FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd [2017] FCA 477

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to ss 1101B(5) and 1324(4) of the Corporations Act 2001 (Cth) (the Act), each of the defendants by themselves, their servants, agents or employees, until the hearing and determination of this proceeding or further order:

(a)    be restrained from making any offers of cash payments (including cash rebates) to prospective retail clients in connection with:

(i)    the provision of a Statement of Advice;

(ii)    the switching of superannuation; and/or

(iii)    the purchase of insurance products;

(b)    be restrained from entering into, or offering to enter into, any Cash Rebate Agreements, Emergency Debt Relief Agreements or other like arrangements with prospective retail clients in connection with:

(i)    the provision of a Statement of Advice;

(ii)    the switching of superannuation; and/or

(iii)    the purchase of insurance products;

(c)    suspend all promotion, advertising or offering of cash payments to retail clients on all internet websites within their power or control, in particular but not limited to the websites conducted with the domain names http://www.yesfs.com.au and http://www.oxygenfs.com.au; and

(d)    be restrained from advertising, promoting or marketing any business or service that involves the offer of cash payments to retail clients in connection with financial products and/or financial services.

2.    Pursuant to ss 1101B(5) and 1324(4) of the Act, the second defendant by itself, its servants, agents or employees be restrained, until the hearing and determination of this proceeding or further order, from carrying on a business in relation to financial products or financial services including by providing financial product advice in respect of superannuation and insurance products (by recommending changes to or purchase of those products, stating an opinion in respect of those products, or reporting either of those things).

3.    There be liberty to apply.

4.    Costs be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    By originating process filed on 10 March 2017, the plaintiff (ASIC) seeks declarations, injunctions, pecuniary penalties and other relief against the defendants. The first defendant (WRM) is the holder of an Australian Financial Services Licence (AFSL) permitting it to provide advice to retail clients about life risk insurance and superannuation products. The second defendant (JECA), which trades as “Yes FS”, is a related company. It carries on marketing activities, including through the website, yesfs.com.au (the Yes FS Website). The third defendant, Yes FP Pty Ltd (Yes FP), is also a related company. This company is a corporate authorised representative of WRM. Also, employees of Yes FP are authorised representatives of WRM for the purposes of providing advice on life insurance and superannuation products.

2    ASIC’s allegations are set out in a concise statement. ASIC alleges that, since on or about 1 December 2015 and continuing, JECA has used ‘GoogleAdwords’ to attract people to the Yes FS Website who have a poor credit history or standing and are in need of a loan or ‘fast cash’ and has represented to them (both in internet advertisements and on the Yes FS Website) that JECA is able to provide credit or loans.

3    In brief terms, ASIC alleges that the defendants do not in fact provide loans but rather provide cash payments to applicants, typically by the following mechanism:

(a)    WRM’s authorised representatives provide advice to the applicant to the effect that the applicant should transfer to a new superannuation fund and take out new or replacement life insurance, total permanent disability (TPD) insurance or income protection insurance (or more than one of these);

(b)    the applicant accepts the advice;

(c)    the new superannuation fund pays WRM a fee for providing the advice to the applicant;

(d)    the insurance company pays an upfront commission to WRM (usually of several thousand dollars), which pays it to JECA; and

(e)    JECA pays a substantial part of the commission to the applicant (again, usually several thousand dollars). This is described as a ‘cash rebate’.

4    In some cases, the defendants pay the applicant an amount, referred to as ‘emergency funding’, before the above steps have been completed. For example, an amount of about $2,000 may be paid about two weeks after the application has been submitted. In such cases, the amount of the emergency funding is later deducted from the cash rebate referred to in (e) above.

5    ASIC alleges that, on numerous occasions since December 2015, WRM’s authorised representatives have provided advice that is not in the best interests of the applicant, inappropriate and conflicted. On the basis of this allegation, and other facts and matters, it is alleged that WRM has contravened s 961L of the Corporations Act 2001 (Cth) by failing to take reasonable steps to ensure that its authorised representatives complied with ss 961B, 961G and 961J of the Act. It is also alleged that WRM has, since 1 December 2015, contravened s 912A(1) of the Corporations Act, which (among other things) requires a financial services licensee to take reasonable steps to ensure that its representatives comply with the financial services laws.

6    As regards JECA, ASIC alleges that it has contravened the following provisions:

(a)    s 911A of the Corporations Act, alternatively s 911B of that Act, by reason of having carried on a financial services business without holding an AFSL or otherwise being authorised by an AFSL holder; and

(b)    s 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), by in trade or commerce, engaging in conduct in relation to a financial service that is misleading or deceptive or likely to mislead or deceive (by making certain representations in internet advertising and on the website).

7    ASIC also alleges, as against all three defendants, that they contravened s 12CB of the ASIC Act by engaging in conduct in trade or commerce in connection with the supply or possible supply of financial services that was in all the circumstances unconscionable.

8    The issue currently before the Court is whether to grant an interlocutory injunction, until the hearing and determination of the proceeding or further order, as sought in ASIC’s interlocutory process filed 10 March 2017. ASIC seeks interlocutory injunctions pursuant to ss 1101B(5) and 1324(4) of the Corporations Act in summary as follows:

(a)    to restrain WRM, JECA and Yes FP from making any offers of cash payments (including cash rebates) to prospective retail clients in connection with the provision of a Statement of Advice (SOA), the switching of superannuation and/or the purchase of insurance products; and

(b)    to restrain JECA from carrying on an unlicensed financial services business by providing financial product advice including in respect of superannuation and insurance products.

