FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd (No 3) [2021] FCA 170

ORDERS

THE COURT ORDERS THAT:

1.    The first defendant pay a pecuniary penalty to the Commonwealth of $1,200,000 in respect of its contraventions of s 12DB(1)(i) of the Australian Securities and Investments Commission Act 2001 (Cth) set out in the declaration made on 20 December 2019.

2.    The second defendant pay a pecuniary penalty to the Commonwealth of $240,000 in respect of his knowing concern in the first defendant’s contraventions of s 12DB(1)(i) of the Australian Securities and Investments Commission Act 2001 (Cth) set out in the declaration made on 20 December 2019.

3.    The defendants pay the plaintiff’s costs of the proceeding.

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

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    On 22 November 2019, I upheld the claims made by the Australian Securities and Investments Commission (ASIC) that, in the period from around 25 September 2015 to around 30 March 2018 (relevant period), Dover Financial Advisors Pty Ltd (Dover) contravened s 1041H(1) of the Corporations Act 2001 (Cth) (Corporations Act) and ss 12DA(1) and 12DB(1)(i) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) on each occasion that its authorised representatives provided clients with a document entitled “Client Protection Policy” in conjunction with, or incorporated into, a statement of advice: Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932; 140 ACSR 561 (Liability Judgment). I also upheld ASIC’s claim that Dover’s sole director, Mr Terrence McMaster, was knowingly concerned in Dover’s contravention of s 12DB(1)(i) of the ASIC Act.

2    On 20 December 2019, I made declarations in respect of the contraventions: Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd (No 2) [2019] FCA 2151; 140 ACSR 635 (Declaratory Relief Judgment). Orders were also made for the parties to prepare for a hearing on the imposition of pecuniary penalties on Dover and Mr McMaster under s 12GBA(1)(a) of the ASIC Act (as in force during the relevant period) in respect of Dover’s contraventions of s 12DB(1)(i) of the ASIC Act and Mr McMaster’s knowing involvement in Dover’s contraventions, as sought by ASIC. The hearing took place on 1 and 2 June 2020.

3    For the reasons that follow, I order penalties of $1.2 million against Dover and $240,000 against Mr McMaster.

Relevant statutory and legal principles

4    ASIC seeks pecuniary penalties against Dover and Mr McMaster under s 12GBA of the ASIC Act as in force during the relevant period (the section was subsequently amended). Relevantly, that section provided as follows:

12GBA Pecuniary penalties

(1)     If the Court is satisfied that a person:

(a)     has contravened a provision of Subdivision C, D or GC (other than section 12DA); or

(b)     has attempted to contravene such a provision; or

(c)     has aided, abetted, counselled or procured a person to contravene such a provision; or

(d)     has induced, or attempted to induce, a person, whether by threats or promises or otherwise, to contravene such a provision; or

(e)     has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or

(f)     has conspired with others to contravene such a provision;

the Court may order the person to pay to the Commonwealth such pecuniary penalty, in respect of each act or omission by the person to which this section applies, as the Court determines to be appropriate.

(2)     In determining the appropriate pecuniary penalty, the Court must have regard to all relevant matters including:

(a)    the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and

(b)     the circumstances in which the act or omission took place; and

(c)     whether the person has previously been found by the Court in proceedings under this Subdivision to have engaged in any similar conduct.

5    Subsection 12GBA(3) stipulated the maximum penalty to be imposed “for each act or omission to which the section applies”. In relation to contraventions of s 12DB, s 12GBA(3) stipulated that the maximum penalty for a body corporate was 10,000 penalty units and for an individual was 2,000 penalty units. The Commonwealth penalty unit was $180 during the period between 25 September 2015 and 30 June 2017 and was $210.26 during the period between 1 July 2017 and 30 March 2018. ASIC submitted that, in the interests of simplifying and moderating its proposed approach to penalties, it was content to rely on the penalty units which applied up to 30 June 2017 in respect of all of Dover’s contraventions and Mr McMaster’s knowing involvement in those contraventions. On that basis, ASIC’s submissions proceeded on the basis that each act of contravention by Dover of s 12DB(1)(i) attracted a maximum penalty of $1.8 million and each act by Mr McMaster of being knowingly concerned Dover’s contravention of s 12DB(1)(i) attracted a maximum penalty of $360,000.

6    The terms of s 12GBA of the ASIC Act are similar in form to civil penalty provisions in the Competition and Consumer Act 2010 (Cth) (s 76) and the Australian Consumer Law (being Schedule 2 to the Competition and Consumer Act 2010 (Cth)) (s 224). The provisions have been construed in a similar manner and the applicable principles are well known. The following is a summary of those principles.

7    First, the Court may impose a penalty in respect of each act or omission that constitutes a contravention, subject to the maximum penalty which is stated to apply to each act or omission.

8    Second, the penalty to be imposed is a penalty that the Court considers appropriate.

9    Third, s 12GBA(2) of the ASIC Act, as in force during the relevant period, requires the Court, in determining the appropriate penalty, to take into account four specific matters and all other relevant matters. The four specific matters are: (i) the nature and extent of the act or omission; (ii) any loss or damage suffered as a result of the act or omission; (iii) the circumstances in which the act or omission took place; and (iv) whether the person has previously been found by a court, in proceedings under Subdivision G, Division 2, Part 2 of the ASIC Act, to have engaged in any similar conduct.

10    In Trade Practices Commission v CSR Limited [1990] FCA 762; (1991) ATPR 41-076, in the context of a contravention of provisions of Part IV of the Trade Practices Act 1974 (Cth) (since renamed the Competition and Consumer Act 2010 (Cth)), French J listed a number of matters potentially relevant to the assessment of penalty under s 76. Those factors have become known as the ‘French factors’ and have been referred to on many occasions in the assessment of civil penalties including under the ASIC Act: see Australian Securities and Investments Commission v GE Capital Finance Australia, in the matter of GE Capital Finance Australia [2014] FCA 701 at [70]; Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; 42 ACSR 80 at [125]-[126]. The factors are:

(a)    the size of the contravening company;

(b)    the deliberateness of the contravention and the period over which it extended;

(c)    whether the contravention arose out of the conduct of senior management or at a lower level;

(d)    whether the company has a corporate culture conducive to compliance with the Act as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention;

(e)    whether the company has shown a disposition to cooperate with the authorities responsible for the enforcement of the Act in relation to the contravention;

(f)    whether the contravener has engaged in similar conduct in the past; and

(g)    the financial position of the contravener.

11    The French factors are neither exhaustive of potentially relevant matters to be considered nor “a rigid catalogue or checklist of matters to be applied in each case”: Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68 (ABCC v CFMEU) at [101].

12    Fourth, in considering the sufficiency of a proposed civil penalty, regard must ordinarily be had to the maximum penalty for the reasons stated (in a criminal sentencing context) in Markarian v The Queen (2005) 228 CLR 357 at [31]: first, because the legislature has legislated for them; secondly, because they invite comparison between the worst possible case and the case before the court at the time; and thirdly, because in that regard they do provide, taken and balanced with all other relevant factors, a yardstick. However, as stated by the Full Federal Court in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25 (Reckitt Benckiser) at [156], care must be taken to ensure that the maximum penalty is not applied mechanically, instead of it being treated as one of a number of relevant factors, albeit an important one. In that case, the Full Court observed (at [157]) that the theoretical maximum penalty on the facts of that case was in the trillions of dollars (some 5.9 million contraventions at $1.1 million per contravention) and that it followed that the appropriate range for penalty in the circumstances of that case was best assessed by reference to other factors, as there was no meaningful overall maximum penalty given the very large number of contraventions over a long period of time.

13    In determining the appropriate penalty for a multiplicity of civil penalty contraventions, the Court may have regard to two common law principles that originate in criminal sentencing: the “course of conduct” principle and the “totality” principle: Australian Competition and Consumer Commission v Yazaki Corporation (2018) 262 FCR 243 (Yazaki Corporation) at [226]. Under the “course of conduct” principle, the Court considers whether the contravening acts or omissions arise out of the same course of conduct or the one transaction, to determine whether it is appropriate that a “concurrent” or single penalty should be imposed for the contraventions: Yazaki Corporation at [234]. The principle guards against the risk that the respondent is punished twice in respect of multiple contravening acts or omissions that should be evaluated, for the purposes of assessing an appropriate penalty, as a lesser number of acts of wrongdoing: Construction, Forestry, Mining and Energy Union v Cahill [2010] FCAFC 39; 269 ALR 1 at [39], per Middleton and Gordon JJ. However, as noted by the Full Court in Yazaki Corporation (at [227]), it is not appropriate or permissible to treat multiple contravening acts or omissions as just one contravention for the purposes of determining the maximum limit dictated by the relevant legislation. Accordingly, the maximum penalty for the course of conduct is not restricted to the prescribed statutory maximum penalty for each contravening act or omission: Reckitt Benckiser at [141]; Yazaki Corporation at [229]-[235]. The “totality” principle operates as a “final check” to ensure that the penalties to be imposed on a wrongdoer, considered as a whole, are just and appropriate and that the total penalty for related offences does not exceed what is proper for the entire contravening conduct in question: Trade Practices Commission v TNT Australia Pty Ltd (1995) ATPR 41-375 at 40,169; Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36 at 53; Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 at [132].

14    Fifth, the principal object of imposing a pecuniary penalty is deterrence; both the need to deter repetition of the contravening conduct by the contravener (specific deterrence) and to deter others who might be tempted to engage in similar contraventions (general deterrence): Singtel Optus Pty Ltd v ACCC [2012] FCAFC 20; 287 ALR 249 (Singtel Optus) at [62]-[63]; Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640 (TPG Internet) at [65] per French CJ, Crennan, Bell and Keane JJ; Commonwealth v Director, FWBII (2015) 258 CLR 482 (FWBII) at [55] per French CJ, Kiefel, Bell, Nettle and Gordon JJ and [110] per Keane J. In FWBII, the plurality (at [55]) confirmed that notions of punishment or retribution, applied in the criminal law, are not engaged in the imposition of a civil penalty, stating (citations omitted):

No less importantly, whereas criminal penalties import notions of retribution and rehabilitation, the purpose of a civil penalty, as French J explained in Trade Practices Commission v CSR Ltd, is primarily if not wholly protective in promoting the public interest in compliance:

“Punishment for breaches of the criminal law traditionally involves three elements: deterrence, both general and individual, retribution and rehabilitation. Neither retribution nor rehabilitation, within the sense of the Old and New Testament moralities that imbue much of our criminal law, have any part to play in economic regulation of the kind contemplated by Pt IV [of the Trade Practices Act] … The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.”

