June 17, 2024
Do licensees always need to ‘take all reasonable steps’?

A Federal Court ruling on whether licensees need to ‘take all reasonable steps’ regarding conflicted remuneration could extend to other parts of the advice process, according to law firm Hall & Wilcox.

The firm referenced the case of ASIC versus RM Capital in March 2024 where the Federal Court ruled licensee RM Capital failed to take reasonable steps to prevent its authorised representative from accepting conflicted remuneration.

RM Capital’s authorised representative, SMSF Club, is alleged to have advised its clients to set up self-managed superannuation funds (SMSFs) to buy real property marketed by real estate agent, Positive RealEstate Pty Ltd. Between December 2013 and July 2016, ASIC alleged, Positive RealEstate paid SMSF Club around $5,000 each time a client bought a property through them using their SMSF.

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

The court ruled that RM Capital did not take reasonable steps, and the steps it did take fell short of the actions required by a licensee. 

The emphasis was placed on the fact that the licensee did not necessarily have to take every single step or follow ‘one true path’ but instead needed to take all the reasonable steps necessary for the particular circumstance. This would consider the complexity of the matter, the level of risk it presents, and the practicality and costs associated with each step, as well as the level of experience and compliance history of the authorised representative.

Hall & Wilcox said the ruling regarding conflicted remuneration could also potentially be applied to other conduct provisions such as:

  • s994E(1) of the Corporations Act, which requires a person who makes a target market determination for a financial product to take reasonable steps that will, or are reasonably likely to, result in retail product distribution conduct in relation to the product being consistent with the TMD.
  • s1021E(3) and 1022B(7) of the Corporations Act, which provide that a person will not breach the relevant provisions in the Corporations Act if the person prepares a defective disclosure document or statement but the person “took reasonable steps to ensure the document or statement would not be defective”.
  •  s912A(1)(ca) of the Corporations Act and subsection 47(1)(e) of the National Consumer Credit Protection Act 2009 (Cth), which require licensees to take “reasonable steps to ensure that its representatives comply” with the financial services laws and credit legislation respectively.

Reflecting on the case and the ramifications it has for advice licensees in the future, Hall & Wilcox partner Adrian Verdnik said the case is a useful example of meeting the reasonable steps test.

“The court said the extent to which any steps are necessary to be performed to discharge the licensee’s obligation to take ‘reasonable steps’ to ensure its representatives do not accept conflicted remuneration depends, in part, on the level of risk presented to the licensee by its representative’s activities. Additionally, the court highlighted that another factor relevant to assessing the reasonableness of any of the steps is the capacity of the licensee to influence its representative’s behaviour.

“The court detailed the risks specific to SMSF Club and held that these risks would have prompted a licensee taking reasonable steps to monitor SMSF Club more closely than would be required in circumstances where no such concerns were presented.

“This case demonstrates that the obligation is not to take all reasonable steps, nor is there one desired approach to be taken. Rather, what constitutes reasonable steps that a licensee should take to ensure its representatives do not accept conflicted remuneration will be a question of fact that depends on all the circumstances.” 

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