9    For the reasons that follow, I consider that it is appropriate to grant injunctions in substance as sought by ASIC. In brief summary, the evidence at this stage indicates very serious shortcomings in the standard of financial advice being provided by WRM’s authorised representatives and of WRM’s supervision of its authorised representatives. An independent audit in June 2016 of 20 client files found that the SOA contained “fundamental problems” in every case. Although some steps have been taken by WRM to improve its processes, they do not instil confidence in me that the deficiencies have been addressed. Accordingly, I consider there to be an appreciable risk of future contraventions of ss 961L and 912A of the Corporations Act by WRM.

10    I note that the trial of this matter is set down for hearing in October this year. If the defendants are able to better address the shortcomings in their processes, it will be open to them to apply to have the interlocutory injunctions lifted or varied.

Applicable principles

11    There was, ultimately, no real dispute between the parties as to the applicable principles.

12    As noted above, the interlocutory (or interim) injunctions are sought pursuant to ss 1101B(5) and 1324(4) of the Corporations Act. Section 1101B provides, in part, as follows:

(1)    The Court may make such order, or orders, as it thinks fit if:

(a)    on the application of ASIC, it appears to the Court that a person:

(i)    has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services; or

(ii)    has contravened a condition of an Australian market licence, Australian CS facility licence, Australian derivative trade repository licence or Australian financial services licence; or

(iii)    has contravened a provision of the operating rules, or the compensation rules (if any), of a licensed market or of the operating rules of a licensed CS facility; or

(v)    has contravened a condition on an exemption from the requirement to hold an Australian market licence or an Australian CS facility licence; or

(vi)    is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention; or

…

(5)    Before considering an application to the Court under subsection (1), the Court may make an interim order of the kind applied for to apply pending the determination of the application, if in the opinion of the Court it is desirable to do so.

(6)    However, if ASIC, a market licensee or a CS facility licensee applies for an order under subsection (1), the Court must not require the applicant, or any other person, to give any undertakings as to damages as a condition of making an interim order under subsection (5).

13    Section 1324 provides, in part, as follows:

(1)    Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a)    a contravention of this Act; or

(b)    attempting to contravene this Act; or

(c)    aiding, abetting, counselling or procuring a person to contravene this Act; or

(d)    inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e)    being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f)    conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

…

(4)    Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).

…

(8)    Where ASIC applies to the Court for the grant of an injunction under this section, the Court must not require the applicant or any other person, as a condition of granting an interim injunction, to give an undertaking as to damages.

14    Both sides cited the decision of Palmer J in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 at [36] in which his Honour summarised the applicable principles as follows:

At the risk of some repetition, I summarise the principles which I draw from the presently applicable authorities:

•    the jurisdiction which the court exercises under CA s 1324 is a statutory jurisdiction, not the court’s traditional equity jurisdiction;

•    Parliament has made it increasingly clear by successive statutory enactments that the court, in exercising its statutory jurisdiction under s 1324, is not to be confined by the considerations which would be applicable if it were exercising its traditional equity jurisdiction;

•    among the considerations which the court must take into account in an application for an injunction under CA s 1324 are the wider issues referred to by Austin J in Sweeney and Parkes, and by Davies AJ in Pegasus; they may be gathered under the broad question whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act;

•    these considerations are to be taken into account regardless of whether the application is for a permanent injunction under s 1324(1) or for an interim injunction under s 1324(4);

•    where an application under s 1324(4) is made by ASIC rather than a private litigant the court is more likely to give greater weight to the broad question whether the injunction would serve a purpose within the contemplation of the Corporations Act;

•    where there is an appreciable – that is, not fanciful – risk of particular future contraventions of the Corporations Act by a defendant, it would serve a purpose within the contemplation of the Corporations Act that the court grant not only a permanent injunction but, in an appropriate case, an interim injunction restraining such conduct. Section 1324 evinces an intention that the possibly severe consequences and the relative promptness of proceedings for contempt of court be added to criminal prosecutions as a deterrent to contraventions of the Corporations Act;

•    although the questions whether there is a serious question to be tried and where the balance of convenience lies will not circumscribe the court’s consideration in an application for an interim injunction under s 1324(4), the interests of justice will always require that those questions be examined carefully when restrictions are sought to be imposed before the case has been properly examined by the court, even where the protection of the public is said to be involved: see per Young J (as his Honour then was), in Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (1986) 11 ACLR 566 at 570-1;

•    the balance of convenience will be viewed differently according to whether the applicant under s 1324(4) is ASIC or a private litigant. Where ASIC is acting to protect the public interest, the absence of an undertaking as to damages, exempted by s 1324(8), will usually be of little consequence. However, where the proceedings are brought to advance a plaintiff’s private interests, then if such an undertaking is not proffered even though it is likewise exempted by subs (8), the court may take that circumstance into account as a matter of practicality, common sense and fairness in determining where the interests of justice lie and whether “it is desirable” to grant the injunction: see per Young J in Lombard Nash at 571.

15    I consider these principles to be applicable, not only to s 1324(4), but also to an application for an injunction pursuant to s 1101B(5).

The hearing

16    At the hearing of ASIC’s interlocutory process, ASIC relied on five affidavits: three affidavits of Glenn John Childs, dated 9 March 2017, 4 April 2017 and 2 May 2017; and two affidavits of Simon James Kerr, dated 9 March 2017 and 28 April 2017. Mr Childs is a Senior Investigator in ASIC’s Enforcement Financial Services team. Mr Kerr is employed by ASIC as a Senior Analyst in ASIC’s Financial Advisers team. Neither deponent was cross-examined.

