Personal advice and ethics – crossing the line? (ASIC v Westpac Securities)

By Mark Bland, Partner

The ASIC v Westpac Securities[1] judgment significantly impacts how financial firms can engage with consumers. It broadens what can be done under a general advice authorisation but also sets ethical rules of engagement. It is particularly important for financial firms that:

  • offer superannuation consolidation services; and / or
  • provide a general advice only service.

However it is of broader interest to all licensees because it adds to the limited judicial consideration of the “efficiently, honestly and fairly” obligation which has loomed large in the Royal Commission.

ASIC v Westpac Securities was heard over 5 days in February 2018. While the Royal Commission hearings raged from March to November, the reserved judgment in this case rumbled in the background. Her Honour Justice Gleeson was ruminating on questions of great import in the hearings. Where is the line between general and personal advice? What behaviour is expected by the term “efficiently, honestly and fairly”?

ASIC was heavily criticised by counsel assisting for not taking the banks to court for personal advice given in the selling Mysuper products in bank branches. Based on the principles in this judgment, perhaps ASIC did well to negotiate the outcomes it did.

Westpac Securities Model

Westpac offered a superannuation consolidation service based on information and general advice. The service involved written offers to existing BT super members offering a free search for other super accounts they might hold (external accounts), followed by telephone calls from its Super Activation Team offering to arrange the rollover of the external accounts into the customer’s BT super account.

Under this service more than $640 million was rolled over into BT super accounts from January 2013 to September 2016.

The Team worked under a quality monitoring framework (QM Framework) that set out a four-part structure for calls:

  1. Open – put the caller in a positive, receptive frame of mind and get permission to ask questions;
  2. Gather – ask questions to understand the customer’s situation and requirements;
  3. Presenting – reassure the customer by telling them other customers feel the same way (social proofing), linking the customer’s motivation to the service being offered and creating an emotional connection to how the service will benefit them;
  4. Objection Handling / Closing – dealing with resistance by the customer, creating urgency and providing directions for next steps.

What happened in the “Gather” phase was critical to the question of whether they had given general or personal advice was given. In this phase, questions were asked as to what customers look for, what they see as important and what they care about in a super fund. They were also asked what benefits they see in consolidating super.

With the answers to these questions, ASIC argued that the Super Activation Team crossed “an important and clear line” into personal financial product advice. Westpac Securities had a general advice only licence, so ASIC sought declarations that Westpac:

  • had provided unlicensed personal advice;
  • had not provided statements of advice;
  • had not complied with the personal advice best interest obligations;
  • had not done all things necessary to ensure that financial services under its licence were provided efficiently, honestly and fairly, because it provided personal advice regardless of the appropriateness of that advice to the customer, in a bid to generate FUM for Westpac.

Where is the line between general and personal advice?

ASIC argued that there is a “clear line” between general and personal advice.

Over the 10 months between hearings and judgment, her Honour clearly considered the opposing arguments very carefully. And it is the meaning of “considered” that determined the outcome, specifically whether the Westpac advisers “considered” one or more of the customer’s objectives, financial situation and needs (personal circumstances) in providing advice in relation to the consolidation of their superannuation.

The definition of “personal advice” in the Corporations Act (s766B) has a subjective limb and an objective limb. It provides that financial product advice is personal advice when it is given in circumstances where:

  1. the provider of the advice has considered one or more of the customer’s objectives, financial situation and needs (personal circumstances) (subjective limb); OR
  2. a reasonable person might expect the provider to have considered one or more of these matters (objective limb).

Any financial product advice that is not personal advice is general advice.

It was found that “expect” in the objective limb required a reasonable person (in the customer’s shoes) to think that it was “likely” (not merely “possible” as ASIC submitted) that the provider had considered one or more of their personal circumstances. [131]

Based on 15 case studies, ASIC argued that Westpac advisers had provided personal advice on either or both of the subjective and objective limbs because, amongst other things, the advisers:

  • knew that each customer had more than one super account at the time the call was made;
  • ascertained what other superannuation accounts the customers had;
  • identified what they considered the benefits of combining super and their personal motivations to consolidate.

