FEDERAL COURT OF AUSTRALIA
Avoca Consultants Pty Ltd v Millennium3 Financial Services Pty Ltd [2009] FCA 883
Acts Interpretation Act 1901(Cth) s 13(1), s 15AA
Australian Securities and Investments Commission Act 2001 (Cth) s 12 BA(1), s 12BAA(1), s 12 BAA(8), s 12BAB, s 12BAB(1), s 12DA, s 12DA(1), Part 2 Div 2, subdiv D
Australian Securities and Investments Commission Act 1989 (Cth)
Corporations Act 2001 (Cth) Ch 7, Div 3 subdiv B subdiv C subdiv D, Div 4, Div 5 Pt 7.6, Pt 7.7, Div 6, s 760A, s 761A, s 761C, s 763A, s 766A(1), s 766A(1)(a), s 766A(1)(b), s 766B, s 910A, s 911A, s 911A(1), s 912A, s 912A(1), s 912A(1)(c), s 912A(1)(ca), 912A(1)(f), s 912D, s 915B(3), s 916A(1), s 916B(3), s 917B, s 941A, s 941B, s 941B(2), s 941D, s 941D(1), s 941E, s 942A(1), s 942C, s 942C(2), s 942D, s 942DA, s 944A, s 945A, s 945B, s 945B(3), s 945B(2), s 946A, s 946A(2), s 946AA, s 946B, s 947A, s 947C, s 947C(2), s 947C(3), s 947C(4), s 947D, s 947D(2)(a), s 947D(2)(b), s 947E, s 949A
Financial Sector Reform (Consequential Amendments) Act 1998 (Cth)
Trade Practices Act 1974 (Cth) s 51AF, s 51AF(1), s 51AF(2)(a), s 52, s 82, 87(1A), Pt V
Corporations Regulations 2001 (Cth)reg 7.7.01, reg 7.7.07, reg 7.7.07(3), reg 7.7.07(4)
AVOCA CONSULTANTS PTY LTD and LAURENCE MARTIN CUNNINGHAM v MILLENNIUM3 FINANCIAL SERVICES PTY LTD
WAD 251 of 2008
BARKER J
14 AUGUST 2009
PERTH
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| WESTERN AUSTRALIA DISTRICT REGISTRY |
|
| GENERAL DIVISION | WAD 251 of 2008 |
| AVOCA CONSULTANTS PTY LTD First Applicant
LAURENCE MARTIN CUNNINGHAM Second Applicant
| |
| AND: | MILLENNIUM3 FINANCIAL SERVICES PTY LTD Respondent
|
| JUDGE: | |
| DATE OF ORDER: | 14 AUGUST 2009 |
| WHERE MADE: | PERTH |
THE COURT ORDERS THAT:
1. The application is dismissed.
2. Subject to order 3, the applicants to pay the respondent's costs, to be taxed if not agreed.
3. Liberty to apply in respect of any reserved costs within 21 days.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| WESTERN AUSTRALIA DISTRICT REGISTRY |
|
| GENERAL DIVISION | WAD 251 of 2008 |
| BETWEEN: | AVOCA CONSULTANTS PTY LTD First Applicant
LAURENCE MARTIN CUNNINGHAM Second Applicant
|
| AND: | MILLENNIUM3 FINANCIAL SERVICES PTY LTD Respondent
|
| JUDGE: | BARKER J |
| DATE: | 14 AUGUST 2009 |
| PLACE: | PERTH |
REASONS FOR JUDGMENT
introduction
1 The respondent, which is referred to in these reasons as M3FS, is a corporation engaged in the business of providing financial services and which holds an Australian financial services licence (AFSL) under the Corporations Act 2001 (Cth) (CA).
2 In about July 2007, M3FS formally acquired the business assets of Mawson Group Australia Limited (Mawson) and Aurora Financial Services Pty Ltd (Aurora). The proposed acquisition had been announced some time earlier.
3 Prior to M3FS's acquisition, the applicants provided financial services under arrangements with Mawson. Following the acquisition, the first applicant, Avoca, became an authorised representative of M3FS pursuant to a deed called the Corporate Authorised Representative Agreement (CARA) dated 16 July 2007, and the second applicant, Mr Martin Cunningham, became a sub‑authorised representative pursuant to the deed.
4 On 8 July 2008, nearly a year later, Mr Cunningham was suspended by M3FS for alleged "material breach" of the CARA. In December 2008, M3FS terminated the CARA and the authorities of the applicants for the same reason. In this proceeding, the applicants challenged the right of M3FS to take such actions.
OUTLINE OF THE PARTIES' CASES
5 The applicants plead that:
· M3FS breached the CARA by suspending Mr Cunningham's authority and then terminating the deed in circumstances where the applicants had not committed any material breach of the deed and M3FS did not have any reasonable cause to suspect the applicants had committed any material breach of the deed (statement of claim para 6 – 7, 17 and 18.1);
· By entering into the CARA, M3FS represented to the applicants that it would not suspend or terminate the authorities of the applicants for anything other than a material breach of the deed or where there were reasonable grounds to suspect a material breach; and that this representation constituted misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (TPA) because the respondent had no reasonable grounds for making the representation (statement of claim paras 8 – 9, 16.1, 17 and 18.2.);
· That by entering into the deed M3FS represented to the applicants that it would provide training to the applicants as required by the CA and the conditions of its AFSL; and that this representation constituted misleading and deceptive conduct in contravention of s 52 of the TPA because the respondent had no reasonable grounds for making the representation (statement of claim paras 8, 10, 16.2, 17 and 18.3);
· Alternatively, if the applicants committed a material breach or there were reasonable grounds to suspect so, M3FS represented to the applicants on three separate occasions (being in December 2007, January 2008 and May 2008) that they were complying with their material obligations under the CARA and there were no areas of non‑compliance that required rectification; and that those representations constituted misleading and deceptive conduct in contravention of s 52 of the TPA (statement of claim paras 11 – 15, 16.3 – 16.6, 17 and 18.4 – 18.6);
· Consequently the applicants are entitled to a declaration that M3FS was not entitled to suspend the authority of the second applicant or terminate the authorities of the applicants as they purported to do, pursuant to cl 12.2(3) and (10) of the CARA; and that the applicants are entitled to damages (at common law, alternatively under s 82 of the TPA) and/or compensation (pursuant to s 87(1A) of the TPA) for loss and damage caused by the suspension and termination.
6 The matter went to hearing on the issues of liability only. At trial the applicants abandoned an earlier claim for a mandatory injunction requiring M3FS to reinstate them as representatives following their appointment on 5 February 2009 as representatives for another duly licensed financial advisor.
7 Factually, the applicants say, in short, that at all material times they provided financial services to retail clients, including by issuing Statements of Advice (SOAs) and otherwise acted in accordance with the requirements of an M3FS compliance review report dated 29 November 2007, and a December 2007 action plan agreed to by the parties. They say that, as a result of the conduct of Mr Jonathon Nguyen, M3FS's State Development Manager and their Relationship Manager, on 15 January 2008 – when, in the absence of Mr Cunningham, he inspected five of Mr Cunningham's client files at the offices of Avoca, ostensibly for the purposes of pre‑vetting, and did not thereafter indicate any difficulties with those files – Mr Cunningham and Avoca were entitled to consider they were compliant with the requirements of M3FS notified through the November audit process and the December action plan.
8 Further, the applicants says that this understanding was compounded by the subsequent actions of Mr Nguyen in April 2008, when, by prior arrangement with Mr Cunningham, he collected six client files from Mr Cunningham at the offices of Avoca on 8 April 2008 and did not communicate any non‑compliant conduct on the part of the applicants revealed by those files until late June 2008. The applicants say that if there were any compliance difficulties revealed by an inspection of those six client files, they would have expected to have heard from Mr Nguyen, or some other officer of M3FS, well before late June 2008.
9 The applicants say the real reason why Mr Cunningham was suspended on 8 July 2008 was because the M3FS compliance committee then believed, on the basis of an incorrect electronic file notation made by Mr Nguyen in respect of his visit to the offices of Avoca on 15 January 2008, but not actually made and entered in the M3FS Myworkspace computer system until 4 July 2008, that the applicants had not made any client files available for pre‑vetting by M3FS as required by the December action plan. The applicants say, in effect, it was on the basis of this belief, based on incorrect information, and not for any other alleged "material breach" of the CARA, that the compliance committee initially suspended Mr Cunningham in July and later terminated the CARA in December 2008.
10 In the alternative, the applicants say that, if M3FS was entitled to suspend the applicants and terminate the arrangements with the applicants for material breach of the CARA, not relevantly related to the incorrect electronic file entry, then the conduct of Mr Nguyen complained of in the period January 2008 to late June 2008, was conduct on behalf of M3FS that impliedly represented to the applicants that they were compliant with the requirements of the CARA. Thus, at the time the applicants were put on notice and shortly after suspended, on the basis they were in material breach of their obligations under the CARA, they had been provided no opportunity to become compliant. Put another way, the applicants say that, by reason of these representations, they were induced to believe they were compliant and thereby had no need to, and did not take any steps to, make themselves compliant, as a result of which M3FS was able to suspend and then terminate the arrangements for material breach of the CARA by the applicants.
11 The applicants also argue that M3FS represented it would properly train Mr Cunningham, which representation it failed to meet.
12 M3FS defends its position by saying it was justified in first suspending Mr Cunningham's authority and then terminating the CARA deed because, in mid 2008, during the currency of the CARA, it detected that SOAs issued by the applicants were substantially defective in a number of significant respects and those failures on their part obliged M3FS to exercise its power to suspend Mr Cunningham's authority on 8 July 2008.
13 As to the applicant's plea there were no reasonable grounds to support the alleged representation that M3FS would provide training to the applicants as required by the CA and the conditions of its AFSL, M3FS acknowledge that s 912A(1) of the CA refers to training, but say the licence does not. In any event, M3FS say the applicants were provided with training.
14 As to the alleged representations that M3FS would not suspend or terminate Avoca's authority for anything other than a material breach or where there were reasonable grounds for suspecting a material breach, and in respect of training, M3FS contends that as a matter of commonsense, it borders on the absurd that a corporation would enter into a contract without any intention of performing it. In short, the respondent rejects these grounds.
15 In relation to the allegations that in December 2007, and then again in January 2008 and May 2008, M3FS represented to the applicants that they were complying with their obligations under the CARA and that there were no areas of non‑compliance which required rectification, M3FS says, first, that the evidence does not support such allegations; and secondly that, even if there were satisfactory evidence in proof of the matters pleaded and even if those matters could reasonably have induced the applicants to form the claimed belief (neither of which conditions are conceded), the most that could be said is that the alleged conduct of M3FS's employees amounted to a waiver of its rights to suspend or terminate Avoca's appointment as its authorised representative for a very limited period. Having regard to the statutory obligations imposed by the CA, a proposition that M3FS would conduct itself in such a way as to forego those rights, even if Avoca did nothing to rectify its faults, is untenable.
16 Further, M3FS contends that the representations that it is alleged to have made, simply cannot be said to be causative of any loss or damage said to have been incurred by Avoca. The matters which led to the suspension and subsequent termination were Avoca's non‑fulfilment of its obligations under the CARA and the requirements of the CA.
17 M3FS also contends that the claims made against it by reference to s 52 of the TPA cannot be sustained on the basis that this provision is excluded by the operation of s 51AF of the TPA.
Regulation of financial services
18 Chapter 7, Corporations Act 2001: Chapter 7 of the Corporations Act 2001 (CA) at all material times regulated financial services and markets. The CA followed earlier legislative reforms to the Australian financial system introduced in 1998 that included similar regulatory provisions to Ch 7.
19 The object of Ch 7 is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
(Section 760A CA)
20 The provisions of Ch 7 impose a range of duties, including disclosure duties, on licensees and their representatives in relation to the provision of financial services including advice.
21 Australian Financial Services Licence: Part 7.6 of Ch 7 deals with licensing of providers of financial services. Subject to s 911A, a person who "carries on a financial services business" must hold an Australian financial services licence (AFSL) covering the provision of financial services (s 911A(1)).
22 A "financial services business" means a business of "providing financial services" (s 761A Definition). The meaning of "carry on a financial services business" is affected by s 761C. A "financial service" has the meaning given by Div 4. Section 766A(1) within Div 4 provides that for the purposes of Ch 7 a "person provides a financial service" (emphasis in original) if they:
(a) provide financial product advice (see section 766B); or
(b) deal in a financial product (see section 766C); or
(c) make a market for a financial product (see section 766D); or
(d) operate a registered scheme; or
(e) provide a custodial or depository service (see section 766E); or
(f) engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph.
23 In the present case, it is the activities of providing financial product advice and dealing in a financial product (s 766A(1)(a) and (b)) that are of particular relevance to the business of the applicants.
24 A "financial product" under the CA has the meaning given by Div 3 (see s 761A definition). As a result s 763A provides the following general definition of a "financial product":
(1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a) makes a financial investment (see section 763B);
(b) manages financial risk (see section 763C);
(c) makes non‑cash payments (see section 763D).
This has effect subject to section 763E.
(2) For the purposes of this Chapter, a particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non‑cash payments is a financial product even if that facility is acquired by a particular person for some other purpose.
(3) A facility does not cease to be a financial product merely because:
(a) the facility has been acquired by a person other than the person to whom it was originally issued; and
(b) that person, in acquiring the product, was not making a financial investment or managing a financial risk.
(emphasis in original)
25 The expression "financial product advice" has the meaning give by s 766B (s 761A Definition). Section 766B provides that for the purpose of Ch 7 "financial product advice" means a recommendation or a statement of opinion, or a report or either of those things that:
(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b) could reasonably be regarded as being intended to have such an influence.
26 The respondent, M3FS, carries on a financial services business and holds an AFSL.
27 General obligations of holder of AFSL: The holder of an AFSL has general obligations that arise under s 912A(1), which relevantly include the following:
(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
…
(b) comply with the conditions on the licence; and
(c) comply with the financial services laws; and
(ca) take reasonable steps to ensure that its representatives comply with the financial services laws; and
…
(e) maintain the competence to provide those financial services; and
(f) ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
…
28 A "representative" is defined by s 910A to mean relevantly:
(a) if the person is a financial services licensee:
(i) an authorised representative of the licensee.
29 In this case, the applicants fall within this definition.
30 Under s 912D, the holder of the AFSL has an obligation to notify the Australian Securities and Investments Commission (ASIC) of certain matters if it breaches or is likely to breach any of the relevant obligations under s 912A or the obligation under s 912A(1)(c).
31 Relevantly, under s 915B(3), ASIC may suspend or cancel an AFSL held by a body corporate by giving appropriate notice.
32 Division 5 of Pt 7.6 deals with authorised representatives. Section 916A(1) empowers the holder of an AFSL to give the authorised representative a written notice authorising the person for the purposes of Ch 7 to provide a specified financial service or services on behalf of the licensee.
33 Under s 916B(3) a body corporate who is an authorised representative of a financial services licence may give an individual a written notice authorising that individual, for the purpose of Ch 7 to provide a specified financial service or services on behalf of the licensee, but only if the licensee consents in writing given to the body corporate.
34 In the present case, M3FS authorised the body corporate of Avoca as its authorised representative, and approved of Mr Cunningham and Mr Gyi as sub‑representatives.
35 Division 6 of Ch 7 deals with liability of the holder of an AFSL for representatives. Under s 917B, if the representative is the representative of only one financial services licensee, as is the case here, the licensee is responsible, as between the licensee and the client, for the conduct of the representative, whether or not the representative's conduct is within the authority.
36 Financial Services Guide (FSG): Part 7.7 of Ch 7 deals with financial services disclosure. Section 941A places an obligation on the holder of the AFSL to give a FSG if a financial service is provided to a person as a retail client. Section 941B places an obligation on an authorised representative to give a FSG if a financial service is provided to person as a retail client.
37 Section 941B(2) provides a FSG must not be given to the person by the providing entity (which includes an authorised representative) unless the authorising licensee has authorised its distribution by the providing entity.
38 Section 941D deals with the timing of giving a FSG. Section 941D(1) states that the general rule is that the FSG must be given to the client as soon as practicable after it becomes apparent to the providing entity that the financial service will be, or is likely to be, provided to the client. It must in any event be given to the client before the financial service is provided. Section 941E provides that the information contained in the FSG must be up to date as at the time when it is given to the client. Section 942A(1) provides that the title "Financial Services Guide" must be used on the cover, or at or near the front, of a FSG.
39 Section 942C sets out requirements where a FSG is given by an authorised representative. Section 942C(2) specifies the contents, which by para (f) includes information about the remuneration (including commission) or other benefits that the providing entity or its employer or authorised licensee is to receive in respect of the provision of any of the authorised services.
40 Section 942D provides that a FSG may consist of two or more separate documents given at the same time. But each document must contain words to indicate that it is part of a FSG. Section 942DA provides that a FSG and a Product Disclosure Statement may be combined in a single document.
41 Statement of Advice (SOA): Division 3 specifies additional requirements for personal advice provided to a retail client, which applies where advice is provided by an authorised representative of a holder of an AFSL (s 944A).
42 Subdivision B of Div 3 specifies requirements relating to the "basis of advice":
· First, there is the requirement to have a "reasonable basis" for the advice (s 945A).
· Secondly, there is "an obligation to warn" a client if the advice is based on incomplete or inaccurate information (s 945B). This warning must be given to the client at the same time as the advice is provided and subject to subs 3, by the same means as the advice is provided (s 945B(2)).
43 Subdivision C specifies the requirements for a Statement of Advice (SOA) to be given:
· The first is the obligation "to give" the client a SOA (s 946A).
· However, the SOA may be the means by which the advice is provided, or a separate record of the advice (s 946A(2)).
· The providing entity does not have to give the client a SOA for small investment advice, in certain circumstances (s 946AA) which are not relevant in this case.
· There are also other situations in which an SOA is not required (s 946B). But these exceptional situations are presently not relevant.
44 Subdivision D deals with "content" of a SOA. Sections 947A and 947C specify the following requirements:
· The title "Statement of Advice" must be used on the cover of, or at or near the front of, a SOA (s 947A).
· Subject to subs 3 of s 947C and the Regulations, the SOA must include the following statements and information (s 947C(2)):
(a) Statement setting out "the advice".
(b) Information about "the basis" on which the advice is or was given.
(c) A statement setting out the name and contact details of the providing entity.
(d) Information about any remuneration (including commission) and any other benefits that any of the providing entity, director or employee thereof is to receive that might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice.
(e) Information about any other interests that might influence the providing entity in providing the advice.
(f) If s 945B requires a warning to be given to the client in relation to the advice – a statement setting out or recording the warning.
(g) Any other statements or information required by the Regulations.
· Subject to subs 4 of s 947C, the level of the detail about a matter that is required is such as a person "would reasonably require for the purpose of deciding whether to act on the advice as a retail client" (s 947C(3)).
· Any information required by s 947D if applicable.
· The statements and information must be "worded and presented in a clear, concise and effective manner".
45 Product replacement requirements: There are additional requirements under s 947D when advice recommends replacement of one product with another, namely information about the following, to the extent that the information is known or could reasonably be found out, by the providing entity:
· any charges the client will or may incur in respect of the disposal or reduction;
· any charges the client will or may incur in respect of the acquisition or increase;
· any pecuniary or other benefits the client will or may lose (temporarily or otherwise) as a result of taking the recommended action (s 947D(2)(a));
· information about any other significant consequences for the client from taking the recommended action that the providing entity knows or ought reasonably to know are likely (s 947D(2)(b));
· any other information required by the Regulations.
46 General: A SOA is not to be combined with a FSG or Product Disclosure Statement (s 947E).
47 Other disclosure requirements are imposed by Div 4, s 949A including:
· An obligation to warn a retail client to whom general advice is given that the advice does not take account of the client's objectives, financial situation or needs, where that is the case.
48 The Corporations Regulations 2001 (Cth) also supplement the requirements of Ch 7 of the CA:
· Regulation 7.7.01 specifies how documents, information and statements are to be given.
· Regulation 7.7.07 requires the FSG given by an authorised representative to include information to the extent it is able to be ascertained at the time the FSG is given to the client, about all remuneration including commission and other benefits that a person has received, or is to receive, for referring another person to the authorised representative or the holder of the AFSL.