17    The defendants relied on an affidavit of Paul Longhi dated 24 April 2017. Mr Longhi is a director of WRM and Yes FP, and was authorised to make the affidavit on behalf of all three defendants. A late objection was made to four sub-paragraphs of Mr Longhi’s affidavit. I ruled that those sub-paragraphs not be admitted, but permitted the defendants to lead some further evidence from Mr Longhi orally. In this evidence, Mr Longhi identified four documents relating to the defendants’ current processes. These documents were accepted into evidence. Mr Longhi was not cross-examined.

The background facts

18    I set out below some of the background facts that appear in the affidavit evidence. It is important to emphasise that, although evidence may have been unchallenged for the purposes of the interlocutory process, that is not to say that it will not be challenged at trial. Accordingly, where I refer to matters as background facts, I am merely stating that these matters appear to be the facts on the basis of the evidence before the Court at this stage.

19    Each of the defendants is owned (directly or indirectly) by Joshua Fuoco, who was a director of each of the defendants until his disqualification on 13 May 2016. The defendants together occupy substantial premises in St Kilda Road, Melbourne, employing approximately 62 full-time staff. In addition, nine staff are employed in Sri Lanka.

20    As noted above, WRM has an AFSL. This was issued on 4 March 2013. The current authorisations for WRM allow it to:

(a)    provide financial product advice for the following classes of financial products:

…

(iii)    life products including:

(A)    investment life insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds; and

(B)    life risk insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds;

…

(vii)    superannuation; and

(b)    deal in a financial product by:

(i)    applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of the following classes of products:

…

(C)    life products including:

(1)    investment life insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds; and

(2)    life risk insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds;

…

(G)    superannuation;

to retail and wholesale clients.

As at 9 March 2017, WRM had 17 active authorised representatives, corporate authorised representatives and financial adviser representatives operating under its AFSL.

21    Since about December 2015, JECA has attracted prospective applicants for loans or cash payments (Cash Applicants) through the Yes FS Website.

22    The third defendant, Yes FP, is the entity in the group that employs WRM’s authorised representatives.

23    Until recently, Customer Services Officers were employed by JECA. However, it emerged in Mr Longhi’s oral evidence that since 2 or 3 May 2017 Customer Services Officers have been engaged pursuant to an employment contract with Yes FP. However, it was not made clear whether previously-engaged Customer Services Officers are still employed by JECA or have been employed instead by Yes FP.

24    In April 2016, ASIC commenced an investigation in relation to WRM and its officers, agents and employees into suspected contraventions of the Corporations Act and ASIC Act including ss 912A, 961B, 961G, 961L and 1041E of the Corporations Act. The scope of the investigation was expanded in July 2016 to also consider (among other things) suspected contraventions by JECA of s 911A of the Corporations Act.

25    In or about July 2016, the defendants began making changes to their processes for providing advice to Cash Applicants. The changes necessitated further investigation by ASIC during mid to late 2016.

26    ASIC conducted a number of examinations pursuant to s 19(2) of the ASIC Act. These took place, in the main, during July and August 2016, with one examination in September 2016.

27    In paragraph [61] of his first affidavit, Mr Childs provides the following summary of the typical process adopted by the defendants, based on his review of information provided by WRM in response to a notice served pursuant to s 912C of the Corporations Act in relation to the period 1 October 2015 to 31 March 2016 (s 912C period):

I have considered the content of WRM’s response to the s 912C Notice and provide the following summary:

(a)    901 Cash Applicants received services from Yes FS and/or financial advice from WRM during the s 912C period and only a small number (approximately 32) did not proceed to act upon the advice;

(b)    during the s 912C period, the average annual salary of Cash Applicants was approximately $67,000 and the average superannuation balance was approximately $51,000;

(c)    the service provided to the Cash Applicant follows essentially the same pattern namely, (1) that the Cash Applicant replaces one superannuation provider (who could be an industry or retail provide[r]) with another provider (typically a retail provider); and (2) that the Cash Applicant purchases life, TPD and [income protection] insurance policies;

(d)    the vast majority of Cash Applicants received cash payments from Yes FS as a result of accepting WRM’s advice, and those payments rebated part or all of the upfront commissions WRM received from insurance providers following WRM’s recommendations to purchase life, TPD or [income protection] insurance;

(e)    all Cash Applicants paid for their insurance premiums from their superannuation fund rather than any other source of funds;

(f)    in at least 214 (of the 901) cases, the insurance, as recommended to Cash Applicants by the WRM [authorised representatives], was either declined by the insurer or was subject to revised terms, such as the insurer only agreeing to provide a lower level of coverage (or to exclude one or more types of insurance coverage) for a reduced premium;

(g)    the revenues generated by WRM, Yes FP, Boulevard and JECA as a result of financial advice provided by WRM (and following WRM’s recommendations contained in the advice) were seemingly as follows:

(i)    to WRM/Yes FP: a fee charged to the Cash Applicant’s superannuation fund, usually in the range of $2,000 to $5,000 (and sometimes higher); and

(ii)    to WRM/Yes FP: ‘upfront’ commissions generated from insurance products obtained by Cash Applicants following a recommendation made by the WRM [authorised representative]. In many cases, the commissions paid were in excess of 100 per cent of the insurance annual premium value. Further, there were sometimes ongoing commissions of between 10 to 11.55 per cent of the insurance annual premium value;

(iii)    Payments were then made to Cash Applicants by a ‘Yes FS entity’.

