Regulatory Rumbles: Can an issuer be held liable for a distributor’s conduct?

Increasingly, ASIC has sought to hold product issuers responsible for the conduct of other entities down the distribution chain. The recent case of ASIC v Diversa Trustees Limited [2023] FCA 1267 (Diversa) is an example of this.

In this edition of Regulatory Rumbles, we explore this trend and examine the legal bases for holding product issuers responsible for the distribution conduct of their representatives, service providers and other intermediaries in the distribution chain.

How far does the concept of ‘issuing’ extend?

‘Issuing a financial product’ is one form of ‘dealing’ and is therefore a financial service for the purposes of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act).[1] However, ‘issuing’ is not defined in the Corporations Act.

Broadly, issuing is the process of installing a customer as a participant in a financial product. For example, in the context of insurance, this involves issuing the policy to the insured and enrolling them on the relevant register. In the context of superannuation, it is the issuing of interests in the superannuation fund.

Conceivably, it could be argued that the concept of issuing could extend to distribution conduct, particularly distribution conduct which forms part of the infrastructure that facilitates the issuing of the product – in this sense, it is part of the process surrounding the ‘client installation’ into a product. In our view, it is likely that this kind of distribution conduct will often fall into one of the other buckets of ‘dealing’, such as ‘arranging’ for the issue of a financial product, or may involve the provision of financial product advice.[2] Simply distributing the relevant PDS to customers is unlikely to amount to ‘issuing’.

One exception may arise where a third party distributor invites the making of applications for an interest in a public offer superannuation fund. Such conduct is prohibited unless the third party is engaged or authorised to act on behalf of the trustee of the fund, and in this sense, could be seen as playing a role in the issuing process itself.[3] However, this will depend on the totality of the circumstances in which the invitation to participate in the fund is made. In enforcement activity over recent years, ASIC has sought to extend the concept of ‘issuing’ by arguing that product issuers can fail to do all things necessary to ensure that the financial service of issuing is provided ‘efficiently, honestly and fairly’ due to conduct that occurs further down the distribution chain.

In Diversa, for example, this argument failed for a range of reasons, including that Diversa did not have knowledge of the deficiencies in the distribution conduct which would have made its issuing of interests in the YourChoice Super Fund unfair and that the relevant distributors were not acting under Diversa’s AFSL.

In other cases, such as MobiSuper and RI Advice, ASIC has succeeded in holding product issuers responsible for the conduct of distributors through breaches of the ‘efficiently, honestly and fairly’ (EHF) obligation and the requirements for licensees to take reasonable steps to ensure their representatives comply with ‘best interest obligations’ and other financial services laws.[4]

In the following sections, we consider the range of ways in which an issuer might be held responsible for the conduct of a distributor, and where the limits of such responsibility lie. The recent case law indicates that the extent of the issuer’s liability can depend two key factors:

• Relationship: The nature of the relationship between the product issuer and distributor; and
• Knowledge: The issuer’s knowledge of the relevant distribution conduct, which in turn impacts the circumstances in which the financial service of issuing is provided.

Who is a ‘representative’?

The definition of ‘representative’ in section 9 of the Corporations Act is broad. It captures a financial services licensee’s authorised representatives, employees and directors, the employees and directors of a related body corporate of the licensee, and any other person ‘acting on behalf of’ the licensee.

In Diversa, Button J accepted that the phrase ‘on behalf of’ has no strict legal meaning and can embrace a wide range of relationships, including those that may not qualify as ‘agency’ relationships.[5] However, her Honour also stated that ‘there is a limit to how loose the connection can be’; the expression ‘still conveys that something is done “for” the company … or something similar to “in the course of the body corporate’s affairs or activities.”’[6]

ASIC tried to argue that the ‘OneVue entities’ were Diversa’s representatives because Diversa had outsourced the entire operation of the YourChoice Super Fund to them.[7] Button J rejected this submission, having regard to the detailed web of mutual obligations between the parties and the many respects in which the OneVue entities were in fact in the ‘driver’s seat’, giving instructions to Diversa.[8]

It seems to us that, while the concept of ‘representative’ is broad, it is unlikely to capture entities with whom the licensee has no contractual relationship or entities who act on their own behalf, in the course of their own affairs, and do not tend to take instructions from the licensee. A classic example would be where an independent financial adviser is providing financial product advice about an issuer’s products – while there may be a contractual relationship between the issuer and the financial adviser, the financial adviser is ordinarily an independent person, acting on its own behalf and having regard to its own duties.

Diversa had appointed the OneVue entities to promote, administer and manage the YourChoice Super Fund through various contractual relationships. Button J’s decision is a reminder to look carefully at the arrangements between an issuer licensee (such as a superannuation fund trustee, responsible entity of a managed investment scheme or an insurer) and relevant distributors (including fund or scheme promoters, advice providers and distributors of white-labelled insurance products) before concluding that the distributor entity acts ‘on behalf of’, and is therefore a representative of, the licensee.

Liability for representatives and agents

The breadth of the definition of ‘representative’ is relevant for two key reasons under the Corporations Act.

The first is that licensees can be held responsible for the conduct of their representatives, as between the licensee and the client, under Division 6 of Part 7.6 of the Corporations Act. Where these provisions apply, the effect is that a client has the same remedies against the licensee as they have against the representative.[9] However, they do not impose civil or criminal liability on the licensee or give ASIC a means to seek remedies against the licensee.