15    Sixth, in common with criminal sentencing, determining a civil penalty usually involves multi-factorial decision-making, identifying and balancing all the factors relevant to the contravention, and where the result is arrived at by a process of “instinctive synthesis” of the relevant factors: Reckitt Benckiser at [44]. It necessarily follows that the penalties imposed in other cases can only be of limited analogical value: Singtel Optus at [60] citing Australian Competition and Consumer Commission v Telstra Corporation Ltd (2010) 188 FCR 238 at [215].

16    In addition to the above principles, ASIC submitted that where there are numerous contraventions arising from separate acts, the starting point is that each contravention should attract a separate penalty arising from that contravention. In support of that submission, ASIC relied principally on the decision of the Full Court of the Federal Court in ABCC v CFMEU. However, ASIC’s submission involved a misstatement of the principles explained by the Full Court in ABCC v CFMEU. The case concerned the imposition of pecuniary penalties upon two unions for taking unlawful industrial action in contravention of s 38 of the Building and Construction Industry Improvement Act 2005 (Cth) (BCII Act). The original jurisdiction of the Court was exercised by the Full Court. The unions admitted the contraventions and did not dispute that penalties should be imposed. The parties applied to the Court for the imposition of a penalty on each union within an agreed proposed range based on agreed facts and joint submissions. However, neither the pleadings nor the agreed facts identified the number of contraventions of the law for which the unions were to be penalised. After determining the number of contraventions, the Full Court considered the submission of the parties that it was open to the Court under s 49 of the BCII Act to impose a single penalty in respect of multiple contraventions of s 38. The Full Court rejected the submission and concluded as follows (at [148]):

The important point to emphasise is that, contrary to the Commissioner’s submission, neither the course of conduct principle nor the totality principle, properly considered and applied, permit, let alone require, the Court to impose a single penalty in respect of multiple contraventions of a pecuniary penalty provision. There is no doubt that, in an appropriate case involving multiple contraventions, the Court should consider whether the multiple contraventions arose from a course or separate courses of conduct. If the contraventions arose out of a course of conduct, the penalties imposed in relation to the contraventions should generally reflect that fact, otherwise there is a risk that the respondent will be doubly punished in respect of the relevant acts or omissions that make up the multiple contraventions. That is not to say that the Court can impose a single penalty in respect of each course of conduct. Likewise, there is no doubt that in an appropriate case involving multiple contraventions, the Court should, after fixing separate penalties for the contraventions, consider whether the aggregate penalty is excessive. If the aggregate is found to be excessive, the penalties should be adjusted so as to avoid that outcome. That is not to say that the Court can fix a single penalty for the multiple contraventions.

17    The Full Court’s reasons recognise two important qualifications to the conclusion that the statutory power to impose a penalty (in that case, s 49 of the BCII Act) did not permit the imposition of a single penalty for multiple contraventions. The first qualification is that such a course is permissible if agreed by the parties or the number of contraventions is so large that precise measurement is not possible. The Full Court explained (at [149]):

In an appropriate case, however, the Court may impose a single penalty for multiple contraventions where that course is agreed or accepted as being appropriate by the parties. It may be appropriate for the Court to impose a single penalty in such circumstances, for example, where the pleadings and facts reveal that the contraventions arose from a course of conduct and the precise number of contraventions cannot be ascertained, or the number of contraventions is so large that the fixing of separate penalties is not feasible, or there are a large number of relatively minor related contraventions that are most sensibly considered compendiously. As revealed generally by the reasoning in Commonwealth v Director, FWBII, there is considerably greater scope for agreement on facts and orders in civil proceedings than there is in criminal sentence proceedings. As with agreed penalties generally, however, the Court is not compelled to accept such a proposal and should only do so if it is considered appropriate in all the circumstances. It is also at the very least doubtful that such an approach can be taken if it is opposed or the proceedings are defended.

18    The permissibility of this approach to the imposition of a pecuniary penalty was also approved by the Full Court of the Federal Court in Transport Workers’ Union of Australia v Registered Organisations Commissioner (No 2) (2018) 267 FCR 40 at [90].

19    The second qualification is that the Full Court in ABCC v CFMEU implicitly approved an approach whereby multiple penalties imposed in respect of multiple contraventions may be expressed in a single order for the payment of the aggregate penalty. After considering the appropriate penalty to be imposed for each contravention, the Full Court concluded that (at [183]):

An order imposing a pecuniary penalty of $300,000 on the CFMEU in respect of its contraventions will be made. An order imposing a pecuniary penalty of $130,000 on the CEPU in respect of its contraventions will also be made.

20    As recognised by the Full Court in ABCC v CFMEU, there have been many cases in which a single pecuniary penalty has been imposed on a respondent in respect of multiple contraventions of the relevant law, including by the High Court in TPG Internet. It may be that many of those cases fall within the two qualifications identified by the Full Court, recognising that a single penalty that is imposed by an order of the court may implicitly be the sum of the individual penalties for many contraventions. Subsequent to ABCC v CFMEU, the Full Court in Yazaki Corporation imposed an aggregate single penalty for five contraventions of the Competition and Consumer Act 2010 (Cth), but articulated the individual penalty for each contravention.

21    The conclusion that a statutory power to impose a pecuniary penalty does not permit the imposition of a single penalty for multiple contraventions is a different principle to that propounded by ASIC: that where there are numerous contraventions arising from separate acts, the starting point is that each contravention should attract a separate penalty arising from that contravention. There is no such “starting point”. The statutory task requires the court to consider whether it is appropriate to impose a penalty for every contravening act or omission. Applying the course of conduct principle, a court may conclude that it is not appropriate. That was expressly recognised by the Full Court in ABCC v CFMEU. In discussing the penalty imposed in the earlier decision of Stuart v Construction, Forestry, Mining and Energy Union (2010) 185 FCR 308, the Full Court observed (at [135]):

In Stuart, it was relevantly alleged that the union contravened ss 38 and 44(1) of the BCII Act. The Full Court found that the primary judge erred in fixing the penalties for those contraventions. In considering what penalties should be imposed, the Court found (at [84]) that the unlawful conduct constituting the contravention of s 38 was “entirely subsumed in the conduct constituting the contravention of s 44 of the BCII Act”. Applying the course of conduct principle, the Court imposed a significant penalty for the s 44 contravention and did not impose a separate penalty for the s 38 contravention. That unremarkable application of the course of conduct principle is quite different to what the Commissioner proposes in this matter. In a sense, the Court did impose a penalty for each contravention, but having regard to the course of conduct principle, it determined that the penalty for the s 38 contravention should be zero because the union had already effectively been punished for the conduct constituting that contravention by the penalty imposed in respect of the s 44 contravention. There is a clear distinction between that methodology and the imposition of a single penalty in respect of both contraventions.

22    The point emphasised by the Full Court in ABCC v CFMEU is the importance, in exercising the statutory power to impose a pecuniary penalty, to identify the number of contraventions that have occurred and relevant differences between the contraventions. Unless the number of contraventions is identified, at least to the extent of identifying a minimum number of contraventions, it is not possible to determine whether the aggregate penalty to be imposed is within the statutory maximum, and it is not possible to assess whether the penalty is appropriate taking into account the statutory maximum.

Outline of arguments

ASIC’s submissions

23    ASIC submitted that an overall penalty in the range of $9,344,250 to $12,129,000 for Dover and $2,867,760 to $3,536,100 for Mr McMaster would be appropriate.

24    ASIC submitted that the following factors supported the imposition of those penalties:

(a)    First, the contravening conduct ought to be characterised as being serious. It involved misleading clients in a number of ways so as to purportedly misstate, exclude, limit, restrict and/or dilute their legal rights against Dover. The purported purpose or effect was to limit the scope of Dover’s exposure to liability for its conduct or the conduct of its authorised representatives.

(b)    Second, the contravening conduct involved a large number (19,402) of contraventions of s 12DB(1)(i) and Mr McMaster was knowingly concerned in each of those contraventions.

(c)    Third, the contravening conduct was protracted. It continued over around two and a half years. During that time, four substantively different versions of the Client Protection Policy were introduced and provided to clients of Dover’s authorised representatives (with escalating misleading content):

(i)    the 25 September 2015 Client Protection Policy (which was substantively the same in relevant aspects as the 28 September 2015 Client Protection Policy);

(ii)    the 5 March 2016 Client Protection Policy;

(iii)    the 4 August 2016 Client Protection Policy (which was substantively the same in relevant respects as the 9 January 2017 Client Protection Policy and the 16 January 2017 Client Protection Policy); and

(iv)    the 23 November 2017 Client Protection Policy.

(d)    Fourth, the contraventions arose as the result of the conduct of senior management, being, in particular, Mr McMaster, who was the sole director and company secretary of Dover and the responsible manager on Dover’s Australian Financial Services Licence (AFSL).

(e)    Fifth, the circumstances surrounding the contraventions, and Mr McMaster’s knowing involvement in them, indicate that Dover, through Mr McMaster, operated with a degree of high-handed and arrogant disregard for applicable laws. This is highlighted by the fact that, during the relevant period, Mr McMaster received advice about potential problems with the content of the Client Protection Policy but did not act to rectify those problems.

(f)    Sixth, the Court ought to infer that Dover, acting through Mr McMaster, engaged in the contravening conduct deliberately or, alternatively, was recklessly indifferent or wilfully blind to the misleading nature of the Client Protection Policy.

(g)    Seventh, Dover operated a very substantial independent financial services advice business. The number of its authorised representatives increased over time from around 200 in September 2015, around 300 in 2016 and around 350 to 400 in 2017.

(h)    Eighth, Mr McMaster has shown little contrition for Dover’s unlawful conduct and his knowing involvement of that conduct.

(i)    Ninth, there is a need to send a strong deterrent message to the broader financial services industry that the obligations imposed by s 12DB(1)(i) of the ASIC Act are serious, must be complied with, and cannot be considered simply a commercial risk or business expense.

25    ASIC also acknowledged that there were a number of factors that can be regarded as mitigating:

(a)    First, ASIC accepts that there is no evidence that the contravening conduct resulted in clients relying on the Client Protection Policy to their detriment and suffering loss.

(b)    Second, ASIC accepts that neither Dover nor Mr McMaster have previously engaged in similar contravening conduct.

(c)    Third, ASIC accepts that some recognition should be given to the fact that, shortly following a letter from ASIC dated 22 March 2018, Dover sent out a corrective notice to inform around 19,000 clients that it was going to withdraw the Client Protection Policy and retrospectively not rely on it, and invited concerned clients to contact Mr McMaster. On around 12 April 2018, Dover published on its website a corrective disclosure notice in relation to the Client Protection Policy.