· Under Reg 7.7.07(3), if the remuneration, including commission or other benefits, are able to be ascertained at the time the FSG is given to a client, then the remuneration, including commission and other benefits, must be included.
· Under Reg 7.7.07(4), if the remuneration etc are not able to be ascertained at that time and the providing entity believes the advice will be given to the client, the particulars of the remuneration including a statement of the range of amounts or rates of remuneration (including commission); or general information are to be given; or a statement that if the remuneration, including commission or other benefits are calculated at the time the personal advice is given the remuneration including commission or benefits the person receives will be disclosed at the time the advice is given or as soon as practicable after that time; or if the remuneration etc are not calculable at the time the personal advice is given, the manner in which the remuneration etc are to be calculated are to be disclosed at the time the personal advice is given or as soon as practicable after that time.
49 Section 51AF TPA: ASIC was established by the Australian Securities and Investments Commission Act 1989 (Cth), and was part of the 1998 package of reforms to the Australian financial system. This Act was repealed by the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act 2001). Part 2 of the ASIC Act 2001 deals with "Consumer protection in relation to financial services". Section 12DA deals specifically with misleading or deceptive conduct and provides:
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
50 Part V of the TPA had prior to 1998 dealt with "Consumer protection". Following the 1998 reforms, s 51AF of the TPA was introduced to provide that Pt V does not apply to financial services:
51AF Part does not apply to financial services
(1) This Part does not apply to the supply, or possible supply, of services that are financial services.
(2) Without limiting subsection (1):
(a) sections 52 and 55A do not apply to conduct engaged in in relation to financial services; and
(b) if a financial product consists of or includes an interest in land, section 53A does not apply to that interest; and
(c) section 63A does not apply to:
(i) a credit card that is part of, or that provides access to, a credit facility that is a financial product; or
(ii) a debit card that allows access to an account that is a financial product.
(3) In subsection (2):
credit card has the same meaning as in section 63A.
debit card has the same meaning as in section 63A.
(emphasis in original)
the period leading up to authorisation of applicants as representatives of M3FS on 16 july 2007
51 Leading up to the authorisations by M3FS of Avoca and Martin Cunningham, and Melvyn Gyi, in July 2007, while time plainly was of the essence in getting the new business arrangements into the market place, it seems there were pressures in settling arrangements with the many new advisers coming over to M3FS from Mawson and Aurora, including the applicants.
52 Mr Cunningham, on behalf of Avoca, had been pressing M3FS to confirm when they and Mr Gyi would be duly authorised. They were also anxious for M3FS to approve the documents they were required by the CA and the CARA to utilise in their businesses, including the Financial Services Guide (FSG) and pro forma Statement of Advice (SOA).
53 In Western Australia, at that time, Mr Jonathon Nguyen was the State Development Manager for M3FS. He was also the designated Relationship Manager for the applicants. The joint managing director of M3FS with responsibility in relation to the engagement of advisers and regulatory compliance issues was Mr Barry Martin, who was based in Brisbane, Queensland. Ms Dale Hare was also based in Brisbane and held the position of Risk and Compliance Manager. She had an active role in relation to the authorisation process for new advisers and the materials to be approved by M3FS for their use, although she had line responsibilities to Mr Martin. She was assisted at material times by Ms Susan Papi, a compliance analyst. Ms Helen Ruano was at material times M3FS's Training Manager as well as a compliance analyst, also based in Brisbane. Ms Ruano was not however involved in the initial contractual and regulatory authorisation and materials approval processes affecting the applicants. Prior to his appointment as the Western Australian State Development Manager M3FS, Mr Nguyen had also been a compliance analyst.
54 On 28 May 2007, Avoca completed its written application to be appointed as an authorised representative of M3FS. It indicated that the level of authority required was life risk and superannuation and accumulation only. The application was accompanied by applications for individual authority completed by Mr Cunningham and Mr Gyi.
55 On 21 June 2007 Jonathan Nguyen sent an email to Martin Cunningham advising:
FYI, in the next couple of weeks M3 will be designing and completing your FSG.
56 On 5 July 2007, Jonathon Nguyen sent an email to Dale Hare concerning amendments to an Avoca Consultants’ brochure. Jonathon Nguyen advised Ms Hare he had "taken into consideration your points and you will notice a lot of the text that has been amended on the marketing brochure have been taken from the FSG to ensure safeguarding". He invited Ms Hare's comments.
57 Between 9 July to 17 July emails were exchanged between Jonathon Nguyen and Worldwide Printing regarding the brochure.
58 On 11 July 2007 Mr Cunningham sent Jonathon Nguyen an email concerning the brochure and requesting that he take out the back page, because it needed to read that Avoca Consultants were authorised representatives of M3FS.
59 On 13 July 2007 Dale Hare sent an email to a number of M3FS officers including Jonathan Nguyen and Helen Ruano, which was copied (cc'd) to a number of other M3FS officers including Barry Martin, and further copied (bcc'd) to a large number of persons (seemingly a number of the proposed advisers) including Martin Cunningham and Melvyn Gyi, advising:
DO NOT ACTION ANYTHING CONTAINED WITHIN THIS EMAIL UNTIL YOU HAVE BEEN OFFICIALLY ADVISED OF YOUR AUTHORISATION UNDER MILLENNIUM 3 FINANCIAL SERVICES PTY LTD.
WE WILL EMAIL YOUR AUTHORISATION WHEN APPOINTED ON THE ASIC REGISTER.
As of next week we anticipate you will be an Authorized Representative of Millennium3. Once authorized you will receive written authority of your appointment. This sets out what you are authorized to provide advice on. If you have any queries please contact your Relationship Manager.
Stationery at World Wide Printing is currently being approved by M3 and we will advise you when we have authorized it to print. All stationary must be approved by M3 prior to use.
I have attached the M3/Mawson Approved Product List transition rules which your M3 Relationship Manager discussed with you. If you have any questions in relation to the transition rules please contact them.
I have also attached the following documents for your use commencing next week:
- M3 Representative Manual
- Induction Manual
- Xplan Fact Finder
- SOA word templates and guidelines for Risk and Super
- M3 Risk Profile Questionnaire
- M3 Conflicts of Interest Register – these entries must be inserted into your current register.
...
Important note:
- As you are moving licensees you can not use a Record of Advice until you have provided an SOA under the M3 licence.
- Please destroy or amend all documents that refer to Mawson Securities or Aurora eg business stationery, SOAs, email sign offs, websites, newsletters etc.
- if you have not returned your M3 FSG for approval please do so immediately.
If you have any questions please contact your Relationship Manager.
key terms of cara dated 16 July 2007
60 On 16 July 2007 the CARA was executed by Avoca. Mr Cunningham and Mr Gyi also signed the deed as "representatives" and agreed to be bound by its terms (see Sch 5 of the deed).
61 Section 1 of the CARA dealt with appointment and authority of Avoca as the authorised representative of M3FS. Clause 1.2 provided that the "Distribution Entity" (M3FS) appointed the authorised representative (Avoca). Section 1.2 stated that the authorised representative was appointed to "Deal in Approved Products" and "Provide advice to Clients and such other services … as Distribution Entity may approve from time to time in writing".
62 Clause 1.6 provided that:
Distribution Entity may by Notice to the Authorised Representative immediately suspend the authority of the Authorised Representative or any of its Representatives pending the investigation of any material breach of this Deed or suspected material breach by the Authorised Representative or any of its Representatives. To avoid doubt, a Suspension Notice may be issued pending the investigation by the Distribution Entity and/or by any Regulatory Authority of:
a. any events, incidents or conduct under clause 2.7(4); or
b. any events, incidents or conduct which may give rise to any of the events listed in clause 2.4; or
c. the issue of any Notice by any Regulatory Authority concerning the conduct of the Authorised Representative or any Representative.
whether or not such events have been notified by the Authorised Representative.
63 Clause 1.7 provided:
During such suspension, the Authorised Representative must ensure that neither he or she (if the Authorised Representative is suspended) or its Representatives (if they are suspended) deal in any Approved Products, provide advice to Clients or provide any of the Agreed Services.
64 Clause 1.8 provided that:
When the investigation is completed, Distribution Entity may do one or more of the following:
a. reinstate the authority of the Authorised Representative or its Representative;
b. revoke the authority of the Authorised Representative or any of its Representatives;
c. impose such conditions or limitations on the authority of the Authorised Representative or its Representatives as Distribution Entity considers appropriate in the circumstances;
d. terminate this Deed immediately under clause 12.
65 The CARA dealt with the authorised representative's responsibility in s 2. Section 2.1 dealt with compliance and provided:
The Authorised Representative must comply with:
1. the terms of the deed, including the Schedules;
2. its obligations under the law including the Financial Services Reform Act 2001, the Corporations Act 2001, the Australian Securities and Investment Commission Act 2001 and the Privacy Act 1988;
3. the provisions, from time to time, of any guide, policy or code issued by any relevant industry body such (NIBA) or any Regulatory Authority including the Australian Securities and Investment Commission (ASIC) or the Australian Prudential Regulatory Authority (APRA);
4. Distribution Entity’s Compliance Manual (as amended from time to time) and perform its obligations under this Manual and this Deed in a diligent and faithful manner;
5. Distribution Entity’s training requirements;
6. any lawful instructions given by Distribution Entity to the Authorised Representative which are consistent with the Deed.
66 Section 2.2 dealt with applications from clients and provided:
The Authorised Representative must:
1. represent Approved Products to the Clients in a fair and accurate manner;
2. use the Financial Services Guide, the Statement of Advice and any other standard form documents approved by the Distribution Entity in providing any advice or Agreed Services to Clients;
3. ensure that all disclosures relating to remuneration or other benefits are made to Clients pursuant to clause 9.10 and in accordance with the law;
4. remit all applications and moneys promptly to the Product Providers or their Custodians;
5. promptly remit to Distribution Entity all moneys (without deduction) received from Clients relating to fees charged for advice given or services provided in relation to authorities provided by M3 FS.
67 Section 2.4 dealt with conduct and provided:
The Authorised Representative must not:
1. engage in false or misleading conduct, or conduct that is likely to mislead or deceive;
2. engage in conduct which is unethical, unprofessional or in breach of any guide, policy or code under clause 2.1 or any conduct which may bring the Distribution Entity into disrepute;
3. contract for, or hold itself out as being capable of contracting for, or on Distribution Entity’s behalf, including entry into any pledge of credit, other than as expressly authorised under this Deed;
4. represent to any Client either expressly or by way of implication that Distribution Entity endorses or recommends any financial product or instruments other than the Approved Products.
68 Section 4 dealt with compliance. Section 4.1 provided:
The Authorised Representative will:
1. permit the Distribution Entity to conduct an Annual Compliance Review for the purpose of assessing compliance with this Deed and the law; and
2. permit the Distribution Entity to conduct such Additional Compliance Reviews as the Distribution Entity considers reasonably necessary including those Additional Compliance Reviews conducted under clause 4.4.3;
on the provision of not less than 24 hours Notice by the Distribution Entity.
69 Section 4.3 provided:
The Authorised Representative will:
1. promptly implement all recommendations made by the Distribution Entity and/or its auditors to rectify any areas of identified non compliance and in accordance with any timetable specified;
2. ensure that its Representatives co‑operate and assist in the prompt implementation of all recommendations for rectification of any areas of identified non compliance:
3. promptly notify the Distribution Entity of any difficulties in implementation of any of the recommendations and propose a solution.
70 Section 12 of the CARA dealt with termination of the deed. Section 12.1 provided:
Either party may terminate this Deed by giving the other 14 days' Notice that this Deed is terminated.
71 Section 12.2 provided that:
The Deed may be terminated immediately by Distribution Entity by written notice to the Authorised Representative if any of the following events occur:
…
3. the Authorised Representative breaches any material obligation under this Deed;
…
10. Distribution Entity forms the reasonable opinion that the Authorised Representative or any of its Representatives has:
a. failed to perform or observe their material responsibilities under the terms of this Deed or any other arrangement between the Authorised Representative and Distribution Entity; or
b. engaged in any conduct which is prejudicial to Distribution Entity, or unprofessional or unethical or in breach of any relevant Code.
the period 17 july 2007 to end of july 2007: FSG and soa
72 By letter dated 17 July 2007, Peter Johnson, Managing Director of Mawson Group Australia Ltd, thanked Avoca Consultants for the "wonderful service" and "excellent representation" it had provided and confirmed that Avoca was now released from its obligations as an authorised representative of Mawson.
73 The same date, 17 July 2007, Dale Hare emailed Martin Cunningham and Melvyn Gyi concerning the subject of "Millennium3 Information Pack and Welcome - Martin please give to Melvyn". This email was in nearly identical terms to that copied to Martin Cunningham and Melvyn Gyi on 13 July, save that it stated in the second paragraph "As of this week we anticipate you will be an authorised representative of Millennium 3" (emphasis added).
74 Having regard to the terms of the CARA, and from what had passed between the parties before 16 July, and this email of 17 July, Avoca and Mr Cunningham and Mr Gyi knew they needed M3FS to approve the FSG and SOA and other documents they were required or desired to use as M3FS representatives, and which at the date of the CARA had not been approved.
75 In this regard, on 16 July 2007, Benita Keen (Office Manager / Personal Assistant) of Avoca sent Dale Hare an email stating:
Dear Dale
Please find attached copies of the statement of advices for Risk & Super, Super only and Risk only together with the fact finder for your perusal.
76 It does not appear that there was any response to this email. Dale Hare states in her witness statement (para 21), after mentioning this email, that "I recall that these amended SOA's and Fact Finder were not approved at that time and there is no record from Myworkspace that states that they were". She also states:
I had a conversation with Jonathon during the appointment of the former Mawson representatives and said to him, 'We will not be approving templates due to the volume of representatives being processed'.
77 Mr Cunningham states in his witness statement that he had a telephone conversation with Jonathon Nguyen "In or about mid‑July 2007" during which time Jonathon said words to the effect, "Avoca is ready to go once you have received an email from head office approving the SOA templates, FSG and stationery".
78 On 17 July 2007, just before 2pm, Benita, e-mailed Dale Hare again, as follows:
Just spoke to Jonathan – he said we would receive an email from yourself informing us that we are ready to go. Are we nearly ready? I know the stationary (sic) is not but what about the FSG and SOA's?
Look forward to hearing back from you.
79 On 18 July at about 1.20 pm, Jonathan Nguyen emailed Dale Hare attaching the final draft of the Avoca Consultant’s brochure that he had received from the M3FS printer, Worldwide. He noted that, "Amendments have been made according to your requirements". He asked for Ms Hare's confirmation of approval. He copied his email to Martin Cunningham.
80 On 18 July 2007 at about 2:16pm Martin Cunningham emailed Jonathan Nguyen in these terms:
Okay – lets go – when can we have them??
81 On 19 July 2007 at about 2.11pm, Susan Papi, Compliance Analyst with M3FS, emailed Benita Keen and advised:
Dale is away sick today and I'm catching up with emails.
I actually sent the approval email to Martin and Melvyn yesterday. Can you check whether it was received.
Has Melvyn resolved his email issues yet?
82 Benita Keen replied by email on 19 July 2007 just after 3pm and advised Susan Papi:
Yes we did receive the authority but there were no attachments with it – confirming the FSG and SOA that we sent up are okay to use??
83 Susan Papi sent a further e-mail to Benita on 19 July 2007, not long before 6pm, attaching "the email I sent earlier yesterday enclosing the FSG's".
84 The attached e-mail was sent 18 July 2007 just after 9am concerning the subject "FSG". It was addressed to "Martin and Melvyn" and advised:
Thank you for your e-mail and attachments.
I have now attached your FSG which has been approved for use once you are authorized (which we anticipate will be today however please await our formal notification.) You should also have received from Dale Hare, our Compliance Manager, an Induction Welcome Pack.
Melvyn, please let us know urgently when you have sorted out your email glitch.
As a corporate authorized representative there are two documents that must be provided to your client. They are your corporate FSG and the M3FS FSG. (attached)
These two documents provide the required disclosure to the client. They must be issued as separate documents to the client.
...
We remind you that all marketing material of any nature including images automatically attached to your emails, websites, newsletters, signage, advertising material such as TV and radio ads etc and, of course, your letterheads, business cards, 'With Compliments' slips etc must be approved by our compliance team before release.
...
If you have any questions, please contact your Relationship Manager, Jonathan Nguyen.
85 It seems the original email sent 18 July was not received at the Avoca end. Mr Cunningham said he had had difficulties due to a changeover by Avoca to the Aladdin system. Be that as it may, the email system was working most of the time, as these email exchanges show. In any event, the relevant text and advice was received by Avoca by this further email communication from Susan Papi on 19 July 2007. As noted it approved the FSG, but no mention was made of the SOA.
86 In the period following this exchange of emails, it appears that Avoca decided, with the approval of Jonathan Nguyen, to engage another firm to do the designing and printing of Avoca's required stationery. On 25 July 2007 Jonathan Nguyen emailed Worldwide and Debbie Stubbs at M3FS, and advised as follows:
Please advise(sic) that Avoca Consultants have put into place alternative arrangements for the designing and printing of there(sic) stationary(sic).
This includes stationary(sic) for both Martin Cunningham and Melvyn Gyi.
87 Mr Cunningham says (in his witness statement, Exhibit A at para 36) that he started to use the new FSG, stationery and SOA templates "which had been approved on or about 24 July 2007". This obviously is a generalisation. At that point only the FSG had been expressly approved and the stationery was still to be printed. Indeed, in cross examination Mr Cunningham conceded (transcript 69) that he assumed what he had sent for approval – a merger of two M3FS templates – had been approved.
88 By the end of July, the state of play seems to have been as follows–
- The CARA had been executed on or about 16 July 2007.
- The authorisations had actually issued on or about 18 July 2007.
- Avoca and Martin Cunningham and Melvyn Gyi had each been relevantly authorised as a representative of M3FS.
- The Avoca Consultants' brochure had been approved by M3FS and had been printed.
- On 19 July 2007, Susan Papi had expressly confirmed the approval of the FSG.
- However, the SOA, which Benita Keen apparently submitted with her email of 16 July 2007, had not been approved.
- Nonetheless Avoca and Mr Cunningham commenced using the SOA pro forma document that they had earlier submitted to M3FS, with the approved FSG.
- Stationery was about to be printed for Avoca Consultants and Martin Cunningham and Melvyn Gyi.
89 Whether Avoca and Mr Cunningham had reasonable grounds to believe, in all these circumstances, that the SOA had been approved at this stage perhaps does not need finally to be determined in these proceedings. However, having regard to later evidence concerning the manner in which Mr Cunningham tended to conduct his business at all material times, he rarely sought guidance or confirmation from M3FS or its representatives as to the relevant state of affairs. Plainly it was open to Mr Cunningham to seek confirmation about approval of the SOA, but he chose not to do so. He "assumed" the SOA he had prepared had been approved, and began to use it, but did not check with Ms Hare or Mr Nguyen that it had actually been approved.
90 This was the case notwithstanding that Mr Cunningham well understood at all material times through July 2007 that, under the CARA, he required M3FS's approval of all documents he was required to give to clients as a representative of M3FS. The terms of s 2.2 of the CARA set out above, specifically required representatives to use the FSG and SOA and other standard form documents "approved by" M3FS in providing any advice or agreed services to clients.
91 The M3FS Information Pack and Welcome document, received on 17 July 2007 confirmed those contractual requirements. It also attached an M3FS Representative Manual (manual). The manual (TB 325 and following) specified "The key behaviours" required by M3FS representative and the consequences of not meeting those behaviours, as well as key processes utilised by M3FS to monitor and supervise representatives and relevant policies, processes and templates required to be used by M3FS representatives.
92 Pertinently, the manual under the heading "PLEASE ASK" stated:
If you have any questions or do not understand what is required of you, then please ask your Manager of the M3FS Compliance.
93 The manual also specified that "I DID NOT KNOW IS NO EXCUSE" and pointedly confirmed to its representatives that:
You are a professional. M3FS anticipates that you will act professionally, run your practice professionally and take responsibility for your actions.
94 Consistent with the provisions of the CA (and the CARA) the manual advised representatives that M3FS had obligations to inform ASIC of certain things:
INFORMING ASIC
If you fail to act professionally in any significant manner, M3FS is required to inform ASIC. ASIC has the power to ban representatives from the industry.
