Federal Court of Australia

Australian Securities and Investments Commission v R M Capital Pty Ltd [2024] FCA 151

ORDERS

THE COURT ORDERS THAT:

1.    The answer to the separate question:

Whether the first defendant, 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 second defendant, did not accept conflicted remuneration

is 'yes'.

2.    The matter is listed for mention on 11.15 am AWST on 7 March 2024.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Table of Contents

REASONS FOR JUDGMENT

JACKSON J:

1    These reasons determine an issue between the plaintiff (ASIC) and the first defendant, R M Capital Pty Ltd (RM Capital), which has been stated in an order for a separate question as follows:

Whether the first defendant, 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 second defendant, did not accept conflicted remuneration.

2    The issue arises because RM Capital is and was the holder of an Australian Financial Services Licence (AFSL) and the second defendant, The SMSF Club Pty Ltd, was one of its authorised representatives pursuant to s 916A of the Corporations Act 2001 (Cth) (Act). As the statement of the separate question suggests, s 963F requires the licensee under an AFSL to 'take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration'. In broad terms, conflicted remuneration is, relevantly, a benefit given to the representative that could reasonably be expected to influence the choice of financial product recommended by the representative to retail clients or the financial product advice given to such clients: s 963A.

3    In overview, ASIC alleges that in the period referred to in the statement of the separate question (the relevant period) there were certain steps that would have been reasonable steps for RM Capital to have taken to ensure that its authorised representatives, particularly SMSF Club, did not accept conflicted remuneration. Those steps will be described below. ASIC says that RM Capital failed to take those steps, and that to the extent that RM Capital contends that it took other steps to seek to ensure that its representatives did not accept conflicted remuneration, they were insufficient to qualify as reasonable steps.

4    Before describing the background and ASIC's allegations in a little more detail, it is necessary to summarise the somewhat tortuous procedural history of the matter, so as to understand what these reasons do and do not cover, and why.

I.    Procedural history

5    ASIC commenced this proceeding on 7 June 2019, with RM Capital and SMSF Club as the named defendants. On 27 June 2019 the Court ordered that all questions of liability in the proceedings were to be heard and determined separately, and in advance of any hearing and determination of questions of penalty or other relief.

6    In March 2021, ASIC asked for the hearing of the matter as against SMSF Club to be heard in advance of the matter as against RM Capital, because ASIC and SMSF Club were close to settling the substantive dispute between them. This raised the question of whether and how the issues of liability and relief as against SMSF Club could be heard in advance of the question of liability as against RM Capital, without findings of liability against SMSF Club prejudicing RM Capital's position. That is because ASIC's case against SMSF Club includes allegations that it breached the ban on authorised representatives of financial services licensees accepting conflicted remuneration in s 963G of the Act. So findings that SMSF Club had breached that prohibition may have been relevant to the issue of whether RM Capital had taken reasonable steps to prevent such breaches.

7    Nevertheless, the hearing of the dispute as between ASIC and SMSF Club was listed for 12 July 2021, before any hearing of the allegations against RM Capital. RM Capital did not oppose that, provided that no declarations were sought against SMSF Club that would prejudice RM Capital's position.

8    In May and June of 2021, ASIC and SMSF Club filed joint submissions and a statement of agreed facts. Both documents purported to address only the dispute as between ASIC and SMSF Club. The documents reflected an agreement reached between ASIC and SMSF Club as to the contraventions alleged against SMSF Club and the appropriate relief in the circumstances. ASIC and SMSF Club's statement of agreed facts included several admissions by SMSF Club, including of contraventions of s 963G of the Act. The joint submissions asked the Court to accept the agreed facts and consider ordering the relief sought.

9    The hearing as between ASIC and SMSF Club was held on 12 July 2021, as listed. Because of SMSF Club's admissions, the hearing primarily concerned the appropriate orders and relief to be made in respect of SMSF Club. However, after submissions made by senior counsel for ASIC, the hearing proceeded on the basis that while the Court would hear all it needed to hear to decide whether to grant relief against SMSF Club, it would not deliver judgment until after the contested hearing of the dispute as between ASIC and RM Capital.

10    Instead of formally reserving judgment as between ASIC and SMSF Club, the hearing on 12 July 2021 concluded on the basis that SMSF Club could make submissions at the subsequent contested hearing involving RM Capital on any question of law, or of mixed fact and law, that could ultimately bear upon the liability of SMSF Club and the orders against it (for example, a question of the proper construction of the relevant statutory provisions). SMSF Club agreed that this preserved procedural fairness for it. SMSF Club also submitted that any issue as to apprehended bias or prejudice, arising from the fact that the dispute as against RM Capital was to be heard subsequent to the hearing involving SMSF Club, was for RM Capital to agitate.

11    The dispute as to liability between ASIC and RM Capital was heard on 1 and 2 March 2022. SMSF Club did not appear or make submissions, and RM Capital did not suggest that the previous hearing involving SMSF Club's admissions in July 2021 gave rise to any issues of procedural fairness concerning RM Capital. Ahead of that hearing, ASIC and RM Capital filed a statement of agreed facts (SOAF) which avoided making reference to the contraventions alleged against SMSF Club.

12    Consistently with that, the hearing was conducted on the basis that the contravention of s 963F of the Act alleged against RM Capital did not require any finding of underlying breaches of s 963G of the Act, which SMSF Club had admitted to contravening in the hearing on 12 July 2021. As a matter of law, that is correct (see below [84]). To maintain procedural fairness for RM Capital, ASIC and RM Capital agreed that the statement of agreed facts between ASIC and SMSF Club would not be in evidence in the hearing of the dispute as between ASIC and RM Capital.

13    However, at the hearing on 1 and 2 March 2022 I queried whether it was desirable for judgment to be given in relation to both defendants at the same time, since it did not seem possible to make findings of liability against SMSF Club (if that were the outcome) while at the same time ignoring those findings in relation to the case against RM Capital.

14    This culminated in orders being made, with the consent of all the parties, that the substantive dispute as between ASIC and RM Capital was to be treated as the hearing and determination of a separate question, being the question stated in the first paragraph of this judgment. The orders also provided that the evidence tendered on 1 and 2 March 2022 would constitute the evidence in the hearing of the separate question. The statement of agreed facts between ASIC and SMSF Club was therefore not part of the evidence for the determination of the separate question.

15    Therefore, these reasons only determine the issues of liability as between ASIC and RM Capital. It will be necessary to determine the case against SMSF Club at a later time.

II.    Summary of agreed background facts

16    The matters summarised in this section are largely common ground between ASIC and RM Capital, as reflected in the SOAF signed on behalf of each of ASIC and RM Capital.

17    At all material times, RM Capital held an AFSL that authorised it to provide financial product advice within the meaning of s 766B of the Act for classes of financial product that included superannuation, and to deal in superannuation financial products.

18    SMSF Club carried on the business of providing financial product advice and accounting and administrative services for self-managed superannuation funds (SMSFs). From 7 August 2013, but with effect from 29 July 2013, SMSF Club was an authorised representative of RM Capital in accordance with s 916A of the Act, authorised to provide financial product advice on behalf of RM Capital. At all material times Justin Beeton was a financial adviser at SMSF Club and its sole director.

19    A different company called Positive RealEstate Pty Ltd (PRE) was in the business of providing property investment services, including education, advice, and something called 'property mentoring'.

20    During the relevant period, SMSF Club provided to its paying clients a suite of services known as the 'SMSF Club'. These involved advising clients about SMSFs and administering them for the clients. Clients who signed up for the programme were known as SMSF Club members. SMSF Club helped club members to set up an SMSF, roll over existing superannuation funds to it, and make other investments through it. I will return to the detail of the services SMSF Club provided and how it provided them below.

21    It is common ground that if the clients did establish an SMSF with the assistance of SMSF Club, their interest in the SMSF would be a financial product within the meaning of s 766B of the Act: see in particular s 764A(1)(g). I accept that to be so; for present purposes it is not necessary to trace through the definitions in Part 7.1 of the Act or, more to the point, in the Superannuation Industry (Supervision) Act 1993 (Cth), in order to conclude that an interest in a superannuation fund is likely to be a financial product.

22    Throughout the relevant period, SMSF Club engaged in various activities that involved giving information to retail clients as defined in s 761G(6) of the Act. RM Capital knew about these activities in a general way at the time. The SOAF indicates that throughout the relevant period, SMSF Club regularly provided 'financial product advice' as defined in s 766B of the Act. It also indicates that throughout that period SMSF Club provided advice, including financial product advice, to clients as RM Capital's authorised representative. However, RM Capital does not admit that the particular conduct of SMSF Club on which ASIC relies constituted financial product advice.

23    There was a referral agreement between PRE and SMSF Club (Referral Agreement). It was in effect from shortly after the time SMSF Club became RM Capital's authorised representative (no later than late August 2013) until August 2016. It was oral at first, but from 18 July 2014, RM Capital asked for the Referral Agreement to be documented, and facilitated that. The Referral Agreement was reduced to writing and executed on 7 September 2015.

24    At all times during the relevant period, the Referral Agreement included a term to the effect that PRE would pay SMSF Club a fee of $5,000 (plus GST), or such other amount as may be negotiated between the parties, each time a client of PRE used the services of SMSF Club (and/or entities associated with SMSF Club) to establish a bare trust within an SMSF to purchase a property through PRE.

25    It is common ground between ASIC and RM Capital that throughout the relevant period, RM Capital knew of the Referral Agreement and the fees payable under it. Precisely what RM Capital knew, and when and how, will be described in the course of setting out the evidence below. It is also common ground that RM Capital approved, monitored and endorsed the Referral Agreement by taking various steps that will also be described below.

26    The SOAF identifies, in a schedule, approximately 170 instances during the relevant period of SMSF Club receiving referral fees under the Referral Agreement. These were paid because clients of SMSF Club purchased properties through PRE. Between February 2014 and July 2015, the fees were paid in the first instance to RM Capital, and ranged from $212.50 up to $4,950. There was then an on payment from RM Capital to SMSF Club of a portion of the fee received by RM Capital from PRE. That is, the referral fees were paid to RM Capital in the first instance, which deducted a percentage of the fee for itself and forwarded the balance to SMSF Club. After July 2015, SMSF Club received referral fees directly from PRE.

27    It appears that RM Capital became aware that ASIC was investigating the matter in June 2016, when it received a notice issued under s 912C of the Act, requiring information from it.

III.    The parties' respective contentions and the issue that arises

28    I will now describe the case that ASIC puts against that largely agreed factual background, and address a pleading point that RM Capital raised about that case. I will then describe the principal bases on which RM Capital defends the matter. After that I will consider the statutory framework, before setting out the evidence in more detail. Finally I will decide whether ASIC has made out its case that will include consideration of the steps that RM Capital did take and the steps that ASIC says it should have taken, and an overall assessment of whether RM Capital did take reasonable steps to ensure that its authorised representative, SMSF Club, did not accept conflicted remuneration.

The particulars of ASIC's case

29    Broadly, ASIC's case is that in order for RM Capital to have discharged its obligation under s 963F of the Act during the relevant period, it should have taken a number of particular steps that would have been reasonable to ensure that its representatives, in particular SMSF Club, did not accept conflicted remuneration.

30    The steps said to have been required are set out in a letter dated 21 May 2021 from ASIC to RM Capital's solicitors, as follows (including one amendment made in a further letter of 8 November 2021):

The reasonable steps that ASIC contends RM Capital ought to have taken to ensure that SMSF Club did not accept conflicted remuneration (and avoid contravening s 963F of the Act as alleged in paragraph 21 of the 2FACS [ASIC's concise statement]) are as follows.

(a)    From 1 July 2013, RM Capital:

(i)    should have ensured that its 'Managing Conflicts of Interest Policy' (referred to in paragraph 16(c) of the 2FACS) included statements to the effect that:

(A)    the Act prohibited authorised representatives of financial services licensees from accepting Conflicted Remuneration; and

(B)    accepting commissions or soft dollar benefits could amount to accepting prohibited Conflicted Remuneration;

(ii)    should have had in place a policy prohibiting the acceptance of Conflicted Remuneration by RM Capital or its representatives, which should, at a minimum, have correctly described:

(A)    the prohibitions in the Act relating to the acceptance of Conflicted Remuneration;

(B)    at a general level, what constitutes Conflicted Remuneration;

(C)    relevant exceptions to the general description of Conflicted Remuneration; and

(D)    by way of illustration, specific types of benefits that may constitute Conflicted Remuneration;

(iii)    should have had in place procedures requiring:

(A)    any proposed agreement or arrangement between an authorised representative of RM Capital and a third party (Third Party Arrangement) that would or might confer a (monetary or non-monetary) benefit on the authorised representative constituting Conflicted Remuneration (Conflicted Remuneration Arrangement) to be submitted to RM Capital for approval before being entered into by the authorised representative;

(B)    RM Capital to review the proposed Third Party Arrangement, consider whether it would constitute a Conflicted Remuneration Arrangement, and take legal advice on that question if there was reason to doubt that the proposed Third Party Arrangement did not constitute a Conflicted Remuneration Arrangement;

(C)    RM Capital, if it considered, upon review, that the proposed Third Party Arrangement would be a Conflicted Remuneration Arrangement, not to approve the Third Party Arrangement;

(D)    RM Capital, by 1 July 2014, to review any Third Party Arrangement entered into before 1 July 2013, consider whether it constituted a Conflicted Remuneration Arrangement, and take legal advice on that question if there was reason to believe that the Third Party Arrangement might constitute a Conflicted Remuneration Arrangement;

(E)    RM Capital, if it became aware that a Third Party Arrangement was a Conflicted Remuneration Arrangement, to require the relevant authorised representative (by 1 July 2014 if the Third Party Arrangement was entered into before 1 July 2013) to terminate the Conflicted Remuneration Arrangement or amend it so that it did not involve the acceptance of Conflicted Remuneration;

(iv)    should have ensured that its Compliance Programme:

(A)    included, in its RM Group Compliance Program Table, requirements, responsibilities, actions to be taken, and a training program with respect to, complying with the requirements of Division 4 of Part 7.7A of the Act; and

(B)    did not countenance any conduct that could constitute accepting Conflicted Remuneration, such as accepting soft dollar benefits;

(v)    should have provided, and ensured that its representatives (including SMSF Club representatives) attended, education and training sessions concerning the prohibitions under the Act on accepting Conflicted Remuneration, as part of an initial induction for any person first becoming a representative after 1 July 2013, and otherwise periodically while the representative remained a representative;

(vi)    should have monitored SMSF Club's compliance with s 963G(1) of the Act, including by auditing the advice of its representatives (including SMSF Club) on a regular basis to enable RM Capital to ascertain the kinds of advice that SMSF Club representatives were providing and whether that advice was, or might be, affected by remuneration it accepted under any agreements or arrangements to which those representatives were party (including, in the case of SMSF Club, the Referral Agreement).

