Protecting your AFSL from advisers who breach

Being able to sever ties with an adviser who is causing you to breach your AFSL obligations is an important consideration for licensees.

AR agreements and internal auditors

You should be sure that your authorised representative agreements (‘AR agreements’) provide you with sufficient ability to terminate advisers at short notice for material compliance breaches. You should also be careful about the representations your internal auditors make to advisers. If auditors get this wrong, an adviser can develop a false sense of security about their appointment.

McDonald v AMP Financial Planning Pty Ltd

These are important lessons arising from the 2018 case of McDonald v AMP Financial Planning Pty Ltd. The case also includes useful judicial commentary on the best interests obligations, personal advice and the use of ROAs – all areas of interest to ASIC.

Breaches of obligations entitled licensee to terminate

In McDonald v AMP Financial Planning, the Supreme Court of Queensland found that McDonald, an AR, had failed to comply with her material obligations and was validly terminated without notice. McDonald had brought proceedings to prevent AMP Financial Planning (‘AMPFP’) from executing the termination. The breaches were related to a failure to provide records of advice (‘ROAs’) and statements of advice (‘SOAs’), along with a failure to act in the best interests of clients.

Circumstances

McDonald was an employee of Create Financial Services, an entity which had entered into an AR Agreement with AMPFP in May 2012. Following an anonymous client complaint, AMPFP conducted an out-of-cycle, ‘deep dive’ audit into McDonald’s practices and processes, specifically in relation to elderly clients.

The breaches

The audit revealed a number of issues, including:

• the inappropriate use of review template notes;
• a failure to issue ROAs and SOAs where required; and
• a failure to act in clients’ best interests.

In each instance, Douglas J found that AMPFP had been justified in terminating McDonald, as the issues amounted to breaches of material obligations under both the AR Agreement and the Corporations Act. Importantly, McDonald was unable to rely on previous AMPFP audit reports that had praised her level of understanding, and her application of advice principles.

Auditors’ representations

McDonald argued that AMPFP was estopped from terminating her, stating that AMPFP’s auditors had represented that she was performing well in her duties as an AR. This argument was rejected as there was no evidence to suggest AMPFP was aware of the breaches at the relevant times. Furthermore there was insufficient evidence to suggest that AMPFP or its auditors had ever given clear, unambiguous representations that McDonald was complying with her obligations.

Hold recommendations

In relation to ROAs, McDonald had breached material obligations of her agreement with AMPFP by failing to provide ROAs for meetings where hold recommendations were given. McDonald submitted that she was unaware that a hold recommendation constituted financial advice and necessitated an ROA. Douglas J found that hold recommendations did constitute financial advice and did require ROAs to be provided. Interestingly, Mr Dunning QC argued for the defendants that if hold recommendations were not financial advice, then the plaintiff necessarily would have been charging clients for ongoing financial services which she was not providing (i.e. fees for no service). This too would have been a breach of the AR Agreement.

SOAs

McDonald had also breached material obligations of her agreement by failing to complete SOAs where required. Notably, in the case of one client, Douglas J held there to have been a breach notwithstanding that the client had signed a ‘no advice acknowledgment’ form. In cases where a client’s portfolio was outside its recommended levels, McDonald should have provided an SOA regardless.

Best interests obligations

Finally, Douglas J discussed advice alleged to have been given by McDonald in breach of clients’ best interests. The breaches were varied, including:

• a failure to explore relevant investment alternatives;
• advising clients to change superannuation and insurance providers where it was unnecessary to do so; and
• advising clients to establish a SMSF where it would expose them to high expenses.

The outcome

In finding these breaches, Douglas J rejected the justifications put forward by McDonald for her advice, or lack thereof. McDonald had breached her material obligations on a significant number of occasions, thereby justifying her immediate termination. Prior positive audit reports did not absolve McDonald of her obligation to comply with the AR Agreement, the Corporations Act, and other relevant regulations and guidelines.

Take action

Your AR agreement is a key tool in managing risk in your business. Contact us for a review of your AR agreement.

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Author: Samantha Hills (Special Counsel)