(d)    Further, on 28 June 2018, Dover and Mr McMaster entered into an enforceable undertaking with ASIC, pursuant to which, among other things:

(i)    Dover agreed to the cancellation of its AFSL;

(ii)    Dover terminated the appointment of each of its authorised representatives;

(iii)    Dover agreed to cease to carry on a financial services business; and

(iv)    Mr McMaster agreed not to, at any time in the future, carry on a financial services business, provide financial services, act as an authorised representative of a financial services licensee, act in a managerial capacity of any entity operating a financial services business or providing legal, accounting or other advisory services to a financial services business, hold out that he holds an AFSL or apply to ASIC for an AFSL.

26    Conversely, ASIC submitted that the facts that Dover and Mr McMaster have already suffered widespread adverse media attention and that Mr McMaster has suffered personal reputational damage and adverse health effects ought not be viewed by the Court as mitigatory. In that regard, ASIC submitted that there is no cogent evidence that this proceeding caused Mr McMaster to suffer particular adverse media attention or personal reputational and health damage as opposed to Mr McMaster’s appearance at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the subsequent closure of Dover. Further, ASIC submitted that it would be anomalous to treat as a mitigatory factor reputational and health effects that were caused by the contravening conduct which gave rise to these proceedings.

27    In quantifying the penalties to be imposed on Dover, ASIC submitted that, as a starting point it is appropriate for the Court to fix significant individual penalties in respect of each of the four occasions on which a substantively different iteration of the Client Protection Policy was first provided to a client of Dover’s authorised representatives, being the versions dated 25 September 2015, 5 March 2016, 4 August 2016 and 23 November 2017. Taking into account the aggravating and mitigating factors, ASIC submitted that an individual penalty equivalent to 50% - 60% of the maximum penalty available under the statute ($1.8 million) would be appropriate with respect to the first instance when the 25 September 2015 Client Protection Policy was provided to a client of Dover’s authorised representatives, being a penalty of $900,000 to $1,080,000. ASIC further submitted that each of the three subsequent, substantively different, iterations of the Client Protection Policy progressively introduced additional limiting clauses and that it would be appropriate to reflect this progressive aggravation by fixing an incrementally higher individual penalty with respect to the first instance when each of these versions of the Client Protection Policy was provided to a client of Dover’s authorised representatives. On that basis, ASIC proposed the following penalties as appropriate:

(a)    an individual penalty equivalent to 55% - 65% of the maximum penalty with respect to the introduction of the 3 March 2016 Client Protection Policy, being a penalty of $990,000 to $1,170,000;

(b)    an individual penalty equivalent to 60% - 70% of the maximum penalty with respect to the introduction of the 4 August 2016 Client Protection Policy, being a penalty of $1,080,000 to $1,260,000; and

(c)    an individual penalty equivalent to 65% - 75% of the maximum penalty with respect to the introduction of the 13 November 2017 Client Protection Policy, being a penalty of $1,170,000 to $1,350,000

28    ASIC submitted that in respect of each of the remaining 19,398 instances of contravening conduct by Dover there ought to be fixed in an individual penalty of between $750 and $1,000, resulting in an aggregate penalty of $14,548,500 to $19,398,000 in respect of these contraventions.

29    Applying the totality principle, ASIC submitted that it would be appropriate to apply a 50% reduction to the aggregate penalties proposed by it to ensure that the total proposed penalty with respect to Dover is proportionate and just in all the circumstances. Applying that reduction, ASIC proposed that the Court impose an overall penalty on Dover in the range of $9,344,250 - $12,129,000 with respect to its 19,402 contraventions of s 12DB(1)(i) of the ASIC Act.

30    With regards to Mr McMaster, ASIC submitted that a similar approach to penalties should be adopted save that Mr McMaster should bear a proportionately higher level of penalty. ASIC proposed that the Court impose on Mr McMaster:

(a)    a penalty equivalent to 55% to 65% of the maximum penalty ($360,000) with respect to Mr McMaster’s knowing involvement in Dover’s introduction of the first iteration of the Client Protection Policy on 25 September 2015, being a penalty of $198,000 - $234,000;

(b)    a penalty equivalent to 60%-70% of the maximum penalty with respect to Mr McMaster’s knowing involvement in the introduction of the 3 March 2016 Client Protection Policy, being a penalty of $216,000 - $252,000;

(c)    a penalty equivalent to 65%-75% of the maximum penalty with respect to Mr McMaster’s knowing involvement in the introduction of the 4 August 2016 Client Protection Policy, being a penalty of $234,000 - $270,000; and

(d)    a penalty equivalent to 70%-80% of the maximum penalty with respect to the introduction of the 13 November 2017 Client Protection Policy, being a penalty of $252,000 - $288,000.

31    As to the remaining 19,398 instances of Mr McMaster’s knowing involvement in Dover’s contraventions, ASIC submits that it would be appropriate to fix a penalty between $200 and $250 in respect of each of them, resulting in an aggregate penalty of $3,879,600 - $4,849,500 in respect of those contraventions.

32    Applying the totality principle, ASIC submitted that it would be appropriate to apply a 40% reduction to the penalty ranges to ensure that the penalty is proportionate and just in all the circumstances. Applying that reduction, ASIC proposed that the Court impose an overall penalty on Mr McMaster in the range of $2,487,760 - $3,536,100.

33    ASIC submitted that the proposed penalties are proportionately higher for Mr McMaster than for Dover because, even though Mr McMaster’s liability is accessorial in nature, Mr McMaster was the directing mind and will of Dover, who approved the content of the Client Protection Policies and required that they be provided to Dover’s clients.

Defendants’ submissions

34    The defendants submitted that ASIC’s method of determining the appropriate penalty in this case is artificial and at odds with the instinctive synthesis approach. It has the effect of punishing Dover and Mr McMaster multiple times for what is in substance the same underlying misconduct, and fails to take account of the course of conduct principle in order to avoid double punishment.

35    The defendants argued that, although there are technically 19,402 separate contraventions, each contravention arose from the making of an identical representation which was contained in a standard form document sent to a large number of consumers. The contraventions flowed from the same wrongful conduct, being the decision to include in the Client Protection Policy a misleading statement. In the circumstances, the defendants argued that imposing penalties in the manner proposed by ASIC carries obvious potential for the defendants to be punished multiple times for the same underlying misconduct. The defendants observed that:

(a)    80% of the total penalty ASIC seeks against Dover and Mr McMaster is based on the fact that the Client Protection Policy was sent to 19,402 clients, and fails to properly account for the fact that these thousands of contraventions were not based upon any distinct or additional wrongdoing ;

(b)    in arriving at the proposed penalties for each of the four occasions on which a different version of the Client Protection Policy was first provided to a client, ASIC has taken into account as an aggravating factor the sending of the Client Protection Policy to a further 19,398 clients, but seeks separate and additional penalties for that conduct; and

(c)    ASIC proposes penalties that become progressively more severe for each version of the Client Protection Policy without recognising that the underlying wrongdoing that gave rise to the contraventions in respect of each version of the Client Protection Policy is the same continuing course of conduct, namely the inclusion of the misleading introductory clause in the Client Protection Policy.

36    The defendants submitted that the totality discount that ASIC applies in the final step of its approach does not resolve the problems with its overall approach. The totality principle is the last step in the sentencing process that is undertaken after the Court has determined an appropriate penalty and is a “final check” whether the aggregate penalty is just and appropriate having regard to the totality of the contravening conduct. The purpose of the totality principle is not to correct, by applying an arbitrary percentage discount, double punishment or a wholly disproportionate penalty, which is how ASIC seeks to deploy the principle in this case.

37    The defendants submitted that the maximum penalty is but one of a number of factors to which the Court must have regard in arriving at an appropriate penalty and the weight and relevance of the maximum penalty will vary depending upon the facts of each particular case. In the present case, the Court having found that there were 19,402 contraventions, the theoretical maximum penalty is so high as to be practically meaningless (in the case of Dover it is in excess of $34 billion and in the case of Mr McMaster it is in excess of $6 billion). The defendants submitted that the present case is in that sense analogous to Reckitt Benckiser where the Full Court concluded (at [157]) that the assessment of the appropriate penalty was best assessed by reference to factors other than the statutory maximum because there was “no meaningful overall maximum penalty given the very large number of contraventions over such a long period of time”.

38    The defendants submitted that the contraventions in this case are properly seen to arise from the same underlying wrongful conduct, namely, the decision to include the introductory clause in the Client Protection Policy and, in those circumstances, it is appropriate that the conduct be viewed as a single course of conduct for the purpose of assessing penalty. The defendants acknowledge that the relevant circumstances include the facts that the conduct occurred over a two and a half year period, during which three further iterations of the Client Protection Policy were introduced, and that the Client Protection Policy was sent to a large number of clients.

39    The defendants submitted that the following factors are relevant to the Court’s assessment of penalties:

(a)    First, the Court should find that no consumers are likely to have suffered loss or damage as a result of the contravening conduct.

(b)    Second, the Court should find that neither Dover nor Mr McMaster is likely to have derived any profit or benefit from the contravening conduct.

(c)    Third, Dover and Mr McMaster promptly and fully rectified the contravening conduct once the matter had been brought to their attention by ASIC.

(d)    Fourth, neither Dover nor Mr McMaster had previously engaged in similar contravening conduct in the past.

(e)    Fifth, Dover and Mr McMaster have received substantial extra-curial punishment and detriment for their contravening conduct prior to the commencement of this proceeding. Pursuant to an enforceable undertaking given to ASIC on 28 June 2018, Dover’s AFSL was cancelled and its financial services business was, in effect, permanently shut down. Mr McMaster has also, pursuant to that undertaking, effectively been disqualified from being involved in a financial services business. Mr McMaster and Dover were subject to widespread adverse publicity in relation to the contravening conduct due to that matter being examined in the course of Mr McMaster’s appearance at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

(f)    Sixth, Mr McMaster and Dover sought to deal with ASIC proactively during the period when the Client Protection Policy was in place.

(g)    Seventh, Dover engaged a number of external law firms and expert compliance consultants to review its compliance processes, including statements of advice and the Client Protection Policy, and on whose advice Dover and Mr McMaster relied. None of them identified or raised with Dover a concern that the Client Protection Policy gave rise to the contraventions which the Court has found in this proceeding.

(h)    Eighth, with regard to Dover’s current financial position, Dover’s business has ceased as a result of the enforceable undertaking, Dover made a net loss of almost $2 million in the 2018 and 2019 financial years and has made a net loss of around $370,000 in the 2020 financial year to the date of the hearing (1 June 2020) and its net assets as at 31 March 2020 were worth less than $20,000.

(i)    Ninth, with regard to Mr McMaster’s financial position, aside from his superannuation entitlements which he is not presently able to access, Mr McMaster’s assets are limited to a $700,000 property and other low value personal items.

40    Having regard to the above matters, the defendants submitted that an appropriate penalty would be in the range of $350,000 to $600,000 for Dover and $5,000 to $20,000 for Mr McMaster.