95 The manual then went on to set out the 20 required behaviours of an M3FS representative, the very first one of which was "Know your Obligations", including understanding a representative's legal obligations in relation to:
· providing appropriate advice;
· providing FSGs, SOAs and PDS;
· not holding out;
· managing and disclosing conflicts;
· replacing products;
· misleading and deceptive or fraudulent conduct;
· general advice warnings;
· privacy;
· suspect transactions.
96 In cross examination (transcript 61 and following), Mr Cunningham acknowledged that he received this manual and was aware of its contents.
97 Nonetheless, as subsequent events suggest, Mr Cunningham was content to make an assumption that M3FS had approved the merged SOA he had Benita Keen send by email to Ms Hare for approval on about 17 July 2007, when he could not be sure, one way or the other, that it had actually been approved. He simply did not think to follow up with his Relationship Manager, Mr Nguyen, or Ms Hare, to whom the draft SOA had been sent for approval, to ascertain whether all was in order. Later, at the November audit, this omission came to light, as explained below, and, in the words of Mr Cunningham, Ms Hare "threw a hissy fit" over the issue (see LMC 31 to Mr Cunningham's witness statement, Exhibit A).
the period of August to october 2007: SETTLING IN
98 On 6 August 2007, Mr Cunningham says he had a meeting with Jonathon Nguyen to discuss his (Mr Cunningham's) "vision for Avoca Consultants". Mr Cunningham produced a document (TB 379-380) that he says he prepared for the purposes of this meeting. It is typed in part and handwritten in part. The document is headed, "VISION FOR AVOCA CONSULTANTS". The handwritten date "6 August 2007" appears at the top right together with the words, "Meeting with Jonathon". In smaller type at the bottom of the first page, "Earnings to date" are noted next to the words, "Current status as of Monday, 11 June 2007". These are followed by the typed words:
Optimum $25 million FUM (981,000 pounds to be transferred in from UK).
Over the page in type are what appear to be some projections, followed by the typed words:
To achieve above, (Must change current business mix Optimum IP 30/2/2 TLI+TPD)
New Mix TPD outside super + TRAUMA
99 Mr Cunningham insists this is a document that he used as an agenda for a discussion with Jonathon Nguyen on 6 August 2007. He says that in the course of the meeting, amongst other things he told Jonathon Nguyen about a link he had on a website www.pomsinperth.com/UK_pensions_1.htm, and how he facilitated the transfer of UK pension funds to Australian superannuation funds. He says he told Jonathon Nguyen that he had £981,000 still to be transferred over from the UK, or words to that effect. He says that Jonathon did not say anything about him not being authorised to facilitate the transfer of UK pensions to Australian superannuation funds.
100 Jonathon Nguyen claims absolutely no recollection of any such meeting or of being told anything at that time about this website or anything about the transfer of UK pension funds to Australian superannuation funds. Indeed, Jonathon Nguyen, when cross examined about Mr Cunningham's evidence, made it clear that he was saying positively that the meeting did not happen (transcript 226). This conflict of evidence bears generally on the credibility of each of Mr Nguyen and Mr Cunningham and the way each tends to conduct themselves professionally, although a finding as to what actually was said on this occasion is not central to the issues for determination in these proceedings. I am prepared to accept that Mr Cunningham referred to this document at the meeting, although it is not a document that was given to Mr Nguyen. I also accept that if the website was referred to, it was in passing such that its significance did not register with Mr Nguyen at the time. Later, in July 2008, when M3FS's compliance committee became aware of this website, they insisted Mr Cunningham take it down as he was not authorised to process this business.
101 From Avoca's point of view it seems that it was business as usual through August and into October. On 16 October 2007, Barry Martin sent an email to all advisers on the subject of "Compliance Department Access". The email reminded each adviser that they each had a M3FS relationship manager. The email stated:
The purpose of this system is so that you have one particular Millenium3 manager who becomes your 'go to' person whenever you need assistance or advice.
Our compliance team has been under an extra layer of pressure over the last few months caused by a number of things including the Mawsons requisition, ASIC regulation changes and the pending introduction of the new Anti‑Money Laundering legislation.
I have noticed that a large number of advisers are contacting members of the compliance team directly. Whilst the compliance team are eager to provide the best service possible, leaving the Relationship Manager out of the loop can cause serious problems within our group.
I am sending this email to remind each of you that any assistance or advice you require from Millennium3 and particularly at the moment in relation to compliance should first be directed to your designated Relationship Manager.
In a lot of cases your Relationship Manager will be able to either provide some of this advice themselves, but if not, will be in a better position to quickly get answers for you.
102 Having emphasised the importance for advisers to deal with their relevant relationship manager, Mr Martin finally advised in the email, that:
Dale, Helen, Susan and Steve will be on the road conducting audits and running PD days and state conferences for most of the period now leading up to Christmas and so it is even more important to direct your queries to your Relationship Manager.
the period of november to december 2007: AUDIT AND ACTION PLAN
103 In early November 2007, Jonathon Nguyen advised Mr Cunningham that Avoca would be audited on 13 November 2007. Mr Cunningham says Mr Nguyen told him that he needed to have "every piece of approved written material we use ready for inspection", or words to that effect.
104 The audit was conducted on 13 November 2007 by Dale Hare. Jonathon Nguyen was also present. The audit occurred over a period of about five hours.
105 Mr Cunningham attended and produced a folder of materials including:
· His business card.
· An Avoca brochure referring to the services it can provide.
· A referral card.
· A FSG.
· A short term financial needs analysis questionnaire.
· A document entitled "The Realities of Superannuation".
· A document entitled "Why do we need personal insurances?".
· A document entitled "Investor".
· A newspaper article entitled "Cover Your Pay".
· A newspaper article entitled "Young Chef Left Nine Flavours".
· A thank you card, birthday card and Christmas card.
106 When asked to provide two of his files, Mr Cunningham provided files in relation to DK (an apprentice chef) and JT (a sous chef).
107 In the course of the audit Mr Cunningham produced the SOA templates he was using, on which the M3FS letterhead appeared. Dale Hare indicated that M3FS had not approved the documents she was shown. Mr Cunningham insisted they had, although he could not show her the email he considered approved the SOAs, and explained it was no longer on his system. Mr Cunningham said he believed that the email in question had been lost in the July period when a lot of files were lost from Avoca's computer system when it installed a new server in or about mid to late July 2007.
108 Mr Cunningham advised Dale Hare that he had cut and pasted the M3FS logo and put it on the SOA he was using. He says that when M3 took over and he was having new stationery and paperwork put through, he asked Jonathon Nguyen to give him the M3FS logo in a jpeg file. He says that Mr Nguyen asked why he needed it and he told him it was for the SOA templates. He says that Mr Nguyen told him to "lift it from a Millennium3 email" or words to that effect. Mr Nguyen denies this evidence. (Having regard to Mr Cunningham's evidence generally, and particularly the cross examination on this point (transcript 70) I do not accept that Mr Cunningham expressly sought or obtained Mr Nguyen's approval to use M3's logo in the manner he did or that Mr Nguyen somehow knew of Mr Cunningham's use of the M3 logo or that the merged SOA template had been sent to Ms Hare for approval in July 2007.)
109 A formal written compliance review report was later issued dated 29 November 2007. In relation to "client files" the compliance review noted:
Files are held in a secure place, a systematic filing system is used, files are bound, information was in chronological order, dividers and tabs were not used.
The FSG version or date provided to the client was not noted within the client file.
It is a requirement that a record is made of the version and date the FSG was presented to the client. Martin has decided to record the FSG version and date provided on the Fact Finder in future.
No research evidence was found in the client files. It is a Millennium3 requirement that research is conducted and retained on the client file.
110 In relation to "data collection" the compliance review noted:
An amended Mawson Fact Finder was used to record client's information in files reviewed. The risk profile section of the Fact Finder demonstrates only a basic understanding of the client. The parameters 1 – 4 are too short to provide a meaningful understanding of the client's attitude and aversion to risk.
...
Millennium3 requires each question of the Fact Finder to be addressed; with the answer or an explanation of why the client would not provide the answer. Sections of the Fact Finder were either struck out; left blank or the term N/A was used.
…
Millennium3 requires:
- To record all information on the Fact Finder
- That there should be no blank sections, strike through or N/A in Fact Finder
- That each section must note the reason why the information has not been collected
- To record the scope of advice
- Record how the sum insured was calculated
- Record who had made the decision to purchase, the sum insured etc
- Record any discussion with the client eg restrictions etc
- Record the discussion held with the client in relation to the Risk Profile questionnaire and investment options discussed and recommended.
111 In relation to "file notes" the compliance review noted:
File notes are retained on the Aladdin software however could not be reviewed due to computer problems. A day book is used to record all incoming calls. A discussion was held with Martin about the importance of having a documented paper trail.
File notes should record the discussion held with the client:
- record when did the discussion took place
- who was present at the discussion
- who made the decisions
- reasons why decisions made
- what information the decision was based on
- were any instructions given or provided
- were any restrictions imposed
112 In relation to "Statement of Advice" (SOA) the compliance review noted:
All files contained an SOA which is a modified Mawson templates for Risk and Super which do not meet Millennium3 requirements in relation to risk profile, rational, replaced policy and authority to proceed. Amended templates with comments and instructions are attached to this report.
The following issues were discussed:
- Front cover page of the SOA must state you are a Representative of Avoca Consultants Pty Ltd which is a Corporate Authorised Representative of Millenium3(sic) Financial Services Pty Ltd etc
- Jonathan to ensure that the Millennium3 logo meets our brand guidelines
- Edit and personalize the SOA to suit the client.
- There should be no strike through or blank sections
- The term 'TBA' should not be used
- Objectives must state why the client requires the product ...
- Discuss the advantages and disadvantages of the recommendations. Refer to the attached SOA example.
- Discuss the advantages and disadvantages of replacing one product for another in the Replaced Policy section.
- Do not use generic statements in the Replaced Policy section.
- Insert both the percentage and dollar amounts for commission. If the rollover amount is not known then a unit amount of $1000 should be inserted and commission calculated accordingly.
- Amend the Other Benefits paragraphs as per discussion held and SOA guidelines attached.
113 The compliance review then set out an "Action plan" for Martin Cunningham. It dealt with training certificates, representative certificate, newspaper articles, registers, SOA templates, client file, research, data collection, risk profile questionnaire, SOA and pre-vet of advice documents.
114 In relation to pre-vet of advice documents, the compliance review noted the following action plan:
To forward the next five client files for review prior to SOA being provided to the client. The information required is File Notes, Fact Finder, Risk Profile and SOA.
Under the heading "When", the compliance review stated:
Forward next five client files for pre vet prior to presenting SOA to client.
115 A number of the issues noted in the review report had previously been discussed during the audit on 13 November and so were not raised with Mr Cunningham for the first time in the review report. While there is some difference between the account of Mr Cunningham and that of Ms Hare and Mr Nguyen as to exactly what action issues were identified for action during the audit on 13 November 2007, it is common ground that Dale Hare drew to Mr Cunningham's attention:
· That there were no file notes or client file check lists on files.
· The need to put file notes on all files that record discussions with clients, advice given and instructions received during such discussions.
116 However, I also accept without reservation the evidence of Ms Dale Hare concerning the conduct of the audit and what was done and said during the audit. The audit was no simple or short affair and occupied much of the working day. Not only did Ms Hare formally review the two files provided by Mr Cunningham but she also made a quick inspection of others. She recalls she looked at approximately six files. She found them all to be in a similar unsatisfactory state.
117 I accept that Ms Hare engaged in discussion with Mr Cunningham of varying lengths concerning the matters subsequently dealt with in the review report, including:
· The failure to keep a record of research on the client's file.
· The inadequacy of using an amended Mawson Fact Finder and the fact that sections of it were not fully completed, with sections either struck out or left blank with no explanation or "N/A" used. In particular, that there was no scope of advice or discussion recorded about the client's needs, objectives or risk profile.
· That the risk profile questionnaire did not meet M3FS requirements and there must be kept a record of discussions held with the client in relation to the questions, not just in adding up of the numbers.
· That the recommendations in a SOA must provide the advantages and disadvantages of the advice given especially when recommending a client replace a financial product and that the files did not provide a rationale or basis for the advice provided.
· That the files did not contain enough information to ascertain whether the information was appropriate and that the file "must be able to defend you in a complaint situation".
· In particular, research must be conducted on the "from funds" to ascertain whether it is in the client's interest to rollover to a new fund or retain what they currently have.
· That the advantages and disadvantages of rolling over must be discussed in the SOA otherwise the client could commit to a recommendation that does not meet their needs and objectives and they may be disadvantaged.
· That in order to obtain information from fund managers, all that was required was a letter of authorisation from the client.
· That articles were being provided to clients without acknowledging their source or context and you must always date and reference where the information was obtained from.
118 I also accept that there was discussion during the audit, which was followed up with direct advice in the review report, concerning the use of expression "TBA" in a SOA in relation to the amount of commission to be paid. This issue was connected to the issue of Mr Cunningham obtaining funds information from an existing fund manager, where there was to be a rollover. I accept Ms Hare's evidence that the advice she gave to Mr Cunningham at the audit, confirmed by the review report, was that every effort must be made by Mr Cunningham to obtain the information from the fund manager, if necessary by having the client sign a simple letter of authority authorising the existing fund manager to provide that information. With that information in hand, a precise commission sum could then be specified in the SOA. All of this needed to be done within a statutory period of five days. Ms Hare explained to Mr Cunningham that in, an exceptional position, where the existing fund information could not be obtained, that it might be permissible to show the percentage of commission for every, say, $1,000.00 of rollover that would be payable.
119 What is important to note, and what I accept, is that Ms Hare emphasised the point both during the audit and in the subsequent report that a reference to the rate per $1,000.00 was only a "last resort" and it was important to conduct the research and obtain the information, if necessary by having the letter of authority signed by the client at the time.
120 As will be seen in the discussion below, Mr Cunningham took this advice as licence to continue to use the "TBA" where he did not have current fund information, in the case of a rollover. His evidence was that he expected Mr Nguyen to give him a pro forma letter of authority to facilitate the research requirement and, because this letter was not forthcoming, he had no option but to continue to use the "TBA" notation in relation to estimated commission in an SOA.
121 The action plan then dealt directly with these and other issues and, so far as the SOA templates were concerned, required that templates attached to the report be dealt with immediately. Indeed, the email sent by Dale Hare to Martin Cunningham enclosing the compliance review report expressly stated:
Your current SOA templates do not meet M3 requirements and you are requested to stop using them immediately. I have attached the standard M3 word templates for you to use until amendments can be made to the Avoca Consultants templates.
Please sign and return the Action Plan to me by the nominated date.
If you have any questions please do not hesitate to contact Jonathon or myself.
122 On 29 November 2007, Mr Cunningham personalised the new SOA templates, as requested, to include his and Avoca's details and sent them by email to Dale Hare for approval. The email to Dale Hare stated:
Further to your email – we have started with the Superannuation and Risk SOA. Please find attached – could you check it before we go to print. I have an appointment at 12pm and need this SOA. Please advise asap!
(emphasis in original)
123 The email suggests that the SOA template sent to Dale Hare was intended to be a first step in having all SOA templates approved, as required by the action plan, but that this particular one required urgent attention because Mr Cunningham was dealing with a client in relation to that area of advice.
124 Dale Hare sent that SOA by email to Jonathon Nguyen and indicated she would talk to him next week.
125 On 30 November 2007, the next day, Mr Cunningham for Avoca sent another email to Dale Hare requesting her fax number and asking her to explain "with regard to the FSG (under Registers in the Action Plan), what exactly you mean by implementing an example of a Mawson FSG?".
126 On 2 December 2007, Dale Hare replied to that email, provided the fax number and further advised:
An FSG register must contain either a soft or hard copy of each version of an FSG issued. With Millenium3 (sic) you have only one version that has been approve (sic) for issue to your clients. Under FSR Act you need to retain a copy of each FSG version approved by Mawson's in your register.
127 On 4 December 2007, Mr Cunningham met with Jonathon Nguyen at Avoca's office. Melvin Gyi also attended the meeting, which last for about an hour. The purpose of the meeting was to discuss the audit report and obviously to deal with the SOA templates.
128 Mr Cunningham says that one of the first things he raised was the complaints in the report concerning the SOA templates he had been using. He insisted that he had sent the SOA templates to M3FS in July 2007 and they had been approved. He says that Jonathon Nguyen said to him words to the effect that he knew this was true.
129 Mr Cunningham says that at the meeting Jonathon Nguyen told him that Avoca and its representatives could start using the personalised SOA templates that Mr Cunningham had emailed to Dale Hare on 29 November 2007.
130 Mr Nguyen says that he made it clear at the meeting on 4 December 2007 that Martin Cunningham was not to provide any SOA's to clients without those documents being pre‑vetted by M3FS until further notice. He says that Mr Cunningham indicated he understood this and would comply with these requirements.
131 As to the personalised SOA templates that Martin Cunningham had sent to Dale Hare on 29 November 2007, Mr Nguyen says he never stated at any time at the meeting on 4 December 2007, that the SOA drafts were approved. Rather, what he did, on 5 December 2007, the next day, was proceed to obtain approval for him to use them.
132 In fact, Mr Nguyen sent an email to Martin Cunningham on 5 December 2007 to this effect:
Please be advised that Dale has been out of office and has been unable to attend to her emails.
I have reviewed your templates and made some amendments.
Can you please peruse through the 3 documents and if you are satisfied with the structure of the templates please advise and I will obtain the approval of for you to use.
Three templates were attached. Plainly, they did not constitute an approval of the SOAs.
133 Mr Nguyen recalls that Mr Cunningham did raise the issue about the SOA templates having been approved earlier and saying he could not provide the evidence because he changed his computer database to Aladdin and had lost all his emails.
134 It is reasonable to infer from the evidence, particularly the documentary record and his email of 5 December 2007, as I do, that Mr Nguyen did not provide any final approval of the personalised SOA templates on 4 December 2007, but indicated to Mr Cunningham that he would expedite the approval process.
135 That Mr Cunningham appears to have treated the actions of Mr Nguyen as amounting to an approval of the draft documents again rather suggests the inclination of Mr Cunningham to assume things too quickly, and not to give appropriate attention to detail.
136 On 5 December, the day after the meeting to discuss the audit report and action plan, Mr Cunningham signed and faxed his acceptance of the action plan to Ms Hare.
137 At that point all concerned must have understood the importance of gaining approval for the SOAs and the "pre‑vetting" process for the next five clients. The actions of Mr Nguyen in proceeding to get approval for the SOAs is consistent with this observation.
138 On 7 December, after some false starts, Dale Hare indicated her approval of the SOAs.
139 On 11 December 2007, Mr Nguyen says that he then had another meeting with Mr Cunningham. Mr Cunningham agrees that there was a meeting, however disputes its purpose.
140 Mr Nguyen says that prior to the meeting, he had obtained the agreement of Dale Hare that he (Nguyen) should do the reviews of Mr Cunningham's SOAs (that is to say, the "pre‑vetting" of files) rather than have the reviews done in Brisbane.
141 Mr Nguyen says that at the meeting on 11 December 2007, he asked Martin Cunningham to provide six files (not the five referred to in the action plan, although this may simply be a misstatement, bearing in mind that later, on 8 April 2008, six files were collected by Mr Nguyen for review purposes) for pre‑vetting and Mr Cunningham advised him that he had not given any advice since their last meeting and would not have any new business until the New Year because he was going on leave. Mr Nguyen says he told Mr Cunningham that he would be doing the pre‑vets and that he would visit his office in the New Year to do so. He also says that he told Mr Cunningham he should not provide SOAs to clients that have not been pre-vetted by M3 until further notice.
142 Mr Nguyen says he passed this information onto Dale Hare.
143 Mr Cunningham, while accepting that he met Jonathon Nguyen on 11 December 2007 concerning other, presently irrelevant, matters, denies that Mr Nguyen said anything to him at all about pre‑vetting files and in particular denies that Mr Nguyen told him he required six (or five) files, that he (Cunningham) advised that he had not given any advice since their last meeting or that Mr Nguyen told him he would visit his office in the New Year. In his responsive witness statement Mr Cunningham also denies that "Jonathon said to me at this meeting, or at any time at all, that I had to provide all my SOA's to Millenium3 for pre‑vetting until further notice" or words to this effect.