(b)    With respect to the Referral Agreement specifically, RM Capital:

(i)    should have applied the procedures referred to in paragraph (a)(iii)(A) and (B), alternatively (C) above;

(ii)    upon so doing, should have concluded that the Referral Agreement was a Conflicted Remuneration Arrangement; and

(iii)    thereafter, should have applied the procedure referred to in paragraph (a)(iii)(D), alternatively (E), above.

31    In broad terms, then, ASIC claims that RM Capital should have had in place a conflicts policy that explained and prohibited the acceptance of conflicted remuneration, procedures for RM Capital to approve (or withhold approval of) agreements under which its representatives might have received conflicted remuneration, and a compliance programme that addressed conflicted remuneration, including by way of training of representatives and monitoring of SMSF Club's compliance. ASIC specifically alleges that the approval procedure should have been applied to the Referral Agreement, and that this should have had the result that the agreement was terminated or amended to remove the possibility of conflicted remuneration.

32    ASIC alleges that RM Capital did not take any of those reasonable steps. To the extent that RM Capital contends that it took other steps that were reasonable to ensure that its representatives did not accept conflicted remuneration, ASIC says that those steps were insufficient in RM Capital's circumstances to satisfy the requirement in s 963F.

33    ASIC's case makes clear that it does not allege multiple failures and therefore multiple breaches during the relevant period. One contravention of s 963F is alleged.

34    The logic of ASIC's particulars concerning alleged steps specific to the Referral Agreement between SMSF Club and PRE is difficult to follow. This seems to be the result of misuse of the term 'alternatively' in paragraph (b), possibly coupled with errors in cross referencing. But RM Capital did not submit that these mistakes made the particulars embarrassing, or otherwise that it could not understand the case against it. If the particulars are read fairly, with due regard to inadvertent errors, it is clear that ASIC is alleging that RM Capital should, at a minimum, have required the Referral Agreement to have been submitted to RM Capital before approving it (which would have presumably have required it to be reduced to writing), and RM Capital should then have reviewed it to decide whether it would or might have involved conflicted remuneration and, if in any doubt, RM Capital should have taken legal advice. ASIC alleges that the outcome of that should have been to withhold approval of the Referral Agreement.

35    It is not clear how the review procedures for arrangements entered into before 1 July 2013 can apply to the Referral Agreement, which appears to have been entered into after that date, so I will have no further regard to paragraph (b)(iii) of the particulars.

A pleading point

36    It is convenient at this point to deal with a submission made by senior counsel for RM Capital to the effect that ASIC's case did not include any allegation that RM Capital learned anything during the relevant period which should have led it to act differently. He asserted that what was put against his client was a lack of policies and procedures. He also referred to Mr Richardson's view, explored below, that the referral fee that PRE was paying to SMSF Club was not conflicted remuneration, essentially because SMSF Club was not providing financial product advice. Senior counsel submitted that no case had been articulated that it came to learn of anything that required RM Capital to reconsider that view. This submission was put primarily by reference to ASIC's letter of particulars set out above.

37    I do not accept the submission. ASIC's letter of 21 May 2021 says that it gives particulars of reasonable steps that RM Capital should have taken to avoid the breach pleaded in paragraph 21 of ASIC's concise statement. It says that the general steps (that is, those not specific to the Referral Agreement) should have been taken 'from 1 July 2013'. It is not a snapshot of what should have been done as at that date.

38    Also, the letter is confined to a statement of the steps that should have been taken; it is not a complete statement of ASIC's case. It responds to a letter from RM Capital's solicitors seeking particularisation of steps, not knowledge. Therefore the lack of any mention in ASIC's letter of knowledge that RM Capital may have gained at any particular time does not imply that RM Capital's state of knowledge should be taken to be frozen throughout the period.

39    Further, paragraph 21 of ASIC's concise statement, as referred to in the letter, alleges a failure to take reasonable steps throughout the relevant period. This allegation relies on the matters set out in paragraph 16 of the concise statement which alleges, among other things, that during the relevant period:

(a)    RM Capital knew that SMSF Club was providing financial product advice;

(b)    RM Capital knew of the referral fees and the Referral Agreement, including by having asked for and facilitated the documentation of the agreement 'from 18 July 2014'; and

(c)    on 4 January 2014 RM Capital received advice (considered further below) that its draft conflicted remuneration policy was erroneous and inadequate.

40    I therefore consider that RM Capital received fair notice that whether it took reasonable steps was to be assessed in all the circumstances, including knowledge it acquired during the relevant period. It cannot be the case that the Court should proceed solely on the basis of what RM Capital knew on 1 July 2013. Further, much of the evidence described below about things RM Capital learned during the relevant period was adduced by RM Capital itself, or comes from a statement of agreed facts which it signed. It is not unfair to have regard to that evidence.

RM Capital's contentions

41    RM Capital argued that it did take reasonable steps to ensure that its authorised representatives did not accept conflicted remuneration. It presented four arguments in this regard.

42    First, RM Capital only allowed authorised representatives to provide financial advice relating to products on its approved products list, and RM Capital reviewed financial products prior to adding them to that list for consistency with relevant legislation, including the conflicted remuneration ban.

43    Second, RM Capital only appointed 'apparently appropriate' persons as authorised representatives. It did this through its Representative and Human Resources Policy, which required various checks into those seeking to become authorised representatives, including checking that the applicants had industry knowledge. RM Capital noted that the conflicted remuneration ban was well-known, implying that if applicants had industry knowledge, then it was likely that they would be aware of the conflicted remuneration ban.

44    Third, RM Capital periodically audited its authorised representatives and also monitored their remuneration by having remuneration payments made to RM Capital, rather than directly to the authorised representatives, and reviewing those remuneration payments regularly.

45    Fourth, RM Capital had a requirement for ongoing training and education by representatives, which included specific training and education on the FOFA reforms and the conflicted remuneration ban.

46    RM Capital submitted that these constituted reasonable steps given the organisation's relatively small size and profitability. RM Capital also submitted that it took additional steps with SMSF Club specifically, including asking that the referral agreement between SMSF Club and PRE be reduced to writing and reviewing SMSF Club's marketing materials.

The issue

47    It is not necessary to restate the competing contentions in the form of specific issues for determination. There is really only one issue in the proceeding as between ASIC and RM Capital at the present stage of the proceeding, concerning whether s 963F of the Act was breached: during the relevant period, did RM Capital take reasonable steps to ensure that SMSF Club did not accept conflicted remuneration?

IV.    Statutory framework and principles

48    The relevant statutory provisions appear in Chapter 7 of the Corporations Act, which regulates financial services and markets. The stated objectives of the chapter include the promotion of fairness, honesty and professionalism by those who provide financial services: s 760A(b). The provisions described below are as at the commencement of the relevant period, that is 1 August 2013. There were no significant amendments during the relevant period.

Licensing and representation of financial services providers

49    Part 7.6 provides for the licensing of providers of financial services. Under s 911A(1) and s 911A(2)(a)(i), a person who carries on a financial services business must hold an AFSL covering the provision of the financial services, unless the person provides the service as a representative of the holder of an AFSL that covers the provision of the service.

50    Relevantly to the relationship between RM Capital and SMSF Club, s 911B(1)(b) permits the provision of a financial service on behalf of a principal who carries on a financial services business if the principal holds an AFSL, the provider of the service is an authorised representative of the principal, and the authorisation covers the provision of the service. 'Authorised representative' of a financial services licensee is defined in s 761A to mean a person authorised in accordance with s 916A or s 916B of the Act to provide a financial service or financial services on behalf of the licensee. As has been said, SMSF Club was authorised by RM Capital to provide financial services, and so was its authorised representative under s 916A. Section 916B effectively permits authorised representatives to grant sub-authorisations to individuals, such as their employees, with the financial services licensee's written consent: s 916B(3).

51    Section 912A(1) of the Act imposes general obligations on the holder of an AFSL, that is, a financial services licensee. Several of them should be noted, namely the obligations to:

(a)    do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and

(aa)    have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and

…

(ca)    take reasonable steps to ensure that its representatives comply with the financial services laws; and

(d)    unless the licensee is a body regulated by APRA - have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and

…

(f)    ensure that its representatives are adequately trained, and are competent, to provide those financial services; and

…

(h)    unless the licensee is a body regulated by APRA - have adequate risk management systems …

52    ASIC does not allege that RM Capital has breached any of these obligations, but they are relevant because they inform the proper construction and application of the provision that is alleged to have been breached, s 963F. One of the necessary criteria for the grant of an AFSL by ASIC is that ASIC has no reason to believe that the applicant for an AFSL is likely to contravene the obligations that will apply under s 912A if the licence is granted: s 913B(1)(b). The legislation therefore contemplates a certain level of confidence (albeit framed in negative terms) that the licensee will act in accordance with s 912A.

53    Under s 916A(1) of the Act, the financial services licensee may make a person an authorised representative by giving them a written notice authorising the person for the purposes of Chapter 7 to provide a specified financial service or financial services on behalf of the licensee. An authorisation may be revoked at any time by the licensee giving written notice to the authorised representative: s 916A(4). A potential authorised representative need satisfy no criteria in order to be appointed, and the financial services licensee need not obtain the approval of ASIC or anyone else in order to appoint a particular authorised representative, although it does need to notify ASIC of the appointment: s 916F(1). Part 7.6 Division 6 imposes liability on licensees for the conduct of their authorised representatives.

54    The point of describing these provisions is that they show that the overall scheme of Part 7.6 is that ASIC regulates applicants for AFSLs, including assessing their competence and integrity, and the Part then places on the approved licensee the principal responsibility of selecting appropriate authorised representatives and supervising their conduct. That informs the proper construction of the provision that RM Capital is alleged to have breached, s 963F.

Part 7.7 Division 4 - Conflicted Remuneration

55    Section 963F is in Part 7.7A of the Act, entitled 'Best interests obligations and remuneration'. The best interests obligations are obligations in Division 2 which includes s 961B(1), requiring providers of personal advice to act in the best interests of the client in relation to the advice, and s 961J, requiring that in a situation of conflict, priority must be given to the interests of the client when giving personal advice. Division 3 is about ongoing fee arrangements.

56    The directly relevant provisions are in Division 4, entitled 'Conflicted remuneration'. Section 963A provides that:

Conflicted remuneration means any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:

(a)    could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or

(b)    could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.

57    There is a range of exceptions to this definition in s 963B to s 963D, which are not relevant to the proper construction of s 963F. They relate to insurance products and basic banking products.

58    'Representative' in this context is defined in a way that includes authorised representatives, directors, employees, or any other person acting on behalf of the financial services licensee: s 910A, s 960. 'Financial product', 'financial product advice' and 'retail client' are also defined elsewhere in the Act. It is not necessary to set those complicated definitions out. It is common ground that the business of SMSF Club involved giving financial product advice to retail clients, however as has been noted, RM Capital does not admit that the particular conduct of SMSF Club on which ASIC relies constituted financial product advice. I reconcile those two things by understanding that RM Capital wishes to keep in issue the question of whether, to the extent that clients of SMSF Club did use their SMSFs to buy property through PRE, that was the result of any financial product advice given by SMSF Club, as distinct from advice about acquiring real property received from PRE. Since, as discussed above, these reasons do not determine any question of contravention by SMSF Club, I need not determine that issue here.

59    Some comments on the definition of 'retail client' in s 761G should, however, be made. In broad terms, that section provides that certain financial products or services, such as superannuation products or some kinds of general insurance products, are provided to individuals as retail clients: see s761G(5), s 761G(6). Financial products or services that do not fall into these categories may be provided to a person as a retail client unless they exceed a certain value, or are provided in connection with a business that is not a small business, or they are provided to persons who have certificates from a qualified accountant that they have net assets or gross income of a certain value: s 761G(7).

60    It is also relevant to note a distinction drawn in s 766B(3) and s 766B(4) between 'personal advice' and 'general advice' as follows:

(3)    For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:

(a)    the provider of the advice has considered one or more of the person's objectives, financial situation and needs … or

(b)    a reasonable person might expect the provider to have considered one or more of those matters.

(4)    For the purposes of this Chapter, general advice is financial product advice that is not personal advice.

61    Section 963E applies to both kinds of advice. It is found in Subdivision C, which is entitled 'Ban on conflicted remuneration'. The section provides, in as many words, that a 'financial services licensee must not accept conflicted remuneration'. It is relevant to appreciate that this is a simple ban, to which no specific defences or carveouts are attached (other than those inherent in the definition of conflicted remuneration mentioned above, and some grandfathering arrangements described below [67]). So disclosure of conflicted remuneration, for example, does not avoid the prohibition.

62    In that context, s 963F is as follows:

Licensee must ensure compliance

A financial services licensee must take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration.

Note: This section is a civil penalty provision (see section 1317E).

63    Section 963G prohibits authorised representatives from accepting conflicted remuneration. Again, subject to an irrelevant exception, this is a simple ban with no exception for disclosure to the client.

