Dixon clients comprised up to 80% of investment in URF

Responding to questions on notice from Liberal senator Andrew Bragg, the Australian Securities and Investments Commission (ASIC) agreed with the senator’s assertion that clients having highly concentrated exposure to a related party product would set off an “alarm bell”.

The written questions, which the senator directed to ASIC as part of budget estimates, noted that the Australian Financial Complaints Authority’s (AFCA) first determination relating to a Dixon Advisory case found the client was “invested between 54 per cent and 75 per cent in related party product across a seven-year period”.

“Is this a surprisingly high allocation in ASIC’s view?” Bragg asked.

“Would such a high percentage of related party products normally be an alarm bell for ASIC? What monitoring does ASIC do to oversight this issue of high related party investment allocation for vertically integrated groups in the financial services sector?”

According to the regulator, it was concerns around overexposure to the US Masters Residential Property Fund (URF) within client portfolios that “formed part of the case ASIC brought before the Federal Court and in which we alleged best interests failures”.

“Generally, overexposure to related party products can be a red flag. However, each instance of financial advice provided to a client needs to be considered to assess issues such as the clients’ objectives and what the client requested,” ASIC said.

“ASIC does not proactively supervise and oversee all advice provided across the financial planning industry that potentially raises issues of overexposure to particular products. However, ASIC does undertake targeted proactive surveillances on various entities and we will consider conducting investigations where serious advice failures are identified (or otherwise brought to our attention).”

Looking at the composition of the URF, it wasn’t just that clients were overexposed to the fund, Dixon clients also made up an overwhelming majority of the investment in the URF.

Bragg questioned the regulator over whether the percentage had been identified, and whether it suggested a “suggest a strong level of pressure had been applied from elsewhere in the company to support this product”.

ASIC said it found that Dixon clients “often comprised up to 80 per cent of the total investment in the URF”.

“The URF was one of a number of integrated products within the EP1 Group that were recommended by DASS to its clients. Given the integrated model, DASS regularly recommended in-house products to their client base,” the regulator said.

“ASIC held concerns about DASS’ recommendation of the URF, and URF-related products, to clients. Accordingly, that aspect was a focus of ASIC’s best interest litigation against DASS.”

Focusing on the company, not the advisers

The regulator has consistently maintained that the focus of its investigation was on the Dixon Advisory business model, rather than on individual advisers.

Indeed, while ASIC named six representatives that had provided advice to clients in breach of their best interest obligations as part of the Federal Court action against Dixon, five still show as current on the financial advisers register, just one of which is under a licensee that is not E&P.

In a November 2023 response to previous questions on notice from Senator Bragg, ASIC explained that the “relevant individual advisers were acting in accordance with the guidance and procedures set by their licensee”.

“Whilst ASIC’s action relied on evidence of certain clients and instances of advice given to those clients (because each individual breach needed to be established to the court’s satisfaction), the core regulatory concern, and focus of the proceedings was the structure of Dixon’s operation, which ASIC alleged led to advice failures across the business,” it said.

“As such, ASIC has not focused its enforcement efforts on individual advisers.”

Responding to Bragg’s most recent questions, the regulator added that during its investigation, it had “limited interaction” with Dixon advisers and “intensive interviewing of advisers was unnecessary”.

ASIC said that reviews of business records and evidence it obtained gave the regulator “sufficient understanding” of the firm’s operations and advice.

“We retained an independent expert to assess each piece of advice provided by a DASS adviser (that was the subject of the allegations presented by ASIC to the court) to establish advice failings,” ASIC said.

Senator Bragg also pushed the regulator on why the directors and management of Dixon also escaped punishment.

“Presumably, if you decided not to take action against individual advisers, then you must have decided that the core of the problem was the underlying business model. If this was the case, then why wasn’t action taken against management and directors who designed and operated that business model?” he asked.

ASIC responded that, given its investigation focused upon “overall systemic issues” related to the business model, “ASIC considered the appropriate response was to take action against DASS for failing to prevent the ongoing advice failures”.

“There was insufficient evidence or grounds arising from the investigation to take action against DASS management and directors,” it said.