144 The evidence of Dale Hare and the documentary record show that Jonathon Nguyen kept Dale Hare informed of the SOA approval process. Dale Hare sent an email to Jonathon Nguyen on 6 December 2007 advising that she had:
reviewed the attached and approve for Martin to use. As discussed the SOA must be personalised and the disadvantages and advantages of the recommendations and any replacement must be discussed.
145 Dale Hare's evidence confirms the evidence of Jonathon Nguyen to the extent that, on or about 11 December 2007, she received a telephone call from Jonathon Nguyen and she agreed to his request or suggestion that he should undertake the pre‑vetting of Martin Cunningham's SOAs. She also says she received a copy of a file note made by Mr Nguyen which recorded the fact that Mr Nguyen and Mr Cunningham had met on 11 December 2007.
146 Ms Hare produced a file note from the M3FS Myworkspace system which purports to record a description of a meeting on 11 December 2007 at 8 am of one hour, as follows:
Meet with Martin to Discuss the Aesteron Letter and also his pre‑vett requirements. Martin advsied (sic) that he has not written any new business and will provide the required SOA's when he back on Christmas leave. Meeting organised for 15th January 2008.
147 In a portion of the printout of this file note, there is a section headed "Data Edit Information" which states as follows:
Created By Nguyen, Jonathon
Created Date 10 Dec 2007 13:01:02
Last Modified By Nguyen, Jonathon
Last Modified Date 23 Oct 2008 17:24:50
Session 53438036
148 There is a question as to just when this entry was created or made, whether it was made contemporaneously on 10 December 2007 or 11 December (the meeting date) or 23 October 2008 (or some other date). Later evidence from Ms Hare concerning the use of M3FS's Myworkspace system (transcript 256) suggests that the information that the meeting was to occur on 11 December, may have been entered on 10 December 2007, but that other data concerning the account of the meeting may not have been entered until 23 October 2008.
149 Be that as it may, Dale Hare also says that in the middle of December she contacted Jonathon Nguyen and asked him whether he had done the pre‑vets of Martin Cunningham's files. Obviously this must have been prior to her seeing the file note of the meeting, or she would have known the answer by consulting the entry on the system. She says that Jonathon advised her that:
Martin is away on holidays and no pre‑vets could be done before the New Year.
150 I doubt that the file note of the meeting of 11 December 2007 made by Mr Nguyen was made at or about the time of the meeting. For this reason and because, as explained below, I find Mr Nguyen generally to be an unreliable witness, I rely generally on Mr Cunningham's account of the meeting, albeit with some hesitation in light of the countervailing propensity of Mr Cunningham to provide over‑generalised accounts of events and his failure to note important detail. In many respects "near enough is good enough" seems to have been his motto. I also consider that by one means or another Mr Nguyen did in fact become aware that Mr Cunningham was to be away over Christmas and did communicate this to Ms Hare in the telephone call of which Ms Hare gave evidence.
the period of january 2008: mR NGUYEN'S VISIT TO AVOCA ON 15 jANUARY 2008
151 It is agreed all round that in early January 2008, Jonathon Nguyen telephoned Avoca and spoke with the office assistant, Benita Keen, and made an appointment to see Mr Cunningham on 15 January 2008 for the purpose of collecting five files for pre‑vetting. That this is so is a further reason for doubting the reliability of Mr Nguyen's file note of the meeting of 11 December, as it records that this appointment was made at the meeting on 11 December 2007. Perhaps the need for the meeting was agreed, but plainly the date was not.
152 Mr Cunningham says that he did not end up being available for the meeting on 15 January 2008, because he had to attend a "late‑notice urgent client meeting". He left the files, he says, that Benita had pulled out for him, for Jonathon Nguyen to collect. It is a little surprising, it should be said, that Mr Cunningham would not have made some effort to speak directly to Mr Nguyen about his change of plan, especially as Mr Cunningham was well aware of the pre‑vetting requirements of the action plan and the reasons for them.
153 Mr Cunningham says that he was later told by Melvyn Gyi that Jonathon Nguyen had attended at the offices of Avoca on 15 January as planned, and had apparently looked at the files that Benita had obtained, but did not take them with him. Mr Cunningham says that on the basis of this advice he then assumed that the files that Jonathon Nguyen had asked to view were all compliant because he heard nothing to the contrary thereafter from Jonathon or anyone else at M3FS.
154 By contrast, in his evidence at the hearing, Mr Nguyen says that he attended the Avoca office on 15 January 2008 and was met by Benita Keen, who advised him that Martin Cunningham had had to attend an urgent meeting. He says he told Benita he was there to "conduct pre‑vets" on Martin Cunningham's files and asked for the files. He says Benita told him she was unsure where they were as Martin Cunningham had had to leave in a rush. Mr Nguyen says that at no time before his attendance did he receive a phone call from Martin Cunningham or his office to advise him that he would be absent.
155 Mr Nguyen says he then asked Benita if Melvyn Gyi was in and he met with him. It seems that up to this point Mr Nguyen had seen very little of Mr Gyi, who had another job working away from Perth on a mine site. However, Melvyn did not provide him with any client files. He said he had a discussion with Melvyn about how his work was going, but there was no discussion at all regarding Martin Cunningham or his work.
156 Consequently, Mr Nguyen says that at no time during his visit to Avoca's office on 15 January 2008 did he see or inspect any files for pre‑vetting purposes or at all. None were provided to him by Benita Keen or Melvyn Gyi.
157 Mr Nguyen claims he made a follow up telephone call to Mr Cunningham and told him that he needed to organise a new time to meet with him and collect files for pre‑vetting. In cross examination (set out in detail below) he suggested he made this call later in the day on 15 January. He says Mr Cunningham told him that he would not be available for a couple of weeks because he had to go to Ireland as his mother‑in‑law was unwell. Mr Nguyen said that he would schedule a new time for a meeting when he returned from Ireland.
158 It is appropriate to mention at this point that Mr Cunningham rejected entirely Mr Nguyen's claim that there was some contact between the two of them between 15 January and 8 April 2008. In particular, Mr Cunningham says that he did not go to Ireland to see his mother‑in‑law in January 2008 and did not tell Mr Nguyen at any time that he was going to Ireland to see his mother‑in‑law in January 2008.
159 What Mr Cunningham does say, however, is that he could not attend the Millenium3 State Conference which was to be held on 8 and 9 November 2007 because his wife's father was dying and she had to fly to Ireland to say goodbye, while the conference was being held. He had to stay home to care for his daughter while his wife was away. He told Jonathon Nguyen that he would not be able to attend the State Conference for this reason. M3FS therefore waived his conference fees.
160 In light of my other findings concerning Mr Nguyen's general credibility, I am inclined to accept Mr Cunningham's account of these particular events. It seems to me that Mr Nguyen has conflated information about Mr Cunningham's wife's visit to Ireland and the reasons for it in late 2007 with the events of January 2008.
161 In cross examination, Mr Nguyen denied that Melvyn Gyi showed him five files while he was there. He denied that he looked through those files quickly.
162 In cross examination, Mr Nguyen was taken to a copy of an electronic file note that he had made in the M3FS Myworkplace system that purportedly was of Mr Nguyen's attendance at the offices of Avoca on 15 January 2008 (TB 970), a document not referred to in his witness statement (Exhibit 2), or responsive statement (Exhibit 3). The file note contained the following information:
Action/Activity
Avoca Consultants Pty Ltd Tuesday 15 Jan 2008
Business Avoca Consultants Pty Ltd
Person Laurence Martin Cunningham
Reference Avoca Consultants Pty Ltd
Action By Jonathon Nguyen
Action Type Meeting
Action Status Completed
Priority Low
Date Due 15 Jan 2008 08:00:00
Total Time Allocated (mins) 60
Chargeable? N
Date Completed 4 Jul 2008
Description Meet with Martin Cunningham to discuss the DMS Online Report for business planning, SOA training and conduct Pre‑vetts. Martin had advised me that Benita is not in the office and he was unsure where the filese(sic) were.
Business Address Suite 4 1st floor, 266 Carr Place
Leederville
WA 6007
163 Mr Nguyen was asked what the "date completed" entry meant, which indicated the detail of "4 Jul 2008". He gave the following evidence (transcript 231):
That date completed 4 July 2008 does not record the date this document was created in the electronic system? --- That is correct.
Do you recall saying that? --- That is correct.
Right. And you said the date completed is the date the activity referred to in the note was completed? So do I understand your evidence correctly? --- I do understand.
What part of the activity, being the meeting held on 15 January 2008, do you say was completed on 4 July 2008? --- The closure of the file note.
The closure of the file note. That is you wrote the description which appears under 'date completed' in that file note on 4 July 2008, didn't you? --- I do not recall.
How did you close the file note on 4 July 2008? I will rephrase the question. What did you do on 4 July 2008 to close the file note? --- I selected, completed and save.
When did you write the description which appears on that document in that document, Mr Nguyen? --- I do not recall.
Well, was it on 15 January 2008? --- I cannot recall.
You can't recall whether it was on 15 January or 4 July or anywhere in between. Is that your evidence? --- It was documented during – between those dates but I do not recall the exact date.
Was it around 15 January or around 4 July? --- I cannot recall.
You can't recall. The description says: meet with Martin Cunningham to discuss the DMS online report for business planning. SOA training and conduct pre-vets. Martin had advised me that Bonita (sic) was not in the office and he was unsure where the files were.
Now, that description does not describe what happened that day, does it? --- That is correct.
You never met with Martin Cunningham? --- That is correct.
So how did you come to write a long description in there? --- That was incorrectly inserted.
How did you come to make the error and incorrectly insert that detail, Mr Nguyen? --- I do not recall.
The fact that it is so clearly wrong, does that help you recollect when you might have written the description? --- No, it does not.
164 After he was further pressed, Mr Nguyen (transcript 232) indicated he was prepared to accept that he wrote this entry at a considerably later time, although he was not prepared to make the ultimate concession that he wrote it on or about 4 July 2008. The detail of what happened on or around 4 July 2008, which is set out below – just before Mr Cunningham's authority was suspended by M3FS– suggests that the file note was probably made on or about 4 July, and I so find.
165 Benita Keen also gave evidence about Mr Nguyen's visit to the Avoca office on 15 January 2008. She recalls that in or about early January 2008 Jonathon Nguyen telephoned her and told her that he needed to see Martin and to pick up five files for pre‑vetting. She made an appointment for 15 January 2008 at 8am. She says that Martin Cunningham subsequently became unavailable because he had to attend an urgent client meeting. She was at the office when Jonathon Nguyen attended on 15 January. The day before he came she had pulled the five files for pre‑vetting out of their filing cabinet and made them ready for collection. Benita Keen says that when Jonathon Nguyen came in, he went straight into Melvyn's office and she did not see if he looked at the files or took them with him. Ms Keen was not required for cross examination and the evidence contained in her witness statement (Exhibit E) was unchallenged.
166 Melvyn Gyi also gave evidence about the visit of Mr Nguyen on 15 January 2008. His evidence went in through his witness statement (Exhibit C). He also was not required for cross examination and his evidence was therefore unchallenged. As to the events of 15 January 2008, he states that Jonathon Nguyen came to Avoca's office to pick up some of Martin's files. Martin was not in the office at the time, but had arranged for the files to be left at reception for Jonathon to collect. He had told Melvyn to expect Jonathon Nguyen. Mr Gyi says that:
I spoke to Jonathon when he arrived and showed him the files. Jonathon had a quick look through the files while we had some general chit chat about how my work on the mine was going and how business was going at Avoca. He then took off without taking the files. I don't know why he didn't take the files with him. He didn't say anything to me about why he was not taking the files. After that, I did not have any contact from Jonathon until at least mid‑April 2008.
167 In light of the unchallenged evidence of Ms Keen and Mr Gyi, and the overall tenor of Mr Cunningham's evidence, and the inconsistencies in that of Mr Nyugen, I have little hesitation in finding that on 15 January 2008 at Avoca's offices Jonathon Nguyen was given the five files, that he did in fact have a quick look at the files while he had some general "chit chat" with Mr Gyi, and that he chose not to take the files with him when he left the office. Just how closely he inspected the files, I am unable to say. I consider, though, having regard to Mr Gyi's evidence (and to Mr Nguyen's later evidence about not looking at all at six client files he collected from Mr Cunningham on 8 April 2008), that he barely looked at them.
168 In those circumstances, I have no hesitation in finding that the content of Mr Nguyen's file note made in respect of his attendance at the offices of Avoca on 15 January 2008, that was completed on 4 July 2008, is totally incorrect.
169 It seems that, when Mr Nguyen felt the need on or about 4 July 2008, to recount in a formal M3FS computer file record what had happened on 15 January 2008, at a time (as explained below) when he knew the effective suspension of Avoca and Mr Cunningham was being considered by M3FS's compliance committee, he reported Mr Cunningham to have been in attendance, but with no files, and attributed fault to Ms Keen for not having the files ready. Later, in his written statement prepared for the purpose of these proceedings, his testimony remained that he did not receive any files for inspection, but that Mr Cunningham was not in attendance, and that he later followed up with Mr Cunningham for files for pre‑vetting. As of 4 July 2008, however, Mr Nguyen's "official" account of what occurred on 15 January available to M3FS's compliance committee, including Mr Martin, Ms Hare and Ms Ruano, was this late‑made file note – which was totally incorrect.
170 I should add that, on this point, I also prefer the evidence of Mr Cunningham, Ms Keen and Mr Gyi to that of Mr Nguyen, on the basis that Mr Nguyen was generally not an impressive or reliable witness. While it is perhaps not uncommon and not unreasonable for persons called to give evidence in legal proceedings, in circumstances where they are unfamiliar with and untutored in relation to such proceedings, sometimes to appear uncomfortable, unsure and evasive when, in truth, they are simply nervous, Mr Nguyen's approach to answering questions put to him, his frequent long delays in answering simple questions, his inability to recall events and the inconsistencies in his evidence concerning the events of 15 January 2008, cannot be explained away by his apparent inexperience as a witness. Mr Nguyen must have known that his evidence would be under attack well before he was called for cross examination. His responses to questions put has caused me to consider him an unreliable witness generally, particularly where his testimony is dependant on his independent recollection of events and not confirmed by contemporaneous documentary records.
171 I should add that, as noted above, I am also unwilling to accept the accuracy of Mr Cunningham's generalised recollection of events, given his willingness to assume facts and events and his lack of attention to important detail. In this instance, however the events of 15 January are corroborated by the unchallenged evidence of Ms Keen and Mr Gyi.
172 I should also add that, in light of Mr Gyi's evidence, I conclude that Mr Cunningham did not understand that Mr Nguyen had made a close inspection of the five files made available for inspection, but that Mr Nguyen had, as Mr Gyi explained, looked at them quickly in the course of some general "chit chat" with Mr Gyi before leaving Avoca's office and leaving the files behind.
the period of february to april 2008 - MR nGUYEN'S COLLECTION OF FILES ON 8 aPRIL 2008
173 Between 16 January and 8 April 2008, Mr Cunningham says – as indeed the evidence confirms, neither Jonathon Nguyen nor Dale Hare – nor anyone else at M3FS – expressly requested to pre‑vet or review any more of his files and he did not have any further contact with Jonathon or Dale or anyone else from M3FS during that period.
174 Mr Cunningham says that Jonathon Nguyen came to Avoca's office to collect the files on 8 April and he saw him and gave him the files as requested. In each case the SOAs on the files had already been sent to the clients. Mr Nguyen took the files and left. There was no discussion about the files.
175 While Mr Nguyen claims he telephoned Mr Cunningham on the afternoon of 15 January 2008, to arrange a further meeting for pre‑vet purposes, in light of my foregoing findings as to his credibility, and the findings below as to his subsequent conduct, I find it hard to believe that he did and I reject his evidence in this regard.
176 For two months between 1 February and 1 April 2008, Mr Nguyen says he spent "a large amount of time out of the office". In early February he was in Brisbane for a few days at a management meeting. From about the middle of February to early March he was on annual leave. Then he was again on annual leave towards the end of March. He then attended the M3FS National Conference in Kuala Lumpur at the very end of March. Mr Cunningham did not attend this conference.
177 Within about a week of returning from the National Conference in Kuala Lumpur, Mr Nguyen made a telephone call to Benita Keen at Avoca and then called at the office on 8 April to collect six client files from Mr Cunningham.
178 It seems from all the evidence that Mr Nguyen took it upon himself to request these six files. There is no indication that Ms Hare or anyone else at M3FS instigated Mr Nguyen's actions in this regard. When he obtained these six files, there is no clear evidence that Mr Nguyen required them for "pre‑vetting" purposes. In that regard, I accept the evidence of Mr Cunningham: he just called for six files. Nor did Mr Nguyen then request or take the opportunity to meet with Mr Cunningham to discuss the contents of those files.
179 Having obtained the six files on 8 April, Mr Nguyen did absolutely nothing with them, not even look at them briefly or otherwise, for a period of seven weeks until he handed them to another M3FS officer, Ms Ruano, for reviewing. This is hardly the conduct of a person keen to conduct a pre‑vet of a representative's files. The following testimony of Mr Nguyen in cross‑examination (transcript 240 – 241) is highly instructive in this regard:
So you’re now saying, you made a phone call in the afternoon but this is the one [at para] 75 that you don’t recall the time and date? So we should understand paragraph 75 as being that the follow up call you made was on 15 January in the afternoon, was it? --- That is correct
I see. Did you follow up at any time subsequent to that to obtain files for pre vetting? --- Following the date of 15 January?
That’s right? --- I did in April.
In April. You did nothing until April and so you followed up the files for pre-vetting in April, do you? --- That is correct.
When you asked for files in April, you didn’t ask for files for pre-vetting, did you? --- I do not recall.
You rang up Benita Keen and asked her just simply for six recent files to review, didn’t you? --- Yes.
You didn’t ask for files for pre-vetting did you? --- I cannot recall the exact wording of our conversation.
You met Martin Cunningham on 8 April and he gave you six recent files, didn’t he? --- That is correct.
They were completed files, weren’t they? --- I was unable to ascertain at the time whether they were completed files or not.
What did you do with those files when you took them away on 8 April? --- I took them back to my office.
Did you review them immediately? --- No.
What did you do with them? --- I was aware that Helen Ruano was coming over for the PD day, so given Helen was the compliance specialist – sorry ---
So the PD day is 27 May? --- That is correct.
You took the files on 8 April. What did you do with them for the seven weeks in between? --- Nothing.
…
You didn’t make any arrangements with Helen Ruano before she came to Perth on 27 May for her to review those files, did you? --- Yes, I did.
When did you do that? --- I do not recall the exact date.
How did you do that? --- A phone call.
Shortly before 27 May? --- I do not recall.
Did you look at the files at all after you picked them up on 8 April or did you just put them in your office and leave them there? --- I did not look through the files.
Pardon? --- I did not look through the files.
You didn’t look at them? --- No.
So you didn’t ascertain that they weren’t possibly for pre-vetting because they were completed? --- Sorry, can you please re-ask the question?
You didn’t ascertain that they weren’t files for pre-vetting because they were in fact completed matters. You didn’t ascertain that? --- No.
But you ascertained that at some time in the future didn’t you? --- After the PD was reviewed, yes.
How did you ascertain that? --- When I was advised by Helen that the SOAs had been issued.
…
Why did you ask her to review them? For what purpose? --- Given that Helen was coming over to WA to be part of our PD day and she had the – she was a compliance specialist. I made the decision to - I thought it would be in the – sorry. I thought it would be best that Helen review those files.
180 It is hard to understand exactly what Mr Nguyen intended, on his own account, by taking possession of the six client files on 8 April and then not dealing with them, not even looking at them, while he held them for seven weeks, but then handing them over to Helen Ruano at the end of May for her to review. If Mr Nguyen was fully of a mind in early April that Mr Cunningham still had to meet the action plan requirements for pre‑vetting of five files, and he requested those six files for that purpose, then surely he would have given them early attention, and have said something to Mr Cunningham concerning his earlier alleged instruction that no SOAs were to be issued without M3FS's approval. All these factors additionally lead me to the finding that Mr Nguyen did not request those files as part of the action plan pre‑vetting process. Just what his intentions were, apart from conducting a periodic audit of files, is unclear.
