Act on as many as 259 occasions, with each contravention attracting a potential civil penalty of up to $1 million.

On Thursday, the Federal Court found that RM Capital, in contravention of s 963F of the Corporations Act 2001 (Cth), during the period August 2013 to August 2016, failed to take reasonable steps to ensure that its representative, The SMSF Club, did not accept conflicted remuneration.

In the judgment, Justice Jackson confirmed that ASIC’s case against RM Capital now “makes clear that it does not allege multiple failures and therefore multiple breaches during the relevant period. One contravention of s 963F is alleged”.

ASIC alleged that The SMSF Club advised its clients to set up self-managed superannuation funds (SMSFs), then use their SMSFs to buy real property marketed by a real estate agent, Positive RealEstate.

It also said The SMSF Club had referral agreements with Positive RealEstate and that RM Capital was aware of this referral agreement.

Further, ASIC alleged The SMSF Club accepted more than $730,000 in conflicted remuneration from Positive RealEstate.

ASIC argued that the payments could reasonably be expected to have influenced financial product advice given by The SMSF Club to its clients, and so constituted banned conflicted remuneration under the Corporations Act.

Justice Jackson ruled that RM Capital did not meet the Corporations Act standard of “reasonable steps” in relation to preventing conflicted remuneration.

“ASIC has established that, during the relevant period, the steps that RM Capital took to ensure that its authorised representatives did not accept conflicted remuneration fell short of the reasonable steps that s 963F of the Corporations Act required of a financial services licensee in RM Capital’s circumstances, at least in respect of the specific circumstances concerning SMSF Club,” the judgment said.

Justice Jackson also questioned the level that James Richardson, managing director of RM Capital, understood the rules regarding conflicted remuneration.

“Mr Richardson did not, however, impress me as someone with a firm grasp on the details of the regulatory environment in which his business was operating,” Justice Jackson said.

“His oral evidence was often at an unhelpfully high level of generality that, as will be seen, was consistent with his affidavit evidence and the other affidavits that RM Capital relied on.”

Among the evidence presented to the court were reports from an external auditor that also noted concerns with The SMSF Club’s understanding of conflicted remuneration.

“RM Capital did not raise these responses with SMSF Club or take any other action with respect to the expressed views of these three advisers as to what constituted conflicted remuneration,” Justice Jackson said.

“So, for example, RM Capital did not correct [Justin] Beeton’s mistaken view that conflicted remuneration arrangements could be ’managed’ by disclosure. It did not correct [Richard] Nordin’s apparent view, also mistaken, that conflicted remuneration was confined to benefits that were provided by promoters to ’specifically to use their products’.

“It did not investigate what [Mark] Small had in mind when he referred to ’general conflict’ and how that related to his understanding of the ban on conflicted remuneration. In these instances at least, even when a review (perhaps falling short of an audit) was undertaken, it appeared not to have any consequence for better compliance by SMSF Club with the prohibition on the acceptance of conflicted remuneration.”

While RM Capital argued that it did take reasonable steps to ensure that its authorised representatives did not accept conflicted remuneration, citing its approved product list, the judgment found that the firm’s approved product list did not adequately consider whether a product involved conflicted remuneration.

“In short, RM Capital’s policies, practices and standard contractual provisions concerning the approved products list gave it the ability to filter out financial products that, for any reason, it did not want its authorised representatives to promote or advise about,” Justice Jackson said.

“But there is scant evidence that it had any practice of considering whether a product involved conflicted remuneration so that, if it did, the product would not be placed on the approved products list. Certainly there is no written policy or procedure to that effect.”

There has not been any decision on penalties for either RM Capital or The SMSF Club at this time, and the matter is listed for mention on 7 March 2024 for the purpose of considering the appropriate next steps in the proceeding.