The second is that a number of provisions impose obligations on licensees with respect to their representatives. Examples include the requirements for financial services licensees to take reasonable steps to ensure that their representatives comply with the financial services law[10] and to ensure their representatives are adequately trained and competent.[11]

It is also important to remember that a person (the ‘provider’) can only provide financial services ‘on behalf of another person…’ (the ‘principal’) where one of the paragraphs in section 911B(1) of the Corporations Act applies. Where the provider holds their own AFSL covering the provision of the relevant service,[12] the service is taken to be provided by the provider and not the principal for the purposes of the other provisions of Chapter 7 of the Corporations Act.[13]

This will assist to limit licensee’s liability for a distributor’s conduct, for example, where the distributor provides financial product advice to clients under their own AFSL. In these circumstances, the distributor is clearly responsible for the provision of the advice from a licensing perspective. This was one reason why Button J held that Diversa could not be held liable for any failure of the OneVue entities (who had their own advice licence) to adhere to efficiently, honestly and fairly obligation.[14]

However, where the relevant distributor is an authorised representative, employee or director of the licensee, the licensee’s AFSL will be ‘in play’[15] and the licensee will be open to being held responsible for breaches of the efficiently, honestly and fairly obligation and other provisions that apply specifically to the responsible financial services licensee.

Finally, it is worth noting that, for the purposes of Chapter 7 of the Corporations Act, a body corporate can be held responsible for any conduct which is engaged in on its behalf by its employees, directors and agents acting within the scope of their or authority, or other persons acting at the direction of one of those representatives (where the direction is within the scope of the representative’s authority).[16] A similar provision exists for the purposes of Division 2 of Part 2 of the Australian Securities Investments Commission Act 2001 (Cth) (ASIC Act).[17] This has the potential to cause licensees to breach provisions which apply more broadly due to the conduct of certain representatives. This could include, for example, the prohibitions against misleading and deceptive conduct in section 1041H of the Corporations Act and section 12DA of the ASIC Act.

Extending liability for other downstream entities – through the ‘efficiently, honestly and fairly’ obligation

Recent cases indicate that an issuer’s liability for a distributor’s conduct can also depend on the impact the distributor’s conduct has on the issuer’s provision of financial services and the licensee’s knowledge of the distributor’s conduct.

For example, in MobiSuper, Tidswell, who was the superannuation fund trustee, knew there was a risk that MobiSuper (who Tidswell had appointed as the promoter of the MobiSuper Fund) was seeking to influence customers to dispose of their interests in their existing superannuation accounts and acquire interests in the MobiSuper Fund, while ostensibly seeking to provide general advice only and without regard to the customer’s interests.[18] Tidswell knew this because it had reviewed and approved the call scripts used by MobiSuper.[19]

Jackson J agreed[20] that Tidswell’s issuing of interests in the MobiSuper Fund in these circumstances contravened the obligation to act efficiently, honestly and fairly. His Honour also said that ‘in those circumstances, at least, Tidswell was required to engage in reasonably close supervision of Mobi’s activities.’[21] These findings did not depend on Mobi being engaged to act on Tidswell’s behalf.

Further, as noted above, ASIC’s ‘knowledge’ argument in Diversa failed because it was not proven on the evidence. However, Button J also said that ‘knowledge is relevant as it forms part of the circumstances in which Diversa performed the financial service of issuing interests in YourChoice Super.’[22]

The efficiently, honestly and fairly obligation only applies to the financial services ‘covered by’ the relevant licensee’s AFSL. In this respect, the Diversa case is a helpful reminder to carefully consider whether third party distributors are involved in the provision of financial services which are covered by the issuer’s AFSL before concluding that their conduct could lead the issuer to breach the efficiently, honestly and fairly obligation. In many cases, third party service providers, and other distributors with whom the issuer has no contractual relationship (e.g. ‘finfluencers’) may not be doing this.

However, taken together these cases indicate that distribution conduct and distribution relationships can impact the circumstances in which the issuer provides financial services, and that this can lead the issuer to contravene its own obligations under financial services law, such as the efficiently, honestly and fairly obligation.

Concluding remarks

We encourage product issuers to map the entities that form part of their product distribution chains and consider how their potential liability can be managed and mitigated. This could involve, for example:

• the careful selection of representatives, agents and other services providers, and clarity on the relevant AFSLs at play;
• clear particularisation in distribution and other intermediary agreements of the conduct which a distributor is authorised to engage in on the issuer’s behalf and the extent of the distributor’s involvement in the client installation process. This step could make a substantial difference to the extent of the issuer’s liability for the distributor’s conduct and whether the issuer has a duty to supervise the distributor; and
• the implementation of appropriate processes to oversee and supervise distributor conduct (as informed by the previous step).

Issuers should also monitor how the distribution conduct of other entities (with whom they do not have a contractual relationship with) impacts their own provision of financial services.

[1] Corporations Act ss 766A and 766C.

[2] See, e.g., ASIC v MobiSuper Pty Ltd [2021] FCA 855 (MobiSuper) at [18].

[3] Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) s 152(3)-(4).

[4] See, e.g., MobiSuper; ASIC v RI Advice Group Pty Ltd (No 2) (2021) 156 ACSR 371 (RI Advice).

[5] Diversa at [383].

[6] Diversa at [385], quoting Lisciandro v Official Trustee in Bankruptcy (1995) ATPR 41-436 at 40,903–4.

[7] Diversa at [384].

[8] Diversa at [386].

[9] Corporations Act s 917E(1).

[10] Corporations Act s 912A(1)(ca).

[11] Corporations Act s 912A(1)(f).

[12] Corporations Act s 911B(1)(d).

[13] Corporations Act s 911B(3).

[14] Diversa at [357].

[15] Diversa at [357].

[16] Corporations Act s 769B(1).

[17] ASIC Act s 12GH(2).

[18] MobiSuper at [43], [49].

[19] MobiSuper at [43].

[20] The contravention was admitted by Tidswell Financial Services Ltd (Tidswell).

[21] MobiSuper at [50].

[22] Diversa at [136].