64    Section 963H prohibits other representatives (such as employees) from accepting conflicted renumeration. Section 963J and s 963K prohibit, respectively, employers and issuers or sellers of financial products from giving conflicted remuneration. Section 963L contains a presumption for the purposes of the division to the effect that certain 'volume-based benefits' are conflicted remuneration. An example is commissions calculated as a percentage of the total value of financial products acquired by retail clients: see s 963L(a)(ii).

65    Division 5 of Part 7.7A bans other kinds of remuneration. Division 6 contains an anti-avoidance provision.

Enactment of Part 7.7A and transitional provisions

66    Part 7.7A was introduced as part of a legislative package generally known as the 'future of financial advice' (FOFA) reforms. The Part commenced on 1 July 2012, but under s 1528, Division 4 did not apply to a benefit given to a financial services licensee or a representative if it was given under an arrangement made before 1 July 2013 (or earlier if the licensee chose to give a notice to ASIC under s 967 providing for earlier application of the Part).

67    Section 1528, however, provides that the regulations may prescribe circumstances in which Division 4 applies or does not apply. One regulation made for that purpose was reg 7.7A.16B of the Corporations Regulations 2001 (Cth), which came into effect on 1 July 2013. Broadly, its effect is to limit the grandfathering effect of s 1528, so that it expires on 1 July 2014. So benefits received after that date can breach the conflicted remuneration provisions, even if they were given under an arrangement made before 1 July 2013. Since there is no evidence that the Referral Agreement was in force before August 2013, this may not matter, but even if it did predate the commencement of the relevant period, any receipt of conflicted remuneration under it after 1 July 2014 would be a breach of the Act.

What s 963F requires

68    There is no case law specifically on the construction of s 963F of the Act. The section has been found to have been contravened in two decisions: Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570 at [78], [83]; and Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786 at [242], [250]. In the first of those cases, the contraventions were admitted and there was no occasion to consider the meaning and effect of the provision. In the second case, the contraventions were in dispute but, while the meaning of the prohibition on the acceptance of conflicted remuneration in s 963E was in issue, the construction of s 963F was not.

69    There have, however, been contested cases concerning s 961L of the Act, which requires financial services licensees to 'take reasonable steps to ensure that representatives of the licensee comply with' the best interests obligations in Part 7.7A Division 2. ASIC and RM Capital agreed that principles stated in those cases were applicable to the equivalently worded obligation in s 963F for financial services licensees to 'take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration'.

70    In particular, in Australian Securities and Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69 at [105]-[106], Lee J made a number of observations about s 961L, which can be summarised as follows, in so far as they are relevant to s 963F:

(a)    the word 'ensure' is forward looking, being directed to the taking of steps to achieve compliance with statutory norms, including the best interest obligations, before any particular instance of non-compliance has arisen;

(b)    although the seriousness of the obligation is amplified by the use of the word 'ensure', the onerousness of the standard is moderated by the requirement to take 'reasonable steps';

(c)    the text of s 961L focusses on the conduct of the financial services licensee, not the representative, and whether the licensee has taken reasonable steps, albeit steps directed at the conduct of the representatives;

(d)    there is nothing in the text of s 961L that makes a contravention of the best interests obligations (by the representative) a pre-requisite to a contravention of s 961L - the latter can occur without the former; and

(e)    the converse may also be the case, that is, a conscientious licensee may have taken reasonable steps even though a representative has 'gone rogue' and contravened the best interests obligations, and in that instance the licensee would not be taken to have breached s 961L.

71    Moshinsky J accepted those observations in Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877 at [395]. His Honour also noted (at [392]) that the obligation imposed by s 961L is to take reasonable steps, not to find and to take optimal steps. As examples of steps that could be taken, his Honour said the following (at [396]):

Although the duty in s 961L is broad, the case law has begun to fill in the contours of what is expected of a licensee by way of compliance with the provision. The authorities indicate that s 961L may require a licensee to take steps to ensure representatives are competent, to monitor and supervise them (including in relation to advice processes, advice quality and conflicts of interest), to ensure compliance concerns are escalated, and to take action that is commensurate with the risks presented by such concerns: see, eg, Australian Securities and Investments Commission v Financial Circle Pty Ltd (2018) 131 ACSR 484 at [62], [67]; AMP Financial Planning at [57]-[62]; AGM Markets at [488]-[499].

72    These things were said in the context of an obligation to take reasonable steps to ensure compliance with different obligations to those in Division 4. But all the provisions appear in the same Part of the Act, a part that is evidently aimed at ensuring that those giving financial product advice to retail clients must give priority to the best interests of those clients. The conflicted remuneration provisions help achieve that aim by seeking to prevent those giving financial product advice to retail clients from being distracted from the best interests of those clients by incentives that could reasonably be expected to influence the financial product they recommend or the advice they give. And both s 963F and s 961L impose obligations on financial services licensees in connection with the conduct of their representatives which are part of the supervisory role already mentioned. I accept that the observations about s 961L set out above apply equally to the obligation in s 963F.

73    I would add that ASIC will not establish a contravention of s 963F merely by pointing to particular steps directed towards preventing acceptance of conflicted remuneration that were reasonable, and which RM Capital could have taken, but did not. The provision is not expressed as an obligation to take all reasonable steps to ensure that representatives do not accept conflicted remuneration. And even if it had been, it would probably not require identification and performance of either the universe of possible reasonable steps, or the 'one true path' that must be followed. In Construction, Forestry, Maritime, Mining and Energy Union v Mechanical Maintenance Solutions Pty Ltd [2022] FCAFC 15; (2022) 289 FCR 508 at [169], O'Callaghan and Wheelahan JJ made the following observations about the requirement in s 180(5) the Fair Work Act 2009 (Cth) for an employer to take 'all reasonable steps to ensure' that the terms and effect of a proposed enterprise agreement are explained to employees in an appropriate manner:

For the purposes of s 180(5), the Commission must be satisfied that 'all reasonable steps' were taken to ensure that the terms of the agreement and their effect were explained to the relevant employees. We do not consider that this requirement necessarily involves the identification of the universe of reasonable steps, and requires that the Commission be satisfied that every one of those steps was taken. Often, a requirement to take all reasonable steps to achieve a particular outcome may be met in different ways. The fact that one reasonable path is chosen over others need not result in a conclusion that all reasonable steps were not taken. For instance, it might be reasonable to explain the terms of an agreement by a written document, or by PowerPoint slides, or by face-to-face meetings as occurred here, or by a combination of those means. The choice of one form of words, or one reasonable medium of communication over others may be relevant to the evaluation that the Commission must make. But the legislation contemplates that there be flexibility. That flexibility arises particularly from s 180(5)(b) which requires that the employer take all reasonable steps to ensure that the explanation is provided in an appropriate manner taking into account the particular circumstances and needs of the employees. If an employer in a particular case pursues a path of explanation and mode of communication that is reasonable, the standard of reasonableness may not require that the employer pursue all parallel means of explanation and communication to achieve the same end.

74    This was obviously said in a different context, and the parts of the Act relevant here do not specifically contemplate flexibility. Nevertheless, I respectfully consider that a similar approach should be taken when applying s 963F of the Act. The section does not require a financial services licensee to take every reasonable step that could be taken. Nor, in any particular fact situation, is there necessarily one and only one set of reasonable steps which, if taken, would satisfy the requirement. To that extent, I accept a submission by RM Capital that the section leaves the question of precisely what to do to the financial services licensee, provided that what is done is reasonable. What constitutes reasonable steps to ensure that representatives do not accept conflicted remuneration will be a question of fact that depends on all the circumstances of the businesses and the activities carried on by the financial services licensee and its representatives: see by analogy Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 197-198 (Lord Diplock).

75    By the same token, whichever path to compliance the financial services licensee has chosen, its sufficiency is not left entirely to its discretion. A licensee will not escape a finding of breach of the section merely by pointing to one or two reasonable steps that it did take. The words 'reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration' are to be read together. They require the licensee to take a set of steps that, in the circumstances, and if taken together, amount to reasonable steps to prevent the acceptance of conflicted remuneration by the representatives. I therefore accept a submission made by ASIC that it is the steps taken by a licensee in totality that must be reasonable.

76    Consistently with the approach the law invariably takes to inquiries of this kind, the question must be answered objectively, and not by reference to what the licensee thinks is reasonable: see Department of Health v Multichem Laboratories Ltd [1987] 1 NZLR 334 at 339 (Eichelbaum J); Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291 at [179] (Middleton J); Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (recs and mgrs apptd) (in liq) [2014] VSC 516 at [546] of the Appendix (Croft J); Ngankiburka-Mekauwe (Senior Woman of Water) Georgina Williams v Minister for Aboriginal Affairs and Reconciliation [2018] SASC 163 at [52] (Stanley J).

77    It must similarly be the case that the objective assessment is made on the assumption that the financial services licensee has a correct understanding of the law. If, for example, the financial services licensee had an erroneous understanding that the prohibition only applied in connection with personal advice and not general advice, that could not provide a defence. It is fundamental to the taking of reasonable steps under s 936F that the licensee inform itself adequately as to the nature of the ban.

78    Nevertheless, the state of the licensee's knowledge of all the circumstances will inform what it could reasonably have been expected to do. The inquiry may also require consideration of the degree of difficulty and practicability of any given steps, as well as the costs associated with them. The reasonableness of a given step must be assessed in all the relevant circumstances of the licensee in question. For example, a particular step may be reasonable, in the sense that it is easy to take and directed to the goal, but at the same time unnecessary, because the licensee has a comprehensive programme of other measures in place, to which the proposed additional step adds nothing. Or, there could be numerous steps that are reasonable when taken individually, but unreasonably burdensome if the licensee were required to take them all. Or there could be a step that appears reasonable in the abstract, but unreasonable or impossible in the circumstances of the particular licensee.

79    The relevant circumstances may also include characteristics of the representative: an experienced representative with a good track record of compliance might require less intensive supervision than an inexperienced one, or one who has previously demonstrated ignorance or disregard of the requirements of Chapter 7 of the Act.

80    Having said all that, positing steps that could have been taken but were not can still be helpful. It is an obvious way of testing the reasonableness of what was (and was not) done. But the focus of the inquiry must always be on whether the steps that were taken in their totality were reasonable. That must be assessed having regard to the importance of the goal of preventing acceptance of conflicted remuneration, and having regard to the circumstances of the case.

81    As noted in AMP Financial Planning, the obligation is to take reasonable steps to 'ensure' something, thus amplifying the seriousness of the obligation. The title to the section further emphasises the importance of the goal, because it simply says that the licensee must ensure compliance, and makes no reference to reasonable steps. While of course the operative text of the provision takes precedence, the title of the section cannot be ignored: s 13(1) Acts Interpretation Act 1901 (Cth); Quikfund (Australia) Pty Limited v Airmark Consolidators Pty Limited [2014] FCAFC 70 (2014) 222 FCR 13 at [81]; Waensila v Minister for Immigration and Border Protection [2016] FCAFC 32; (2016) 241 FCR 121 at [41].. It is further amplified by the importance of the goal; in the context of the stated objectives of Chapter 7 and the evident objectives of Part 7.7A as a whole as canvassed above, the goal of preventing the acceptance of conflicted remuneration is an important one. That is reinforced by the fact that significant civil penalties may be imposed if it is breached: up to $200,000 for an individual and $1,000,000 for a body corporate (s 1317G(1E) and s 1317G(1F)).

82    The importance of the goal is also increased by the fact that the conflicted remuneration provisions only apply in relation to advice to retail clients. That concept, as described above at [59], implies a certain level of vulnerability in members of the class of retail clients that may require licensees to take greater pains to ensure that they are protected from conflicts of interest which, in the eyes of the legislature, are inherent in the acceptance of conflicted remuneration by financial advisers.

83    All of this means that steps that result in significant cost, inconvenience or difficulty to a licensee may still be reasonable ones to ensure that representatives do not accept conflicted remuneration. That is especially so given the relationship between licensees and representatives that emerges from the provisions of Chapter 7. As described above, the scheme of the licensing provisions of the chapter is, broadly, to give licensees relative freedom in whom they appoint as representatives, but to impose on the licensees a commensurate obligation to ensure the competence of the representatives and the lawfulness and propriety of their conduct.

84    Since the focus is on the conduct of the licensee, not the conduct of representatives, whether a contravention has occurred is to be determined independently of whether there have been particular contraventions by representatives: see AMP Financial Planning at [123]. ASIC expressly eschewed any attempt in its case against RM Capital to establish that SMSF Club contravened s 963G, so the separate question posed in the present case is to be answered on the basis that no actual breaches of s 963G by SMSF Club have been alleged or proven.

85    But that does not mean that instances in which conflicted remuneration may have been received are irrelevant. Those instances can shed light on both the extent of the risk and on the nature of steps that could be taken to prevent it. The exercise of assessing what is reasonable is not an abstract or entirely hypothetical one. It requires attention to the actual circumstances, which may include circumstances of proven or possible breach. Action must be taken that is commensurate with the risks presented by any compliance concerns: RI Advice Group at [396]. At the very least, if a licensee is aware of certain circumstances, this may require it to take more, or more onerous, steps if those steps are to be assessed as reasonable in the circumstances. It is, however, important not to assess this from a position of hindsight: Ngankiburka-Mekauwe at [52].

86    I am conscious that none of the above discussion produces hard and sharp rules to give specific guidance to licensees and ASIC as to what constitutes reasonable steps. But a provision such as s 963F is not susceptible to reduction to rules of that kind. It is a provision that applies across a wide range of licensees and representatives, from multi-billion dollar listed companies to small stockbrokers.

V.    The evidence

87    I will now set out an account of the evidence, to the extent that it was relevant. Much of what follows appears in the SOAF and so is common ground between the parties. It is doubtful whether the SOAF is a statement of agreed facts for the purposes of s 191 of the Evidence Act, because SMSF Club has not signed it and so the facts in it may not have been agreed by 'the parties to a proceeding' for the purposes of the section. But unsigned statements of agreed facts can still be received as evidence by a court, consistent with the policy underlying s 191: see Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166 at [36] (Foster J). No issue arose in this case whereby the further effect of s 191 - that evidence cannot be adduced to contradict or qualify a statement of agreed facts that has effect under that section - became relevant. I will treat the SOAF as uncontradicted evidence admitted by the consent of the parties to the separate issue after, no doubt, significant negotiation and careful consideration by them. I will therefore give it substantial evidentiary weight.