Overview of the evidence

41    The parties relied on the evidence adduced at the liability hearing and adduced the following additional evidence at the penalty hearing.

42    ASIC read the following affidavits:

(a)    Peter Baccanello swore two affidavits, the first on 14 February 2020 and the second on 4 May 2020. Mr Baccanello was employed by ASIC as a lawyer in ASIC’s Financial Services Enforcement Team. Mr Baccanello’s affidavits exhibited a large number of documents relating to Dover, its business and financial performance, its legal compliance activities, and dealings between ASIC and Dover and Mr McMaster in relation to the Client Protection Policy. Mr Baccanello was not cross-examined.

(b)    Jacob Emerson Timmerman swore two affidavits, the first on 14 February 2020 and the second on 28 May 2020. Mr Timmerman was employed as Acting Team Leader for the Data Analytics and Reporting section of the Strategy, Analysis and Operations team within the Wealth Management Group at the Melbourne office of ASIC. Mr Timmerman’s evidence comprised spreadsheets detailing the number of authorised representatives and financial advisers appointed by Dover (as the holder of an AFSL) over time and, for comparative purposes (as to relative size), a spreadsheet detailing the number of authorised representatives and financial advisers currently appointed to AFSL holders nationally, where their AFSL includes an authorisation to provide personal advice to retail clients, as at 4 January 2016, 1 April 2018 and 1 February 2020. Mr Timmerman was not cross-examined.

(c)    Ian Donald affirmed an affidavit on 13 May 2020. Mr Donald was the Ombudsman of the Australian Financial Complaints Authority (AFCA). AFCA is an external dispute resolution scheme for consumers who are unable to resolve complaints with financial services organisations. Under s 912A of the Corporations Act 2001 (Act), it is a requirement for holders of an AFSL to be a member of the AFCA scheme. Mr Donald deposed that AFCA's role is to assist consumers and small businesses to reach agreements with financial firms to resolve their complaints. If complaints do not resolve between the parties, AFCA can make a "determination" which may include determining that a financial firm pay a sum of money to the consumer. Mr Donald’s evidence concerned Dover’s response to nine complaints lodged with AFCA relating to the conduct of Dover’s authorised representatives. Mr Donald was not cross-examined. Objection was taken to the admissibility of Mr Donald’s evidence on the ground of relevance. For the reasons explained below, I uphold that objection. I do not consider that the evidence is relevant to the imposition of penalties in this proceeding and I have disregarded the evidence.

43    The defendants read the following affidavits:

(a)    Mr McMaster affirmed an affidavit on 6 April 2020. Mr McMaster gave evidence concerning Dover, its business and financial performance, its legal compliance activities including reviews of the Client Protection Policy, dealings between ASIC and Dover and Mr McMaster in relation to the Client Protection Policy and the consequences for Dover and Mr McMaster personally from these proceedings. Mr McMaster was cross-examined. While I consider that Mr McMaster was generally an honest witness who accepted a degree of responsibility for the contraventions of the law relating to the Client Protection Policy, I do not consider that he was a reliable witness. His affidavit evidence concerning his financial position was partial and, for that reason, conveyed a misleading impression. I do not accept his evidence concerning his objective in creating the Client Protection Policy which I consider to be, at least in significant part, a reconstruction favourable to himself. Nor do I accept his evidence of contrition for the contraventions. Indeed, I find that Mr McMaster has no true contrition for the contraventions; rather, he considers himself to be a victim of malicious and unjustified legal proceedings brought by ASIC. That perception is unsupported by the evidence he relies upon and is a construct of his subjective beliefs and imagination. Further, as described in more detail below, the evidence of his dealings with persons giving advice to Dover, with ASIC and with AFCA show him to have an imperious and bullying disposition, being unwilling to accept correction and being quick to assume (wrongly) that he is the victim of unfair treatment. Each of those matters reflects adversely on his credibility as a witness. As a result, I have placed limited weight on his evidence unless it is corroborated.

(b)    Sven Burchartz swore an affidavit on 22 May 2020. Mr Burchartz was a lawyer and a partner of law firm Kalus Kenny Intelex (KKI), solicitors for the defendants. Mr Burchartz gave evidence with regard to correspondence between the parties concerning ASIC’s claims of privilege over documents discovered in this proceeding. In connection with Mr Burchartz’s affidavit, the defendants tendered a further affidavit of Mr Baccanello sworn 12 February 2020 being an affidavit of discovery.

Findings of Fact

44    The findings of fact set out below are organised by reference to the factual matters relevant to the assessment of penalty, including each of the mandatory statutory factors and the “French factors”.

The nature and extent of the contravening act or omission

45    The nature and extent of the contravening acts is detailed in the Liability Judgment and the Declaratory Relief Judgment and will not be repeated in detail. The following are the key findings relevant to the assessment of penalty.

46    Dover contravened, relevantly, s 12DB(1)(i) of the ASIC Act on each occasion that its authorised representatives provided clients the Client Protection Policy in conjunction with, or incorporated into, a statement of advice. Relevantly, the introductory clause contained in the Client Protection Policy was a false or misleading representation within the meaning of s 12DB(1)(i) of the ASIC Act. The relevant parts of the introductory clause stated:

Dover’s Client Protection Policy sets out a number of important consumer protections designed to ensure every Dover client gets … the maximum protection available under the law…;

47    The introductory clause was false or misleading because the Client Protection Policy did not ensure that clients received the maximum protection available under the law. Rather, various other clauses in the Client Protection Policy purported to remove or dilute the protections that clients would otherwise have under the law. As I found in the Liability Judgment (at [6]), many clauses of the Client Protection Policy sought, perversely, to make the client responsible for failings and inadequacies in the advice provided to them. For the reasons explained in the Liability Judgment, I consider that the false and misleading nature of the introductory clause of the Client Protection Policy involved a serious contravention of s 12DB(1)(i) of the ASIC Act because of the real potential to mislead Dover clients as to their legal rights.

48    The contraventions occurred between around 25 September 2015 and around 30 March 2018. The number of clients of Dover's authorised representatives who were provided with statements of advice which included the Client Protection Policy (as varied from time to time) in the relevant period was 19,402.

49    During the relevant period, four different versions of the Client Protection Policy were used by Dover, being versions introduced on 25 September 2015, 5 March 2016, 4 August 2016 and 23 November 2017. Each of those versions incorporated additional clauses that purported to exclude or limit Dover’s liability to the client thereby exacerbating (to some extent) the falsity of the representation in the introductory clause. However, as the defendants submitted, the aspect of the Client Protection Policy that ASIC alleged, and I found, was false or misleading was the introductory clause. There was no material change to that clause throughout the relevant period.

50    For that reason, I accept the defendants’ submission that the contravening acts are most appropriately characterised as a single course of conduct. As the authorities make clear, and as accepted by the defendants, that is not to suggest that the multiple contravening acts are to be treated as a single act for the purpose of assessing the statutory maximum penalty that may be imposed. Rather, it is to take into account the nature and character of the wrongdoing, particularly the continuity of the original act of contravention, in determining the appropriate penalties to be imposed for the many contraventions that occurred and whether and to what extent a “concurrent” penalty should be imposed.

Any loss or damage suffered as a result of the contravening act or omission

51    As noted above, ASIC accepts that there is no evidence that the contravening conduct resulted in clients relying on the Client Protection Policy to their detriment and suffering loss. The defendants ask the Court to go further and make a positive finding that no consumers are likely to have suffered loss or damage as a result of the contravening conduct. In support of such a finding, the defendants rely on the following matters.

52    First, Mr McMaster gave uncontradicted evidence that Dover never relied upon any of the exclusion and limitation of liability provisions of the Client Protection Policy to limit or deny liability to a client.

53    Second, in mid-April 2018, Dover sent a notice of correction by email or letter to all clients that had been provided with a statement of advice during the relevant period and uploaded the notice to its website (see Liability Judgment at [83]). The notice of correction informed clients that the Client Protection Policy was deceptive because it contained clauses that purported to avoid liability, and stated that Dover would not rely on the clauses. The notice invited clients, if they considered that the advice given to them had resulted in financial loss, to seek legal advice or lodge a complaint with the Credit Industry Ombudsman and disregard the Client Protection Policy. Mr McMaster gave uncontradicted evidence that, since the Client Protection Policy was withdrawn, Dover never received any complaint from a client to the effect that the Client Protection Policy was misleading or that Dover had relied upon any of the exclusion clauses in the Client Protection Policy in Dover's dealings with the client.

54    Third, despite having investigated the matter extensively, ASIC did not identify any consumers who claim to have suffered loss by reason of the Client Protection Policy.

55    Fourth, the Client Protection Policy was a relatively lengthy document which was incorporated into statements of advice provided to clients. Ordinary human experience suggests that many clients were unlikely to have read the Client Protection Policy in any detail.

56    I accept the matters set out above and find that, as events turned out, it is unlikely that any consumers suffered loss or damage as a result of the contravening conduct. As the statute makes clear, that is a relevant factor in the assessment of penalty. It follows, as stated by the Full Court in Singtel Optus at [57]-[58], that the absence of loss or damage to consumers is a circumstance which would usually attract a less severe penalty than if substantial harm had been inflicted on consumers.

57    However, it is also relevant to consider the extent to which the contravening conduct had the potential to cause consumers loss and damage. In the Liability Judgment (at [3] and [6]), I concluded that the title of the Client Protection Policy was highly misleading because the document:

… did not protect clients. To the contrary, it purported to strip clients of rights and consumer protections they enjoyed under the law. Some 19,402 clients of Dover's authorised representatives were provided with the Client Protection Policy in conjunction with a statement of advice.

… many clauses of the Client Protection Policy sought, perversely, to make the client responsible for failings and inadequacies in the advice provided to them.

58    In my view, the Client Protection Policy had real potential to mislead consumers into believing that they had no legal recourse against Dover in respect of financial advice given to them when that was not the case. Such an erroneous belief could have caused consumers very great loss. While the evidence shows that, in the period before the conduct was stopped by the intervention of ASIC, it was unlikely that consumers had suffered loss, the seriousness of the contravention must also be assessed by the loss that the conduct had the potential to occasion.

Any financial gain from the contravening conduct

59    In addition to assessing whether the contravening conduct resulted in any person suffering loss, it is relevant to consider whether the contravening conduct resulted in the defendants receiving a financial gain. Having concluded that, in the present case, it was unlikely that consumers suffered loss by reason of the Client Protection Policy, it follows that it was unlikely that Dover received a financial gain from avoiding liability to consumers. However, that does not exhaust the possible means by which Dover might have gained from the use of the Client Protection Policy. In particular, consideration can be given to the effect that the Client Protection Policy might have had on Dover’s ability to attract and retain financial advisers. Certainly, the evidence shows that Dover’s business grew throughout the relevant period. It is a possibility that the use of the Client Protection Policy, containing strong limitation of liability clauses, might have been a feature of Dover’s business model that was attractive to financial advisers. There was some evidence to the contrary, given by Mr McMaster, to the effect that some financial advisers complained about the terms of the Client Protection Policy because they considered that clients may not approve of its terms. Overall, the evidence is insufficient to form any conclusions about the possibility of financial gain to Dover from the contravening conduct.