181 Even if Mr Nguyen was busy on various matters including personal leave, it is quite apparent that Mr Nguyen, at the very least, did not entertain any primary concerns about Avoca's or Mr Cunningham's capacity to conduct business as an M3FS adviser during the period from 15 January 2008 to the end of May 2008. It is hard to believe that, and simply not explained by the evidence why, Mr Nguyen simply sat on the six files he collected. If he wished to pre‑vet them, one would have thought that he would have looked at them in a timely fashion so as not to delay the business being conducted by Avoca on behalf of M3FS. If he was concerned to review or audit SOA advice already given or was concerned that he had not conducted any or a proper pre‑vet of files in January, then surely he would have been anxious to complete that review or audit as soon as he got the six files. Instead he apparently, opportunistically, handed the six files to Ms Ruano, without prior notice, when she attended the Perth PD (professional development) Day on 27 May and asked her to review the files. Contrary to his evidence, Ms Ruano said she knew nothing about Mr Nguyen's desire to have her review those files before he approached her at the PD Day in Perth on 27 May 2008. I accept her evidence. The conduct of Mr Nguyen to this point, in his dealings with Mr Cunningham, seems to have been that of a man racked by indecision and prone to procrastination.
the period of may to july 2008 - suspension
182 Mr Cunningham says the six client files were returned to him, via Melvyn Gyi, after the PD Day led by Helen Ruano that he attended on 27 May 2008. At that time no‑one said anything to him about the files. He assumed there were no problems with those files. I accept he made this assumption.
183 Ms Ruano gave evidence that she had neither met nor spoken to Martin Cunningham before the PD Day. She says that during the course of the morning of 27 May 2008, Jonathon Nguyen handed her six of Martin Cunningham's files and asked her: "Can you review these files for me? They are from Martin Cunningham, an adviser of ours who had his files placed on pre‑vet following a compliance audit from November 2007". She agreed to do so and did so.
184 This advice to Ms Ruano from Mr Nguyen, speaking of the pre‑vet requirement in the past tense, rather suggests that the purpose of the request was to have Ms Ruano advise whether, following the pre‑vet procedure, Mr Cunningham was conducting business in a manner that complied with M3FS's expectations.
185 Ms Ruano says she soon realised that the files she had been given could not be pre‑vetted as the SOAs had already been presented to clients. However, she reviewed the files as given to her. She says she was able to complete a review of the files in less than an hour because, as she put it, the lack of content within the files left very little to read or to reference. Assessing a compliant file would by comparison take much longer – three hours on average.
186 Ms Ruano noted that the files she had been given lacked documents, research, working papers and client information. She considered SOAs were incomplete by industry and M3FS standards, including the s 945A CA requirement "to have a reasonable basis for the advice", and the s 947D CA product replacement requirements.
187 Ms Ruano personally met Mr Cunningham at the PD day, at the Mount Lawley Golf Club. However, she considered the social setting was an inappropriate one in which to raise her concerns with him. Nonetheless, she says her concerns were serious enough to lead her to form the preliminary view that Mr Cunningham should undergo significant training and that he was not currently competent to provide compliant advice, and that his authority should be suspended until such time as M3FS could be satisfied that he properly understood M3FS's requirements and expectations.
188 Ms Ruano says that she told Jonathon Nguyen on 27 May 2008 that the files were "useless to read" and Martin Cunningham did not have any idea from where the funds were coming. The source of superannuation funds was not recorded on the SOAs and using the expression "TBA" in the forms was not a satisfactory option. Ms Ruano said she also said to Jonathon Nguyen that that she would speak to Dale Hare but her initial judgment was that Martin Cunningham should be suspended.
189 Mr Nguyen, in his evidence, acknowledged that Ms Ruano made her immediate impressions known to him on 27 May 2008, that the files were grossly unsatisfactory. However, he did not then or soon after communicate to Mr Cunningham anything of what Ms Ruano had communicated to him on 27 May 2008. As a result, Mr Cunningham was left blissfully ignorant of his potential predicament.
190 A few days later, on about 2 June 2008, Ms Ruano read the 29 November 2007 compliance review report relating to Avoca and Mr Cunningham. She did this in preparation for a compliance committee meeting on 4 June 2008. She also noted the action plan that had been agreed to in early December 2007.
191 The M3FS compliance committee met regularly, at least monthly during 2008. Ms Ruano then sat on the compliance committee with Barry Martin and Dale Hare. She conveyed her findings about Martin Cunningham's client files to the compliance committee at its meeting of 4 June 2008.
192 The compliance committee at that time regularly dealt with significant compliance issues relating to M3FS's business and its representatives. All committee members were based in the Brisbane offices of M3FS. Ms Ruano explained that this enabled the committee members, in consultation with each other, to instigate compliance actions between meetings, if necessary.
193 The minutes of the compliance meeting of 4 June 2008 shows that these three members and Susan Papi were present at the meeting. In an attached compliance report for June 2008, under the heading "Suspensions", reference is made to Martin Cunningham in the following terms:
Martin Cunningham review has revealed that matters raised in the November 2007 compliance review report had not been followed in any aspect resulting in the latest review not being any better. An action plan for a 2 week period to become compliant is to be issued and stated clearly that non compliance in any matter will result in termination. This was agreed to at the time of the compliance committee meeting.
194 As it transpired, Mr Cunningham was not then given any notice of any period for further compliance, fourteen days or otherwise. Rather, on 5 June 2008, Ms Ruano and Dale Hare contacted Jonathon Nguyen by telephone and advised him that it had been determined that Martin Cunningham would be required to amend all client files as the state of his files had been deemed substantially unsatisfactory. Ms Ruano told Mr Nguyen that she would forward to him a letter that he was to hand deliver and discuss with Martin Cunningham. No doubt Mr Nguyen was kept involved as he was the Relationship Manager for the applicants.
195 Nearly two weeks later, on 20 June 2008, Mr Nguyen and Mr Cunningham met, although no letter from Ms Ruano had been forthcoming. Mr Nguyen says that he advised Mr Cunningham that the state of his files had been found to be totally unsatisfactory and that he had not addressed the issues from his December 2007 action plan sufficiently, specifically the cessation of use of "TBA" in SOAs.
196 Mr Nguyen says that he also told Mr Cunningham that he had ignored the requirements of the action plan to submit SOAs for the next five clients for pre‑vetting. He says that he also told Mr Cunningham that he had not followed his requirements to provide copies of all of his SOAs for pre‑vetting as discussed at the meeting of 4 December 2008. Mr Nguyen says that he advised Mr Cunningham that Helen Ruano would be in contact with him regarding other requirements.
197 Mr Nguyen says that, some days after this meeting, he received a telephone call from Martin Cunningham concerning the status of the compliance review of his file. He then spoke to Dale Hare who told him to advise Mr Cunningham that he should direct any questions about the compliance review directly to M3FS's head office.
198 Mr Cunningham disagrees with much of Mr Nguyen's account of the meeting on 20 June 2008. He agrees that he did have a meeting with Jonathon Nguyen on 20 June 2008, at the request of Jonathon. He thought Mr Nguyen wanted the meeting to discuss Avoca's budget for the next financial year, and says they did indeed discuss the budget when they met.
199 Mr Cunningham also agrees that Mr Nguyen did ask him why he was still using "TBA" in his SOAs, but denies he said anything about the six client files he had collected in April. He did not say that a review had been conducted and did not say anything about being non‑compliant with the pre‑vetting requirements.
200 Mr Cunningham also denies he had a follow up telephone conversation with Mr Nguyen a few days later concerning the status of the compliance review.
201 Ms Hare confirms the evidence of Ms Ruano that on 5 June 2008, she and Ms Ruano telephoned Mr Nguyen and advised that the state of Mr Cunningham's files had been deemed substantially unsatisfactory and that it had been determined that he would be required to amend all client files so that they were compliant. Mr Nguyen was also told he would be asked to hand deliver a letter to Martin Cunningham from Ms Ruano.
202 Ms Hare says that she was later informed by Jonathon Nguyen that he had met with Martin Cunningham on 20 June 2008 and refers to a file note made by Jonathon Nguyen concerning the meeting having taken place and the matters discussed. The file note in question notes a meeting between Jonathon Nguyen and Martin Cunningham on Friday 20 June 2008 at 8.30am for an hour. The "date completed" on the entry is "23 Jun 2008". The description of the activity is as follows:
Discussed with Martin recent pre‑vett and advised that it has not met satisfactorily requirements. In particular writing TBA on clients SOA where he has been unable to identified (sic) the clients balance.
Advised that Helen Ruano would be sending him a Compliance Report outlining her findings.
203 The content of the file note is a far cry from the account that Mr Nguyen has given in evidence of the meeting on 20 June 2008. The note plainly refers to the six files collected on 8 April. It makes no express mention of the late 2007 pre‑vetting requirements.
204 I consider that the account of the meeting of 20 June 2008 given by Mr Cunningham is far more likely to convey the tenor of that meeting than that provided by Mr Nguyen, despite Mr Cunningham's tendency to over‑generalise events and ignore or leave out important detail. I think this is so for a number of reasons. First, my general assessment provided earlier concerning the quality of Mr Nguyen's testimony remains a real issue. By this time, Mr Nguyen seems to have had very little continuing contact with Mr Cunningham. I consider it unlikely that Mr Nguyen would suddenly have taken a very direct and strong stand with Mr Cunningham in late June, in light of his earlier conduct in looking briefly at five files for pre‑vetting on 15 January 2008, then taking six files for review on 8 April 2008 and doing absolutely nothing with them for seven weeks. It is unlikely, all this time later, on 20 June 2008 – nearly two and a half months after collecting the six files – that Mr Nguyen would have met with Mr Cunningham and chastised him about his compliance record. It seems to me far more likely that Mr Nguyen, racked as he seems to have been by indecision and given as he was to procrastination, placed some emphasis on the continued use of "TBA" in documentation and said something about the unsatisfactory state of the files, but said precious little else apart from the fact that Mr Cunningham could expect to receive a compliance report from Ms Ruano before long. Nor am I satisfied that Mr Cunningham telephoned Mr Nguyen soon after the 20 June meeting, as Mr Nguyen alleges. Ms Hare does not refer to any follow up call from Mr Nguyen as he alleges.
205 On 1 July 2008, the compliance committee met again. Apart from the meeting that Jonathon Nguyen had with Martin Cunningham on 20 June 2008, nothing of particular substance had occurred that involved the compliance committee since its 4 June 2008 meeting. The compliance committee was made aware of Mr Nguyen's discussion with Mr Cunningham by his file note of the meeting of 20 June, which was completed on 23 June. The committee decided that Mr Cunningham should be contacted by email with an inquiry made as to whether he had given any financial advice to any person and requesting that he confirm that no SOAs had been submitted by him to M3FS for pre‑vetting. Ms Ruano says that based on the answers provided to these inquiries, suspension of Martin Cunningham would be actioned, if considered warranted.
206 On 2 July 2008, Helen Ruano emailed Mr Cunningham. The email was on the subject, "Requires your immediate attention: pre‑vetting of SOAs" and read:
Just a courtesy email to remind you of the pre vetting requirements instructed by Millennium3 during your November review and discussion with Jonathon since that time. I attach your report that was issued.
I note that neither Millennium3 Compliance area or Jonathon has received any SOAs for prevetting for the period since November 2007.
Therefore, I need you to confirm via return email of your confirmation that you have not provided any personal advice to any client either existing or new potential client and have not issued SOAs stating your personal advice to anyone.
Please response(sic) by close of business Thursday 3rd July 2008.
207 Mr Cunningham responded to the email from Helen Ruano the very next day, 3 July 2008, as follows:
I am totally confused by your comments in the 2nd paragraph as I have been compliant with the pre‑vetting requirements and have provided files and SOA's in accordance with this.
Could you please expand on this misunderstanding and advise accordingly.
208 In light of the findings I have made, one can understand Mr Cunningham writing in such terms. He believed Jonathon Nguyen had inspected, albeit quickly, the five files for the purposes of pre‑vetting at the premises of Avoca on 15 January, and that Mr Nguyen had taken possession of another six files in April, where pre‑vetting was not an issue. He had heard nothing further from Mr Nguyen until the 20 June meeting, and only then in terms that did not suggest his status as an M3FS representative was in peril.
209 Ms Ruano replied to Mr Cunningham by email on 3 July 2008 and stated:
Just to clarify – Pre vetting (and described in the action plan) is the act of sending the completed SOA to the licensee, for review and identification of errors/inappropriate standards etc, prior to giving to the client.
Post vetting is where the client issued SOA is provided to the licensee for review after it is provided to the client – this is the normal audit process.
Therefore, as per the original email – please provide details as to when and whom the pre vetting SOAs were provided for review prior to giving to the client. So should our records be incorrect – I can clear up this misunderstanding.
During my WA visit, I noted that only 6 SOAs were assessed on that PD day (SOAs issued over a period of January – May 2008) were already provided to the clients – hence these were not pre‑vetted.
Please provide the information requested by close of business today.
210 Mr Cunningham responded by email on 3 July, within the period requested, and advised:
Thank you for your response, however I am still confused.
As per the request of Dale Hare in December 2007, five files were made available at our office for the purpose of the pre‑vetting of the SOA's. Those files were there for Jonathon's review and he attended our offices on 15 January 2008 to review those files for pre‑vetting purposes. We presumed that all matters were compliant for pre‑vetting purposes as we have heard nothing to the contrary from Jonathon or Millenium3(sic) save for your email below.
I cannot account for what Jonathon did or didn't do on the day of his visit, or what copies of records he kept for your files, to confirm pre vetting compliance for your records. I left Jonathon at our offices (with Melvyn Gyi) as I had to attend a client appointment and I am completely surprised by the content of your email below about no record of pre vetting SOAs. Our next contact with Millenium3(sic) regarding compliance was Jonathon contacting us on April 7 requesting 6 files, which he collected from us on April 8 (I presumed he was looking at postvetting compliance) and he returned these files on May 27 saying they were all fine.
I hope you can enlighten me and confirm Millennium3's proper attendance to prevetting compliance as I have been nothing more than willing to assist Millennium3 meet your obligations.
211 Helen Ruano immediately responded on 3 July by email as follows:
Thank you Martin for your prompt reply. I will consult with Jonathon regarding this matter. I shall advise outcome.
212 Ms Ruano finalised a report for the compliance committee on 5 July 2008 in consequence of which the compliance committee decided to suspend Martin Cunningham.
213 At the time Ms Ruano completed her report on 5 July 2008, she had access through the M3FS Myworkplace system to various computer file notes that had been prepared over time by Mr Nguyen. These included the file note completed by Mr Nguyen on 4 July 2008, the day before her report, in respect of the attendance of Mr Nguyen at the offices of Avoca on 15 January 2008. This file note has been discussed in some detail above. I have found it to be totally incorrect. At the very least, it was a self‑serving entry, well after the event, by a person given to indecision and procrastination.
214 The very next communication Martin Cunningham received was an email from Dale Hare as Risk and Compliance Manager of M3FS, on 8 July 2008, suspending his authorisation with M3FS with immediate effect, as follows:
In accordance with clause 1.6 of the Authorised Representative Deed we hereby advise that your authorisation with M3FS is suspended effective immediately.
As your authorisation has been suspended, you will not be able to provide personal advice on or deal in financial products.
Please read and signed(sic) the attached letter agreeing to the course of action. The original will be in the post tonight. I will also be faxing a copy of this letter to your office.
Please refer any questions to Jonathon Nguyen.
215 The letter attached to the email, the original of which was sent by post to Martin Cunningham, Avoca Consultants, was dated 8 July 2008 and stated as follows:
Re: Notice of Suspension of Authority
I refer to the compliance review conducted with you on the 27 May 2008 by Helen Ruano of this office.
It was evident on this review you did not provide a reasonable basis for the advice in the Statements of Advice and/or appropriate information for the clients to make an informed decision on whether to act on this advice. The client files also did not contain adequately completed Fact Finders, Risk Profile questionnaires and file notes of discussions held with the clients.
ASIC requirements are that the SOA must clearly set out the advice and on what basis it has been recommended. For all advice, the SOA must explain, in clear and simple terms, the costs, benefits, loss or gain and significant consequences for the client if the advice is acted on.
Subsequently we must advise you that in accordance with clause 1.6 of the Authorised Representative Deed, we hereby advise that your authorisation with M3FS is suspended effective immediately.
As your authorisation has been suspended, you will not be able to provide personal advice on or deal in financial products. This means you must cease conducting reviews, contacting clients or seeking new business. You will not be able to hold yourself out as an Authorised Representative of Millennium3 Financial Services Pty Ltd from the 8 July 2008.
The following course of action has been determined:
1. To cease immediately to provide advice to clients.
2. Jonathon to conduct a review on five client files. Jonathon to provide guidance of standards required.
3. For you to review all advice provided since the 16 July 2007.
a. Review File notes and Fact Finders.
b. Reissue the SOAs to the clients. All these SOAs to be pre‑vetted prior to issuing to clients.
c. All SOAs with an explanation letter which will be provided by M3.
4. Sign and return this letter as acknowledgement of your suspension and agreeing to the above course of action.
Martin your actions have placed your own authority within M3FS and your business at serious risk.
This letter is to serve as notice that any failure to adhere to these conditions or any future serious compliance breach will result in a review of your authority with M3FS.
216 The letter, signed by Dale Hare on behalf of M3FS, plainly was a notice of suspension that envisaged a review of the business conducted by Martin Cunningham would be completed to ensure that all clients had appropriate SOAs. The last paragraph of the letter as set out above put Mr Cunningham on notice that failure to adhere to the conditions set out or any future serious compliance breach, would result in a review of his authority with M3FS. This suggested that Mr Cunningham could perhaps expect to see the suspension lifted once the course of action outlined had been undertaken and satisfactorily completed. However, it did not necessarily promise that outcome. In this, the letter reflected the powers of M3FS to suspend and terminate an authorised representative's authority under cl 1.6, cl 1.7 and cl 1.8 of the CARA.
217 Nonetheless, it is clear that the letter of 8 July sent by Dale Hare on behalf of M3FS reflected the then intention of the compliance committee, to advise Martin Cunningham that he was noncompliant but, following a period of suspension and retraining, could possibly resume business.
the period of july to december - termination
218 Following Mr Cunningham's suspension, Ms Hare made arrangements for a "paraplanner" to review Avoca's and Mr Cunningham's files and produce appropriate SOAs to deal with the deficiencies that M3FS expected to identify. Initially, Ms Hare proposed to have the paraplanner work with Mr Cunningham to ensure that the information was correct and completed in a timely manner, but she soon determined that the paraplanner would be able to produce the SOAs without his input. That work was then undertaken.
219 As it transpired – despite further pleas from Mr Cunningham, and a colleague in the industry, Mr Dougherty, to Mr Martin directly – on 10 December 2008, following further investigation and consideration, as discussed in more detail below, M3FS terminated the CARA and the authorities of Avoca and Mr Cunningham.
220 By letter dated 10 December 2008 to Mr Cunningham at Avoca, signed by Barry Martin as joint Managing Director for M3FS, Avoca and Mr Cunningham were advised as follows:
As recently advised directly to you by Barry Martin on or about 1 December 2008 and by the Company's solicitors to your solicitors, this Company has completed its final report concerning the events in question, which report has been filed with ASIC. A copy of that report has recently been provided to your solicitors by this Company's solicitors.
We now advise both the Company and you that this Company has determined, pursuant to clause 1.8 of the Deed to exercise its right pursuant to clause 12 ,to terminate with immediate effect from today, 11 November 2008, this Company's appointment of Avoca Consultants Pty Ltd as an authorised representative under the Deed and, necessarily, the appointments of yourself and Melvyn Gyi as individual representatives under that Deed. Specifically and, without in any way limiting or waiving any of this Company's rights under the Deed, we consider that your conduct and that of Avoca Consultants Pty Ltd which has been the subject of the review recently completed, constitutes conduct that breaches items 3 and 10 of clause 12.2 of the Deed and warrants the termination of the Deed.