88    I will commence with a brief general assessment of the evidence of the only witness who was cross examined, James Richardson. After that, the account can be broken into evidence specific to SMSF Club and RM Capital's relationship with it, and more general evidence as to what RM Capital did in relation to the FOFA reforms, including the policies and procedures that it did, and did not, have in place. Rather than set out the evidence strictly chronologically, it will be convenient, for the most part, to describe the SMSF Club-specific evidence first, as it provides context for the more general evidence.

James Richardson

89    Mr Richardson is a principal of RM Capital and was called as a witness by it. He has a Diploma of Financial Planning, and over 35 years' experience in financial services, including the provision of advice about listed and unlisted financial products. He has been a director of RM Capital since 1994. He is also an authorised representative of RM Capital.

90    I consider that Mr Richardson was giving his evidence as truthfully as he could. He displayed a level of wariness in the witness box which was only to be expected of someone who was being cross examined at the culmination of what he described as '[d]ealing on this matter for seven years'. That wariness frequently led him to ask the cross examiner to repeat the question or to indicate that he did not understand it. But I do not consider that this rose to the level of obstruction or evasion. Mr Richardson was willing to make concessions when the circumstances warranted it. While he often did not remember details, that is unsurprising, given that he was asked questions about whether he read particular policy and regulatory documents, and even different versions of the same document, up to nine years before he gave his evidence.

91    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. 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.

92    I will now turn to describe the relevant evidence. If no specific timing is given for any matter described below, it subsisted or took place within the relevant period.

RM Capital and its compliance personnel

93    When RM Capital was incorporated was not in evidence. Mr Richardson has been a director since at July 1994; when its other present director, Guy Le Page, became a director was also not in evidence. At all relevant times the company has carried on the business of providing financial services, including wealth management, securities trading and financial planning. It has held its AFSL since August 2002.

94    RM Capital's offices are in Perth. In addition, 17 corporations and approximately 39 individuals were authorised representatives of RM Capital at some point during the relevant period. These authorised representatives were based variously in Perth, Sydney and Melbourne.

95    RM Capital's financial statements do not reveal a large operation. In the three financial years that roughly correspond to the relevant period, its gross income rose from $2,291,403 to $3,719,368, its profit before income tax rose from $100,037 to $256,113 and its net assets (equity) rose from $738,008 to $921,983.

96    Mr Le Page held the position of RM Capital's 'responsible manager' within the meaning of ASIC's Regulatory Guide 105 (which was not in evidence). In that capacity, he was ultimately responsible for RM Capital's compliance with financial services laws. Mr Le Page swore an affidavit in the proceeding, but for reasons not explained RM Capital did not read that affidavit into evidence and so Mr Le Page was not cross examined.

97    Three other individuals are named in the SOAF as employees who had duties that included unspecified compliance matters, but it does not appear that any of those persons were solely devoted to a compliance role. They reported to the directors, Mr Richardson and Mr Le Page. Two of those individuals, who appear in the evidence discussed below, were Jenni Kosonen and Joseph Ho. Mr Ho also gave an affidavit which was admitted into evidence.

98    RM Capital also engaged two external consultancies to advise it about compliance (and other things). They were, first, GRC Essentials Ltd, and then Compliance Plus (WA) Pty Ltd. The services of both of those companies were principally provided by Reena Shah (who was called by RM Capital to give evidence) and her colleague, Jacqui Stewart. They assisted RM Capital with compliance, including by conducting compliance reviews and audits of client files of its representatives.

99    The agreement between RM Capital and each of those consultancies (the agreement with GRC Essentials was novated to Compliance Plus from 1 July 2014) provided for them to give RM Capital a minimum of 70 hours of compliance services per annum, excluding time spent on file audits. This could be increased to up to 200 hours if the consultancy was asked to help to respond to complaints or ASIC notices.

100    During the relevant period, RM Capital had a Compliance Committee, comprised of the directors, one or more of the employees mentioned above, and Ms Stewart and/or Ms Shah. The Compliance Committee held quarterly meetings, which were minuted.

SMSF Club's appointment as authorised representative

101    According to Mr Richardson, Mr Beeton had been a professional and personal friend of his since 2005. Mr Beeton and his brother had a company that was an authorised representative of RM Capital in 2005 and 2006. But in June 2013, Mr Beeton visited Perth and told Mr Richardson that he and his brother had fallen out, and so Mr Beeton wanted to establish a new corporate authorised representative with RM Capital.

102    In the discussions that ensued, Mr Beeton told Mr Richardson that his company, SMSF Club, was (among other things) providing advice and information pertaining to SMSFs, and that its 'business model was premised on servicing a market sector comprised of people wishing to operate and manage their own self-managed super fund': first affidavit of Mr Richardson sworn 3 July 2020 (Richardson I) para 98.

103    In an email to Mr Richardson on 24 July 2013, Mr Beeton said that SMSF Club's business plan was 'to provide general advice relating to everything SMSF related', including 'Direct property'. In the email he appeared to suggest that the giving of advice on some subjects would be 'outsourced especially that of direct property. I will have an internal lawyer who will establish smsf's and the bare trust if buying a property. This will be as an outsourced relationship though'. And, he said, 'If we refer a client to the property sourcing firm we may also receive a kick back. Still in discussions though'.

104    RM Capital appointed SMSF Club as its authorised representative by way of a written Corporate Authorised Representative Agreement dated 7 August 2013. The operative clause of the agreement, clause 2.1, appointed SMSF Club:

to act as an authorised representative of RM Capital within the meaning of Chapter 7 of the [Corporations Act] for the duration of the Term and to carry out the following activities in connection with the Business:

2.1.1    to promote investments in, or the acquisition of, Authorised Financial Products;

2.1.2    to advise Clients in relation to Authorised Financial Products on the basis of the product information supplied to, or arranged to be supplied to, the Corporate Authorised Representative by RM Capital from time to time; or

2.1.3    to arrange investment in, or the acquisition of, Financial Products which are Unauthorised Financial Products but only in accordance with clause 2.2.

105    Authorised Financial Products were defined as follows (cl 1.1.7):

those Financial Products determined by RM Capital from time to time as the Financial Products which may be promoted to Clients, as advised to the Corporate Authorised Representative in RM Capital's approved products list (as amended from time to time).

RM Capital's case placed great reliance on the approved products list mentioned here, and the subject was addressed in evidence that will be described further below.

106    Clause 2.2 of the Corporate Authorised Representative Agreement required the prior written approval of RM Capital before SMSF Club was permitted to arrange investments in, or advise in relation to, 'Unauthorised Financial Products', unless the client selected the product without any advice from SMSF Club.

107    Under clause 4.2.1 of the Corporate Authorised Representative Agreement, SMSF Club agreed to 'have a sound working knowledge of, and to comply with, the [Corporations Act], ASIC Regulatory Guides and Practice Notices and all other Applicable Laws, standards, orders, regulations, directives and policies in force from time to time'. It also agreed to comply with 'Manuals' (a defined term which included 'compliance manuals of policies and procedures' provided by RM Capital), policies and procedures and all legislative and ASIC requirements and to obtain and maintain an up to date knowledge and understanding of the terms and materials contained in the Manuals, policies and procedures: cl 4.2.4. SMSF Club was further required to comply with 'all of RM Capital's policies and procedures which are in place as amended from time to time and all reasonable and lawful directions of RM Capital': cl 4.2.5. There was no reference to the prohibition on receipt of conflicted remuneration in the agreement.

108    RM Capital was able to terminate the Corporate Authorised Representative Agreement at any time on giving written notice: cl 15.1.

109    SMSF Club was obliged to pay RM Capital 30% of any fees earned by it on Corporate Finance Transactions: cl 7.3.2 and Schedule Item 12. Corporate Finance was defined very widely: cl 1.1.15.

The Referral Agreement

110    According to Mr Richardson's evidence, in 2013, sometime after the appointment of SMSF Club as an authorised representative of RM Capital, he had a conversation with Mr Beeton in which Mr Beeton said that there was a referral arrangement between SMSF Club and PRE. Mr Beeton's description of the arrangement, according to Mr Richardson's evidence (Richardson I para 110) was that:

110.1.    PRE was a property developer based in Sydney;

110.2.    the agreement involved:

110.2.1.    PRE referring to SMSF Club persons who PRE considered may want to acquire real property by the vehicle of a SMSF;

110.2.2.    SMSF Club then facilitating the establishment of a SMSF and the establishment of a bare trust; and

110.2.3.    SMSF Club providing to persons referred by PRE only those services and not providing those persons with any advice;

110.3.    SMSF Club's clients paid a $2,500 fee to SMSF Club, for the services of SMSF Club in establishing a SMSF and a bare trust, which fee was purely for administration and other costs associated with the SMSF fund, rather than associated with the bare trust;

110.4.    if those clients then subsequently acquired a property through PRE, a referral fee of $5,000 would be paid to SMSF Club; and

110.5.    the referral agreement was a mechanism for him to acquire new clients, rather than prospecting in the marketplace.

111    Mr Richardson's evidence about the reference here to a bare trust was that, at the time, he 'understood a bare trust to be an arrangement that sat inside a SMSF that the trustees of the SMSF had to initiate in order to be able to acquire a property, which operated as a requirement … that had to be met before the SMSF could purchase property' (Richardson I para 111).

112    Mr Richardson had a number of conversations in which he asked Mr Beeton whether he was giving advice about buying property. These occurred 'at and later on from when he first told me about the referral agreement with PRE' (Richardson I para 112). Mr Beeton told Mr Richardson that 'he was not giving advice about specific or direct property investment'. Mr Richardson saw no reason to doubt what Mr Beeton told him. He thought it was not inconsistent with what he had seen at a seminar he had attended, at which Mr Beeton had spoken. According to Mr Richardson (Richardson I para 108), Mr Beeton had 'conducted an informative presentation on information regarding self-managed super funds'. He attended the seminar (in Melbourne) in 2014, so presumably the conversations with Mr Beeton, and the views Mr Richardson formed, extended into that year.

113    Mr Richardson's evidence about those views was as follows (Richardson I):

114.    I did not consider that the referral fees constituted conflicted remuneration, which the FOFA reforms prohibited. I knew that property was not a financial product. The arrangement described by Mr Beeton did not involve SMSF Club giving any advice. Consequently, there was no financial product advice, or any other financial services, that SMSF Club would be providing which could be influenced by the payment of the referral fees. The other services which SMSF Club provided were independent of, and had no relationship with, the referral fees or the acquisition of property by an SMSF.

115.    I also believed that other activities undertaken by SMSF Club fell outside the scope of that referral arrangement and would not be influenced by the referral agreement.

116.    In all matters pertaining to RM Capital's obligations as a licensee, in forming a view as to what is and what is not appropriate, I seek internal advice and external advice. After becoming aware of the referral agreement, I would have sought advice internally and externally.

117.    I received advice internally within RM Capital from Mr Le Page, and externally from Ms Stewart or Ms Shah of GRC Essentials. Nobody suggested that the fees payable to SMSF Club by PRE constituted, or the referral agreement involved, conflicted remuneration.

118.    Specifically, I recall having a meeting with Ms Stewart and Ms Shah from GRC Essentials at RM Capital's offices in late 2013 or early 2014, during which I asked them to the effect if the referral agreement had any potential implications regarding FOFA. Neither Ms Stewart nor Ms Shah raised any issues.

119.    RM Capital did not seek legal advice about the referral agreement. I did not perceive any need to do so. Nobody from whom I sought advice, internally within RM Capital or externally, suggested to me that there were any issues which may warrant legal advice. Also, I was aware (I cannot now recall exactly when and how I became aware) that both Ms Stewart and Ms Shah, although they were not lawyers, had qualifications that involved some legal qualification. They operated a professional compliance advisory business. I expected that both Ms Stewart and Ms Shah would be able to identify any potential legal issues, and at least advise me if legal advice should be obtained.

114    Senior counsel for RM Capital properly accepted that Mr Richardson's evidence in paragraph 116 of his affidavit that he 'would have sought advice internally and externally' may be understood as being about following a general practice, rather than a specific recollection, and that is indeed how I understand it.

115    Ms Shah gave the following evidence in her affidavit:

125.    In 2014, I attended a meeting at RM Capital. Mr Richardson was running late for the meeting. Consequently, prior to the meeting starting, Ms Kosonen and I had a discussion about anything she was aware of that we could start ticking off before Mr Richardson arrived. Ms Kosonen said to me words to the effect that there was an approved arrangement between SMSF Club and a property group. She did not know the name.

126.    I asked Ms Kosonen about the details of the arrangement.

127.    Ms Kosonen said to me words to the effect that there was a flat fee to be paid to SMSF Club by the property group for the property referral. She told me that she was not aware of the exact dollar amount. She said words to the effect that she knew it was a flat fee, but she would get the details from Mr Richardson when he arrived.

128.    This was the first time the arrangement was brought to my attention.

129.    When Mr Richardson arrived, he said that Justin (a reference to Justin Beeton) was working on an arrangement, and he would let me know the details once it was put in place.

130.    I said words to the effect that, if there was financial remuneration being exchanged, there should be a formalised agreement in place. I also suggested updating the FSGs [financial services guides provided to clients] and the SOA [statement of advice] template for the disclosures of any payments. I also said words to the effect that, because general advice clients may not necessarily receive SOAs, those clients needed to be specifically notified via a letter so that they were aware of the payments.

116    The respective accounts of Ms Shah and Mr Richardson are difficult to reconcile. It will be necessary to analyse them, and make findings, below.