(h)    on average, Cash Applicants paid approximately $3,750 to WRM from their superannuation fund as a fee, and on average WRM has received upfront commissions of approximately $5,580 from an insurance provider. The average payment made from those commissions as a ‘rebate’ to Cash Applicants is approximately $3,623;

(i)    thus the Fuoco Group was generating on average approximately $5,707 ($3,750 + $5,580 - $3,623) per Cash Applicant and WRM was to be paid on average annual ongoing commissions from the insurance provider of approximately $517 (assuming that the Cash Applicant maintains the insurance policies).

28    In Mr Longhi’s affidavit, he describes the defendants’ business as one of “making cash payments to eligible clients who are in need of money for various personal, domestic or household purposes”. His description of the mechanism for payments to be made to eligible clients at [12]-[14] of his affidavit is broadly consistent with the outline in Mr Childs’s affidavit, set out above. Mr Longhi does, however, dispute the proposition (made earlier in Mr Childs’s first affidavit) that clients are advised, regardless of their individual personal circumstances, to replace one superannuation provider with another. Mr Longhi also states that: in the period since the information supplied pursuant to the s 912C notices, the rate of clients who do not proceed in the defendants’ process is between 33% and 49%; in the three months to March 2017, the rate of clients not proceeding was between 45% and 49%; and 55% of those not proceeding were excluded because a conclusion was reached that to do so was not in their best interests. Mr Longhi further states that applicants are currently asked whether they would prefer to remain in an industry superannuation fund or whether they would be prepared to move to a retail fund; and that, in many cases, the client’s existing superannuation fund is retained.

29    The affidavit evidence includes a number of ‘website captures’ of the Yes FS Website. A website capture as at 1 February 2017 (exhibit “GJC-1” at pp 320-352) indicates that the website included statements such as:

(a)    “Eliminate Debt Fast”;

(b)    “No repayments”;

(c)    “No interest”;

(d)    “No loan”; and

(e)    “No Conventional Credit Check Required”.

Mr Childs states in his first affidavit, and I accept for present purposes, that there are no direct references in any of the website captures annexed to his affidavit to the requirement for Cash Applicants to switch or establish new superannuation providers or insurance policies.

30    JECA runs advertisements through GoogleAds to direct people using search terms such as “personal loans bad credit”, “bankruptcy loans”, “no credit check loans”, “bad loan” and “personal loan consolidation” to the Yes FS Website.

31    Mr Childs’s first affidavit contains an analysis of consumer behaviour in relation to the Yes FS Website. This analysis was obtained through use of a web analytics tool named Hitwise. The analysis indicates that, in the period September 2016 to January 2017, the website obtained between approximately 5,000 and 14,000 visits per month. The analysis shows that during the four weeks up to 28 January 2017, the top ten most popular search terms leading to the Yes FS Website were:

(a)    cigno loans;

(b)    cash loans;

(c)    personal loan with guarantor;

(d)    credit corps who buy off your loan;

(e)    no credit check dental payment plans;

(f)    fast cash loans au;

(g)    fast personal loans Australia;

(h)    money start loans;

(i)    50 000 dollar loan; and

(j)    no credit check loan.

32    Mr Longhi states that, although the website has the number of visits indicated in Mr Childs’s affidavit, this only translates to approximately 150 clients per month.

33    The initial application process is described in Mr Childs’s first affidavit at [94]-[96].

34    The initial communications between a Cash Applicant and a Customer Services Officer (referred to in the affidavit as “CSO”) are described in Mr Childs’s first affidavit at [97]-[100]. At [97], Mr Childs states:

Since December 2015, the next step has usually involved the CSO contacting the Cash Applicant by telephone and referring to their completed Application Form and explaining to them what Fuoco referred to in his s 19 examination as ‘the value proposition’ … . This will generally involve the CSO enquiring whether the Cash Applicant was aware that their superannuation could be used to pay for insurance. The CSO will also explain that it may be appropriate for the Cash Applicant to alter their superannuation and insurance arrangements (after future consultation with a WRM [authorised representative]) so as to obtain access to a rebate … . The CSO explains to the Cash Applicant that the cash rebate is generated through insurance commissions (specifically that ‘commission is rebated back to you by Yes FS’), that a fee is charged to their superannuation and that emergency funding may be available … .

35    In Mr Longhi’s affidavit, he describes the process by which a Customer Services Officer contacts a Cash Applicant in terms which are broadly consistent with the above description. In particular, Mr Longhi states:

27.    A CSO subsequently contacts the prospective client by telephone and explains the nature of the cash rebate service. During this discussion the CSO provides further information about the cash rebate service. In particular, the CSO reiterates that:

(a)    the cash rebate service is not a loan;

(b)    that cash may be able to be accessed via the financial planning process;

(c)    the financial planning process entails assessing the prospective client’s life insurance situation and may also include providing budgeting and debt reduction advice;

(d)    if changes to existing life insurance (or new life insurance) is recommended and accepted by the client, the client will receive a proportion of the commission that is provided to WRM in the form of a cash payment; and

(e)    the prospective client is advised as to the length of time [of] the process which generally takes about 6 to 8 weeks.

28.    The CSO also communicates the life insurer’s preliminary view to the prospective client. Where the preliminary view is that the prospective client:

(a)    is not eligible for cover – the CSO confirms that the cash rebate service is not available to the client and the matter proceeds no further; and

(b)    may be eligible for cover – the CSO:

(i)    advises the cash rebate service may be available to the client if a financial planner recommends changes to (or the purchase of new) life insurance; and

(ii)    indicates the amount of the cash rebate that the client may be eligible to receive.