The circumstances in which the contravening act or omission took place

60    Mr McMaster acknowledged that he drafted the Client Protection Policy and no-one else assisted or contributed to the drafting.

61    Mr McMaster said that he was prompted to introduce the Client Protection Policy by a case before the Financial Ombudsman Service (FOS) in relation to a complaint made about a Dover adviser who was alleged to have fraudulently withdrawn money from the client’s self-managed superannuation fund. The FOS found that the adviser had not been authorised by the trustee of the fund to withdraw the money, and that Dover was responsible for the adviser’s conduct and was required to pay the trustee compensation. The FOS written determination included the following statements:

Generally, the FSP is responsible for all conduct of its representatives.

The FSP [Dover], as an Australian financial services licensee, is responsible for the conduct of its representatives, whether or not the conduct is within authority.

However, the FSP is not responsible for a representative's conduct if the representative's lack of authority is disclosed to the client clearly and prominently before the client relied on the conduct.

A licensee is liable for loss suffered by a client by reason of the representative's conduct.

There is no evidence that Mr F disclosed his lack of authority

I have reviewed the information provided. I am satisfied that there is no evidence that Mr F [the adviser] clearly and prominently disclosed to the Applicant [the client] that the FSP had authorised Mr F to make transfers from the SMSF to Company D, without seeking the Applicant's consent.

The FSP is liable for Mr F's conduct.

62    Mr McMaster said that he interpreted the FOS determination as meaning that, if the adviser had clearly and prominently disclosed that Dover had not authorised the adviser to make the fraudulent transaction, then pursuant to s 917D of the Corporations Act (which was footnoted in the FOS determination), Dover would not have been liable. Mr McMaster said that, in light of the FOS determination, he considered that changes should be made to the standard clauses that Dover required authorised representatives to incorporate into statements of advice so as to include a clear disclosure broadly to the effect that Dover did not authorise its authorised representatives to act outside of their legal obligations, including by engaging in fraudulent activity such as the FOS had found. Mr McMaster said that he believed that Dover was entitled to require its authorised representatives to make this disclosure to clients so that Dover could rely on the protection afforded by s 917D in the event that authorised representatives acted in a way that was contrary to their legal obligations. Mr McMaster admitted that the changes (which were implemented in the Client Protection Policy) were intended to protect Dover against liability in the event that an authorised representative engaged in misconduct or breached their legal obligations. Mr McMaster claimed that he intended and believed that the change would help to improve compliance standards amongst authorised representatives by making clear to authorised representatives that Dover would not be responsible for their conduct if they did not comply with their legal obligations.

63    In cross-examination, Mr McMaster agreed that the statements in the FOS determination came as a surprise to him, as previously he had understood that Dover was responsible for the conduct of its authorised representatives, but the FOS determination caused him to believe that Dover could avoid responsibility by making a disclosure under s 917D of the Corporations Act. Despite that, Mr McMaster did not seek any legal advice about his interpretation of the FOS determination.

64    Mr McMaster gave evidence that, between 20 July 2015 and September 2015, he prepared the Client Protection Policy which replaced the existing mandatory clauses and disclosures in statements of advice produced by Dover’s authorised representatives. A clause stipulating that Dover did not authorise its advisers to act outside of their legal obligations, including by engaging in fraudulent activity, was ultimately included in the Client Protection Policy and is referred to in the Liability Judgment as the “Authority Liability Exclusion”. Mr McMaster claimed that the title “Client Protection Policy” originated from his objective to encourage advisers to submit their statements of advice for review by Dover before providing them to clients. In that regard, Mr McMaster said that he informed advisers that Dover would not rely on the Authority Liability Exclusion in the Client Protection Policy provided that the adviser had obtained approval for the statement of advice via Dover's review process before it was sent to clients.

65    Mr McMaster was challenged on aspects of this evidence in cross-examination. I do not accept that Mr McMaster’s evidence is a full explanation of the circumstances and motivations for introducing the Client Protection Policy. I consider that Mr McMaster’s evidence is a reconstruction favourable to himself. Mr McMaster’s account overlooks the following significant matters.

66    First, the email sent by Mr McMaster on 25 September 2015 to Dover’s advisers by which he introduced the new Client Protection Policy makes clear that many of the exclusion clauses that were included in the Client Protection Policy were originally mandatory elements of the statements of advice issued by Dover’s advisers. The email stated:

The second improvement: one hypertext link to all materials deemed to be included in your SOA

The existing hypertext links/additional disclosures are getting messy, so we have streamlined them and simplified them into one compendious link titled Dover's Client Protection Policy.

Please click on Dover's Client Protection Policy to see how this works.

To facilitate this, all the existing paragraphs regarding matters like "The Corporations Act disclosure requirements: Incorporation by reference" and "Dover is only responsible for actions within its Australian Financial Services Licence" should be deleted, as should be the paragraphs dealing with under-insurances, disclosure in risk insurance contracts, disclosure in SMSF advices, tax advice and so on. These clunky and increasing numerous and complex paragraphs are now replaced by this one new, simple and (very) short paragraph:

"Dover's Client Protection Policy

Dover's Consumer Protection Policy comprises additional conditions of our contract with you to give you the maximum protection possible under the Corporations Act and related law. You must read and understand Dover's Client Protection Policy before acting on the recommendations in this statement of advice. You can do this by clicking on this link: Dover's Client Protection Policy."

We believe the approach implicit in Dover's Client Protection Policy will improve the presentation of your SOA and increase the probability of your client accepting your advice.

67    It is apparent from that email that, prior to the introduction of the Client Protection Policy, Dover included many of the exclusion and limitation of liability clauses in its statements of advice. The Client Protection Policy improved the “messy” and “clunky” presentation of those clauses by incorporating them into a single document. Mr McMaster conceded in his evidence that the introduction of the Authority Liability Exclusion was intended to protect Dover from liability. It is plain that all of the other exclusion and limitation of liability clauses had a similar objective.

68    Second, the above email also contains a significant statement that “we” (being Dover) believed that the new Client Protection Policy “will improve the presentation of your SOA and increase the probability of your client accepting your advice”. I consider that the statement is a fair assessment of the likely effect of the Client Protection Policy. The document has the misleading title “Client Protection Policy” and contains the misleading introductory clause that the Client Protection Policy contains important consumer protections designed to ensure every Dover client gets the maximum protection available under the law. The title and introductory clause would be likely to increase the probability of clients accepting the advice given to them, because extensive exclusion clauses were to be removed from the statement of advice and incorporated into the Client Protection Policy, and the Client Protection Policy was likely to mislead clients into believing the document was beneficial to them.

69    Third, whether or not Mr McMaster represented to advisers that Dover would not rely on the Authority Liability Exclusion if they submitted their statements of advice for review, the clear and intended effect of the clause was to exclude clients’ legal recourse to Dover. The Client Protection Policy was a communication made to clients and clients were not informed that Dover may choose not to rely on the exclusion.

70    Having regard to the above matters, I find that the purpose or objective of the Client Protection Policy was to exclude or limit Dover’s liability to clients to the financial benefit of Dover, while presenting such exclusions and limitations in an attractive manner using the label “Client Protection Policy”. I do not accept Mr McMaster’s evidence that he considered that the document would operate to protect the interests of clients.

Whether the person has previously been found by a court to have engaged in any similar conduct

71    ASIC accepts that the defendants have not previously been found by a court to have engaged in any similar conduct.

The size of the contravening company and financial position of the contravener

72    Dover operated a substantial independent financial services advice business. The number of its authorised representatives who were registered on the Australian Financial Advisers Register increased over time from around 200 in September 2015 to around 400 in April 2018. An Adviser Information Booklet prepared by Mr McMaster in early 2018 stated:

Dover is the second largest non-institutionally owned AFSL, and it is probably [sic] that it will become the largest non-institutionally owned AFSL by late 2018.

73    Mr Timmerman deposed that a financial adviser can be an individual who either holds an AFSL or is an authorised representative or an employee or director of the holder of an AFSL and is authorised to provide personal financial advice to retail clients. AFSL holders are required to register financial advisers they have appointed with ASIC and this data is collated by ASIC to produce the Australian Financial Advisers Register. To put Dover’s size in the context of the overall market for financial advisory services, Mr Timmerman’s evidence shows that, as at 1 April 2018, the total number of authorised representatives in Australia who were also registered on the Australian Financial Advisers Register was 17,434, and the total number of financial advisers registered on the Australian Financial Advisers Register was 25,882. Thus, while Dover was a significant independent financial services advice business, it only constituted a modest share of the total market for financial advisory services in Australia.

74    Dover’s source of revenue was its financial advisers. Dover’s advisers paid a flat fee to Dover. As at mid-2018, the amount of the fee was around $20,000 per annum for each adviser. For multi-adviser practices, the fee was around $12,000 per annum for each additional adviser. Based on the financial information Dover lodged with ASIC:

(a)    for the 2015 financial year, Dover generated revenue of $18,064,912 and net profits after tax of $315,385;

(b)    for the 2016 financial year, Dover generated revenue of $25,401,812 and net profits after tax of $390,620;

(c)    for the 2017 financial year, Dover generated revenue of $34,733,713 and net profits after tax of $1,737,875; and

(d)    for the 2018 financial year, Dover generated revenue of $39,817,331 and made a net loss after tax of $303,933.

75    On 8 July 2018, Dover’s AFSL was cancelled and it ceased to carry on business. Mr McMaster gave evidence that, since that time, Dover’s principal activities have been winding up the business including the collection of debts. Mr McMaster said that between 30 June 2018 and 31 March 2020, Dover’s net assets declined from more than $3 million to approximately $20,000. Part of that decline was the payment of a dividend after the 2018 financial year of $1,225,000.

76    In his affidavit, Mr McMaster deposed that, as at 2018, Dover was 100% beneficially owned by himself via a “trust-based structure”. The nature of trust was not detailed in Mr McMaster’s affidavit and was not fully explored in cross-examination. The evidence shows that, at all relevant times, the shares in Dover were owned by a company called Garraway McMasters Investments Pty Ltd, the shares in Garraway McMasters Investments Pty Ltd were held by Garraway McMasters Holdings Pty Ltd, and the shares in Garraway McMasters Holdings Pty Ltd were held by Mr McMaster. Mr McMaster was the sole director of Garraway McMasters Investments Pty Ltd and Garraway McMasters Holdings Pty Ltd.

