Court rules on licensee’s conflicted remuneration case

The Federal Court has ruled financial advice licensee RM Capital failed to take reasonable steps to prevent its authorised representative (AR) from accepting conflicted remuneration.

RM Capital’s AR, SMSF Club, is alleged to have advised its clients to set up self-managed superannuation funds (SMSFs) to buy real property marketed by real estate agent, Positive RealEstate Pty Ltd.

Between December 2013 and July 2016, ASIC alleged, Positive RealEstate paid SMSF Club around $5,000 each time a client brought a property through them using their SMSF.

This is a contravention of the Corporations Act as RM Capital should have taken reasonable steps to prevent SMSF Club from accepting the payments as they constituted conflicted remuneration.

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Conflicted remuneration is defined as any benefit that could reasonably be expected to influence either the choice of financial product recommended by the licensee or representative or the financial product advice given by the licensee or representative to retail clients.

In the judgment on 29 February, Justice Jackson said: “The capacity that RM Capital had under its standard form agreement to prevent authorised representatives from promoting or advising on unsuitable financial products, to require them to comply with its policies and procedures, and to require representatives to have a sound working knowledge of the law, was insufficient to constitute reasonable steps, either by itself or together with the other measures taken. 

“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 s963F of the Corporations Act required of a financial services licensee in RM Capitals ’circumstances, at least in respect of the specific circumstances concerning SMSF Club.”

The judge also touched on the use of approved product lists by RM Capital and whether that had acted as a filter against conflicted remuneration from occurring.

“Importantly, RM Capital had no policy, procedure or consistent practice, written or unwritten, to ensure that products that involved conflicted remuneration were not on the approved products list. To the extent that RM Capital relied on its ability to use the approved products list as a filter to guard against conflicted remuneration, I find that it did not use that ability on any consistent or continuous basis, in part because it had no such policy, procedure or consistent practice."

The court adjourned the proceeding to consider (a) relief that should be ordered against RM Capital and (b) orders to be made in relation to SMSF Club. The matter is listed for mention on 7 March.