117    In any event, it appears that Ms Shah's advice that there should be a formalised agreement in place was accepted, as eventually SMSF Club and PRE entered into a written Referral Agreement. But it took until 7 September 2015 for this to happen. Mr Richardson said in his affidavit that it took some time, and passed on an explanation he received from Mr Beeton that it had been difficult to get agreement from PRE about formalising the arrangement.

118    Clause 1 of the written Referral Agreement provides:

From time to time, the Referrer [PRE] may refer Client(s) to Entity [SMSF Club] on the terms contained in this Agreement.

The referral fee will be calculated as a $5,000 AUD fee to be negotiated between the parties when clients of the referrer use the services of the entity and associated entities for the establishment of a Bare Trust within an SMSF and purchase property through the Referrer.

119    Mr Richardson assumed that the terms of the written agreement and the previous oral agreement were the same. The SOAF stipulates that the written agreement was in materially the same terms as the oral agreement.

120    It may be observed that the written agreement does not say who should pay the fee to whom, and it might be thought that since PRE is in name and in substance the party doing the referring, the fee would be payable to it. But it was common ground in this proceeding that under both the written Referral Agreement and its unwritten predecessor, it was PRE who was liable to pay and did pay the referral fees to SMSF Club. The crux of the arrangement, as expressed in the closing words of clause 1, was that the client would purchase real property through PRE.

121    On 15 May 2015, RM Capital identified that the Referral Agreement gave rise to a conflict between the interests of SMSF Club and the interests of its clients. Mr Ho, who appears to have been providing compliance services to RM Capital under contract at this time, made an entry noting the conflict of interest in a conflicts of interest register maintained in RM Capital's Cometrix system. Cometrix was a cloud-based repository for policy and procedure documents and registers. Mr Ho's entry summarised the arrangement as follows:

Informal arrangement has been in place since August 2013 and request for referral agreement has been discussed in 2014 and formal agreement executed in September 2015. Arrangement is for SMSF Club to receive up to 30% of commissions / $5000 received by Positive Real Estate when one of the SMSF Club clients purchase a property using Positive Real Estate and where that client was originally referred to SMSF Club by Positive Real Estate.

122    In a field for 'Licensee Comments', Mr Ho entered:

Where personal advice is provided to any of the referred clients because they opt for personal advice disclosure will occur in SOA. However where the client opts to receive only general advice disclosure is noted in the FSG and further disclosure to discussed with the client prior to investing.

123    The evidence does not disclose what prompted these entries in the register. In any event, RM Capital did not at any time before receiving a notice from ASIC mentioned below identify referral fees or any benefit conferred under the Referral Agreement as conflicted remuneration. It did not before or during the relevant period seek or obtain legal advice as to whether referral fees or any benefit that may be provided to SMSF Club or RM Capital under the referral agreement could constitute conflicted remuneration.

124    RM Capital received the referral fees payable to SMSF Club under the Agreement between 12 March 2014 and 17 August 2015 and disbursed a portion of the fees to SMSF Club, after taking its percentage. However after that period ended, SMSF Club continued to receive the referral fees from PRE direct. The fees received by RM Capital ranged between $212.50 and $5,142.50. (The reference to 30% of commissions in Mr Ho's note above may explain why, in many cases, the referral fee paid by PRE to SMSF Club was less than $5,000.)

125    Mr Richardson's evidence about the cessation of the referral fees from mid-2015 was (Richardson I para 149):

During RM Capital's regular monitoring of payments received by RM Capital in respect of SMSF Club, we noticed the lack of referral fee payments. When I became aware of this, I wondered what was going on, whether the relationship between SMSF Club and PRE was still continuing, whether there was a breakdown in that relationship and/or whether something else was going on.

126    Sometime after payment of the referral fees ceased, Mr Richardson raised it with Mr Beeton, and asked about the relationship between SMSF Club and PRE. Mr Beeton told him that Mr Beeton was severing his ties with PRE and he wanted to buy back a shareholding that PRE had in SMSF Club. This is the first reference in Mr Richardson's evidence to any such shareholding.

127    At around the same time Mr Beeton told him that he was terminating SMSF Club's referral agreement with PRE. This is odd because, on Mr Richardson's evidence, this appears to have been said at roughly around the same time that SMSF Club signed the written Referral Agreement. Mr Richardson told Mr Beeton that SMSF Club receiving fees directly from PRE would breach SMSF Club's authorised representative agreement with RM Capital. Mr Richardson's evidence was that he did not know that SMSF Club had continued to receive payments from PRE directly until that was revealed to him by documents provided by ASIC in this proceeding.

128    In early August 2016, Mr Beeton told Mr Richardson that SMSF Club's Referral Agreement with PRE had been terminated.

SMSF Club's activities

129    It seems that Mr Beeton had a practice of giving seminars to interested persons about the advantages and disadvantages of establishing an SMSF. That appears from presentation slides he sent to Mr Richardson in July 2013, from which it follows that RM Capital was at least generally aware of what he was saying at the seminars. The slide pack included many slides presenting what were said to be the advantages of buying property within superannuation.

130    The process for joining the SMSF Club programme was as follows. Potential clients had an initial meeting with an adviser representing SMSF Club, who provided the potential clients with some standard documentation including an application form. At these initial meetings, the advisers explained various aspects of forming and running an SMSF.

131    If a client wished to join the SMSF Club programme, they were required to complete and return the application form to SMSF Club, together with an initial fee. This covered the establishment of a company to act as trustee of the client's SMSF, registration of the company with relevant regulatory authorities, assistance with rolling over superannuation to the SMSF and establishment of a bank account for the SMSF. If the client already had an SMSF and/or a trustee, SMSF Club organised the transfer of the accounting and administration. SMSF Club then administered the SMSF, including bookkeeping, online reporting and financial reports.

132    Members of the SMSF Club programme were also given access to a range of 'education material' that was described in an information memorandum given to potential clients. On a number of occasions, Mr Beeton attended 'property information nights' held by PRE for potential clients. There, Mr Beeton gave oral presentations accompanied by PowerPoint presentations in which he talked about the advantages and risks of buying property inside an SMSF. Another SMSF Club adviser (unnamed in the SOAF) similarly presented on behalf of SMSF Club at 'mentoring seminars' held by PRE for its clients.

133    SMSF Club initial client meetings, described above at [130], occurred regularly with persons who had been referred by PRE. At those meetings, SMSF Club advisers gave the potential clients information about establishing and running an SMSF, in addition to giving them the application form and information memorandum mentioned above.

134    RM Capital knew that SMSF Club engaged in conduct that was generally of the kind that has been just described. It also knew that SMSF Club regularly provided financial product advice as its authorised representative.

135    In so far as that conduct comprised the giving of advice, it was given on the basis that the clients were retail clients.

Concerns about SMSF Club

136    In December 2014, Mr Richardson and Ms Kosonen visited SMSF Club's offices in Sydney for the first time. Mr Richardson's evidence about the visit in his first affidavit was:

126.    During that visit, Ms Kosonen provided an oral training session to SMSF Club's personnel on RM Capital's policies, procedures and systems relating to compliance matters.

127.    During the visit, I observed that SMSF Club's premises were located in an area adjacent to the offices used by PRE and that those offices shared a common foyer and a common reception desk.

128.    At this time, I asked Mr Beeton what the arrangement was with SMSF Club's office space. I do not recall Mr Beeton's specific answer, but he answered to the effect that he was sharing office space with PRE.

129.    I also discovered during that visit that SMSF Club's server was linked to PRE's server and that SMSF Club's compliance and/or operating IT systems was being hosted through PRE's IT system.

137    A power point along with speaking notes from the oral training session was in evidence. Neither makes any reference to the ban on conflicted remuneration, from which I infer that this subject was not covered at the session.

138    Mr Richardson acknowledged in cross examination that he had told ASIC that he was not happy when he realised that there was such a close connection between SMSF Club and PRE, because 'the familiarity between the parties might have been stronger than I had been led to believe'. He told ASIC that the arrangement 'could have been deemed to be incestuous' (ts 94). But that did not cause him to reconsider the Referral Agreement and get advice on it.

139    Nevertheless, according to Mr Richardson's evidence, after this visit RM Capital increased its monitoring and supervision of the relationship between SMSF Club and PRE. He said that the steps taken included 'consultation and dialogue' with Mr Beeton and two members of SMSF Club's staff (Richardson I para 135). He also said that RM Capital 'undertook its regular audits in addition to written (usually email) and oral dialogue'. The RM Capital personnel who undertook the consultation and dialogue included Mr Richardson, Mr Le Page and various other members of RM Capital's internal staff and external consultants with compliance functions.

140    According to Mr Richardson (Richardson I):

137.    There was a high level of contact between SMSF Club and Mr Beeton personally, and RM Capital. SMSF Club's personnel, including Mr Beeton, regularly (on occasion, multiple times daily) contacted and utilised RM Capital's staff, and RM Capital's external compliance consultants (GRC Essentials or Compliance Plus) for assistance with various compliance, or other general business, issues.

138.    I cannot specifically recall each individual discussion that I had with Mr Beeton or Mrs Beeton [SMSF Club Operations Manager]. The discussions that I had involved me asking questions about:

138.1.    the nature of SMSF Club's relationship with PRE;

138.2.    the delivery of services delivered by SMSF Club to its clients;

138.3.    the delivery of services in relation to SMSFs and personal insurance (not general insurance); and

138.4.    other various issues that I considered were relevant and pertained to the delivery of financial services by SMSF Club to its clients.

139.    I still maintained my usual regular contacts with Mr Beeton (as part of the contact that I maintained with RM Capital's ARs). On a number of occasions, I said words to the effect that Mr Beeton should remember the importance of tight processes surrounding the provision of financial product advice by SMSF Club and ensuring that the FSG, adviser profile and other appropriate documents were being provided to SMSF Club's clients.

141    Additionally, Mr Richardson contacted Mr Beeton from time to time about developments that might warrant review of SMSF Club's practices. As a result of these discussions and his visit in December 2014, Mr Richardson 'formed the view that SMSF Club's relationship with PRE was more entwined than what I had believed from what Mr Beeton had told me, and what I had reviewed, in 2013' (Richardson I para 140). But in early 2015 SMSF Club moved its offices from Sydney to the Gold Coast and Mr Richardson considered that this 'provided a degree of separation between SMSF Club and PRE'.

142    In September 2015, Ms Shah raised concerns about the adequacy of SMSF Club's record keeping, particularly in relation to demonstrating that it did not give personal advice as distinct from general advice. In an email to Mr Richardson dated 1 September 2015, Ms Shah said:

In addition the referral arrangement is not formalised and is moreover we are talking about property in SMSF a[n]d fail to see how you can do this on a general advice basis i.e. yes one can do a seminar to explain the bare bones of how it works, structured and how it can be done but once client wants to do it, unless it is a highly sophisticated investor, how would they instruct you to set up bare trust, who to use as corporate trustee, and what value they should look at etc. While the property side may be done by the property expert the fiduciary obligation is still with the advisor to highlight significant issues e.g. borrowing capacity and impact on cash flow, insurance requirements etc. I have not seen an actual file of a client where this has occurred so am struggling to see how this works under a general advice model and Justin has not forwarded the records as requested by Jenni.

143    Her email concluded:

Overall its simple Justin does all his business under a personal advice model or moves on because the 'shades of grey' in these instance are too risky to your business. To me there is no other middle ground. Where he stays on under a personal model basis, he uses systems as per what licensee requires and we organise for a full review of his operations to be undertaken early next year.

144    In an email to Mr Richardson on 16 October 2015, Ms Kosonen echoed Ms Shah's concerns, saying 'Further to Reena's email below, we need to get some clear direction on what The SMSF Club requirements are. There are too many grey areas, we need to get clear understanding on what you want them to provide'. Ms Kosonen also thought that Mr Beeton's 'note taking on all general advice trades are very generic. He is writing the bare minimum and it is very inadequate'.

145    On 12 November 2015, RM Capital sent SMSF Club a letter, signed by Mr Richardson, demanding 'full and unencumbered access to all the books and records of the SMSF Club Pty Ltd ('SMSF Club') since its authorisation as a Corporate Authorised Representative (on 11 March 2013) by 17th November 2015'. This was said to be in order to fulfil RM Capital's compliance requirements under the Act.

146    The letter had the subject heading, 'Compliance Request/ASIC Compliance Breach - Access to books & records'. The letter said that RM Capital had recently come into possession of an SMSF Club Information Memorandum, presumably for the offer of a financial product, that had not been authorised by RM Capital and that RM Capital would lodge a 'compliance breach' with ASIC within the next few days. Other than that, the circumstances that prompted the letter are not explained in the evidence.

147    The letter set out a list of requests for information from SMSF Club that had not been complied with. None of them related specifically to the ban on accepting conflicted remuneration, nor does the evidence disclose whether any books or records produced in response to the demand were reviewed in relation to that topic. Mr Richardson accepted in cross examination that conflicted remuneration was not on his radar at the time.

148    It is not clear from Mr Richardson's evidence what followed from this exchange of correspondence, other than that concerns about RM Capital remained, and led him to arrange an audit which took place in July 2016 and is mentioned below.

The approved products list

149    I have already referred to the fact that, with certain exceptions, SMSF Club was only authorised to advise on financial products as RM Capital's authorised representative if those products were on an approved products list issued by RM Capital. This was a standard term in all of RM Capital's agreements with its authorised representatives.

150    RM Capital had a Research Committee which decided which products to include on the approved products list. Mr Richardson and Mr Le Page were on that committee. Mr Richardson's evidence was that by the relevant period, they tended to address matters that fell to the Research Committee at the quarterly meetings of the Compliance Committee, rather than have a separate meeting of the Research Committee.

151    According to Mr Richardson, products were not included on the approved products list unless RM Capital was satisfied that they were appropriate for its authorised representatives to promote or advise about. Among other things, RM Capital considered the remuneration payable in respect of the product (presumably, payable to RM Capital or its representatives) 'and whether any legislative requirements could potentially be breached by [authorised representatives] promoting or advising on a product' (Richardson I para 31). Mr Richardson was not cross examined on this evidence and I accept it as correct.