77    In cross-examination, Mr McMaster stated that throughout the relevant period he did not earn any salary, management fees or director fees from Dover. Mr McMaster also said that the dividend of $1,225,000 paid after the 2018 financial year was applied to discharge a loan from NAB which had been applied toward Dover’s business.

78    On 26 June 2019, Garraway McMasters Investments Pty Ltd's shareholding in Dover was transferred to a company called Balcombe Investment Group Pty Ltd (now called Blue Duck Venture Capital Pty Ltd) which is owned by Mr McMaster’s adult children.

79    Mr McMaster graduated from Melbourne University in 1987 with a Bachelor of Laws and a Bachelor of Commerce and he continues to hold a legal practising certificate. He gave evidence that his current occupation was dealing with the closure of Dover’s business and that he was not currently undertaking any activities which produced an income for him. While Mr McMaster is the principal of a law firm called TMC Legal which employs one other solicitor, he gave evidence that he is not active in the firm and its sole activities are connected to the closure of Dover. Mr McMaster said that he does not have any great inclination to practice law into the future.

80    In his affidavit under the heading “My financial position”, Mr McMaster deposed that, leaving aside superannuation entitlements which he was not presently entitled to access, his current assets comprised a unit at 1/14 Foam Street, Hampton which Mr McMaster estimated to be worth $700,000 and minor low value personal effects and assets. However, cross-examination revealed that Mr McMaster’s evidence concerning his current financial position was partial and misleading. Mr McMaster admitted the following matters during cross-examination:

(a)    Mr McMaster is a beneficiary, together with his wife and adult children, of a discretionary trust called the Garraway McMaster Family Trust, the trustee of which is a company called Delpelis Pty Ltd. The Trust owns a one-third interest in an accounting business originally set up by Mr McMaster (and previously trading as McMasters) and earns about $15,000 per month from that interest. The Trust also owns a residential property in Champion Street, Black Rock that generates rental income. The total assets of the Trust are worth between $3 million and $4 million. Mr McMaster has access to the bank account of the Trust and withdraws about $2,000 a month for his personal use. Mr McMaster also holds a credit card and the credit card bills are paid by the Trust.

(b)    Mr McMaster is also a beneficiary, together with his wife and adult children, of a discretionary trust called the Tulip Street Trust. The Trust owns the premises at 71 Tulip Street Cheltenham from which the Dover business was previously conducted. The premises is currently vacant, but Mr McMaster believed that it would begin to earn rent in August 2020 of about $10,000 per month.

(c)    The property in Foam Street, Hampton owned by Mr McMaster earns approximately $2,000 per month in rental income.

(d)    Mr McMaster is a director of a company called Spring Hill Poultry Pty Ltd which is involved in a poultry business. It has a net income of approximately $300,000 per annum. Forty percent of its shares are owned through a self-managed superannuation fund.

Whether the contravention arose out of the conduct of senior management or at a lower level

81    The contravention arose out of the conduct of the most senior management within Dover, being Mr McMaster. Throughout the relevant period, Mr McMaster has been Dover's sole director and secretary. Mr McMaster was the sole responsible officer for Dover from 30 January 2007 to 31 December 2016, and one of three responsible officers for Dover from 1 January 2017 onwards.

Compliance culture

82    Mr McMaster gave evidence that the main service that Dover provided to its financial advisers was to supervise compliance, with a particular emphasis on the statutory best interests duty under Division 2 of Part 7.7A of the Corporations Act and the appropriateness of advice. As at 1 February 2018, Dover had around 410 financial advisers and around 22 full-time compliance staff (whose roles included reviewing statements of advice).

83    Mr McMaster gave extensive evidence about Dover’s compliance practices. The key elements of those practices were as follows:

(a)    Dover undertook a mandatory review of each statement of advice issued by an adviser, including a final review by MLA Lawyers.

(b)    Dover had a compliance committee which was responsible for overseeing Dover’s compliance process. It held quarterly meetings until 2016 and then monthly meetings. The compliance committee minutes note four instances in which the Client Protection Policy was discussed during the relevant period. There is no evidence of any substantive consideration of whether the Client Protection Policy might be misleading at these compliance committee meetings.

(c)    Dover provided education and training to its advisers in relation to compliance and published on its website educational and training resources.

84    Mr McMaster gave evidence that Dover had a low complaint rate from clients. He said that between September 2015 and March 2018, Dover received a total of 36 complaints relating to 27 different advisers. Of those complaints, 20 resulted in compensation being paid to the client. During the same period, the total number of statements of advice that were provided by Dover advisers to clients was 19,402.

85    I accept Mr McMaster’s evidence about Dover’s compliance practices. However, the evidence indicates a gap in legal compliance. Nothing in Mr McMaster’s evidence suggests that Dover was attentive to compliance with its obligations under the ASIC Act, particularly the prohibitions against false, misleading and deceptive conduct and other similar consumer protection obligations.

86    Mr McMaster gave evidence that Dover engaged a number of external law firms and expert compliance consultants to review its compliance processes, including statements of advice and the Client Protection Policy. Mr McMaster said that none of them identified or raised with Dover a concern that the Client Protection Policy gave rise to the contraventions which the Court has found in this proceeding. While the evidence shows that the external advisers did not identify a concern with the introductory paragraph of the Client Protection Policy, overall I do not consider that the evidence concerning external advice assists the defendants. The evidence shows that Mr McMaster was generally not receptive to criticisms of the documentation being used by Dover. Indeed, Mr McMaster’s attitude toward the external advisers can fairly be described as imperious. The evidence is as follows:

(a)    In February 2016, Dover engaged Holley Nethercote Lawyers to conduct a review of Dover's statement of advice review process. Holley Nethercote engaged Ian McDermott of Imac Legal to assist. The review was not expressly directed to the Client Protection Policy.

(b)    On 7 March 2016, Mr Nethercote sent a draft report to Dover requesting that it be checked for factual accuracy. On 8 March 2016, Mr McMaster replied by providing criticisms of the report, using phrases such as “wrong” and “very wrong”. In a number of instances, Mr McMaster asserted that a particular issue did not need to be addressed in the statement of advice review process because it was dealt with in the Client Protection Policy, for example disclosure of risks relating to insurance coverage. It is apparent that Mr McMaster considered that it was sufficient to deal with investment risks by excluding liability for the risk in the Client Protection Policy.

(c)    On around 18 March 2016, Mr Nethercote sent a copy of the completed report to Mr McMaster by email. The email stated:

Final report attached. The report has been shortened considerably to reflect the precise scope and we have amended the report in light of Terry’s comments last Tuesday.

As an aside, in the process of redrafting the report and re-examining the role of the Client Protection Policy, we noticed the sentence on the front page of the Policy “Under the Corporations Act Dover is not responsible for anything done by your adviser which is not within the authority provided by Dover in these circumstances.”

Given section 917B of the Corporations Act, we think this statement is wrong and misleading. We have not fully reviewed the contents of the policy but we thought bringing this to your attention was warranted.

(d)    On 21 March 2016, Mr McMaster replied to Mr Nethercote by email stating that the report “cannot be used” as it “goes beyond its brief, in a perjorative [sic] style, to imply shortcoming where there are in truth strengths” and concluding that “I will keep doing it our way”. In relation to Mr Nethercote’s statement about the Authority Liability Exclusion in the Client Protection Policy, Mr McMaster gave evidence that he read the statement but formed the opinion that Mr Nethercote’s view was not correct. Mr McMaster did not seek further advice.

(e)    In around June 2017, Dover engaged Sophie Grace Compliance to conduct a review of Dover’s compliance processes. A report was provided to Dover in July 2017. The report contained a review of Dover’s website, including the Client Protection Policy, with handwritten suggested amendments. In relation to the Underinsurance Exclusion (as referred to in [70]-[72] of the Liability Judgment), Sophie Grace Compliance inserted a note stating: “consider rewording or removing”. Dover did not follow this recommendation. There is no evidence that Mr McMaster, or anyone at Dover, gave any consideration to the recommendation made by Sophie Grace Compliance, or even sought any clarification as to why the recommendation had been made.

(f)    In early 2018, Dover retained Integrity Compliance to review Dover’s statement of advice review process and its new adviser “on-boarding” process. On 7 February 2018, Integrity Compliance requested, among other things, whether there were any policies that would need to be reviewed as part of the task. In her response the next day, Ms Florence Tee of Dover did not request that Integrity Compliance review the Client Protection Policy.

87    In relation to the issue of Dover’s compliance culture, ASIC adduced evidence from Mr Donald concerning Dover’s dealings with AFCA in relation to client complaints. The evidence was adduced to contradict Mr McMaster’s evidence concerning Dover’s attitude and responsiveness to consumer complaints. Mr Donald described the outcome in nine determinations that have been made by AFCA against Dover since it has closed its business. I reject the evidence on the grounds of relevance. It relates to a period after Dover’s business has closed, and does not bear upon Dover’s compliance culture during the period of contravention. While the evidence shows that, during 2019 and into 2020, Mr McMaster adopted an adversarial approach to his dealings with AFCA (again displaying an imperious manner), in my view the dealings in that period are not probative of Dover’s business practices during the relevant period.

88    Overall, I find that, during the relevant period, Dover had inadequate compliance processes to address its obligations under the ASIC Act, particularly the prohibitions against false, misleading and deceptive conduct and other similar consumer protection obligations.

The deliberateness of the contravention and the period over which it extended

89    It is convenient to consider collectively factors such as the period of the contravening conduct, and whether the conduct was deliberate and covert, because the factors are interrelated in this matter.

90    Three initial points can be made. First, the contravening conduct involved sending a standard form document containing a misleading statement to 19,402 clients of Dover’s financial advisers and, as such, the conduct was not in any sense covert. Second, the conduct involved a patently false and misleading statement which ought to have been obvious to Mr McMaster who holds a legal practising certificate. Third, the contravening conduct continued from around 25 September 2015 to around 30 March 2018, which is a substantial period of time.

91    In considering whether the contravening conduct was deliberate, it is appropriate to focus on the knowledge and attitude of Mr McMaster, as he created the Client Protection Policy and mandated its use by Dover’s financial advisers.

92    The defendants resist the conclusion that the contravening conduct was deliberate. In doing so, they rely principally on three categories of evidence.

93    First, the defendants rely on Mr McMaster’s evidence, considered earlier, that his objective in implementing the Client Protection Policy was to create an incentive for Dover’s advisers to have their statements of advice reviewed by Dover. For the reasons given earlier, I have not accepted that evidence.