36    It appears that a Cash Applicant who indicates that he or she wishes to proceed is sent certain documents including a Cash Rebate Agreement and, in some cases, an Emergency Debt Relief Agreement. Mr Childs’s first affidavit refers to sample emails sent by Customer Services Officers to Cash Applicants. An example of an email sent in the period post-July 2016 is set out in Mr Childs’s first affidavit at [104] as follows:

As discussed we do not offer our Cash Applicants loans – Yes FS offers a referral to a Financial Planning service with an associated company Yes FP that can provide a cash rebate back to you. Here is how it can work:

We refer you to one of our Advisers from the Financial Planning division – YesFP who will obtain your financial needs and objectives as well as your current financial affairs so that they can provide you the most appropriate advice on superannuation and insurances. You will be provided with a rebate from insurance commissions of approximately $----*. Please note this figure is an estimate and may change should your financial planner make alternate recommendations once your case is analysed. The rebate process can take some time (generally 6-8 weeks) so Yes FS offer Cash Applicants an emergency cash advance of $---- against the quoted rebate should they require it (a $100.00 fee applies). This payment can normally be made available in 7-10 business days from receiving the below documents back from you (subject to insurance pre-approval).

Your superannuation will be charged a once off fee by the Financial Planning division of an approximate amount of $---- including GST depending of [sic] the complexity of your file. We would also retain commissions of around $XXXX.00.

We have referred your file to Nicole Niu who will work with you to ensure that any advice is suitable for your needs…

The following documents are sent to you via Adobe Document Cloud and can be completed and signed ONLINE:

4. Our Cash Rebate Agreement (CRA)…

5. The Emergency Debt Relief Agreement…

These need to be completed and returned within 48 business hours for us to make a time for you to talk with Nicole Niu who will take you through the next steps which will include the preparation of a Statement of Advice which will outline all of the costs and benefits of the rebate process for you…

37    Once the Cash Rebate Agreement and any Emergency Debt Relief Agreement have been completed and other supporting documents have been provided by the Cash Applicant to JECA, the Cash Applicant is contacted by a WRM authorised representative. There were changes made to the process in about July 2016. The process is described in Mr Childs’s first affidavit. It involves the use of ‘para planners’ to prepare a Limited Statement of Advice (LSOA), which is then reviewed by a financial adviser. Mr Childs describes the process in the post-July 2016 period in his first affidavit as follows:

119.    In the post-July Period, based on the s 19 examinations of WRM [authorised representative] Longhi and Bowring, the common steps in this stage involved:

(a)    having a telephone conversation with the Cash Applicant in order to complete the Cash Applicant Data Collection Form …;

(b)    the Cash Applicant completing via an external online risk assessment tool, FinaMetrica, questions about their investment preferences and risk appetite to determine their risk profile …;

(c)    the WRM [authorised representative] completing a paraplanning request so the external paraplanners can prepare a LSOA …;

(d)    the preparation of the LSOA by a paraplanner using AdviserLogic and Xplan software …;

(e)    the LSOA being returned to the WRM [authorised representative] for review and then sent to the Cash Applicant … .

120.    By way of example, GJC-4 pp 259 to 296 and 297 to 352, are two examples of the LSOAs prepared by [authorised representatives] Niu and Garzon under the ‘new’ advice model (including the cover letter). The LSOAs attach an Authority to Proceed document (ATP) which the Cash Applicant is asked to sign and return if they wish to implement the advice that has been given.

121.    The LSOAs reviewed by ASIC in the post-July [2016] Period typically follow the same format namely:

(a)    recommend that the Cash Applicant replaces one superannuation provider with another superannuation provider;

(b)    recommend that the Cash Applicant purchases or replaces existing life, TPD and/or [income protection] policies (usually all three);

(c)    include little or no analysis or discussion of their objective related to seeking ‘fast cash’ or a loan;

(d)    give limited consideration to the cash rebate, including the amount of the rebate, how the client should use the cash rebate to manage their debt (although on occasions do contain references to using the cash rebate of unspecified amount to pay off an unspecified debt);

(e)    omit:

(i)    the fact that how much the client might ultimately receive by way of the cash rebate will be affected by the ultimate outcome of their insurance applications;

(ii)    advice on debt management (apart from on occasions stating the cash rebate should be used to pay off debt); and

(iii)    the identification of any conflicts of interests.

38    WRM’s authorised representatives are typically paid a base salary of about $50,000 to $60,000 per annum and are entitled to a bonus depending on how many Cash Applicants per month are serviced (meaning that the insurance process is complete and the advice fee and upfront insurance commission are paid).

39    On 28 November 2016, WRM produced to ASIC an unexecuted performance bonus scheme agreement between Yes FP and an authorised representative dated 1 December 2016. This suggests that payment arrangements were altered in late 2016. In summary, the document allows for the payment of a bonus (in addition to the base wage) by way of a percentage of the adviser fee if the authorised representative has 48 Cash Applicants successfully complete the authority to proceed during a quarter. The payment is subject to the authorised representative receiving “an A grade compliance rating (internal)” during the quarter.

40    It appears that, if the Cash Applicant accepts the advice (which appears to occur in the majority of cases), the Cash Applicant signs the Authority to Proceed form in the LSOA and returns it to WRM. It seems implicit, if not explicit, in this structure, that unless the Cash Applicant accepts the advice to change superannuation funds and take out new or substitute insurance, the cash payment will not be forthcoming.