152    Mr Richardson also gave general evidence that the approved products list was reviewed to check that all approved products would comply with the FOFA reforms. Again, he was not cross examined about this and I accept it as correct. According to him, compliance with the FOFA reforms was addressed via the compliance committee meetings. But beyond that general recall of discussions about those matters, Mr Richardson could not recall specific steps taken.

153    RM Capital had a Research and Benefits Policy which, throughout the relevant period, stipulated that it was RM Capital's policy that representatives may only recommend products on the approved products list. It also stipulated that products were to be submitted to the Research Committee for approval, and specified the membership of that committee, which at all times included Mr Richardson and Mr Le Page.

154    A text box highlighted with a 'caution' symbol set out the following criteria which, it said, the Research Committee must consider 'before adding new products onto the licence':

1.    Ability for RM Group's Financial Controller to administer the commissions;

2.    RM Group's ability to monitor the product eg access to centralised system and reports;

3.    Advisers must receive product training;

4.    Key personnel to be added onto the product providers 'Authorised Persons List'

5.    A formal agreement is executed, the provider has current PI cover and background check is completed.

155    The Research and Benefits Policy also set out the kinds of products that were on the approved products list, namely:

- Managed Investments

- Annuities

- Superannuation and Corporate Superannuation Products

- Self-Managed Superfunds

- Direct Shares

- Personal Risk Insurance Products

- Tax Effective Investments

- Cash Management Accounts

- Master Funds

- Margin Loans

- Portfolio Management Service

- Insurance

156    It then sets out criteria for approval specific to each kind of financial product, for example:

Tax Effective Investments

Tax Effective Investments are to be selected after considering the following key issues:

- Ownership and Capital Structure

- Management Credentials

- Structure of Investment

- Projected Investment Returns

- Financial Outcomes & Sensitivity Analysis

- Risks - Independent Opinion (Research Report)

- ATO Product Ruling

157    There is no reference in these criteria to conflicted remuneration, or compliance with the Act more broadly. The only criterion that makes reference to complying with laws was one for SMSFs, which had as a criterion 'Experience with financial products and complying to strict Superannuation Laws'.

158    Two examples of the approved products list were in evidence - one as at May 2012 and one as at July 2014. Each of them is a list of a number of different kinds of things: platforms (for example, Colonial First State First Choice), capital guarantee/protected products (for example, from Macquarie), margin lending products, equities (the broad description 'ASX Securities' is given under this heading), insurers and superannuation providers, property trusts and other products and funds.

159    PRE does not appear on the May 2012 list, but it does appear on the July 2014 list, under a heading of 'Property Development & Joint Venture'. The entry simply names 'Positive Real Estate' and indicates that it was added in July 2014. No further description of any specific financial products offered by or through PRE is given and the evidence does not otherwise indicate precisely what financial product was being referred to or contemplated here. All that can be said is what follows from the evidence about PRE's activities, and SMSF Club's activities in relation to them, that is summarised above.

160    Mr Richardson gave no evidence of any specific discussion within RM Capital of the possibility that the referral fee in the Referral Agreement was conflicted remuneration as part of the decision as to whether PRE was placed on the approved products list. His only evidence about consideration of the referral fee in connection with the approved products list was to say that PRE was included on the list after RM Capital approved the referral fee arrangement between SMSF Club and PRE.

161    Ms Shah gave some general evidence about her role in reviewing possible conflicted remuneration arrangements. According to her, the review extended to looking at any arrangements that authorised representatives of RM Capital had in place, and she asked questions of RM Capital including whether there were any issues of conflicted remuneration.

162    It appears from the context of this evidence that this was a review of existing arrangements at around the time of the implementation of the FOFA reforms. Ms Shah's evidence is not specific as to when that occurred, but she does say that it was 'in preparation of the FOFA reforms' and was to assist RM Capital to understand the reforms. It is thus likely to have taken place at around July 2013 at the latest, when the reforms came into effect. Apart from the general evidence just mentioned, it does not appear that Ms Shah took part in the review of the approved products list, which she said was tasked to the research committee.

163    Ms Shah also recalled in the context of the review that took place around July 2013 that there were three authorised representatives who had some form of referral agreement in place by which they paid or received referral fees. She does not name them. Given the timing, it is likely she was speaking of authorised representatives other than SMSF Club and agreements other than the Referral Agreement. In any event, all Ms Shah said about those arrangements was that she discussed with RM Capital personnel 'the need to be transparent about the fees the [authorised representatives] received and the grandfathering arrangements' (Shah para 120). She did not discuss any need to determine whether the arrangements involved conflicted remuneration or the need to ensure that if they did, they were terminated or modified so as to comply with the ban on conflicted remuneration.

164    It does not appear that the review undertaken around July 2013 was intended to prompt any consideration by RM Capital of what steps might need to be taken to ensure compliance with the prohibition on conflicted remuneration, on the part of SMSF Club or anyone else. Nor does it appear that it did prompt any consideration of that subject. Ms Shah's evidence that is specific to consideration of the Referral Agreement, described above, does not suggest that there was any consideration of conflicted remuneration by members of the Research Committee before PRE was placed on the approved products list.

RM Capital's Compliance Programme

165    I will now describe more general evidence about RM Capital's compliance policies and procedures. RM Capital had a document entitled 'Compliance Programme' in effect during the relevant period. This purported to describe its processes and procedures in relation to compliance matters. It was first adopted in May 2012 and was amended a number of times during the relevant period.

166    The Compliance Programme contained statements to the following effect:

(a)    strict adherence to the procedures set down in the Compliance Policy and Compliance Manual was expected and would be monitored;

(b)    RM Capital would ensure that there were adequate resources in place 'to develop, implement and maintain the compliance program';

(c)    compliance standards and procedures would be reviewed on a regular basis to ensure that they were being effectively implemented and monitored, a quarterly Compliance Committee meeting would be held 'to address overall compliance requirements and implementation process', and a formal review of compliance requirements and the compliance programme would be undertaken annually 'to ensure that it remains relevant and effective';

(d)    RM Capital was committed to best practice and compliance standards, its 'ultimate goal' was 'the creation of a culture of compliance', and processes and procedures 'should be compliance driven so that compliance becomes a way of doing business';

(e)    in the 'Procedure' section under the heading 'Identification of Compliance Issues':

RM Group utilises the Complii system to monitor its operational risk and compliance. This system provides the licensee with a dashboard of outstanding AML [anti-money laundering] forms, FSG's [financial services guides], ROA's [records of advice], 'SOA's [statements of advice], s708/s761G/A certificates, Client Profiles/Risk Profile, General Advice Clients/Limited Advice Clients, and complaints. The system also captures Staff Trades, Offer Documents, Chinese Walls register and Client File notes.

(f)    new representatives would be required to undergo an internal audit assessing their compliance with their responsibilities and review of financial recommendations within six months of appointment, established representatives were required to undergo an audit (internally or externally) annually, and all representatives were required to complete annual competency assessments; and

(g)    all representatives would receive appropriate training with regard to compliance functions upon induction and would also have access to compliance resources and an ongoing training facility (such as Kaplan Professional).

167    In connection with point (c) from this summary, Mr Richardson's evidence was that GRC Essentials did review RM Capital's policies and proposed amendments to those policies, which were implemented.

168    In connection with point (e), Complii was an online compliance system for authorised representatives, to which they could upload records such as anti-money laundering forms, financial services guides and records and statements of advice.

169    The Compliance Programme contained a table headed 'RM Group Compliance Program Table' which was listed as one of the resources that could be used to meet compliance obligations, but was not otherwise explained. The table listed, for each 'Obligation' (such as a section of the Act), a 'Procedure for maintaining compliance'; 'How procedure(s) will be monitored'; 'Frequency'; and a 'Responsible Manager'. Mr Richardson was the Responsible Manager for each obligation. The programme stated him to have the 'overall responsibility for the management of Compliance Standards' and to be 'responsible for the management of the compliance function'.

170    In March 2014 a row was introduced into the RM Group Compliance Table which listed as the 'Obligation' s 963E, s 963F, s 963G and s 963H. The procedure for monitoring compliance was stated to be: 'Ban on Licensee or Representative accepting conflicted remuneration'. The procedure was to be monitored as follows:

Ensure representatives are supervised and monitored in accordance with this plan.

Review Soft Dollar Register

Review remuneration arrangements

Ongoing staff training

171    The stated frequency of all this was annually. ASIC describes this as 'tucked away in the schedule in the back': ASIC's closing written submissions para 50. The 'Soft Dollar Register' is described in the Managing Conflicts of Interest Policy, to which I now turn.

RM Capital's policy on conflicts

172    Throughout the relevant period, RM Capital had policies in place which included the 'Research and Benefits Policy', which has already been mentioned, and a 'Managing Conflicts of Interest' policy.

173    The version of the Managing Conflicts of Interest policy that was in place at the commencement of the relevant period was dated January 2012.

174    The January 2012 version of the Managing Conflicts of Interest policy acknowledged that a 'higher rate of commission', 'other relatively higher incentives' and 'soft dollar incentives' could give rise to conflicts of interest. It set out three mechanisms for managing conflicts of interest: avoiding them, disclosing them and controlling them (the latter being described as 'having a considered approach to identifying, evaluating and responding to conflicts of interest'). It said that conflicts of a significant nature could be (rather than must be) avoided by, among other things, 'avoiding products with high commission structures or volume bonuses'.

175    This version of the Managing Conflicts of Interest Policy did not deal specifically with the ban on conflicted remuneration. But it did contain an 'Appendix 1 Conflicts of Interest Table', apparently intended to be used to identify conflicts of interest, which included the following rows:

176    That table was removed from the version of the Managing Conflicts of Interest Policy that was issued in November 2013. From that time until the end of the relevant period, the policy included the following (emphasis in original):

Commission Related Remuneration

RM Group's representatives are authorised to provide financial services and may be remunerated via allowable commission paid by the providers of the recommended products. Therefore RM Group acknowledges that a Conflict of Interest exists and ensures that clients are fully informed of this by the representative as well as being documented in the FSG, ROA and SOA. RM Group also requires all representatives to attend regular training, part of which is dedicated to the management of Conflicts of Interest. Any remuneration payment will be assessed as per the Conflicted Remuneration Policy to ensure it is an allowable arrangement.

177    However, as discussed below, the Conflicted Remuneration Policy was only ever a draft throughout the relevant period. When questioned about the reference to the Conflicted Remuneration Policy in this passage, and the subsequent removal of that reference in the December 2016 version of the Conflicts Policy, Mr Richardson said that he 'did read these documents, but probably not as carefully as I should have' (ts 80).

178    Throughout the relevant period, the Conflicts Policy also contained the following passage, on which RM Capital relied:

Product Suitability/ Appropriate Advice

It is RM Group's policy that all representatives involved in providing advice to clients only recommend the products on the Approved Products List (APL). RM Group is responsible to ensure that appropriate due diligence has been undertaken for products within the APL. Approval from RM Group is required prior to recommending a product not on the APL. …

179    Ms Shah's evidence was that conflicts of interest was included as a standard agenda item for the Compliance Committee meetings, which typically she and/or Ms Stewart would attend. If RM Capital brought to the attention of her or her colleagues at GRC Essentials/Compliance Plus that a new product was being offered, they would enquire about the payment arrangement and, if there was a referral arrangement, they would enquire whether additional disclosures were needed. There was no specific conflicted remuneration section in the agenda; Ms Shah's evidence appeared to be that this was intended to be captured by the conflicts of interest item. There was also a separate section on the agenda for discussion of referral, joint ventures or other business arrangements which, Ms Shah said, would allow any of these matters to be captured and evaluated.

180    Ms Shah's general evidence was (Shah para 41):

From time to time, RM Capital would state that there was a referral arrangement or new product and, as a committee, we reviewed the arrangement and made a determination on what needed to happen to address any conflicts as well as any other compliance issues - such as a notification to a professional indemnity insurance broker, seeking further legal advice and/or obtaining further information from third parties.

181    Ms Shah also gave the following evidence about how conflicts of interest were managed (Shah para 80, amended to exclude inadmissible evidence):

Multiple strategies were applied to manage conflicts of interest as well as conflicted remuneration assessments…. There was a Research and Benefits policy (which I refer to below) which specifically addressed the steps that RM Capital would follow. Second, as part of review process, if this was brought to the attention of GRC Essentials or Compliance Plus, we would advise on whether there were any disclosure requirements, by [financial services guide]s, through [statement of advice]s and [records of advice] or otherwise. If there was referral or other third-party arrangements to be put in place, the [authorised representatives]s would discuss that with RM Capital. As and when brought to my attention, I would assist in addressing any conflicts or disclosure requirements and advised on whether any formal agreements to be put in place advice licensee [sic] to organise these. Where there was an issue on banned arrangements (for example, volume bonuses), I discussed this with RM Capital to arrange for these to be removed by the product issuer, as well as assisting in a review of templates for opt in arrangements, as well as fee disclosure statement.

182    But Ms Shah's evidence does not refer specifically to risks of conflicted remuneration, nor does it descend to any specific examples of what was done when a risk of that kind had, in fact, been identified.

RM Capital 's policies on the appointment of representatives

183    Another policy that RM Capital had in the relevant period was titled 'Representative and Human Resources Policy'.

184    The Representative and Human Resources Policy contained procedures regarding the selection and appointment of representatives. Although it referred to the possibility of the appointment of corporate authorised representatives, the policies contained in it appear to be mainly directed to the appropriate recruitment and selection of individuals. And although it is not made abundantly clear, it appears that the policy only relates to individuals who were employed by RM Capital, or appointed directly as its authorised representatives. It does not appear to cover, for example, employees of corporate representatives such as SMSF Club.

185    Broadly, the Representative and Human Resources Policy is directed to ensuring that individuals who are selected as representatives have the appropriate education and qualifications, and are of good fame and character. At no point during the relevant period did the policy make specific reference to conflicted remuneration or indeed to any particular requirements of the financial services chapter of the Act with which representatives were required to comply.