94    Second, the defendants rely on evidence showing that: throughout most of the relevant period in which the Client Protection Policy was being used, ASIC was conducting an investigation into Dover’s business and was aware of the Client Protection Policy; Dover corresponded openly with ASIC and indicated a willingness to rectify any deficiencies identified by ASIC, and yet ASIC did not raise with Dover any concerns with respect to the Client Protection Policy; and when ASIC did finally raise its concerns with Dover, Dover acted promptly to rectify the problem. The defendants rely on these events in support of the contention that the contravention was not deliberate and that, if ASIC had raised a concern at an earlier point in time, Dover would have responded by removing the offending provisions, shortening the period of contravening conduct.

95    The evidence establishes the following chronology of events:

(a)    On 6 May 2016, ASIC wrote to Dover stating that ASIC would conduct a surveillance on Dover, which would be a detailed review of Dover to assess its compliance with its AFSL obligations, with a particular focus on Dover’s arrangements for the monitoring and supervision of its representatives and the quality of advice provided by its representatives. The letter referred to earlier correspondence and the “history of Dover Financial and particular aspects of its operations”, including the incidence of breach reporting, dealing with poor quality advisers, reviewing every statement of advice, the extent of monitoring resources and its processes for appointing advisers.

(b)    Between May and November 2016, Dover received various requests for information from ASIC in relation to the surveillance. On 22 November 2016, Dover wrote to ASIC asking whether there were any compliance issues that had been identified which Dover should be addressing. On 24 November 2016, Mr Davison of ASIC replied stating that the surveillance was ongoing and ASIC was unable to provide any feedback until it was completed.

(c)    The defendants are critical of ASIC’s response on 24 November 2016 because an internal ASIC email dated 21 October 2016 from a member of ASIC’s Financial Adviser’s Team, which was copied to Mr Davison, had identified the exclusion clauses in the Client Protection Policy as being potentially misleading. The email stated:

I know I have been banging on about these disclaimers, but I just think they are so outrageous…

The inclusion of these disclaimers has to be a breach of efficiently, honestly and fairly and in some cases misleading and deceptive conduct. They are blatantly mis-stating the law, with the sole purpose of making consumers doubt their rights. While it is unlikely the disclaimers would mean anything if you went to Court, I hate to think how many clients would be deterred at the complaint stage by Dover pulling these documents out.

I am particularly concerned about the disclaimers that state you can't bring an action for 10 years (which exceeds both FOS and the statutory limitations) and the one that says clients are responsible for any fraud on their accounts - when in this same file the client is giving the adviser discretion to operate the investments. They are also saying it is the client's responsibility to notify them in writing of any legislative change that may affect their advice and to request in writing, new advice every six months. This is a client that is paying on [sic] ongoing advice fee!!

The other really offensive one is that it says you agree we aren't responsible for the advice if you cease using us as your adviser

The whole thing is outrageous

(d)    In December 2016, ASIC prepared and circulated internally a Discussion Paper in connection with ASIC’s surveillance of Dover. The Discussion Paper was lengthy and identified numerous issues of concern in relation to Dover. Under the topic of “advice”, the Discussion Paper included the following paragraph:

A number of disclosures contained in SOAs, or through linked disclosures, appear to have been designed to unreasonably mislead or deceive clients. For example the "Client Protection Policy" linked in the SOA sets out a number of obligations for the client prior to proceeding with advice. Amongst other things it states that the client agrees that Dover is not responsible for any losses connected to their advice if the client ceases to engage the Dover adviser. Holley Nethercote noted this policy "is of no probative value" however it remains misleading to clients.

(e)    The Discussion Paper stated that it was the view of the surveillance team that, based on evidence reviewed, Mr McMaster should not provide or be involved in the provision of financial services and Dover was not complying with its obligations under s 912A of the Corporations Act and that it would need significant changes if it were to ever become a compliant licensee. The Discussion Paper set out a number of options for discussion as follows:

•     Negotiated Outcome. Options include additional licence conditions imposed by consent or an enforceable undertaking. Consideration of this option should account for the fact that ASIC has previously imposed (by consent) additional licence conditions and it appears that this did not have lasting change in the licence in terms of compliance with its general obligations.

•     Administrative Action. This includes possible banning action of Mr McMaster, Ms Tee and licence suspension or cancellation. Factors for consideration of this option include the challenges in obtaining licence suspensions or cancellations. This includes the time it takes to prepare a brief and issue a notice of hearing and the licensee's ability to make changes during that period and then submit that they have changed. It is noted that Dover has recently asked for interim feedback from ASIC on any issues it has identified so it can commence making changes. ASIC advised that no feedback will be provided until our work it [sic] complete. Dover has separately emailed ASIC about its plan to introduce a new adviser 'self-audit' process.

•     Civil Action. This could include taking civil penalty action against Mr McMaster and Ms Tee for the deficient financial services they provided and against Dover for the advice failings of the remaining advisers. The action could also seek to include obtaining orders from the court prohibiting Mr McMaster and Ms Tee from providing financial services or being involved in providing financial services. This alone will not address the ongoing status of and concerns about the Dover licence.

•     Second Licence Application. If the Dover Independent licence application is refused, ASIC will be required to offer it a hearing. The grounds for refusal will be the concerns identified in the surveillance.

(f)    No action was taken against Dover or Mr McMaster at that time.

(g)    On 30 May 2017, Mr McAllister-Harris of ASIC sent an email to Dover attaching a notice under s 33 of the ASIC Act requiring Dover to produce various categories of documents. The notice stated that it was issued in relation to suspected contraventions by the defendants of ss 912A, 961B, 961G, 961J and 961L of the Corporations Act since 1 January 2015. The notice did not refer to any suspected contraventions of the prohibitions against misleading and deceptive conduct in the Corporations Act or the ASIC Act.

(h)    In June 2017, Mr McMaster exchanged several emails with Mr McAllister-Harris of ASIC about the progress of ASIC’s surveillance, stating that Dover was “keen to see if there is any way we can do things better” and that if there were something that Dover was doing incorrectly, it would rectify it immediately. In response, ASIC stated that it was investigating the contraventions referred to in the s 33 notice and identified three areas of concern, none of which related to the Client Protection Policy or the contravening conduct the subject of this proceeding.

(i)    By at least October 2017, ASIC corresponded internally on the issue of the legality of the Client Protection Policy and proposed correspondence with Dover regarding ASIC’s concerns with respect to the Client Protection Policy.

(j)    In December 2017, ASIC began to draft correspondence to Dover about its concerns with respect to the Client Protection Policy.

(k)    On 22 March 2018, ASIC wrote to Dover stating that it considered the Client Protection Policy was misleading including by reason of the introductory clause. ASIC’s letter contained demands that Dover:

(i)    confirm that it has withdrawn the Client Protection Policy;

(ii)    undertake not to rely on the Client Protection Policy in any dispute with, or in response to any complaint made by, a current or former client;

(iii)    provide to ASIC, for its consideration and approval, a proposal to give a notification to all current and former clients to the effect of (i) and (ii); and

(iv)    advise whether the exclusion clauses in the Client Protection Policy have been relied on or referred to by Dover or any of its authorised representatives in relation to a complaint or concern raised by a current or former client.

(l)    On 27 March 2018, Dover responded by agreeing to items (i) and (ii) above. By 5 April 2018, Dover had also agreed to items (iii) and (iv).

(m)    Between 5 April 2018 and 11 April 2018, Mr McMaster corresponded with ASIC in relation to the form of corrective notification, which ASIC ultimately approved on 11 April 2018. The corrective notification was uploaded to Dover’s website on 12 April 2018 and emailed to Dover’s clients between 12 and 20 April 2018.

96    The defendants are correct to observe that staff within ASIC were aware of the misleading character of the Client Protection Policy from a relatively early point in time (at least October 2016). It is unclear why ASIC took as long as it did to bring this proceeding against Dover. ASIC did not seek to explain the delay. I infer from the documentary evidence that ASIC considered that there were more significant problems within Dover’s financial services business than just the Client Protection Policy and it was focussed on investigating those matters. From a consumer protection perspective, it would have been preferable if ASIC had moved far more promptly on the obvious problems with the Client Protection Policy. However, this proceeding is not concerned with the efficiency of ASIC’s enforcement action. It is concerned with the assessment of the seriousness of Dover’s contravening conduct in all the circumstances.

97    It is necessary, though, to reject an assertion made by Mr McMaster when giving evidence, and a submission made on behalf of Mr McMaster by Senior Counsel, that the evidence shows that ASIC refrained from raising with Dover its concerns with respect to the Client Protection Policy so that Dover would not be informed of the problems and rectify them. It was a serious allegation to make, suggesting that ASIC’s dealings with Dover were activated by an improper, if not malicious, motivation. The documentary evidence does not come close to supporting the allegation. It is also inherently implausible that ASIC would decide not to take action to prevent wrongdoing for the purpose of exacerbating the wrongdoing. It is far more plausible that resourcing limitations, or errors or oversight in decision making, caused the delay in ASIC raising its concerns with respect to the Client Protection Policy.

98    Nevertheless, I accept that the evidence shows that, throughout the relevant period, Dover sought to engage proactively with ASIC about its business practices and, when the problem with the Client Protection Policy was pointed out by ASIC, Dover acted promptly to remedy the problem. That does not excuse Dover from responsibility for the length of time in which the contravening conduct continued. However, it does bear on the question of the deliberateness of the contravening conduct.

99    The third category of evidence relied on by the defendants in resisting the conclusion that the contravening conduct was deliberate is the evidence showing that Dover engaged a number of external law firms and expert compliance consultants to review its compliance processes, including statements of advice and the Client Protection Policy, and that none of them identified or raised with Dover a concern that the Client Protection Policy gave rise to the contraventions which the Court has found in this proceeding. I have considered that evidence under the topic of compliance culture. I accept that the evidence shows that the external advisers did not identify a concern with the introductory paragraph of the Client Protection Policy. For the reasons expressed earlier, though, I do not consider that the evidence assists the defendants. Mr McMaster failed to act on warnings that he was given by external advisers.

100    Weighing all of the evidence, I am not satisfied that the defendants’ contraventions of the ASIC Act were deliberate in the sense that they continued to issue the Client Protection Policy consciously aware that it was false or misleading. It is implicit in Mr McMaster’s admission that he was knowingly concerned in Dover’s contravention that he was aware of all relevant facts that made the introductory clause false and misleading. However, it is a further step to find that he was consciously aware that the document was false or misleading and mandated the use of the document regardless of that fact. I find that Mr McMaster was not consciously aware that the introductory clause in the Client Protection Policy was false or misleading. Further, it would not be accurate to describe the contravening conduct as careless. My impression is that Mr McMaster did care about legal compliance. However, Mr McMaster had excessive confidence in his own legal qualifications and was not receptive to concerns being raised about the Client Protection Policy. Given the importance of the Client Protection Policy in defining the legal rights of clients, Dover ought to have sought legal advice about the content of the Client Protection Policy but did not do so. Ultimately, that was the cause of the problem.