41    Subsequently, in the typical case, the Cash Applicant has their superannuation switched to the WRM recommended provider, purchases multiple insurance policies (typically, life, TPD and income protection) and receives a cash payment from JECA.

42    It would seem to be an inevitable consequence of the pattern of advice described above that in every case the effect of acceptance of the advice will be to reduce the amount in the Cash Applicant’s superannuation fund. This is borne out by Mr Kerr’s analysis carried out over the period July to December 2016. Based on a review of 34 client files selected randomly the position was that:

(a)    the clients had their superannuation balance reduced by between $2,750 and $15,663 upon implementation of the advice (an average reduction of $8,085.50);

(b)    32 clients had their superannuation balance reduced by more than 10% upon implementation of the advice;

(c)    14 clients had their superannuation balance reduced by between 20% and 59.11% upon implementation of the advice; and

(d)    seven clients had their superannuation balance reduced by between 40% and 59.11% upon implementation of the advice.

43    In June 2016, WRM engaged Know Compliance to conduct a general review of WRM’s compliance system and documentation in order to: identify any system defects and form a view on the company’s state of compliance; make recommendations to ensure compliance with the conditions of WRM’s AFSL; and conduct 50 file reviews. In the event, only 23 files were reviewed before the budget for the audit was exhausted. It is to be inferred for present purposes that, due to the number of problems encountered, it took much longer than anticipated to review each file. Know Compliance’s interim progress report dated 29 June 2016 (which was based on a review of 20 client files) is summarised in Mr Childs’s first affidavit as follows:

In the Interim Progress Report, Know Compliance identified in substance the following interim issues based upon their file reviews:

(a)    Cash Applicant questionnaires were largely scant in nature with numerous files showing deficiencies such as the Cash Applicant’s existing insurance policies not being included, no information on the areas of advice to be scoped out, the reasons and the risk of doing so.

(b)    File notes were severely lacking.

(c)    All LSOAs contained ‘fundamental problems’, including:

(i)    templated wording used for scoping in or out areas of advice;

(ii)    Cash Applicants moved to more expensive superannuation despite not requesting additional features;

(iii)    Cash Applicants being advised to apply for levels of life, TPD and [income protection] cover that were arguably not in their best interests given their limited super balances relative to the insurance premiums that would be deducted from their super;

(iv)    some instances of Cash Applicants in financial difficulty who were not receiving any advice regarding cash flow problems;

(v)    deficient replacement of product analyses;

(vi)    absence of structured ‘better position’ statement;

(vii)    lack of disclosure of cash rebate Cash Applicant would receive; and

(viii)    too much reliance placed overall on the use of template wording.

(d)    Many super application forms sighted did not match the LSOA recommendations.

(e)    Adviser fees charged were in conflict with what was stated in the Cash Applicant questionnaire or LSOA.

44    Know Compliance provided its final reports in early July 2016. These comprised a Report on Compliance Arrangements; a document entitled “Breach Report Recommendations”; and File Review Feedback Forms. It appears likely these final reports, or at least drafts of them, were issued on or before 6 July 2016.

45    On 6 July 2016, WRM implemented a two-day suspension from providing advice to Cash Applicants. During the suspension, training sessions were held for the authorised representatives and certain new documents were prepared. The training was not formal but was discussion based. Know Compliance was not in attendance.

46    On 15 August 2016, following correspondence from ASIC, WRM submitted breach reports to ASIC.

47    On 28 November 2016, ASIC served a further notice requesting the production of documents. On the same day, WRM produced a number of procedure or policy documents in use at that time. It appears that the Compliance Manual and the conflicts of interest document provided by WRM had not been updated to take on recommendations made by Know Compliance and otherwise contained deficiencies as detailed in Mr Childs’s first affidavit.

48    After reviewing changes made by the defendants to personnel, documents and software, and training and other compliance processes, Mr Childs comments in his first affidavit at [163]:

Notably, however, in the post-July [2016] period:

(a)    the LSOAs continue to recommend that the Cash Applicant replaces one superannuation provider with another superannuation provider and purchases or replaces existing life, TPD and/or [income protection] policies (usually all three);

(b)    the LSOAs continue to contain the omissions referred to at paragraph 121 above;

(c)    WRM’s internal compliance documents, such as the Compliance Manual and conflicts policy remain largely unchanged as discussed in paragraph 139 to 141 above; and

(d)    the employment/contractor agreements remain largely unchanged, although the criteria for payment of bonuses may have altered (as discussed in paragraph 52 to 58 above[)].

49    In Mr Kerr’s second affidavit, he expresses an opinion in relation to the 34 client files he reviewed. He states that, in his opinion, each of the 34 clients received advice that was not in their best interests and advice that was inappropriate for them. Of course, the opinion of Mr Kerr is not an independent opinion, as he is employed by ASIC. Nevertheless, it does represent a significant adverse opinion (supported by detailed material) which I consider it permissible and appropriate to take into account for present purposes. I note that Mr Kerr’s evidence was not challenged by cross-examination or by contrary evidentiary material.

50    In Mr Longhi’s affidavit he deals, at [46]-[53], with the topic “Changes made by the defendants”. He refers, at [47], to changes that have been made in relation to the Yes FS Website since August 2016. He also states (among other things) that: a financial planner employed by Yes FS has obtained accreditation to provide advice to clients concerning budgeting and debt reduction for additional fees; the defendants now offer clients assistance with personal budgeting and debt reduction as part of the financial planning services; the Compliance Team has been increased to five staff; and no fee is charged for emergency funding. The defendants also relied on four recent documents:

(a)    a standard form employment contract with Yes FP;

(b)    WRM’s Compliance Manual as at 10 April 2017;

(c)    a form of Cash Rebate Agreement between JECA (trading as Yes FS) and a Cash Applicant; and

(d)    a (more recent) form of Cash Rebate Agreement between Yes FP and a Cash Applicant.