221 Section 12.2 of the CARA as noted earlier, provided that the deed may be terminated immediately by M3FS by written notice to the Authorised Representative, if any of a number of the following events occur, including:
3. The Authorised Representative breaches any material obligation under this Deed.
10. Distribution Entity [M3] forms the reasonable opinion that the Authorised Representative or any of its Representatives has:
a. failed to perform or observe their material responsibilities under the terms of this Deed or any other arrangement between the Authorised Representative and Distribution Entity; or
b. engaged in any conduct which is prejudicial to Distribution Entity, or unprofessional or unethical or in breach of any relevant Code.
application of s 52 tpa
222 By way of a preliminary issue, M3FS contends that s 52 of the TPA has no application in relation to the dealings between M3FS and the applicants and so those claims of misleading and deceptive conduct that rely on s 52 must necessarily fail. M3FS says that any conduct of M3FS said to be misleading or deceptive in such circumstances can only be the subject of an ASIC Act 2001 claim, not one under the TPA. During the hearing, counsel for the applicants declined an invitation to amend its claim in this respect.
223 Section 12DA of the ASIC Act 2001 deals with misleading or deceptive conduct. In terms redolent of s 52 of the TPA, s 12DA(1) provides:
12DA Misleading or deceptive conduct
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
(emphasis in original)
224 Section 12DA appears in subdiv D of Pt 2 of the ASIC Act 2001. Subsequent provisions in subdiv D deal with false or misleading representations and other conduct in relation to particular types of financial services.
225 Part V of the TPA deals with "Consumer protection" as well. But s 51AF of the TPA provides that it does not apply to financial services:
51AF Part does not apply to financial services
(1) This Part does not apply to the supply, or possible supply, of services that are financial services.
(2) Without limiting subsection (1):
(a) sections 52 and 55A do not apply to conduct engaged in in relation to financial services; and
(b) if a financial product consists of or includes an interest in land, section 53A does not apply to that interest; and
(c) section 63A does not apply to:
(i) a credit card that is part of, or that provides access to, a credit facility that is a financial product; or
(ii) a debit card that allows access to an account that is a financial product.
(3) In subsection (2):
credit card has the same meaning as in section 63A.
debit card has the same meaning as in section 63A.
(emphasis in original)
226 M3FS, to put it simply, relies on s 51AF(2)(a) to contend that s 52 does not apply to the representations of M3FS that the applicants complain of, because such conduct as alleged is conduct engaged in, in relation to financial services. In this regard, M3FS puts particular emphasis on the expression "in relation to", words generally accepted to be of wide import. M3FS reject any suggestion that s 12DA of the ASIC Act 2001 is limited in its application to conduct relating to the actual provision of financial advice, such as the preparation of a SOA in accordance with the requirements of Ch 7 of the CA.
227 So far as the expression "financial services" that is used in s 12DA(1) of the ASIC Act 2001 is concerned, s 12BA(1) provides that "financial service" has the meaning given by s 12BAB. Section 12BAB(1) provides that, for the purposes of Div 2 of Pt 2 of the ASIC Act 2001, subject to para (2)(b), a person provides a "financial service" if they:
(a) provide financial product advice (see subsection (5)); or
(b) deal in a financial product (see subsection (7)); or
(c) make a market for a financial product (see subsection (11)); or
(d) operate a registered scheme; or
(e) provide a custodial or depository service (see subsection (12)); or
(f) operate a financial market (see subsection (15)) or clearing and settlement facility (see subsection (17)); or
(g) provide a service that is otherwise supplied in relation to a financial product; or
(h) engage in conduct of a kind prescribed in regulations made for the purposes of this paragraph.
228 As noted, s 12BAB(1) introduces the expression "financial product". Section 12BAA provides a definition of "financial product". Section 12BAA(1) provides that subject to subs (8), for the purposes of the division, a "financial product" is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a) makes a financial investment (see subsection (4));
(b) manages financial risk (see subsection (5));
(c) makes non cash payments (see subsection (6)).
229 In making the CARA, that is to say, in M3FS authorising the applicants to act as its representatives in "providing financial product advice" – any representations made by M3FS to the applicants were, on one view – that pressed by M3FS – necessarily made "in relation to" the provision of such advice and so must constitute an example of a person "engaging in conduct in relation to financial services".
230 However, an issue arises whether the representations, if any, that arise from the making of the CARA are necessarily anterior to, and separate from, the conduct of "providing financial products advice", and for that reason do not constitute an example of a person engaging in conduct in relation to financial services. In other words, the representations in the CARA are sufficiently remote from the provision of financial products advice to be considered conduct "in relation to" such advice.
231 The focus of s 12DA is to prevent a person engaging in conduct in relation to financial services that is misleading or deceptive. The question now raised is whether a representation conveyed in an agreement whereby one person authorises another person to be their representative for the purpose of providing financial product advice is an instance of the first person "engaging in conduct in relation to the providing of financial product advice". For my part, the answer is 'No'.
232 In my view, if M3FS conveyed representations by the relevant deed, such as those pleaded, it is not accurate to describe M3FS's conduct in so doing as conduct engaged in, in relation to providing financial product advice. Rather, it is conduct engaged in, in relation to the authorisation of the applicants as representatives of M3FS, albeit the applicants were thereby authorised to act as the representative of M3FS for the purpose of providing such financial product advice. Any representations arising from the deed thereby arise from conduct which is necessarily anterior to and separate from the provision of financial product advice and, for this reason, are not "in relation to" the provision of such advice. Such conduct is sufficiently remote from the provision of financial product advice not to be considered conduct "in relation to" such advice.
233 This construction of s 51AF(2)(a) is also consistent with the primary focus of s 51AF(1) of the TPA Act, which is limited to the "supply or possible supply" of financial services. The appointment by M3FS of a representative is not an instance of "supply" of such services or "possible supply" of such services.
234 The applicants further point out that the provisions now included in Pt 2, Div 2 of the ASIC Act 2001 were first introduced into the predecessor Act, the Australian Securities and Investments Commission Act 1989 (Cth) by the Financial Sector Reform (Consequential Amendments) Act 1998 (Cth). The second reading speech makes it clear that its purpose was to "transfer responsibility for consumer protection in the financial system from the ACCC to ASIC". In the second reading speech in the Senate incorporated into Hansard on 14 May 1998, it was said of these amendments that they would do two things:
First, they will amend references to the word 'bank' and like expressions, and to the 'Insurance and Superannuation Commissioner' in the Corporations Law and the Australian Securities and Investments Commission Act 1989.
Secondly, they will confer on ASIC sole responsibility for consumer protection in relation to financial services. These proposed amendments are part of the on‑going implementation of the Financial System Inquiry recommendations. In particular, recommendation 3 was to the effect that ASIC should have sole responsibility for administering consumer protection regulation within its jurisdiction over the financial sector. For this purpose, consumer protection provisions comparable to those in the Trade Practices Act 1974 were recommended to be included in ASIC's legislation.
…
The Financial Sector Reform (Amendments and Transitional Provisions) Bill, does not, however, confer general consumer protection functions and powers on ASIC. Currently, the Australian Competition and Consumer Commission (the ACCC) exercises this general function in the financial system through the provision of Parts IVA and V of the Trade Practices Act.
The amendments will explicitly transfer responsibility for consumer protection in the financial system from the ACCC to ASIC.
: Hansard, Senate, Thursday 14 May 1998, page 2796 – 2797.
235 The applicants contend that a construction of the scope of s 12DA to give effect to that purpose is to be preferred: s 15AA Acts Interpretation Act 1901 (Cth).
236 The applicants also contend that the heading for Div 2 of Pt 2, which is deemed part of the ASIC Act 2001 by s 13(1) of the Acts Interpretation Act 1901, describes the provisions as concerning, "Unconscionable conduct and consumer protection in relation to financial services". The applicants contend this shows that the purpose of the legislation has not changed: it provides consumer protection in relation to financial services. The applicants say an authorised representative of a licensee is not a consumer of financial services protected by Div 2 of Pt 2.
237 I accept the applicants' contention that in resolving any textual ambiguity it is helpful to note what was said in the second reading speech in relation to the passage of the relevant 1998 amendments, to the effect that they were intended to transfer responsibility for "consumer protection" matters from the ACCC to ASIC. I do not consider that the conduct of M3FS, as a financial services provider, in the course of authorising the applicants to be its representatives is apt to be described as a dealing with a "consumer" of financial services as defined in the ASIC Act 2001 that is caught by s 12DA of the ASIC Act, or s 51AF of the TPA.
238 Surprisingly, the issue of whether s 52 of the TPA applies in relation to conduct of the type alleged by the applicants against M3FS in this case, has not previously been determined by judicial authority. For my part, while I recognise the force of the respondent's literal textual analysis, that representations allegedly made in a deed whereby the holder of an AFSL authorises representatives to act for it, are made "in relation to" financial services, for the reasons given above I do not prefer that interpretation or construction.
239 For these reasons I reject the submissions made on behalf of M3FS that s 52 of the TPA is incapable of applying to the pleaded representations or conduct of M3FS.
the question of material breach
240 As explained above, Ms Ruano's first reaction when she first reviewed the six client files of Mr Cunningham provided to her by Mr Nguyen on 28 May 2008 at the Perth PD Day, was that they were "useless to read" and that Mr Cunningham did not "even have any idea from where the funds are coming". The superannuation amounts and the source of the superannuation funds were not recorded on the SOA in each case and he regularly used the expression "TBA" in relation to those items, which she considered quite unsatisfactory. Soon after she was also concerned that Mr Cunningham had failed to have his SOAs pre-vetted, as required following the November 2007 audit and December action plan. Then, as noted above, in early June, for the purposes of the June 2008 compliance committee meeting, Ms Ruano reported her concerns to the meeting.
241 For the purposes of the subsequent July meeting of the compliance committee, Ms Ruano formalised her views in a report dated 5 July 2008 on the subject "Interim Audit Report – Pre‑Vetting". She labelled the report as "Compliance review report conducted on 27 May 2008". As can be seen from the sequence of events, her report dated 5 July 2008, whilst supplemented with information from M3FS's Myworkspace system, discussions with Dale Hare and some passing discussions with Mr Nguyen, as well as an exchange of email correspondence with Mr Cunningham, was primarily dependent upon the review she had made of the six files on 27 May 2008.
242 The report dated 5 July 2008 stated that the purpose of the review was to assess whether requirements "as per the compliance induction review report" issued by Dale Hare in November 2007, had been met; particularly the aspects of pre‑vetting as described in the December action plan.
243 Ms Ruano noted that according to M3FS records, there was no indication of the pre‑vetting requirements procedures having been carried out during the period from the date of the initial induction review held in November, to the date of her review on 27 May 2008. Ms Ruano then referred to the six files she had received from Mr Nguyen and noted the following deficiencies:
· All files presented involved advice pertaining to pre‑existing superannuation transfers with life risk insurance considerations – that is to say they were not files provided for the purposes of pre‑vetting.
· These files were deficient in all areas, both under the requirements of industry standards and M3FS.
· File notes were very little to no file notes. Any files notes recorded were not adequate to "tell the story" of the client's circumstances, basis of recommendation was not established, and sequence of events was not thorough.
· Fact finders – information collected on the fact finder would be considered not supportive of the eventual personal advice given.
· Research – no evidence of research, nor an indication of an attempt to obtain research was evident on the files. It should be noted that entries such as "TBA" or "not known" are an indication that advice given had no reasonable basis to be given.
· Know Your Client and Know Your Product requirements were not met in any of the client files presented.
· Statements of advice – it was noted that handwritten template SOAs were used. Observation of the quality of the "personalization" of the SOAs was ranked poor and did not meet the "Clear, Concise and Effective" policy. These were not edited to meet the client's situation, nor were "ticks" placed in boxes to show the advisor's selection or some form of rationale as to the basis of the recommendations. No rationale was recorded in the SOAs as to why the pre‑existing super funds were transferred to a newly set up superannuation fund. Mr Cunningham had not even "known" what type of super fund was being assessed – items such as the fund's provider, fund name, investment values, insurance values, whether it was accumulation or defined benefit etc etc, what risk tolerance the funds were being held as.
· Sum insured values not even noted.
· Replacement of a financial services product areas of the SOAs were not completed, either at all or partially (namely "TBA" or "unknown").
· Rationale as to why the new product was selected were not completed.
· Commission percentage values were stated but not any amounts and dollar values calculated.
· Referral sections were not completed in their entirety.
244 In summary, Ms Ruano, in her report, stated:
Based on the findings of this review and comparing that to findings in the review conducted in November 2007, there has been no improvement at all. It would be considered 'unacceptable' practice and pre‑vetting obviously had not been sought.
The activities shown here are noted as 'high risk'.
It is recommended that all files be reviewed and rectified by Martin, intense retraining be conducted for Martin and his ability to follow procedures as required by industry and M3 be reassessed.
Suspension of authority is highly recommended.
245 Ms Ruano was cross examined about the six files she reviewed on 27 May 2008, which were the subject of her 5 July 2008 report. I found Ms Ruano a straightforward witness, without guile who gave evidence that could be relied upon. I generally accept her evidence. When the suggestion was put to her that her only complaint was that file notes were not adequately completed, Ms Ruano made it plain (transcript 347 – 348) that was not correct and that:
If you go through the document, the actual template for file notes were not present but there were writings by Martin Cunningham and/or other members of his staff all over existing documents. Like, for example, on one of the files I noted that he put "10.30am appointment" on the bottom of a fact finder, all these little items all over the place. Together they did not add to what would tell the story about the client.
246 It also became clear that Ms Ruano expected to find, particularly after she had raised the pre‑vetting issues with Mr Cunningham by email, that there were in fact files (SOAs) that had been pre‑vetted on behalf of M3FS. This turned out not to be the case. In fact she could find no evidence of pre‑vetting of any files, including the six files she had been provided with.
247 Ms Dale Hare also gave evidence on behalf of M3FS and was cross examined on behalf of the applicants. At all material times she was the Risk and Compliance Manager for M3FS. Ms Hare, like Ms Ruano, was a straightforward witness who did not embellish her answers and whose testimony could be relied upon.
248 Ms Hare evinced appropriate understanding, from a practical point of view, of the statutory obligations an adviser, such as the applicant, labours under in providing financial services advice and also the details of the responsibilities an advisor has to M3FS. Ms Hare in particular was pressed about her understanding of s 945B of the CA in respect of the content of a SOA in circumstances where it is not the means by which the advice is provided. Ms Hare explained that while advice could be given verbally, it must be followed up by a written statement of advice, within five days, which sets out recommendations and reasons for the recommendation of a product. When pressed as to whether she and the compliance committee had considered Mr Cunningham was in serious breach of his obligations under this provision, she explained that the committee "based it on the whole review of the situation, not just on that particular aspect" (transcript 255). In this regard, Ms Hare further explained (transcript 255):
With any review of any adviser we look at the file as a whole to see whether the file provides a story and see whether the file tells and provides a summary of the recommendation that has been provided to the clients. Now, what we look at in a file is whether there are file notes, whether a fact finder has been completed and whether an SOA has been completed and whether there has been research conducted. From that information, we assess whether the advice is appropriate and whether the client has enough information to make an informed decision whether to accept that advice.
249 Ms Hare was also pressed in cross examination about the steps that an adviser should take to obtain the authority of a client to request information from an existing fund manager in order to complete an SOA correctly and Mr Cunningham's statement that, in effect, he was promised by Mr Nguyen the provision of a form that he could use to obtain authority from a client in this regard.
250 In cross examination (transcript 265), Ms Hare, while not recalling anything that Mr Nguyen may have told her about the provision to Mr Cunningham of a pro forma authority form, recalled that Mr Cunningham had raised the issue on 13 November during the audit. She said that what she told him then was that, "All you need is a letter of authority from the client. Just simply get the client to issue you with a letter of authority" (transcript 265). She further explained that all the client needed to do was write a letter saying:
I give you permission to go to … for example to obtain information on my existing policies. Signed …
251 Ms Hare had produced to her by counsel for the applicants, a form of authority that she explained M3FS had developed in the past for such use. Ms Hare (transcript 266) said that M3FS had that form for people to use if they wish. She explained that some advisers do not like using standard forms and prefer to get clients to write it themselves.
252 The real point about Ms Hare's evidence on this point was the preparation and signing of an authority is not a matter of expert knowledge. It is a simple matter that any experienced representative can do for themselves. I accept Ms Hare's evidence in this regard.
253 In the event, M3FS, through the compliance committee was concerned that in the provision of advice, Avoca and Mr Cunningham may not have been compliant with statutory requirements in respect of SOAs. Following the suspension of Mr Cunningham, M3FS conducted its own review.
254 Ms Hare confirmed that no client of Avoca or Mr Cunningham suffered any loss or was the subject of any fraud in relation to advice he had provided. She rejected, however, that the clients got "good advice". She explained (transcript 277) that:
No. They got the right document. The document wasn't completed with enough information for the client to make an informed decision on whether to act on that advice.
255 Ms Hare also confirmed that while most advisors provide verbal advice to a client, they then follow up by confirming that advice in a written advice that sets out the advantages and disadvantages of the recommendations and how those recommendations meet the client's needs.
256 Ms Hare was also pressed about the position the compliance committee took in the light of the compliance report prepared by Ms Ruano dated 5 July 2008 and was asked to assume that the file note completed by Mr Nguyen on 4 July 2008, was not a correct account of what had happened on 15 January 2008. She was asked whether the same decision to suspend would have been taken in those assumed circumstances. Ms Hare explained (transcript 291 – 292) as follows:
No, I can't give you yes/no answer, because the reason to suspend or terminate is not based on one particular facet, and that being the pre‑vetting. The reason to suspend or terminate was based on the whole situation and the whole situation was, we did not believe that the SOAs that were issued to the clients contained enough information for the clients to make an informed decision on whether to accept the advice or not, they did not disclose or discuss the advantages and disadvantages of moving from one product to another product. The file notes were not in the files, the fact finders were only partly completed, there was no true record of discussion held in relation to the risk profile situation. So the pre‑vet was just one small issue in the whole matter.
257 When challenged that the "pre‑vet" was the major issue leading to suspension, Ms Hare responded:
No, the pre‑vet was one issue in the whole matter. Because what you look for is, on 30 November 2007, I went and conducted a compliance review. On that review, I sat down with him, with Martin and said to him, 'Okay, your files do not tell the correct story. They do not have enough information in there to protect you if you get a complaint or to provide enough information of a client to accept the advice or not. You need to have supporting information in there.' So supporting information means having file notes of discussions you've had with the client, all the way through, having file notes of discussions in relation to the risk profile questionnaire, to make sure the client understands what the risks profiles about, the fact finder, what's the client's needs and objectives. They weren't in the fact finder at all, okay. In regard to the SOA, the SOA did not contain information, there were blank sections throughout the SOA, there was a 'TBA' in there, there was 'non applicable' in there, it did not discuss what the advantages and disadvantages are. That is the reasons why we suspended Martin and eventually terminated him.
258 I accept the evidence of Ms Hare, that these were the reasons why the compliance committee eventually decided to suspend and finally decided to terminate the authority of the applicants when it did. In particular I find that it was not simply because M3FS was concerned that Avoca and Mr Cunningham had failed to meet the pre‑vetting requirements initially established by the audit in November 2007 and action plan in December 2007. Rather, it was the range of failings and deficiencies identified by Ms Hare in the transcript passages just recited that led to this decision.
259 Having considered evidence relating to the six files in question and the evidence of Mr Cunningham both in examination and cross examination concerning his practices and the reasons why he completed the documentation in the way he did, and what documentation he completed and provided, I consider M3FS had proper grounds for concern, that Mr Cunningham was in breach of his material obligations under the CARA, and so M3FS were justified in suspending Mr Cunningham's authority in July and ultimately terminating the CARA.
260 It is understandable, in the circumstances, however great the impact was then and subsequently on Avoca and Mr Cunningham, that M3FS through the compliance committee should have taken the steps it did to ensure the integrity of its business, the quality of advice provided to clients and overall the extent to which it and its representatives were compliant with the financial services obligations created by the CA and its own procedures laid down for representatives.
