Westpac has been held liable for the failure of one of its representatives to comply with their best interests obligations, in a court ruling handed down late last year. The bank was unsuccessful in arguing that the misconduct represented just one contravention, rather than more than the 22 that the Australian Securities and Investments Commission claimed.
However, it convinced the court that it did not have knowledge that there was significant risk – a serious charge. Rather, the court ruled that it ought reasonably to have known of the risk.
ASIC took the case to the Federal Court, alleging that a Westpac adviser Sudhir Sinha had contravened the Corporations Act when giving advice to four couples between 2013 and 2014.
ASIC also alleged that Westpac, as the responsible licensee in relation to the contraventions, had also contravened the Act.
It argued that Westpac, as the holder of a financial services licence, “had failed to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly.”
As a result of the advice and recommendations given by Sinha, each of the four couples altered their existing superannuation or insurance arrangements and acquired interests in or took out super or insurance products with entities associated with Westpac.
“Westpac or its associated companies, and Sinha indirectly, earned not insubstantial fees and commissions from the implementation of Sinha’s recommendations,” the court found.
Sinha’s remuneration was part fixed and part variable. The variable component was made up of money payable under the terms of his partnership agreement and included a proportion of revenue generated for Westpac
It was later discovered that Sinha’s recommendations, and the circumstances in which he made them, were “deficient and defective, both as a matter of process and in substance”.
Sinha, who was employed by Westpac Financial Consultants Ltd in 2002 and worked under a “partnership model” from 2012, had failed to give priority to the clients’ interests, gave advice based on incomplete information, gave advice that was inappropriate and provided advice in circumstances where there was an obvious conflict.
The court said: “That should not have come as a complete surprise to Westpac. That is because Sinha’s less than satisfactory conduct as a financial adviser had previously come to the attention of certain senior officers of Westpac as a result of various internal compliance reviews, audits and investigations.”
Issues identified during audits included failure to identify client circumstances and objectives, failure to address alternative strategies, lack of disclosure of fees, poor record keeping, failure to comply with Westpac’s policies and procedures and failure to ensure advice and products were appropriate.
A review of 24 of his client files in 2010 found that all had their summary of costs table removed, 42 per cent disclosed “no reasonable basis for advice” and 28 per cent contained blank forms signed by clients.
Westpac admitted that it had contravened the Act but it disputed the number of contraventions. ASIC alleged there were 22 – each of which would attract a separate fine. Westpac argued it was a single contravention.
The court ruled that “a person who provides personal advice to a client may be found to have engaged in multiple contraventions of the Act in circumstances where the advice, even though contained in a single statement of advice, relates to more than one financial product.”
ASIC also alleged that Westpac had knowledge that there was significant risk that Sinha would not comply with his bests interests obligations. Westpac disputed this, arguing that it ought reasonably to have known there was significant risk but not that it had knowledge of the risk.
On this matter the court ruled in Westpac’s favour, ruling that it ought reasonably to have known of the risk because of Sinha’s less than satisfactory record.
“It cannot be inferred that any senior employee or officer of Westpac had actual knowledge of that risk. The final report concerning the 2010 investigation did not conclude or support that conclusion that there was significant ongoing risk that Sinha would not comply with [his] obligations,” the court said.