51    Mr Longhi also describes, at [54] of his affidavit, other compliance steps taken by the defendants. Many of these took place before July 2016, when the Know Compliance reports were received. The steps since July 2016 are described in [54] of the affidavit as follows:

…

(f)    in September 2016, outsourced para planning function to third party provider with more experienced para planners;

(g)    in November 2016, hired additional financial planners with greater experience;

(h)    in December 2016, established the Compliance Team to oversee compliance matters; and

(i)    in February 2017, introduced new grading system to review Statement of Advice by Compliance Team.

52    The lease of the St Kilda Road premises occupied by the defendants commenced on 3 August 2015 and has a further 15 months to run. The defendants have expended substantial moneys on the fit-out, electronic wiring and communication and interior decoration. The current annual rent is approximately $136,000.

Consideration

53    I will deal first with the part of ASIC’s application that seeks an interlocutory injunction, in summary, to restrain the defendants from making any offers of cash payments (including cash rebates) to prospective retail clients in connection with the provision of an SOA, the switching of superannuation and/or the purchase of insurance products.

54    In its originating process, ASIC seeks (by way of final injunctive relief) an order pursuant to s 1101B(1) or 1324(1) of the Corporations Act that the defendants be restrained, whether by themselves, their servants, agents and employees or otherwise, from:

(a)    carrying on a business related to, concerning, or directed to financial products or financial services within the meaning of s 761A of the Corporations Act;

(b)    providing any of the following services:

(i)    providing financial product advice within the meaning of s 761A;

(ii)    dealing in financial products within the meaning of s 761A;

(c)    in any way holding themselves out as doing the things in (a) and (b) above.

55    It is apparent that the interlocutory injunction sought by ASIC as summarised above is expressed in terms that are different from the final relief sought. I do not think this is necessarily an obstacle to the grant of an interlocutory injunction. For example, I consider that it is open to the Court to grant an interlocutory injunction where the terms are different from the final relief sought, but where the interlocutory injunction is in aid of the final relief.

56    In the present case, the affidavit material raises substantial concerns about the quality of the advice provided by WRM’s authorised representatives, which in turn raises serious concerns as to whether WRM is adequately supervising its representatives. The Know Compliance reports of June and July 2016 contain serious adverse conclusions as to the quality of the advice being given and the processes adopted. However, on the basis of the affidavit material presently before the Court, it is not clear that sufficient steps have been taken to address these matters. The changes described in Mr Longhi’s affidavit are expressed in brief and high level terms with little or no underlying detail. Very little documentation has been provided to make good the proposition that the defendants have sufficiently reformed their operations. The changes that are described may or may not have achieved results, but it is very hard to tell on the basis of the current material. Certainly, Mr Kerr’s analysis, undertaken during the period July to December 2016, suggests that the changes that have been made have not made much of a difference. Given the strength of the adverse conclusions reached by Know Compliance, and the seriousness of the matter, one might have expected the defendants to have commissioned a new, thorough, independent audit of their operations within months of the Know Compliance reports, and then again periodically, to ensure that the steps that had been taken were sufficient to reform their operations. But the material does not suggest that any such process has been adopted.

57    Moreover, the documents produced by the defendants at the hearing do not instil confidence. The WRM Compliance Manual is stated to be “as at 10 April 2017” but it is plain from a number of pages that the manual has not been properly updated and still does not address some matters raised by Know Compliance. For example, pages 42-43 of the Compliance Manual refer to provisions that were superseded some years ago. It is somewhat surprising, to say the least, given the history of ASIC’s investigation, that the defendants have not taken all possible steps to put their ‘house in order’. This does not instil confidence that the defendants appreciate the seriousness of the matters that have been raised by ASIC and have taken sufficient steps to address them.

58    In light of these matters, I consider there to be an appreciable risk that, if an interlocutory injunction is not granted, WRM will contravene ss 961L and 912A of the Corporations Act.

59    The defendants submit that there is a non sequitur between the interlocutory injunction sought by ASIC and the alleged contraventions. The defendants submit that there may be appropriate financial advice together with a cash rebate, and there may be inappropriate financial advice and no cash rebate. There is no necessary connection, they submit, between the provision of a cash rebate and inappropriate advice. Accordingly, they submit that there is no proper basis to grant the interlocutory injunction sought by ASIC. I do not accept this submission, for the following reasons. First, although ASIC has only sought an interlocutory injunction in cases where the provision of advice is coupled with the offer of a cash payment, it would have been open to ASIC to have sought a broader interlocutory injunction relating to the provision of advice more generally. The necessary nexus between the injunction and the alleged contravention may be provided by the broader form of injunction that ASIC could have sought. Secondly, I think there is, at least for present purposes, a logical connection between the injunction sought by ASIC and the alleged contraventions. The model adopted by the defendants as described above typically involves WRM paying to the Cash Applicant a substantial part of the upfront commission it (WRM) receives from the insurance company. It may be inferred, at least for present purposes, that the reason the insurance company is prepared to pay a large upfront commission (often several thousand dollars) is to cover the costs of WRM providing proper advice to clients. But if WRM typically parts with a substantial part of the upfront commission, it raises doubts as to whether it has sufficient resources to adopt proper processes and adequately supervise its authorised representatives. It is noteworthy that, notwithstanding the adverse Know Compliance reports, no steps appear to have been taken to address this aspect of the model adopted by the defendants. In these circumstances, I think there is an adequate nexus between the interlocutory injunction sought by ASIC and the contraventions alleged against WRM.

