ASIC has commenced civil penalty proceedings in the Federal Court of Australia against Commonwealth Bank of Australia (CBA) and CBA’s subsidiary, Colonial First State Investments Limited (CFSIL) in relation to alleged conflicted remuneration paid by CFSIL to CBA between 1 July 2013 and 30 June 2019.
ASIC alleges that more than $22 million in conflicted remuneration was paid by CFSIL to CBA for the distribution of Essential Super, a superannuation product issued by CFSIL. CBA distributed the Essential Super product using its branch and digital channels. Approximately 390,000 individuals became members of the Commonwealth Essential Super fund under the arrangements.
ASIC alleges that the arrangements between CBA and CFSIL breached the ban on conflicted remuneration under ss963E and 963K of the Corporations Act 2001 (Cth) because the arrangements could reasonably be expected to influence:
- the choice of financial product recommended by CBA to retail clients; or
- the financial product advice given by CBA to retail clients.
ASIC is seeking civil penalties against both CBA and CFSIL in relation to the alleged misconduct. Each contravention attracts a maximum civil penalty of up to $1 million for each of CBA and CFSIL.
Deputy Chair Daniel Crennan QC said ‘This investigation is related to a Royal Commission referral to ASIC arising from the superannuation round of the hearings. This proceeding reflects the ongoing commitment by ASIC’s Office of Enforcement and its Royal Commission Litigation Program to bring the Royal Commission’s referrals and case studies to litigation when appropriate.’
The first case management hearing is yet to be listed by the Court.
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Background
The arrangements between CBA and CFSIL in relation to the sale of Essential Super were considered in a Superannuation Case Study detailed in the Financial Services Royal Commission Volume 2 Final Report (pg 62) and subsequently a referral was made to ASIC (pg 99).
The following provisions of the Corporations Act ban the giving and accepting of conflicted remuneration:
- section 963E(1) which states that ‘a financial services licensee must not accept conflicted remuneration’; and
- section 963K which states that ‘an issuer or seller of a financial product must not give a financial services licensee…conflicted remuneration’.
Conflicted remuneration is defined in the Corporations Act as any benefit, whether monetary or non-monetary, given to an Australian 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 could reasonably be expected to influence:
- the choice of financial product recommended by the licensee or representative to retail clients; or
- the financial product advice given to retail clients by the licensee or representative.
The conflicted and other banned remuneration provisions were introduced in June 2012 as part of the Future of Financial Advice reforms, representing the Australian Government’s response to the 2009 Inquiry into financial products and services in Australia by the Parliamentary Joint Committee on Corporations and Financial Services (PJC). In that report, the PJC commented that:
‘A significant conflict of interest for financial advisers occurs when they are remunerated by product manufacturers for a client acting on a recommendation to invest in their financial product … These payments place financial advisers in the role of both broker and expert adviser, with the potentially competing objectives of maximising remuneration via product sales and providing professional, strategic financial advice that serves clients’ interests…’
ASIC updated its guidance on conflicted and other banned remuneration (RG 246) in December 2017 (17-421MR).
In June 2019, ASIC commenced civil penalty proceedings in the Federal Court against R M Capital Pty Ltd and its authorised representative, The SMSF Club Pty Ltd, in relation to alleged acceptance of conflicted remuneration (19-135MR).
In September 2019, ASIC commenced civil penalty proceedings in the Federal Court against Select AFSL Pty Ltd (Select), BlueInc Services Pty Ltd (BlueInc), Insurance Marketing Services Pty Ltd and director Russell Howden for breaches of the law arising from telephone sales of life and accidental injury insurance. Amongst other allegations, ASIC is also claiming that Select, BlueInc and Mr Howden breached the provisions of conflicted remuneration to its sales agents (19-244MR).
Editor's note:
The first case management hearing has been listed for 30 July 2020 at 9:30am. The proceeding has been allocated to Justice Anderson.
Editor's note 2:
The first case management hearing listed for 30 July 2020 was vacated and orders were made by the Court on 28 July 2020 with the consent of the defendants.
The Court ordered, amongst other things, that:-
- the defendants file and serve defences by 24 August 2020; and
- the parties file and serve a Statement of Agreed Facts by 19 October 2020.
The matter is listed for a further case management hearing on 11 March 2021 at 9.30 am.
Editor’s note 3:
The parties appeared at the case management hearing on 11 March 2021 before Justice Anderson.
The Court has ordered that the matter be set down for trial on 26 April 2022.
The parties are to complete a number of steps towards trial, including preparing any joint report of independent experts and filing of a court book.
The matter is listed for a further case management hearing on 17 March 2022.
Editor's note 4:
The parties appeared at the pre-trial case management hearing on 17 March 2022 before Justice Anderson.
The Court has made orders relating to the arrangements for trial including a timetable for objections of evidence.
The matter remains listed for trial on 26 April 2022.
Editor's note 5:
The trial proceeded on 26 April 2022. Closing arguments are listed for hearing on 5 and 6 May 2022.
Editor's note 6:
Closing arguments proceeded on 5 and 6 May 2022. Judgment is now reserved.
Editor's note 7:
On 29 September 2022, the Federal Court handed down judgment dismissing ASIC’s proceedings with orders as to costs (22-264MR).