261 The compliance committee engaged Maria Good, a compliance consultant specialising in financial services compliance, from about 8 July 2008 to provide advice in relation to aspects of the circumstances concerning Avoca and Mr Cunningham. Ms Good prior to joining M3FS was employed for a number of years as a senior analyst in the compliance directorate at ASIC. Prior to joining ASIC she had been employed by the New South Wales Corporate Affairs Commission in the investigation and corporate finance areas. Ms Good was well qualified to provide advice in relation to compliance matters. She was aware of Regulatory Guide 84, published by ASIC for the first time in 2005, which set out the expectations on the substance and form of superannuation advice provided to retail clients. It is the document that ASIC uses in its surveillances of licensees and their representatives and is widely published in the industry.
262 Ms Good was made conversant by Dale Hare with Ms Ruano's review of Mr Cunningham's files. On 9 July 2008, she indicated to Mr Barry Martin and Ms Dale Hare that the deficiencies disclosed by the Ruano review were serious because clients were not in a position to make an informed decision to switch superannuation. They were not provided with adequate information about the costs, benefits and consequences from switching from one superannuation fund to another.
263 Ms Good explained that she was acutely aware that ASIC take seriously any breach of financial services rules that would adversely impact on consumers. Based on what she was advised by M3FS she considered the deficiencies in the files of Martin Cunningham to be significant and appropriate to be reported to ASIC.
264 Ms Good expressed the opinion that the deficiencies were serious and likely to be considered as such by ASIC. Further she believed that the deficiencies fell substantially short of the conduct and activity expected of a competent advice professional. In light of the significant regulatory focus by ASIC on superannuation advice from 2005 onwards, Ms Good believed that it was not reasonable for advice provided by an authorised representative, acting with reasonable care and diligence to demonstrate a lack of a reasonable basis for the advice, fail to consider the client's circumstances, identify and compare the "to" and "from" funds or fail to consider, disclose or quantify the consequences and implications of the recommendations.
265 On this basis, Ms Good then assisted M3FS to report to ASIC what she considered to be notifiable breaches in accordance with s 912D of the CA.
266 In September 2008, Ms Good provided further advice to Mr Barry Martin concerning Mr Cunningham's suspension.
267 Mr Barry Martin gave advice that confirmed the evidence of Ms Ruano and Ms Hare, and also confirmed the involvement and advice received from Ms Good concerning Avoca and Mr Cunningham.
268 Mr Martin indicated that he supported the decision to suspend the authority of Martin Cunningham on 8 July 2008 on the basis of a recommendation from Dale Hare and advice of Maria Good that:
· the quality of the personalisation of the SOAs with regard to each individual client was very poor;
· no rationale was recorded in the SOAs as to why the pre‑existing super funds were transferred to a new set up superannuation fund;
· there was inadequate information collected and recorded in the client files about the client's needs and objectives;
· there was no or insufficient product research contained within the client file and no adequate basis for the advice was documented as required by s 945A of the CA.
269 In taking the suspension decision, Mr Martin indicated that he also had to consider what liability M3FS would incur from the actions of Mr Cunningham as its authorised representative. He also needed to consider the interests of all other authorised representatives of M3FS who needed M3FS's licence to remain in good standing so that their businesses could continue to operate. Based on the advice of Ms Good and Ms Hare, he decided to suspend the authority of Martin Cunningham as a representative of M3FS.
270 Mr Martin said that he had his first conversation, by telephone, with Mr Cunningham, following the suspension, on 9 July 2008. He confirmed to Mr Cunningham that as a result of his suspension he could not provide any advice to clients until the matter was sorted out. He also advised Mr Cunningham that he would be obliged to report him to ASIC.
271 Mr Martin indicated there would be a review of Mr Cunningham's client files to find out if any clients had been disadvantaged. M3FS needed to do this to ascertain whether there had been any financial loss to clients. Evidence of any client financial loss would indicate a significant breach of financial services laws under s 912D of the CA and would be reportable by law to ASIC.
272 Mr Martin said that he told Mr Cunningham:
Your files have indicated a whole series of problems, including recording of TBA where dollar amounts should have been, no reasonable explanation of the effects or reasons for the transfer of superannuation, no explanation as to the effect your advice could have on the expected retirement benefit of the client. Your files also have a lack of documentation.
273 Mr Martin says that Martin Cunningham told him:
Nobody has told me that it was a Millennium3 requirement that the disadvantages of financial advice be set out in a SOA.
274 Mr Martin said he replied that he would not have expected to have to tell Mr Cunningham because it was not an M3FS requirement, it is a requirement of the law, "something every qualified financial advisor would know and not have to be told".
275 Mr Martin further states, something that Mr Cunningham does not dispute, that during the conversation Mr Cunningham said to him words to the effect "then there are 200 (files) of them because they are all the same as the files you reviewed". Mr Cunningham also indicated during the phone call that he thought he should "just resign and go somewhere else". Mr Martin indicated he could do that, but he could not be released until M3FS had rectified all the problems on his files that they were ultimately responsible for, which they would attempt to do as soon as possible.
276 Mr Barry Martin says this telephone conversation was of a duration longer than the two minutes Mr Cunningham has estimated in his evidence.
277 Subsequently, Mr Martin received and considered a compliance report from Dale Hare of her audit of Martin Cunningham's client files on 14 July 2008.
278 On 15 July 2008, Mr Martin became aware that the applicants maintained a website which promoted the repatriation of UK pensions to Australia. With this knowledge Dale Hare sent an email to Mr Nguyen on 16 July 2008 instructing him to contact Mr Cunningham's office and direct Avoca to take the webpages down and to confirm in writing that it had been done. Mr Martin says that prior to 15 July 2008, M3FS was not informed about the website and unaware of its existence until 15 July 2008. He was concerned that the reference to Mawson on this website might be misleading and deceptive and needed to be removed without delay.
279 Mr Cunningham and Avoca were not accredited by M3FS to provide advice in relation to UK pensions.
280 On 4 September 2008, Mr Martin and Dale Hare spoke to Mr Cunningham by telephone. Mr Martin asked Mr Cunningham if he had given advice to clients who had UK pensions. Mr Cunningham replied: "No, I am only the facilitator". Mr Martin advised Mr Cunningham that this meant that there were about 40 files that M3FS did not need to reissue SOAs for.
281 In late July 2008, M3FS arranged for a financial planning consultant to prepare and provide revised SOAs for clients of Martin Cunningham. The compliance committee meeting of 4 August 2008 dealt with these files, as a result of which 165 client files, held by Martin Cunningham, were sent to the Brisbane offices of M3FS for the purpose of remedying previously reported deficiencies on the files. The expected outcome was the reissue of SOAs.
282 On 28 August 2008, Mr Rick Dougherty contacted Mr Martin and requested the lifting of the suspension on Martin Cunningham. Mr Martin indicated to Mr Dougherty that could not be considered until all the SOAs had been rectified, which had not happened at that point. During the call Mr Dougherty said:
You were aware of the problem with Martin Cunningham's files in December (2007), but you didn't do anything about it until June. It seems like you guys stuffed up.
Mr Martin says he replied:
Those circumstances don't change the situation, what the bloke has done with the clients files requires serious work to fix it up and we are duty‑bound to fix it up. There is no reason to lift the suspension until the client files are fixed up.
283 Mr Dougherty then emailed Mr Martin on 29 August 2008 requesting the lifting of Mr Cunningham's suspension. At that point, Mr Martin directed that M3FS engage its solicitors to reply on behalf of M3FS. A letter was sent to Mr Dougherty on 9 September 2008.
284 During September the 165 affected client files were being considered on behalf of M3FS. Mr Cunningham was requested to provide further information. By email dated 8 September 2008, Mr Cunningham responded explaining his manner of conducting business and providing advice. Mr Cunningham emphasised that he abided by the number one rule in all advice, namely, to "know your client" and gain their trust and understand that every client's circumstances are "slightly different". Mr Cunningham's email information plainly indicated that he considered that he had acted reasonably and at all times had met the best interests of his clients. Plainly he still held out hope that M3FS would lift his suspension.
285 On 10 September 2008, Mr Martin sought the advice of Ms Maria Good as to whether or not it was possible for M3FS to lift Martin Cunningham's suspension. She indicated "No".
286 By early November 2008, as a result of the review conducted by Ms Hare, amended SOAs had been sent out to clients whose files were affected by the deficiencies perceived by M3FS. A report to that effect was provided to the 3 November 2008 compliance committee meeting.
287 At the 2 December 2008 compliance committee meeting Dale Hare reported that the final report had been sent by M3FS to ASIC on 17 November. ASIC confirmed by email on 18 November 2008 that they did not propose to make any further inquiries in relation to the breach. However, they reserved their right to do so.
288 Mr Martin stated that at the December meeting of the compliance committee, he decided to terminate the authorisation of Avoca and consequently the individual authorities of Mr Cunningham and Mr Gyi. A termination letter dated 10 December 2008 was then sent to Mr Cunningham by email on 11 December 2008.
289 Mr Martin said that the grounds for termination were for a breach of items 3 and 10 of cl 12.2 of the CARA, namely:
· Item 3 – authorised representative breaches any material obligation under the deed.
· Item 10 – distribution entity (M3FS) forms the reasonable opinion that the authorised representative or any of its representatives has failed to perform or observe their material responsibilities under the terms of the deed or engaged in any conduct which is prejudicial to M3FS, unprofessional or unethical or in breach of the relevant code.
290 Mr Martin said in cross examination (transcript 391) that M3FS did nothing to resolve and terminate the suspension within two weeks of imposing it in July 2008, because of what he learned in his July telephone conversation with Mr Cunningham:
We did nothing because we had subsequently had a phone conversation with Mr Cunningham which showed to us that the problem was far bigger than we expected. In fact in that conversation when we told Mr Cunningham what we believed was wrong with the files he indicated words to the effect, 'Well, if that's the case, there's 200 the same'. So we went from a situation of having recognised that there's six that we know of to now finding out within one day of his suspension that there was 200 which put a totally different perspective on what we needed to do.
291 Mr Martin further explained (transcript 392) that he did not accede to the representations of Mr Dougherty to remove the suspension because:
By that stage we had taken possession of 165 files. We still thought that we could correct the files that we found deficient in a reasonably short period of time. But when we got those files there was so – they were so lacking in any information that it was impossible for anybody to be able to correct them without getting considerable information from the funds that accepted the transfers. Now, in this situation it was probably – it could have been worse because in most cases all of the money that was coming over from other funds was going into the one company, which was Asteron. So we were totally reliant upon getting information from Asteron before we could fix those files.
292 Mr Martin further indicated (transcript 395) that he did act on the request of Mr Dougherty to consider removing Mr Cunningham's suspensions. However, when he spoke to Maria Good she indicated, in emphatic terms, that he should not. He accepted this advice.
293 Mr Cunningham, in his responsive witness statement (Exhibit B) and in his testimony more generally endeavoured to respond to the complaints made about his advice practices by Ms Ruano, Ms Hare and Mr Martin. Concerning superannuation advice, Mr Cunningham said that for clients who are switching superannuation funds he always advised them about the difference in fees between the new fees he was recommending to them and their current and dormant funds.
294 Mr Cunningham said he had a schedule of fees he took to client meetings, which he updated regularly. He showed the schedule to the client at the initial meeting and wrote the fee comparison details in the comment box at the end of the document called "Realities of Superannuation", which was one of the documents in the folder he gave to his client at the initial meeting. He gave the Realities of Superannuation worksheet to the client and it was kept in their folder, which they retained, so that the details were with them when their completed SOA subsequently arrived.
295 Mr Cunningham says that he filled out a Financial Needs Analysis for every client he saw, and took into account all of the details when giving advice.
296 If the clients were interested in taking out risk insurance (whether it be life, TPD, trauma or income protection insurance) he filled out at the initial meeting a document called "Why do we need personal insurances?", which was contained in the client folder that he gave to the client. The worksheet explained the four different types of risk insurance. He wrote on the worksheet his advice as to what insurances the client should have. He gave that completed worksheet to the client and they kept it in their client folder and retained it when they received their completed SOA.
297 Mr Cunningham said he kept his laptop switched on at all times at client meetings so that he could immediately give a client a quote of premiums that would be applicable to the different products he recommended.
298 For clients who wanted to tidy up their superannuation into one fund, Mr Cunningham said he gave the advice mentioned earlier about the comparison of fees between the old and new fund. He also provided a comparison of fees, even though the SOA template he received from M3FS in December 2007 did not have a section to set out this comparison.
299 Mr Cunningham said he always advised his clients to the effect that the benefit of combining their superannuation in one fund is that they will save on fees which otherwise might lead to their dormant superannuation funds being reduced to nothing.
300 Mr Cunningham emphasised that a client's existing superannuation fund cannot be replaced immediately if there are insurances, such as life insurance or TPD insurance attached to it. For a client who wants to combine their superannuation into one fund but has insurances attached to their current fund, his first priority is to transfer the funds held in their dormant superannuation funds into their new fund. It can take some time to transfer funds held in a client's existing superannuation fund into a new fund, if it has insurances attached to it.
301 In cross examination, Mr Cunningham said he was aware of his obligations as an advisor under s 945B of the CA when giving advice based on information relating to a client's circumstances that is "incomplete or inaccurate".
302 He also acknowledged that prior to the November 2007 audit, he had written "TBA" on some advice that he gave. He acknowledged that this was an issue raised at the audit meeting. He said however, that he was informed by Mr Nguyen that he would be given necessary paperwork to alleviate this problem.
303 Mr Cunningham explained that, after the audit, he only continued to insert the letters "TBA" in one place on SOAs, namely, against the superannuation of the client or prospective client. He said Ms Hare had told him that on commissions, he could use an example of $1,000.00 on the SOA. In other words, where it was not clear what commission was to be earned, the sum of $1,000.00 was entered. He did this instead of writing "TBA". He accepted that he did not give a warning that this was an inaccurate sum, but did it because he was advised to do so by Dale Hare.
304 Mr Cunningham insisted that, at all material times, he was waiting for Mr Nguyen to provide him with the authority pro forma. In cross examination he was asked (transcript 92):
Counsel: Yes, my question – is it your evidence that it did not dawn on you at any time after your appointment as one of Millenium3's representative in July 2007, that the simple and obvious solution to this problem that you'd been saddled with, was to have the client write a simple letter to the insurer or insurers concerned to request authorising that insurer to provide you with the relevant information that you needed? --- Yes, correct.
It didn't dawn on you? --- No.
I see. May I take it that when you were assured in November 2007, by Mr Nguyen that he would provide you with this magic key --- ? --- Yes.
--- to solve this insoluble dilemma, you waited patiently for the key until July 2008, without chasing him up to say, 'Mr Nguyen, Mr Nguyen could I have the key please to this insoluble dilemma' or words to that effect? --- You are absolutely correct.
Okay, you sat by and allowed Mr Nguyen to keep the magic key and you didn't chase him for it, is that it? --- Absolutely correct.
305 Mr Cunningham when pressed that Ms Hare had told him at the November 2007 audit words to the effect that the recommendation in the SOA must provide the advantages and disadvantages of the advice, especially when you are recommending they replace a financial product and that the files do not provide a rational basis for the advice provided, he did not agree. He denied that that was the substance of what Ms Hare had said to him at that meeting. He said (transcript 99): "She told us we have to discuss it with the clients." Mr Cunningham accepted however (transcript 100) that when Ms Hare said that, she was commenting critically about the advice given in all of the SOAs that he had prepared up to that point. He "assumed" that was so.
306 Notwithstanding his earlier evidence, Mr Cunningham (transcript 108) acknowledged that an SOA provided to a Mr D in February 2008 was a statement that notwithstanding the November 2007 audit, contained the letters "TBA". Mr Cunningham justified his continued use of the letters "TBA" solely on the ground that Mr Nguyen, at that stage, had not provided him with a letter of authority in order to obtain information and provide an accurate account of it in the SOA.
307 At this point, Mr Cunningham was also continuing to ascribe a fee of $1,000.00 (not a rate per $1,000.00 in the "last resort" circumstances described by Ms Hare in her evidence) as a nominal sum where he did not have the information currently to provide a more accurate estimate of the fee.
308 Mr Cunningham also contended that, in relation to the advice given to Mr D, he was committed to providing him with an unlimited scope of advice on a full financial needs basis. When challenged that he did not do so, Mr Cunningham insisted that he did. He said it must have been done the week before. He accepted, however, that this was not in the SOA. His explanation (transcript 110) was:
Well, there's nothing filled in, sir, because he's a single man with no wife, lives in … Road, he has no debts, he owns no car, he's a typical 25 year old chef.
309 Ultimately Mr Cunningham conceded (transcript 110) that there were materials missing that should have been included in that SOA, as identified in Ms Hare's responsive witness statement at pages 22 – 26, and that these were materials that should have been provided in discharge of his responsibilities as one of M3FS's representatives.
310 Mr Cunningham also accepted (transcript 138) that when following his suspension he spoke with Mr Martin by telephone and Mr Martin made criticisms of the files he had created, he had said words to the effect: "Then there are 200 of those files, because they are all the same as the files you reviewed".
311 So far as a regular complaint in the course of evidence made by Mr Cunningham is concerned, that he could not do anything about the "TBA" notation difficulty in SOAs until such time as Mr Nguyen provided him with a letter of authority, I find that this innocuous observation, which was probably made by Mr Nguyen during the audit in November, has become something of a straw clutched at by a drowning man to save himself. There is little or nothing to it.
312 As observed earlier, in relation to Ms Hare's evidence on the point, the fact of the matter is that a financial adviser with Mr Cunningham's experience should have known what was required of him in order to have a client sign a simple letter of authority that he could provide to a financial organisation in order to obtain information concerning the client's current superannuation or other financial investments. The suggestion by Mr Cunningham that he was powerless to rectify this deficiency until such time as he was given a pro forma letter of authority, as senior counsel for the respondent submitted, beggars belief. If he truly believed he required the pro forma letter, one would have expected him to follow up on it long before he did in July 2008.
313 In my view, having regard to the factual findings made above, M3FS were justified in suspending Mr Cunningham in July 2008, considering Mr Cunningham to be in breach of his material obligations under the CARA, and then terminating the applicants' authorities in December 2008 for material breach of the CARA deed. The applicants have failed to discharge the onus they bear of proving that the respondent acted for reasons other than material breach and that there was no material breach.
314 While, as I have found above, the conduct of Mr Nguyen in the period January to May 2008 is in many ways inexplicable, and did nothing to cause Mr Cunningham to think he may not have been compliant with M3FS's requirements, by the time M3FS's compliance committee first in June, and then in July 2008, came to look more closely at the conduct of the financial services business of Avoca and Mr Cunningham, firm advice to the contrary was then communicated.
315 In my view, while Mr Cunningham, on his own behalf and on behalf of Avoca during the first half of 2008, may have been conducting a financial services business in much the same way as he had for years, utilising documents he was familiar with – as the evidence strongly suggests was the case – he was in fact failing to meet the strict requirements of the CA, and so of M3FS under the CARA.
316 The various deficiencies identified by Ms Ruano, Ms Hare, Ms Good and Mr Martin in the inspected six client files provided to Ms Ruano by Mr Nguyen in late May 2008, in fact represented Avoca's and Mr Cunningham's usual mode of providing financial services advice to their clients. Mr Cunningham himself confirmed that to Mr Martin when they first discussed the matter of the suspension by telephone on 9 July 2008.
317 While, following the suspension of Mr Cunningham, M3FS reviewed 165 files of which 11 required fresh SOAs to be issued – in order to make the advice compliant with the CA for those clients – the nature of the deficiencies in practice identified by the Ruano review justified M3FS holding the view that the authorities of the applicants should be suspended and then terminated for material breach of the CA.
318 An important contention put on behalf of the applicants is that the compliance committee, both at the point of suspension and subsequently at the point of termination, were significantly influenced in coming to these decisions by Avoca's and Mr Cunningham's alleged conduct on 15 January 2008, as represented in a file note of that meeting made by Mr Nguyen that he completed on or about 4 July 2008. The applicants contend that, but for the incorrect account Mr Nguyen gave of his attendance at the offices of Avoca on 15 January 2008, when he stated that Mr Cunningham, in effect, failed to produce requested files for pre‑vetting, the compliance committee and M3FS would not have suspended Mr Cunningham in July and would not ultimately have terminated their authorities in December 2008.