186    As mentioned, it does not appear that this policy covered the selection and appointment of corporate authorised representatives themselves. There was also an 'Appointment of Authorised Representatives Procedure' within the Representative and Human Resources Policy, on which RM Capital does not rely. It only concerned requirements to notify ASIC, and did not impose, for example, criteria for the selection of corporate representatives such as SMSF Club.

187    Mr Richardson did give evidence, however, about RM Capital's practices in relation to the appointment of authorised representatives. He said that on most occasions, he and/or Mr Le Page were familiar with parties who approached them with a view to becoming authorised representatives of RM Capital. Such parties had to complete an application booklet. From there, RM Capital would undertake external checks (such as credit and police checks), make inquiries in the marketplace as to whether there were any outstanding issues around the proposed authorised representatives, have Mr Richardson and Mr Le Page meet with the proposed authorised representatives, and obtain a range of documentation from the applicant, including documentation of relevant educational qualifications.

188    If the decision was made to accept a new authorised representative, procedures were undertaken to perform what was described as 'on boarding'. This included education and training in matters including RM Capital's policies and procedures. There is no evidence that this education and training covered conflicted remuneration. As already mentioned, RM Capital did not have a policy on that subject in effect at any time in the relevant period.

RM Capital's awareness of the introduction of the ban on conflicted remuneration

189    As has been explained, the ban on conflicted remuneration came into effect on 1 July 2013, with grandfathering in certain circumstances which, to all intents and purposes, ended on 1 July 2014.

190    Mr Richardson confirmed in cross examination that he was aware that the conflicted remuneration provisions were to commence on 1 July 2013. He also confirmed that he read part of the ASIC Regulatory Guide 246 at around the time that it was published (March 2013) and that he read in particular a section of the guide setting out what was covered by the ban on conflicted remuneration, and stating the obligation of financial services licensees under s 963F to take reasonable steps to ensure that their authorised representatives do not accept conflicted remuneration. In that section (para RG 246.32), it was said that ASIC expected:

that an AFS licensee's processes and procedures for monitoring and supervising its representatives will allow the licensee to determine whether its representatives are accepting conflicted remuneration and take appropriate action if this occurs.

191    Mr Richardson accepted that he understood at the time that RM Capital needed to put in place practices and procedures so that it could comply with that legislative requirement. While the passage just quoted does not appear expressly in the legislation, but is rather a gloss by ASIC in its regulatory guide, I understood Mr Richardson to be indicating that he did not disagree that financial services licensees such as RM Capital did need to adopt practices and procedures of the kind described by ASIC in order to comply with their obligation under s 963F, and that he held that understanding at the time he first read the regulatory guide.

192    Paragraph RG 246.33 said:

The conflicted provisions remuneration apply to both personal and general financial product advice, regardless of the channel used to communicate the advice. For example, the provisions apply to financial product advice that is provided verbally, in paper-based format, or online.

Mr Richardson confirmed that he read that paragraph too and that he knew that the ban applied to both personal and general financial product advice.

193    The above evidence, elicited in cross examination on behalf of ASIC, was not challenged by the cross examiner or impugned in closing submissions. Nor is it implausible or contradicted by other evidence. So I accept it as correct. While RM Capital's subjective beliefs about the conflicted remuneration provisions are not directly relevant to the objective assessment that arises under s 963F, this evidence has some peripheral relevance in that it eliminates possible support for any inference that RM Capital did not understand the ban properly, making it unlikely that it took any steps to ensure that representatives complied with it.

RM Capital's draft policy on conflicted remuneration

194    From July 2013, RM Capital had a draft policy concerning conflicted remuneration called 'Managing Conflicted Remuneration Arrangements' (Draft Policy). The version in evidence is dated July 2013. The Draft Policy was not ratified, implemented or given to SMSF Club or its representatives, or any of RM Capital's other authorised representatives. In other words, throughout the relevant period it remained a draft.

195    The Draft Policy identified the requirement in s 912A(1)(aa) of the Act for financial services licensees to have in place adequate arrangements for the management of conflicts of interest, and the existence of Part 7.7A Division 4 and in particular the prohibition in s 963E on a financial services licensee accepting conflicted remuneration. It described conflicted remuneration in terms identical to the legislative definition given at [56] above. It stated relevant prohibitions, including the prohibition on authorised representatives accepting conflicted remuneration found in s 963G. It noted the grandfathering provisions for arrangements in place before 1 July 2013, but not the effective end of that grandfathering on 1 July 2014 by reason of reg 7.7A.16B of the Corporations Regulations (which was promulgated on 28 June 2013). The Draft Policy also said, incorrectly, that 'Conflicted remuneration arrangements requirements only apply … where personal advice is provided' (emphasis in original).

196    The Draft Policy contained a general statement that RM Capital would at all times ensure that it had appropriate measures in place to meet its obligations with regard to the management of conflicted remuneration arrangements. It included, under the heading 'Operational Control', a statement that 'Prior to establishing new business arrangements, a review would be undertaken to ensure no banned conflicted remuneration will be received and where excluded benefits are received, these will be assessed as part of the conflicts management process and managed accordingly'. It also provided for annual reviews of 'conflicted remuneration arrangements'.

197    Under the heading 'Remuneration practices', the Draft Policy said:

R M Capital Pty Ltd has considered its remuneration practices (including non-monetary benefits) as part of ensuring conflicts management arrangements are adequate, in light of the following requirements:

•    R M Capital Pty Ltd must ensure that no banned conflicted remuneration is received;

•    Where a conflicted remuneration is likely to be received, R M Capital Pty Ltd will take necessary steps to:

•    Ensure the benefit/s to be received will meet the definition of an excluded benefit under RG 246 and/or (refer to appendix 1 for list of excluded benefits).

•    Seek client consent to receive those benefits

•    Provide disclosure to the client via FSG, SOA or other form of disclosure e.g. brokerage statement, trade confirmation etc. and Annual Fee Disclosure Statements on the benefits received / receivable

198    This appears to suggest that, if a benefit was not an excluded benefit, then a breach of the prohibition on conflicted remuneration could be cured by client consent or by disclosure to the client. This was an incorrect understanding of the law. The Act does not provide for the prohibition on receipt of conflicted remuneration not to apply if it is disclosed to the client, or even if the client's consent to it is obtained.

199    There is an argument that in some circumstances, client consent could amount to authorisation by the client, which brings a benefit within an exception for benefits given by a retail client in relation to financial product advice given to the client by the financial services licensee or representative: see s 963B(1)(d)(ii) and s 963C(e)(ii), read with the definition of doing an act s 52. But RM Capital did not make that argument in this proceeding, and it accepted that disclosure of a benefit to the client did not cure a breach of the ban on conflicted remuneration.

200    If the application of the ban to all advice, not just personal advice, and the ineffectiveness of disclosure to deal with the ban were not apparent to RM Capital when the Draft Policy was prepared, they became apparent soon afterwards. In December 2013, RM Capital was in discussions with Saxo Capital Markets (Australia) Pty Ltd about the possibility of clients being transferred to RM Capital. In the course of those discussions, Saxo reviewed the Draft Policy.

201    Stephen Luu, Head of Sales of Saxo, passed on the following comments from Saxo's compliance manager, in an email to Mr Richardson sent on 3 January 2014:

o    While the document highlights RM Capital's obligations to comply with conflicted remuneration rules and regulations, the policy is lacking a specific process or procedure that RM Capital will perform in order to ensure that any benefit received [is] not conflicted remuneration. In other words, if they will be using our FOFA [compliant introducing broker] arrangement, the procedure is very clear, and just needs to be documented.

o    I have a few concerns regarding the following points:

•    Page 2 - Conflicted remuneration requirements only apply to where personal advice is provided. Current FOFA rules and regulations apply to both general and personal advice provided to retails clients.

•    Page 3 - under a) Remuneration practices, it states that 'where conflicted remuneration is likely to be received, RM Capital will take necessary steps to: ensure the benefit/s to be received … Seek client consent … provide disclosure … etc. My concern here is the fact that there is a ban on conflicted remuneration, and if a benefit is likely to be conflicted remuneration, it should not be accepted. Any precaution, and ensuring compliance with FOFA rules must be done prior to accepting any benefit from the client, not after, this will be considered a breach according to current FOFA rules and regulations.

I [therefore] need more clarity via a formal policy or procedure document on their specific step by step procedure in ensuring that a benefit is not conflicted remuneration.

202    A few days later, on 8 January 2014, Mr Richardson forwarded the email to Ms Stewart and Ms Shah at GRC Essentials, asking whether the 'current policy', which he identified as the 'Conflict Management Policy', needed to be amended to accommodate the comments from Saxo's compliance manager.

203    On the same day, Ms Shah responded as follows:

Hi James,

With comments on general advice inclusion take this on board but now the issue is that this may change as part of reforms announced by liberals so do we amend policy now and [then] again in few months? We can do this if required.

Client consent - can use their forms but I am not sure what they mean by relevant procedures..?

Point about specific procedures while use of SAXO [introductory broker] process will be a tool it will not be the only tool

CCM, Investment committee meetings, review of agreements with product issuers, commission payment review, licensee review all form part of the overall process.

Page 3 policy says likely to receive so in my english it means before it has been received. I will re word policy to state where a benefit is likely to be received … and email this to you tomorrow.

thanks.

Regards,

Reena Shah

Director

GRC ESSENTIALS PTY LTD

(sent from my phone)

204    On 17 January 2014, Saxo followed up its queries with Mr Richardson and he then followed up Ms Shah saying 'Can we please finalise our internal compliance response in order to get the Saxo platform facilities online'.

205    However the Saxo deal did not proceed and in cross examination, Mr Richardson said he did not recall specifically what transpired after these emails and related conversations that he had with Ms Shah and Ms Stewart in relation to Saxo. There is no evidence that any of the matters raised by Saxo's compliance manager were taken further after Ms Shah's email. According to Mr Richardson, because the Saxo deal fell over, he did not chase it up.

206    According to Ms Shah's affidavit (para 83), the Draft Policy was not 'ratified or rolled out' during the relevant period because 'subsequent to its initial preparation, there was discussion at compliance committee meetings about whether the existing policies and practices, meant that any remuneration arrangement would be captured'.

207    Save for that, the evidence does not disclose what, if anything, came of the Draft Policy after January 2014. RM Capital did not put into evidence any revised and corrected draft. So it can be inferred that no correction of the policy did occur during that period (RM Capital did not suggest otherwise). That is despite evidence given by Mr Richardson in cross examination that, at the time of the emails with Stephen Luu, he understood that it was not a matter of disclosure of conflicted remuneration; there was a ban on conflicted remuneration and such remuneration should not be accepted.

208    It is an agreed fact that the conflicted remuneration policy was not implemented or given to SMSF Club or its representatives during the relevant period. Mr Richardson's evidence is that the policy on conflicted remuneration was finalised and circulated to authorised representatives in 2018, but in what form is not clear (noting that this was outside the relevant period). Ms Shah's evidence was to similar effect.

Training

209    According to Mr Richardson, RM Capital included a requirement to attend training in its agreement with each authorised representative. In the agreement with SMSF Club, this was in clause 4.2.13, which required individuals (presumably, all representatives employed or otherwise appointed by SMSF Club) to 'attend, and participate in, all competency, compliance, educational and training programs conducted, arranged or prescribed by RM Capital for its authorised representatives from time to time, including PD [professional development] Days and RM Capital conferences'.

210    The Representatives and Human Resources Policy included a policy and procedures about training of both those who provided advice and those who did not. This included a statement that RM Capital would organise a group training session on an annual basis and also said that each advice provider should complete annual training plans. Conflicted remuneration, and even the FOFA reforms, were not among the subjects listed for training, but 'Compliance Issues' was on the list as an area that may be covered.

211    Mr Richardson's evidence (Richardson I para 42) was that RM Capital had a 'stringent' policy that authorised representatives, including corporate authorised representatives, had to maintain continuing professional development (CPD) hours by the half year. The CPD hours undertaken by each authorised representative were recorded on an online system which was maintained by the external training provider, Kaplan. This was supervised by the compliance officers and overseen by Mr Le Page, as the responsible manager, and by Mr Richardson.

212    More specifically, it is common ground that in May to August 2013, GRC Essentials conducted information sessions on the FOFA reforms, including the conflicted remuneration provisions. They were conducted for advisers employed by RM Capital and for RM Capital's representatives.

213    The training sessions that were conducted lasted for three to four hours. They were accompanied by documents that included a 'FOFA Fact Sheet' and a slide pack. These were also emailed to representatives.

214    The slide pack said (among other things) that 1 July 2013 was an 'important date' for the FOFA reforms, which presumably indicated to attendees that this is when the reforms came into effect, and that one of the key reforms was the banning of conflicted remuneration. A slide headed 'Conflicted Remuneration' said (all errors in original):

•    What is Conflicted remuneration?

•    The provisions put a prospective ban on:

- all investment commissions

- platform payments

- volume payments

- Alternative remuneration arrangements

- asset based fees on borrowed amounts

- conflicted remuneration on all MySuper and intra-fund advice (including Group Insurance commissions inside superannuation without an investment component

- Excluded benefits

- p insurance schemes

•    AFS licensee's, authorised representative's, employee representatives, and product issuer as well as product sellers all have to comply with the provisions on conflicted remuneration.

215    The next slide set out as 'exceptions':

•    Exceptions:

- Pre existing arrangements

- Insurance commissions outside superannuation

- Insurance commissions inside superannuation without an investment component

- Excluded benefits

216    The final slide was:

What is RM doing in relation to FOFA?

•    Working with Complii to streamline processing but in the interim you need to be clear on advice/service being provided

•    General advice will be the default position on Complii system

•    Updating Client Profile to clearly indicate what type of service is being engaged

•    Updating FSG, SOAs and ROAs

•    What you need to do

- Engage with clients on what services are provided

- Complete Adviser Profile information request

- Ensure you use the new documents as soon as they are released

- Identify any clients you have on an ongoing payment arrangement

- Ask questions

217    No record or register of who attended the training was in evidence. Given the otherwise comprehensive nature of the documentation put into evidence, arising from ASIC's wide-ranging compulsory notices to produce documentation, I infer that no record or register of attendees was kept. At trial RM Capital appeared to accept that none was kept.