60    Another point raised by the defendants concerns alleged delay in conducting the investigation and commencing the proceeding. It is difficult to form a view about this. There was a substantial amount of material to be considered. In any event, if there has been some delay, I do not think the period of delay is great, and it has provided more time for the defendants to address the serious deficiencies in their processes observed by Know Compliance, and to carry out an audit or audits of their processes to ensure that the problems have been resolved.

61    Another factor to be considered is the impact that an interlocutory injunction would have on the defendants’ business. The evidence indicates that in most cases: the Cash Applicant is attracted to the defendants’ offering by the prospect of obtaining a loan or cash payment; the financial advice is to the effect that the Cash Applicant should change superannuation funds and take out new or substitute insurance; the Cash Applicant receives a cash rebate representing the substantial part of the upfront commission; and the Cash Applicant’s superannuation balance is reduced by the advice fee paid to WRM and the insurance premium. It follows that the interlocutory injunction sought, expressed in terms of not offering a cash payment, would effectively prevent the defendants from carrying on business in accordance with their current model. It is true that the interlocutory injunction would not preclude the giving of financial advice in relation to superannuation and insurance products without the making of a cash offer. But that is not the way the defendants’ business currently operates and would require some restructuring on the part of the defendants. Thus, I take into account that the interlocutory injunction sought may well stop the defendants carrying on a very substantial part of their business, which may well have serious financial implications for the defendants and impact upon their employees.

62    Another relevant factor is the absence of an undertaking as to damages. However, in circumstances where the legislature has expressly stated that an undertaking as to damages is not required, the absence of such an undertaking, while relevant, is to be accorded relatively little weight.

63    Finally, it is important to have regard to one of the purposes of the statutory power to grant an interim injunction, namely the protection of the public. In light of the matters discussed above, if there were to be contraventions of the relevant provisions of the legislation, this is likely to cause serious harm to members of the public who entrust their financial affairs to WRM.

64    Taking the above into account, I consider it appropriate to grant an interlocutory injunction, until the hearing and determination of the proceeding or further order, restraining WRM (whether by itself, its servants, agents or employees) from making any offers of cash payments (including cash rebates) to prospective retail clients in connection with the provision of an SOA, the switching of superannuation and/or the purchase of insurance products. As JECA and Yes FP act as agent for WRM in relation to these matters, and they are parties to the proceeding, it is appropriate for the interlocutory injunction to apply to them as well.

65    I turn then to the part of ASIC’s application that seeks an interlocutory injunction, in summary, to restrain JECA from carrying on an unlicensed financial services business including by providing financial product advice in respect of superannuation and insurance products.

66    In seeking this interlocutory injunction, ASIC relies on the statements made by Customer Services Officers to Cash Applicants before they are passed on to a financial planner. ASIC’s case in this respect proceeded on the basis that the Customer Services Officers were employed by JECA. (JECA does not hold an AFSL and it is not a corporate authorised representative of WRM.) It seems that the arrangements regarding Customer Services Officers have recently changed. As noted above, Mr Longhi indicated in his oral evidence that since 2 or 3 May 2017 Customer Services Officers have been engaged pursuant to an employment contract with Yes FP. However, it was not made clear whether previously-engaged Customer Services Officers are still employed by JECA or have been employed instead by Yes FP. I will proceed on the assumption that some Customer Services Officers are still employed by JECA.

67    The evidence described earlier, in particular [27] and [28] of Mr Longhi’s affidavit and the sample email sent by Customer Services Officers to Cash Applicants set out in [104] of Mr Childs’s first affidavit, suggest that there is an appreciable risk that Customer Services Officers will provide financial advice to Cash Applicants. At least on one view, the communications described in those parts of the evidence involve an implicit preliminary recommendation that it would be appropriate for the Cash Applicant to switch superannuation funds or take out new or substitute insurance. It may be inferred that communications in the future will be along the same lines as described in that evidence. In these circumstances, there is, at least on the present evidence, an appreciable risk that JECA will contravene ss 911A and 911B of the Corporations Act unless an interlocutory injunction is granted. (I note that, in Gore v Australian Securities and Investments Commission (2017) 341 ALR 189, the Full Court of this Court considered that provisions of the Criminal Code (Cth) (enacted as part of the Criminal Code Act 1995 (Cth)) have application to pecuniary penalty provisions which are capable of giving rise to a criminal offence.)

68    The other relevant factors can be dealt with relative briefly. In so far as this part of the injunction is concerned, it does not appear that the making of such an injunction will significantly impact on the defendants’ business. It may be inferred that the defendants could, at least for the time being, make appropriate changes to their processes or structure to ensure that Customer Services Officers are not, even implicitly, giving financial planning advice. Again, an important consideration is the protection of the public. This strongly favours the grant of an interlocutory injunction as sought by ASIC.

69    Taking the above into account, in my view, it is appropriate to grant an interlocutory injunction, until the hearing and determination of the proceeding or further order, restraining JECA from carrying on an unlicensed financial services business including by providing financial product advice in respect of superannuation and insurance products.

70    I will hear from the parties on the precise form of the orders.

Associate:

Dated:    11 May 2017