319 For the reasons expressed by Ms Hare in her evidence, which I have quoted earlier in these reasons, and the evidence of Mr Martin, it is plain that, while the compliance committee and M3FS believed there had been no pre‑vetting conducted as required, their substantive and real concerns were that, despite the audit review of November 2007, there had been no meaningful steps taken to remove the deficiencies identified at that time and the subject of the action plan of early December 2007, which left M3FS at risk of having in the field a representative who was not only, not strictly complying with the CA requirements concerning disclosure, but also seemingly not capable of remedying his deficient practices.
320 Accordingly, while I have found that the conduct of Mr Nguyen in the period between 15 January and 27 May 2008 is inexplicable, in that he did absolutely nothing in terms of reviewing, either for the purposes of pre‑vetting or general auditing, the files of Avoca and Mr Cunningham, that was not, in the final analysis, the reason for the suspension in July and the termination in December 2008.
321 The factual reality, as I have found it, is that while Mr Cunningham apparently believed he was compliant with the action plan requirement to submit five client files for pre‑vetting by making five files available at Avoca's offices for inspection by Mr Nguyen on 15 January 2008 – he did very little, if anything, thereafter otherwise to meet or remedy the broad range of recommendations or deficiencies identified in the November 2007 audit, as Ms Ruano discovered in late May 2008.
322 It is surprising, to say the least, that Mr Cunningham would not himself have followed up Mr Nguyen following 15 January, to get "feedback" from Mr Nguyen on the files that had been provided for pre‑vetting purposes, especially as he knew from Mr Gyi that Mr Nguyen had only made a quick inspection of the file before leaving Avoca, but that seems to have been the way he conducted his business affairs.
323 It is also surprising that Mr Cunningham would not have followed up Mr Nguyen during April, May or June following the collection from him by Mr Nguyen of six client files on 8 April 2008. Rather, he seems to have assumed there were no problems unless advised to the contrary. Again, his conduct was consistent with his usual business practices.
324 In these circumstances, I reject the applicant's claim that M3FS breached the CARA by suspending Mr Cunningham and later terminating the applicants' authorities when the applicants had not committed any material breach and did not have any reasonable grounds to suspect they had committed any material breach of the deed.
325 I also reject the applicant's related claim that M3FS engaged in misleading or deceptive conduct under s 52 of the TPA in representing that it would not suspend or terminate the authorities of the applicants for anything other than a material breach or whether there were reasonable grounds to suspect a material breach of the deed. I expressly find that at the time such representations as were made by M3FS, it had reasonable grounds for making them, and that such representations were not misleading or deceptive. Indeed, M3FS acted at all times on the basis there was a material breach of the deed.
326 For the reasons given above I do not consider that the suspensions and terminations complained of, were made by M3FS other than by reference to material breach of the CARA, in circumstances where they had reasonable grounds for considering or suspecting material breach of the deed. Consequently, the applicants claim on these grounds must fail.
Question whether representation that no areas of non‑compliance required rectification
327 The applicants, in the alternative, say that if the applicants committed (as I have found they did) a material breach of the CARA or there were reasonable grounds to suspect material breach, that M3FS represented to them on three separate occasions, being December 2007, January 2008 and May 2008 that they were complying with their material obligations and there were no areas of non‑compliance that required rectification. The applicants say those representations constituted misleading and deceptive conduct in contravention of s 52 of the TPA.
328 So far as the conduct of M3FS of December 2007 is concerned, taking into account the evidence relating to December 2007 and my findings above, there was nothing said or done by or on behalf of M3FS in December 2007 from which Mr Cunningham and Avoca could reasonably have drawn a representation by or on behalf of M3FS of the type pleaded. Rather the position was to the contrary. In December 2007, the November audit had just been completed and it was necessary for Avoca and Mr Cunningham to sign the action plan, which Mr Cunningham did on 5 December 2007. Thereafter, according to findings I have made, Mr Cunningham well understood that it was necessary for him to meet the various recommendations and requirements mentioned in the audit report, which included lodging the next five client files with Mr Nguyen for pre‑vetting. His understanding did not change through December.
329 So far as January 2008 is concerned, there was nothing done by or on behalf of M3FS expressly to support the allegation that a representation of the type pleaded was made. What can be said, and what has been canvassed in detail earlier in these reasons, is that following the quick inspection by Mr Nguyen of five files of Mr Cunningham at the offices of Avoca on 15 January 2008, Mr Cunningham did not hear anything further from Mr Nguyen or anyone else at M3FS during January.
330 While one might think it surprising that Mr Cunningham did not follow up Mr Nguyen, at least out of general interest, to learn the fruits of his quick inspection of the files, the fact is he did not. More to the point, presently, however is that Mr Nguyen did not follow up Mr Cunningham after the quick inspection of files on 15 January 2008. While Mr Nguyen claims he became aware, at some point, that Mr Cunningham was away in Ireland during part of January, and relies on this (amongst other reasons) to suggest a reason for his inaction, I consider Mr Nguyen is factually mistaken in this regard. I accept Mr Cunningham's evidence he was not in Ireland in January and had not told Mr Nguyen he would be. The simple fact is, nothing further was done by Mr Nguyen until he made arrangements on 7 April 2008 to collect, and then collected, on 8 April 2008, six client files from Mr Cunningham. As I have said above, in this regard Mr Nguyen's behaviour is inexplicable. He seems to have been racked with indecision and prone to procrastination.
331 Following Mr Gyi's report of Mr Nguyen's quick inspection of the five files at the offices of Avoca on 15 January 2008, Mr Cunningham on his own behalf and on behalf of Avoca assumed that the files were to M3FS's satisfaction. He had provided the files, on the face of it, for pre‑vetting purposes as per the action plan requirement. Having heard nothing to the contrary from Mr Nguyen in the immediate period after 15 January 2008, it seems to me it was reasonable for him to assume that the pre‑vetting requirement of the action plan had been satisfied. However, I do not consider he was entitled to assume anything more than that. Mr Cunningham knew from what Mr Gyi had reported that Mr Nguyen had not made a thorough audit of the files – it was a quick look in the course of "chit chat" with Mr Gyi. He knew he laboured under the continuing obligation not to breach the material obligations of the CARA deed and so the CA.
332 So far as May 2008 is concerned, the position is different again. Mr Nguyen, having collected the six files of Avoca and Mr Cunningham on 8 April 2008, did absolutely nothing with them, as I have found above. He eventually handed them to Ms Ruano for review when she attended the Perth PD Day on 27 May 2008. Ms Ruano had no discussion or conducted any review with Mr Cunningham concerning those six files at that time. Nothing overtly happened in May 2008 to support any express or inferred assurance on the part of M3FS that Mr Cunningham and Avoca were compliant with M3FS requirements.
333 Mr Cunningham knew – or believed – the purpose of Mr Nguyen collecting the files was for the purpose of review, to ascertain if he was meeting the requirements of the CA and his other material obligations under the CARA. I do not consider that it can be inferred, or that it was reasonable for Mr Cunningham to assume, by reason of the fact that he heard nothing further from Mr Nguyen or anyone else at M3FS about those six client files during May, that the client files in question were considered "compliant". While he might have begun to think that there probably were no difficulties, because no one had come back to him quickly to raise any issues, at the same time Mr Cunningham did nothing himself to inquire whether there may have been any issues. In my view, he was not entitled to assume anything, one way or the other, at that point and the conduct of M3FS in May did not convey any representation of the type pleaded. Indeed, the fact the files were collected for review begged the question whether there were compliance issues.
334 This position in May is also to be contrasted with that of 15 January 2008 and following when, to Mr Cunningham's reasonable understanding, Mr Nguyen quickly looked at the five client files for pre‑vetting purposes and left the files behind; and then did not actively follow up on his visit during January.
335 In all of these circumstances, I do not consider that by its conduct in December 2007, January 2008 and May 2008 – taken separately or together as a course of conduct – M3FS represented to the applicants that they were or remained compliant with their material obligations and that there were no areas of non‑compliance that required rectification.
336 Following Ms Ruano's review of the six files collected by Mr Nguyen from Mr Cunningham on 8 April 2008, the position dramatically escalated. As explained above, I find that a review of the six files and subsequent inquiries revealed to the reasonable satisfaction of M3FS, that Mr Cunningham had failed to meet his material obligations under the CARA.
337 While the manner in which Mr Cunningham was going about providing financial services should perhaps have been discovered earlier than it was by M3FS, its failure to do so is explicable by the inexplicable conduct of Mr Nguyen in the period January to May in doing nothing to review substantively Mr Cunningham's work. But even if Mr Nguyen had acted differently, and a proper review had occurred sooner, the problem simply would have been discovered sooner by M3FS. That problem was all of Mr Cunningham's own doing, stemming from his failure to give proper attention to the recommendations and requirements of the November audit report. Mr Nguyen's cursory review of five client files on 15 January 2008 did not absolve Mr Cunningham of that obligation. Indeed, nothing done by Mr Nguyen on behalf of M3FS in the period January to May 2008 altered the position of the applicants. They remained at risk at all material times, by their own conduct, of being considered by M3FS to be in breach of a material obligation under the CARA.
This is not a case where the applicants allege the respondent waived compliance with key terms of the CARA deed, or that the respondent, by the conduct of its officers, is estopped from relying on the actions or conduct of the applicants said to constitute a breach of the material obligations under the deed. Rather, it is claimed that, by its conduct as pleaded, the respondent represented the applicants were complying with their material obligations and there were no areas of non‑compliance. I do not consider such a representation is made out. At material times, there was no such continuing representation in place. At the very least, as of 20 June 2008 Mr Cunningham was expressly aware M3FS had concerns after Mr Nguyen met with him. However, he was on general notice of review of his work when Mr Nguyen collected the six files for review on 8 April 2008. Neither of these events is consistent with a representation of the type pleaded. But even more fundamentally, I do not consider that Mr Nguyen's conduct on 15 January 2008 constituted anything more than a representation that the five client files he quickly looked at that day were satisfactory and the pre‑vetting requirement of the action plan had been met.
338 Accordingly, I reject the applicant's claim that the conduct of M3FS on the three separate occasions complained of in the statement of claim constituted misleading and deceptive conduct in contravention of s 52 of the TPA, namely representations that there were no areas of non‑compliance that required rectification. Accordingly, the applicants claim on this ground must fail.
the question of Mr cunningham's training
339 The applicants say that, by entering into the CARA, M3FS represented to the applicants that it would provide training to the applicants as required by the CA and the conditions of its AFSL and that that representation constituted misleading and deceptive conduct in contravention of s 52 of the TPA because the respondent had no reasonable grounds for making the representation.
340 M3FS refute the claims made, on a number of grounds. First, that s 52 of the TPA is not applicable in light of the provisions of Ch 7 of the CA and s 51AF of the TPA. I have dealt with this matter above and have concluded that s 52 of the TPA indeed continues to apply to such a pleaded representation in the circumstances of a case like the present. Secondly, M3FS contend that it would be surprising if in a business relationship of the type that the parties were embarking upon at the time the CARA deed was executed that M3FS did not intend to honour any representations concerning training that can be drawn from the deed. Thirdly, M3FS question whether any such obligations can be drawn from the CA in the circumstances pleaded. Finally, M3FS say there is the question whether there was any breach of the training representation in any event.
341 The assumption of an obligation by an authorised representative that it would meet the requirements of M3FS in relation to training, when one has regard to a licensee's training obligations under the CA lends some first blush support to the view that the applicants would have had some expectation that they would receive advice, assistance or some form of training in that regard, and that the CARA conveyed such a representation.
342 Section 912A(1)(ca) of the CA requires the licensee "to take reasonable steps to ensure that its representatives comply with the financial services laws"; and (f) requires the licensee "to ensure that its representatives are adequately trained, and are competent, to provide those financial services".
343 The terms of the deed do not expressly provide for M3FS to provide training. However, s 2.1 of the CARA provides that a representative must meet M3FS's "training requirements".
344 Given the general objectives of Ch 7 of the CA, set out above, and the tightening of the law governing the provision of financial services, and the rigorous licensing system outlined above, the obligation in (f) of s 912A(1) to "ensure its representatives are adequately trained, and are competent", to provide such services, when combined with the obligation in (ca) to take reasonable steps to ensure they also comply with the laws, strongly suggests the holder of an AFSL should undertake a continuing training program that is calculated to produce competent representatives or maintain their level of competence.
345 Given, that the CARA obliges M3FS's representative to meet the M3FS's training requirements, it seems to me reasonable to conclude that the CARA conveyed a representation by M3FS to the applicants that M3FS would provide training to Mr Cunningham to enable him to attain or maintain a reasonable level of competence commensurate with the demands of the CA on a licensee and its representatives.
346 Accordingly, I consider the applicants' pleaded representation is made out.
347 However, as to the applicants' further plea, that it was a misleading or deceptive representation because, when made, there were no reasonable grounds for M3FS to make it, I find there is simply no evidence to support such a finding. Indeed, the evidence is all to the contrary.
348 The evidence shows M3FS from the outset were concerned to ensure the applicants (and representatives generally) were compliant with the CA, and pursued training opportunities.
349 Accordingly, I reject the applicants' claim that at the time the representation was made it was either misleading or deceptive on the basis there was no reasonable grounds for its making, as alleged. There is nothing to suggest that there was no reasonable basis for the making of the representation by M3FS at the time it was made.
350 The evidence discloses that M3FS offered, and indeed the applicants received, appropriate training from M3FS.
351 It is common ground that Avoca and Mr Cunningham were previously representatives of Mawson and had been engaged and trained in the financial services industry for some years. Mr Cunningham had relevant experience, knowledge of the legislative requirements governing their industry and, generally speaking, an appreciation of the finer points of the provision of financial services.
352 In the case of Mr Cunningham, the Kaplan Training Summary concerning him sets out training he undertook prior to becoming a representative of M3FS. It shows that Mr Cunningham undertook "video workshops" periodically between 2003 and June 2007. In the period thereafter it shows that Mr Cunningham undertook video workshops periodically between February 2008 and November 2008.
353 It shows that Mr Cunningham in July 2004 took a Kaplan course in Investment Planning 1. It also shows that following the period he commenced as a representative of M3FS, Mr Cunningham undertook workshops by way of an Induction Programme in October 2007, a workshop, Zurich - Claims and Underwriting in November 2007, Kaplan 2007 – 12 CPD - in December 2007 and ING – A Global Window Superannuation and investment outlook 2008 in February 2008. It also shows that Mr Cunningham while with M3FS undertook training in AML CTF Module 1 – The Clean Money Legislation in December 2007, and at the same time undertook Module 2 – The Know Your Customer Rule. Additionally, as noted earlier, Mr Cunningham attended a PD Day organised by M3FS on 27 May 2008. He also undertook other training in July 2007 and April 2008.
354 Ms Ruano explained that Mr Cunningham had thereby completed the appropriate training to be compliant with ASIC Regulatory Guide 146. He had, for example, completed the Tribeca Diploma of Financial Services (Financial Planning) modules. He had also successfully completed the following Tribeca Diploma of Financial Services (Financial Planning) modules:
· Superannuation and Retirement Planning and Investment Planning 1.
· AMP Core Knowledge and Essential Accreditation.
· Independent Centre of Financial Training – Step by Step Accreditation Programme.
355 Ms Ruano says Mr Cunningham had also complied with his annual training plan. As an adviser with at least ten years experience she expected he would understand his advice obligations, particularly since he had been receiving the Kaplan (formerly Tribeca) training material since he had been with Mawson and had continued to receive the material since joining M3FS. This is, in the Court's view, a reasonable observation to make.
356 Ms Ruano explained that the Kaplan material has repeatedly focussed on superannuation switching advice since 1995, the ASIC Shadow Shopping Projects in 2003 and 2006, and ASIC's 2005 surveillance campaign on Superannuation Switching Advice which led to the AMP surveillance and subsequent enforceable undertaking dated 27 July 2006. Regulatory Guide 84 "Super switching advice: Questions and answers" dated 20 June 2005 is also relevant. In October 2006, Kaplan issued a training article specifically addressing the AMPFP undertaking.
357 It follows, in my view, that Mr Cunningham had, as Ms Ruano and M3FS accepted, appropriate training through the Tribeca/Kaplan training systems.
358 So far as professional development is concerned, Mr Cunningham, as noted, attended the PD Day in Perth at the Mount Lawley Golf Club in May 2008. The sessions that day included software facilities, fraud training and technical/research matters. During the PD Day in Perth, attendees were given a demonstration of the Midwinter software computer application that generates SOA documentation. A demonstration of a case study was performed to show how a specific section of the SOA – replacement of financial product – was generated by the programme. This demonstrated the type of information needed to complete that particular section of the SOA.
359 When Avoca and Mr Cunningham first became representatives of M3FS they were given induction training by Mr Nguyen, which included a video presentation. While Mr Cunningham in his evidence tended to discount the value of that induction programme I have little doubt that it was administered. To the extent that Mr Cunningham may have considered the video presentation a form of light entertainment, as he seems to have done, it is probably an indication of the fact that he was, by then, well experienced in the financial services industry – or considered himself to be – and the content of the video presentation probably did not convey to him anything particularly new or different.
360 Mr Cunningham did not attend the Millennium3 State Conference in November 2007, as explained above, due to the ill‑health of his wife's father.
361 In my view, it cannot be said, with any reasonable justification, that M3FS fell down on meeting any representation made concerning the provision of training to Avoca and Mr Cunningham.
362 The greater concern is that Mr Cunningham, by reason of his long experience in the financial services industry, in many respects is shown by the evidence to have assumed that his prior experience, practices and way of delivering financial product advice was consistent with the practices and requirements of M3FS, and that he perhaps did not give sufficient attention or consideration to M3FS's specific requirements. To that extent it appears, from all the evidence, including the way Mr Cunningham explained and defended his own practices in providing advice to his clients, that Mr Cunningham did not see the transition of his business from Mawson to M3FS as requiring any significant changes to his practice once he became a M3FS representative and proceeded on the basis it was pretty much "business as usual". The fact that in July 2007 he personalised his old SOAs and put M3FS letterhead on them is but one indication of his approach. As is his continued use of the acronym "TBA" on SOAs, both before and after the November 2007 audit, when he had not obtained relevant information that needed to be disclosed on advice to a client.
363 It is surprising in many ways, despite the findings I have made about what happened on 15 January 2008 when Mr Nguyen attended the offices of Avoca, that Mr Cunningham did not see fit to follow up Mr Nguyen directly in the days following, when he understood he had quickly looked at the five files, to ascertain the outcome of the visit, from Mr Nguyen's point of view. This suggests he did not take the agreed action plan requirements as seriously as he should have. So too does the fact that Mr Cunningham did not himself follow up Mr Nguyen at any stage for over two months – from 8 April to 20 June 2008 - in relation to the six files collected by Mr Nguyen from his office on 8 April 2008.
364 Mr Cunningham seems to have assumed at all times that what he had done in the past was appropriate and that, notwithstanding the rather pointed observations about his usual practice made orally during the November audit and in the 29 November compliance review report, and in the agreed action plan in early December 2007, gave them relatively little close regard.
365 As a result, it is ultimately difficult to find, as alleged in the statement of claim by the applicants, that there were not reasonable grounds for the representation M3FS made about training. The facts disclose that at all material times M3FS had systems in place to provide guidance, advice and training in the various ways described earlier in these reasons, and indeed that it did so. Accordingly, the applicants' claim that M3FS's representations concerning training constituted misleading and deceptive conduct in contravention of s 52 of the TPA must fail.
conclusion and orders
366 In these circumstances, the applicants' claim that they are entitled to a declaration that M3FS was not entitled to suspend the authority of the second applicant or to terminate the authorities of the applicants as they did, pursuant to the CARA, and to damages and costs should be dismissed.
| I certify that the preceding three hundred and sixty-six (366) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker. |
Associate:
Dated: 14 August 2009
| Counsel for the Applicants: | Mr DH Solomon |
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| Solicitor for the Applicants: | Solomon Brothers |
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| Counsel for the Respondent: | Mr DE Grieve QC |
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| Counsel for the Respondent: | Mr RGH Keller |
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| Counsel for the Respondent: | Mr MB Duncan |
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| Solicitor for the Respondent: | nortonsmith & co |
| Date of Hearing: | 16 - 20 March 2009 |
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| Date of Judgment: | 14 August 2009 |