218    There is no evidence that Mr Beeton or any other SMSF Club advisers attended that training. Given the timing of the training, that is May to August 2013 when SMSF Club only became an authorised representative of RM Capital at the beginning of that August, I infer on the balance of probabilities that they did not. RM Capital did not submit to the contrary.

219    There is some evidence of training of SMSF Club personnel, but it is not clear what it covered. There was an email exchange between Ms Kosonen and Mr Beeton about training which dated from mid-August 2013. Ms Kosonen seems to have emailed all RM Capital advisers, saying that there would be a training session on 20 August 2013 that would be in RM Capital's boardroom, or could be attended by Skype. Mr Beeton replied saying that he would be on holidays that week and asked whether the session would be recorded. Ms Kosonen replied 'As you probably haven't seen Complii before, I'll run through it all when you get back'.

220    RM Capital submitted in opening that I should find that Mr Beeton did have the contemplated session with Ms Kosonen. I am prepared to infer that he did, as Mr Richardson recalled having a meeting with Mr Beeton and Mr Le Page immediately following Mr Beeton attending in-house training at RM Capital's offices, and Mr Richardson's electronic calendar entries indicated that this occurred on 9 September 2013.

221    It is not, however, apparent that the training covered conflicted remuneration. For one thing, this was after the May to August training described above. For another, the subjects of the session stated in Ms Kosonen's initial email were:

FOFA Updates-

•    Profile Form

•    SOA

•    ROA

Review-

•    Internal Notes

•    FSG's Not Sent

•    Required Profiles

•    No email Addr

•    708

This does not mention conflicted remuneration and seems directed more to the external and internal records that advisers needed to create in relation to their advice as a result of the FOFA reforms.

222    Aside from the above, there is no evidence that any training about conflicted remuneration was given to any of RM Capital's representatives. It is unlikely that it was, since Mr Richardson accepted in cross examination that he did not ask for any further training on conflicted remuneration to occur after 2013 at any time during the relevant period.

223    Mr Richardson's explanation for this was that he took the authorised representatives to be conversant in the rules in relation to conflicted remuneration 'given they were experienced advisors, and they understood the full impact of what the ban on conflicted remuneration' (ts 74). He said this in the context of being asked about a sentence in the minutes of the meeting of the Compliance Committee on 10 June 2013 that '[Mr Richardson] noted that post the recently held FOFA training session … the advisers appeared to be conversant with requirements and impact on their individual businesses'.

224    However in his response dated 17 November 2015 to RM Capital's letter of 12 November 2015 raising several concerns, Mr Beeton complained:

As mentioned to you personally numerous times, I believe RM Capital should provide an annual three day training program for all Authorised Representatives. This will give RM Capital the platform to provide training and supervision of its Authorised Representatives. This event will also provide all Authorised Representatives to share knowledge and within a collaborated team hopefully grow as an individual and also as a group.

If RM Capital provided greater training and detailed advice relating to compliance matters some of the issues raised within your letter could easily been avoided …

Monitoring

225    According to the SOAF, RM Capital knew that it had an obligation to monitor and supervise its representatives and to ensure that they were complying with financial services laws.

226    RM Capital's Compliance Programme said that the person responsible for the management of the compliance function (in the second and third versions, Mr Richardson), had among their responsibilities 'representative audits'. At no time did the Compliance Programme specify exactly what representative audits were, or what subjects they would cover, how many would be undertaken, at what frequency, or who would be audited (RM Capital employees, corporate or individual authorised representatives or employees of authorised representatives?).

227    Mr Richardson went on to explain that RM Capital had a practice of reviewing every authorised representative's monthly commission statements. This practice could identify things that were out of the ordinary, for example, a sudden spike in the authorised representative's revenue.

228    Mr Richardson gave general evidence that RM Capital had its external compliance consultants, GRC Essentials or Compliance Plus, audit the records of authorised representatives periodically, usually annually.

229    Ms Shah's affidavit contained evidence about the content of the audits. They included on-site review of client files to check for compliance with obligations such as the provision of statements of advice when personal advice was given. There was also a question and answer session to check on representatives' knowledge, where questions could be asked such as, 'Do you understand what a conflict of interest is?' But Ms Shah's evidence made no mention of any process for checking whether conflicted remuneration was received.

230    RM Capital also relies on evidence from Mr Richardson that it had a strictly enforced policy that all revenue that an authorised representative generated was to be paid to RM Capital, with RM Capital's entitlements then deducted and the balance paid over to the authorised representative. Mr Richardson's affidavit also said that RM Capital 'tracked management fees or ongoing service-based fees that [authorised representatives] charge clients to ensure that this conformed with what had been disclosed (including in FSGs or SOAs) and that any fees were in line with regulatory requirements (including the Corporations Act)' (Richardson I para 55). This monitoring process also allowed it to check that representatives were not advising on products that were not on the approved products list.

231    In that regard, RM Capital also relies on evidence from Mr Ho. His affidavit said that the process of receiving commissions and then paying them on to representatives after deducting RM Capital's share allowed RM Capital to review what products its authorised representatives were promoting or advising on, and to ensure that they were only doing so for approved products. Mr Ho said that the remuneration that RM Capital received on behalf of authorised representatives was reviewed by Mr Richardson, Mr Le Page and by in house and external accountants. Mr Ho's evidence in that regard makes no mention of whether this level of monitoring was directed at detecting conflicted remuneration.

232    The Complii system had the capability for RM Capital to monitor the activities of its authorised representatives in real time, including by the representatives recording or uploading the advice they gave on Complii. But until a time between late 2014 and June 2015, SMSF Club did not keep records of its advice on Complii, as it used a different platform known as SalesForce, to which RM Capital did not have online access until 12 November 2015.

233    Then from that time, RM Capital required SMSF Club to use Complii. However, RM Capital experienced difficulties in migrating SMSF Club's records to Complii, and this was not fully achieved until about 2017. Mr Richardson's evidence was that the difficulties 'appeared to be largely technical' (Richardson I para 132). However in cross examination, he accepted that he had previously told ASIC that the problem with accessing the records was resistance from PRE, and that PRE was making it difficult for Mr Beeton to provide the information that RM Capital was asking for.

234    Mr Richardson also gave general evidence that RM Capital monitored what SMSF Club uploaded to the Complii system to ensure that all necessary records were being kept. Mr Richardson's evidence is that this went beyond the monitoring given to other authorised representatives because of a 'particular focus with respect to SMSF Club' (Richardson I para 142). But given his evidence that SMSF Club's records were not fully migrated to Complii until 2017, it is not clear whether this monitoring occurred during the relevant period.

235    In any event, it is an agreed fact that the only reviews or audits that RM Capital conducted of SMSF Club files during the relevant period were:

(a)    a review that GRC Essentials and Compliance Plus performed in July 2014 of three SMSF Club advisers (Mark Small, Richard Nordin and Mr Beeton), two of which included a review of three client files; and

(b)    something the SOAF calls a 'representative review' of six client files, which took place in July 2016.

236    In relation to the first of these, the external consultants recorded the following in response to the prompt on a form 'Provide details of Representative's understanding of what is a conflicted remuneration arrangement under FOFA' (SOAF para 65):

(a)    for Beeton: 'need to manage either through disclosure or avoidance';

(b)    for Nordin: 'Richard's understanding is being paid by a provider to specifically use their product(s). (bonus/commission/soft dollar)' / ' Richard confirmed he does not receive any soft dollar benefits'; and

(c)    for Small: 'Aware of general conflict so not recommending products.'

237    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. So, for example, RM Capital did not correct Mr Beeton's mistaken view that conflicted remuneration arrangements could be 'managed' by disclosure. It did not correct Mr 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 Mr 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.

238    Ms Shah says that there was a '2013 audit for SMSF Club', but she does not say exactly when it took place or what it covered. There was a 'gap' between that audit and the subsequent one which, according to Ms Shah, occurred for a number of reasons (Shah para 137):

One of the reasons was that RM Capital was reviewing some financial transactions, and RM Capital wanted this to occur before undertaking the audit. Another reason was that Justin Beeton took some time off because he relocated his family from Sydney to Queensland.

239    It will be recalled that concerns about SMSF Club led to a letter of concerns on 12 November 2015 and a response from Mr Beeton on 17 November 2015. According to Mr Richardson's evidence, this led to review which was conducted at SMSF Club's offices in July 2016. It was conducted by a Philip Campbell, along with Mr Richardson and Mr Ho, who was at that time a compliance contractor to RM Capital. Mr Ho's evidence was that he travelled to SMSF Club's offices on the Gold Coast in July 2016 and that an 'annual [authorised representative] audit' occurred at that time. According to a report on the reviews prepared by Mr Campbell under the aegis of Compliance Plus, the reviews were to have 'a particular emphasis on ensuring that the provision of general advice did not extend into the provision of personal advice'. Concerns about that subject, and about record keeping in relation to it, were identified from the reviews. But the report does not indicate that conflicted remuneration was covered in the reviews, and nor were conflicts of interest, the FOFA reforms, or Chapter 7 of the Corporations Act concerning financial services.

ASIC investigation

240    RM Capital became aware that ASIC was investigating it from at least 9 June 2016, when it received a letter from ASIC requiring information about the advice being provided by SMSF Club and commissions received by RM Capital.

VI.    Consideration

241    It is convenient to consider first the steps that RM Capital did take during the relevant period to ensure that its representatives did not accept conflicted remuneration. I will then compare that with the steps that ASIC submits RM Capital did not, but should have, taken, and in the course of that I will determine whether the steps put forward by ASIC would indeed have been reasonable steps. That will provide a framework for consideration of whether the steps that RM Capital did take amounted to reasonable steps, in the sense discussed in Part IV above.

242    It is convenient at this point to make a general observation about proof. The onus of establishing a contravention of s 963F of the Act is on ASIC. It does not automatically follow from an absence of evidence that a particular step was taken that ASIC has established that it was not taken.

243    That said, in the circumstances of the present case, the principle often identified with Blatch v Archer (1774) 1 Cowp 63 at 65; (1774) 98 ER 969 is relevant. In Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450 at [80]-[81] the Full Court summarised that principle as follows:

… In this regard, reliance may properly be placed upon the principle tracing back to the remarks of Lord Mansfield in Blatch v Archer (1774) 1 Cowp 63 at 65 that 'all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted'. As Hodgson JA (with whose reasons Beazley JA agreed) explained in Ho v Powell (2001) 51 NSWLR 572 at [14]-[15]:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision.

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so.

(citations omitted)

Thus, where the evidence relied upon by a party bearing the onus of proof does not itself clearly discharge the onus, the failure by that party to call or give evidence that could cast light on a matter in dispute is relevant to determining whether the onus is being discharged: Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371 (Dixon CJ); Shalhoub v Buchanan [2004] NSWSC 99 at [71] (Campbell J). This principle is therefore wider than that in Jones v Dunkel (1959) 101 CLR 298. As Austin J in Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 explained at 93 [440], '[w]hereas Jones v Dunkel reinforces an inference drawn against the party who has not called evidence, to the effect that the evidence would not have assisted that party's case, Blatch v Archer leads either to the drawing of such an inference, or to some other assessment of the weight of evidence, unfavourable to the party against whom the principle is applied' (emphasis added) [i.e. emphasis added by the Full Court in Coshott v Prentice].

244    Here, while RM Capital does not have the onus of proof, it nevertheless had within its power the ability to adduce oral and documentary evidence as to any steps it took to ensure that its authorised representatives did not accept conflicted remuneration. And it did adduce a great deal of evidence as to the steps it took to ensure compliance with the law, including numerous iterations of the written policies and procedures it had adopted and, in one case, a draft policy that it did not adopt. The evidence of Mr Richardson and Ms Shah in particular appears to be intended to give a complete picture of RM Capital's compliance activities during the relevant period.

245    That can give rise to an inference that if RM Capital did not lead evidence that it took a particular step, for example that it adopted a policy that dealt with a particular matter, then it did not take that step. I will indicate below the specific instances in which I have drawn such an inference. But in short, the apparently comprehensive nature of the evidence adduced on behalf of RM Capital together with the apparent ability of RM Capital to adduce evidence on the subject, may support an inference against RM Capital, consistent with the Blatch v Archer principle described above.

What steps did RM Capital take against acceptance of conflicted remuneration?

Compliance personnel and a compliance programme

246    To begin with, RM Capital had a framework for compliance in place. By that I mean: it had staff whose responsibilities included ensuring that representatives complied with financial services laws, including suitably senior staff members, that is the principals Mr Richardson and Mr Le Page; there was also an overarching Compliance Programme in place, and embodied in writing, the contents of which gave appropriate regard to the importance of compliance and of regular audits and training [166] (unless otherwise stated, all paragraph references are cross-references to these reasons); and there was a Compliance Committee that met regularly, if not often, with the meetings attended by Mr Richardson, internal staff whose roles extended to compliance matters, and suitably qualified external compliance personnel.

247    In March 2014 the Compliance Programme was amended to make reference to sections of the Act that deal with conflicted remuneration, including s 963F and s 963G. It stated, appropriately, that there would be a ban on a licensee or representative accepting conflicted remuneration [170]. It provided for a monitoring procedure in connection with that ban.

Selecting suitable personnel

248    RM Capital's Representative and Human Resources Policy provided for persons who were appointed as employees or authorised representatives of RM Capital to have the appropriate education and character [183]-[186], [188]. On the basis of Mr Richardson's evidence about recruitment, I am prepared to find that RM Capital's selection, appointment and training of employees and other representatives was consistent with the policy [187]. This can be characterised as a measure likely to reduce the chance that representatives accepted conflicted remuneration, as suitably educated and qualified people of good character are more likely to understand the law and less likely to breach it.