In the judgment there is a useful exposition of the elements of the definition of financial product advice and of personal advice. The court found that personal advice implied a level of intellectual engagement beyond what ASIC represented. Her Honour stated:

“In my view, the word “considered” refers to an active process of evaluating or reflecting upon the subject matter of the consideration, appropriate to the provision of “financial product advice”. It does not require a process that is “detailed, extensive or careful”, however, it does involve an intellectual engagement with the subject matter of the consideration.” [127]

And later:

“Mere knowledge of facts about customers, particularly that they held multiple superannuation accounts, and an intention to persuade the customer to accept the rollover service does not support an inference that the caller engaged in any reflection upon the customer’s position that amounted to “consideration”. [386]

Her Honour went on to say that neither “active listening”, nor the use of facts that might be used to influence the customer during the call, amount to the intellectual engagement required for it to be “considered”.

As for the objective limb, her Honour noted particular circumstances which suggest to a reasonable person (or “the person on the Bondi bus”) that the adviser had not considered their personal circumstances:

  • The call was not preceded by the customer providing information about his / her personal circumstances;
  • The customer had not sought personal advice;
  • The customer is not paying for the service;
  • The customer had no previous relationship with the adviser and was not known to the adviser;
  • The content of and tone of each call involved a general advice warning and clear indications that the adviser lacked knowledge of the details of the customer’s financial situation.[394]

Her Honour also made the point that, in accordance with ASIC’s guidance, consolidation is of such an obvious benefit, it could be described as a universal need, such as the aim of avoiding unnecessary payment of fees or having one’s super arranged in a way that’s easily tracked and managed. Her honour considered such a universal need not to be a “need” within the meaning of the personal advice definition being “objectives, financial situation or needs”. [121]

What behaviour is required by “efficiently, honestly and fairly”?

The Royal Commission Interim Report placed a strong focus on what the Commissioner called “overarching obligations” of licensees. The “overarching obligation” given most attention was the general obligation of licensees under s912A(1)(a) to do all things necessary to ensure financial services are provided efficiently, honestly and fairly. Her Honour summarises the various cases on this obligation, with a focus on the concept of “sound ethical values and judgment” in ASIC v Camelot[2]. I will refer to 912A(1)(a) as the “ethics obligation”. It needs a simply name than “efficiently, honestly and fairly” and it would be misleading to call it an ethical obligation because it is not a moral obligation but a legal one.

The Court found Westpac Securities breached its ethics obligation.

While her Honour found that Westpac had not provided personal advice, she still picked up on the issue of what was in the “best interests” of the client. Westpac argued, in its defence, that its rollover service was a “naked exercise in marketing”, that the consumer would have been aware of this and would not think Westpac was acting in the customer’s best interest. Her Honour rejected this and found that Westpac had breached the ethics obligation because:

  • The advisers did not explain that a prudent person may wish to consider the sort of matters that would be considered if the advice was personal advice, such as the loss of benefits in the other fund, loss of insurance and whether they were better consolidating into another fund – her Honour referred to warnings on ASIC’s Moneysmart website that could have been used;
  • The social proofing technique, saying that most customers like to consolidate, should not be used to provide assurance to customers so as to influence them to accept the rollover service;
  • Advisers conveyed that consolidation was an obvious and uncontroversial course of action for the client when that may not have been the case. This approach was bolstered by social proofing and the adviser’s attitude of helpfulness which only reinforced the impression that there was no possible lack of alignment between the interests of the customers and Westpac;
  • Advisers didn’t expressly identify Westpac’s interests in the customer consolidating and presented themselves as merely assisting in a way that gave the impression that the customer should feel comfortable in accepting the service.

Accordingly, the judge found that while advisers’ conduct was not dishonest it was not “efficient, honest and fair”.

How should licensees respond to this case?

The imperative is to reflect on whether your firm operates with sound ethical values and judgement in dealings with clients. Does it have compliance arrangements to ensure the firm does comply with this ethics obligation? Where is the ethics obligation line for the financial services?

This judgment presents an opportunity to do more under general advice communication channels, allowing greater personalisation in a single, transactional context. However if firms expand their general advice models, they will need to ensure advisers are skilful enough to recognise what is in a client’s best interests, and ensure that they are given the appropriate warnings and made aware of the interests of the adviser and his / her employer.

It is expected that the Royal Commission report will reinforce that it is not only personal advice providers that need to consider the best interests of clients. Licensees more broadly need to review their business models against the overarching obligations such as the ethics obligation, adequate management of conflicts and the consumer warranties in the ASIC Act. This leaves no room for a ‘naked exercise in marketing’.

 

[1] ASIC Securities and Investment Commission v Westpac Securities Administration, in the matter of Westpac Securities Administration Ltd [2018] FCA 2078.

[2] ASIC v Camelot Derivatives Pty Ltd (In Liq) [2012] FCA 414

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