The best interests duty: process or outcomes?

On 30 March 2017, the Federal Court handed down its decision in ASIC v NSG Services Pty Ltd. The case represents the first civil penalty action taken by ASIC alleging breaches of the best interests obligations and is significant in understanding the nature of the best interests duty.

Background

In 2012, the Future of Financial Advice reforms were enacted by the Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial Advice) Act 2012 (Cth). The latter introduced the best interests obligations contained in Part 7.7A, Division 2 of the Corporations Act 2001 (Cth).

The best interests obligations apply in relation to the provision of personal advice to retail clients,¹ and impose on the provider (that is, the individual who provides the advice)² a range of statutory duties including (among other obligations):

• to act in the best interests of the client;³ and
• to provide advice to the client only if it would be reasonable to conclude that the advice is appropriate to the client.⁴

These provisions received judicial consideration in the Federal Court’s recent decision of ASIC v NSG Services Pty Ltd⁵ (ASIC v NSG Services).

The decision

On 30 March 2017, the Federal Court handed down its decision in ASIC v NSG Services. The case represents the first civil penalty action taken by ASIC alleging breaches of the best interests obligations.

ASIC alleged that, on several occasions, certain NSG Services Pty Ltd (NSG Services) representatives failed to comply with ss 961B and 961G in relation to personal advice provided to retail clients which committed them to costly, unsuitable, and unnecessary financial arrangements. ASIC also alleged that NSG Services breached s 961L by failing to take reasonable steps to ensure that its representatives complied with the best interests obligations. In respect of breaches of the best interests obligations by NSG Services representatives who were not authorised representatives, ASIC further alleged that NSG Services breached s 961K. NSG Services accepted that it contravened these provisions.

In considering the relevant legislative provisions, Moshinsky J made two notable observations.

1. First, s 961B(2) may be treated as providing a ‘safe harbour’ for providers accused of breaching the best interests duty. Thus, if the provider can prove that they did each of the steps listed under s 961B(2), they will have satisfied the best interests duty.⁶ Both parties accepted that a provider may be able to satisfy the best interests duty in s 961B(1) even though they do not fall within s 961B(2).⁷ With respect, this is also our view. Section 961B(1) is the primary obligation while s 961B(2) is a statutory defence which must be proven by the party relying on it. Undoubtedly, the content of s 961B(1) is shaped by, or more accurately, overlaps, but is not synonymous with, the steps contained in s 961B(2).
2. Secondly, his Honour commented that: “It was common ground that, while s 961B is concerned with the process or procedure involved in providing advice that is in the best interests of the client, s 961G is concerned with the content or substance of that advice. At first blush, the text of s 961B does not appear to support the proposition that s 961B is concerned with the process or procedure involved in providing advice that is in the best interests of the client. However, support for this way of viewing the focus of s 961B is provided by the context in which it appears, including the language of s 961G, the legislative history, and the legislative materials (see, in particular, the revised explanatory memorandum to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) at [1.23], [1.24], [1.57]). It is unnecessary for present purpose to reach a concluded view on this issue.”⁸ (emphasis added)

The second observation is particularly significant to an understanding of the nature of the best interests duty.

The best interests duty

Sections 961B(1) and 961B(2) serve fundamentally different functions: s 961B(1) sets out the core best interests duty while s 961B(2) sets out a statutory defence. The content of the duty in s 961B(1) will of course be influenced by the various steps which constitute the defence contained in s 961B(2).

However, a key issue affecting both sections is whether s 961B is concerned with the process of giving advice or outcomes.

In our view, the correct interpretation of s 961B is that it is concerned with the process of giving advice. Moshinsky J’s comments in ASIC v NSG Services lends support to this proposition. Although it was unnecessary for his Honour to reach a concluded view on the issue, his Honour’s comments are defensible as a matter of statutory interpretation and in light of the legislative history of s 961B. That s 961B is to be interpreted in this manner is supported by several considerations:

• all the steps provided for under s 961B(2) form part of the process of giving advice and are not concerned with outcomes;
• in considering s 961B, the revised explanatory memorandum to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) (the FOFA EM) states that “the requirement to act in a client’s best interests is intended to be about the process of providing advice, reflecting the notion that good processes will improve the quality of the advice that is provided. The provision is not about justifying the quality of the advice by retrospective testing against financial outcomes”;⁹
• s 961B may be contrasted to s 961G, which refers to “resulting advice” and whether it would be “reasonable to conclude that the advice is appropriate”; and
• the FOFA EM draws a distinction between “the process of providing advice (as regulated in section 961B)”¹⁰ and “the quality of advice (as regulated in section 961G)”.¹¹

In our view, as to s 961B being concerned with the process of giving advice and not outcomes, no implication should be drawn from his Honour’s comment that it was unnecessary to reach a concluded view on the issue.

This interpretation accords with the interpretation of the best interests duty of a trustee. For example, Justice Stone comments that “the [best interests] principle, as with all other aspects of fiduciary duty, is directed to input not to outcomes”.¹² This view received support in the decision of Manglicmot v Commonwealth Bank Officers Superannuation Corporation,¹³ in which Rein J held that “s 52(2) [the best interests duty] is concerned with process, not outcome”.¹⁴

Endnotes

1. Corporations Act 2001 (Cth) s 961(1).
2. Corporations Act 2001 (Cth) s 961(2).
3. Corporations Act 2001 (Cth) ss 961B–961F.
4. Corporations Act 2001 (Cth) s 961G.
5. [2017] FCA 345.
6. ASIC v NSG Services Pty Ltd [2017] FCA 345 [17].
7. ASIC v NSG Services Pty Ltd [2017] FCA 345 [18].
8. ASIC v NSG Services Pty Ltd [2017] FCA 345 [21].
9. Revised Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) [1.23].
10. Revised Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) [1.24].
11. Revised Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) [1.24].
12. Justice Margaret Stone, ‘The superannuation trustee: Are fiduciary obligations and standards appropriate?’ (2007) 1 Journal of Equity 167, 181.
13. (2010) 239 FLR 159.
14. Manglicmot v Commonwealth Bank Officers Superannuation Corporation (2010) 239 FLR 159, 179 [51].