Cooperation with the enforcement authorities

101    The defendants’ cooperation with ASIC can be considered in three phases.

102    The first phase was the period in which ASIC conducted surveillance on Dover’s business, which is described earlier. During that period, the defendants displayed full cooperation with ASIC.

103    The second phase was the period in which ASIC raised its concerns with the defendants in relation to the Client Protection Policy. Again, during that period, the defendants displayed full cooperation with ASIC. As set out above, on 22 March 2018 ASIC wrote to Dover stating that it considered the Client Protection Policy was misleading. Within 3 weeks, the defendants had agreed to withdraw the Client Protection Policy, undertaken not to rely on the Client Protection Policy in any dispute with a current or former client, and issued a corrective notification.

104    On 22 April 2018, Mr McMaster gave evidence at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Mr McMaster gave evidence that he fainted during his evidence and had to be taken to hospital. Mr McMaster said that the Royal Commission was a very difficult experience for him. He said that, prior to appearing, he was told by staff working for the Royal Commission that he would only be asked the questions that were listed in a document that the Royal Commission provided to him. However, Counsel assisting the Royal Commission then asked many questions that were not in that document. Mr McMaster was not prepared for those questions. The lack of an opportunity to prepare created stress for him. Mr McMaster said that he has a history of fainting in stressful settings. The photograph of Mr McMaster being taken from the Royal Commission made the nightly news bulletins of each television station and received widespread media coverage. Mr McMaster said that he was extremely embarrassed and upset at this. The Royal Commission and the media attention that followed caused extreme distress to him and his family. Mr McMaster said that he believed it was a major contributor to his diagnosis of post-traumatic stress disorder and depression in July 2018. Mr McMaster said that he became suicidal. He had not suffered depression or a similar condition before these events. Although Mr McMaster did not adduce evidence corroborating his claimed diagnosis of post-traumatic stress disorder and depression in July 2018, he was not cross-examined on that evidence. I therefore accept that evidence.

105    Continuing with the second phase of the defendants’ dealings with ASIC, on 4 May 2018 Mr McMaster sent an email to ASIC in which he proposed an enforceable undertaking or similar understanding whereby (i) Dover would continue to operate subject to making various changes to its compliance processes and (ii) Mr McMaster would cease to be a director, employee or owner of Dover and would agree not to be involved in the management of the holder of an AFSL. On 17 May 2018, ASIC replied by email stating that it was not prepared to accept an enforceable undertaking from Dover. The day before, on 16 May 2018, ASIC had sent a letter to Mr McMaster (which Mr McMaster received on 18 May 2018) stating that, amongst other things, ASIC was concerned that Dover may not have complied with its obligations under s 912A of the Corporations Act. The letter set out ASIC's concerns which related to various aspects of the Client Protection Policy including but not limited to the misleading nature of the introductory clause. The letter stated that its purpose was to inform Dover of ASIC's concern and to give Dover an opportunity to appear at a hearing before ASIC and to make submissions to ASIC prior to a decision being made whether to suspend or cancel Dover's AFSL under s 915C(1) of the Corporations Act. The letter stated that the hearing would occur on 14 June 2018.

106    Mr McMaster responded almost immediately to ASIC’s letter of 16 May 2018 and suggested an urgent meeting to discuss the option of an “orderly closure” of Dover’s business. He instructed lawyers to act on his behalf. Mr McMaster gave evidence that, at this time, he was overcome by stress and anxiety and was not able to sleep or work competently.

107    From late May to late June 2018, the defendants negotiated the terms of an enforceable undertaking with ASIC, which was ultimately given on 28 June 2018. The preamble to the undertaking referred to ASIC’s concerns that the Client Protection Policy contravened s 912A of the Corporations Act (requiring a financial services licensee to do all things necessary to provide financial services efficiently, honestly and fairly) and s 12BG of the ASIC Act (voiding unfair contract terms). Pursuant to the undertaking:

(a)    Dover agreed, by 6 July 2018, to lodge an application to cancel its AFSL, to terminate the appointment of each of its authorised representatives and to cease to carry on a financial services business; and

(b)    Mr McMaster agreed, from 6 July 2018, not to, at any time in the future, carry on a financial services business, provide financial services, act as an authorised representative of a financial services licensee, act in a managerial capacity of any entity operating a financial services business or providing legal, accounting or other advisory services to a financial services business, hold out that he holds an AFSL or apply to ASIC for an AFSL.

108    I find from the foregoing that, during the second phase of dealings with ASIC, the defendants displayed full cooperation.

109    The third phase concerns the conduct of this proceeding which commenced on 12 September 2018. I find that the defendants have displayed some cooperation with ASIC in the conduct of the proceeding. The defendants admitted the primary facts concerning the preparation and use of the Client Protection Policy, and Mr McMaster admitted responsibility for the Client Protection Policy. However, the defendants defended the proceeding on the basis that the introductory clause was not false, misleading or deceptive, which I ultimately found to be untenable. The defendants are not to be penalised for defending the proceeding, but lesser allowance is to be made on account of cooperation in the third phase.

Personal consequences for Mr McMaster

110    Mr McMaster gave evidence that the adverse publicity that followed his appearance at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the closure of Dover has adversely affected his capacity to work.

111    Mr McMaster said that the other directors in the accounting firm McMasters demanded that he resign as a director and barred him from working with McMasters' clients as an accountant and a lawyer. The accounting firm McMasters subsequently changed its name to Curve Accountants and removed all references to Mr McMaster on its website. As noted earlier, though, the Garraway McMaster Family Trust continues to hold a one-third interest in that accounting firm.

112    As referred to earlier, Mr McMaster gave unchallenged evidence that the closure of Dover and the resultant adverse publicity has caused him severe stress. In the months that followed the Royal Commission and the closure of Dover, he experienced a heavy sense of shame and embarrassment and rarely went outside for fear of being recognised. He became depressed and suicidal. He sought and obtained medical assistance.

113    Following the Liability Judgment, Mr McMaster’s membership of the Institute of Public Accountants was terminated and he has been expelled from each of the Association of Financial Advisers and the Financial Planning Association.

Contrition

114    Mr McMaster’s behaviour following the institution of these proceedings indicates that he has only a limited appreciation of the seriousness of the contravening conduct and little if any contrition for the wrongdoing.

115    On 24 October 2018, Dover issued a response to the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The covering letter to the response, authored by Mr McMaster, asserted that the Interim Report was “full of deliberate misstatements” and that the intention of including the misstatements was to “help ASIC build a false narrative on Dover”. The letter continued with assertions that the Royal Commission was acting in a deliberately misleading manner to assist an “ASIC set-up”. Amongst other things, the response referred to the Client Protection Policy and asserted that:

It increased the quality of advice provided to Dover’s clients. Further, critically, it brought in superior professional indemnity insurance and in this way provided greater client protection. This was of great benefit to Dover’s clients.

116    On or about 5 July 2019, after the conduct of the liability hearing in this proceeding (but before judgment), Mr McMaster published an article or “blog” on the Dover website in a section called “Friday Reflections”. Before the Dover business closed, Mr McMaster published articles on this section of the website that he believed would be of interest to Dover’s advisers. The articles were able to be viewed by the public. The article published on 5 July 2019 was titled “ASIC’s in-house solicitors set Dover and Terry up at the Royal Commission”. The article identified two of ASIC’s solicitors by name and included photographs of them from their LinkedIn profiles, and named their two supervisors at ASIC, referring to the four ASIC employees as “the ASIC 4”. Amongst other things, the article asserted that the “ASIC 4” engaged in “malicious conduct” toward Dover and Mr McMaster; that throughout 2016 and 2017, they deliberately misled and deceived Dover by omitting the Client Protection Policy from a list of ASIC concerns; and that ASIC treated Dover differently from how it treated the major financial institutions. During cross-examination, Mr McMaster did not resile from the assertions made in the article. As noted earlier in these reasons, none of these assertions were supported by the documentary evidence available to Mr McMaster and adduced in evidence.

117    On 13 February 2020, after the publication of the Liability Judgment, Mr McMaster was quoted in an article in the Australian Financial Review as stating that he was “convinced his downfall was part of a conspiracy orchestrated by the corporate regulator”. Mr McMaster confirmed in cross-examination that those were his words and he continued to hold that view. Again, it is necessary to reiterate that those assertions were not supported by the documentary evidence available to Mr McMaster and adduced in evidence.

118    In cross-examination at the penalty hearing, Mr McMaster maintained that if ASIC had expressed its concerns about the Client Protection Policy to Dover in a timely manner, Dover would have stopped its misleading conduct immediately at that time. Mr McMaster maintained that ASIC was at least partially to blame for Dover’s contraventions.

119    It is clear from Mr McMaster’s evidence during cross-examination that the statements made by him, as set out above, were not the result of impulsive behaviour brought about by the stress and depression he suffered following the closure of Dover and the events of the Royal Commission. Mr McMaster continues to hold the views expressed above. Given the lack of documentary support for those views, I find that the views have arisen from Mr McMaster’s unwillingness to accept responsibility for the wrongdoing the subject of this proceeding and desire to blame others, particularly ASIC, for the events that occurred.

Consideration of appropriate penalty

120    I accept the submission of the defendants that ASIC’s proposed approach to the determination of an appropriate penalty in this case is not appropriate. As noted earlier, in Reckitt Benckiser the Full Court stated that care must be taken to ensure that the maximum penalty is not applied mechanically, instead of it being treated as one of a number of relevant factors, albeit an important one (at [156]). So too, in Director, Consumer Affairs Victoria v Alpha Flight Services Pty Ltd [2015] FCAFC 118, the Full Court stated (at [43]):

It is incorrect to commence with the maximum penalty and engage in a ratcheting down exercise. The process to be applied in arriving at a particular penalty figure was considered in the context of criminal sentencing by the High Court in Markarian. This process provides, by analogy and with adjustment, guidance as to how the Court should approach the assessment of pecuniary penalties in the present context. In Markarian, Gleeson CJ, Gummow, Hayne and Callinan JJ held the following:

(a)     Assessment of the appropriate penalty is a discretionary judgment based on all relevant factors (at [27]);

(b)     It will rarely be appropriate to start with the maximum penalty and to proceed by making a proportional deduction from that maximum (at [31]);

(c)     The Court should not adopt a mathematical approach of increments or decrements from a predetermined range, or assign specific numerical or proportionate value to the various relevant factors (at [37] citing Wong v The Queen at 611 and 612 per Gaudron, Gummow and Hayne JJ);

(d)    It is not appropriate to determine an “objective” penalty and then adjust it by some mathematical value given to one or more factors such as a plea of guilty or assistance to authorities; and

(e)     The Court “may not add and subtract item by item from some apparently subliminally derived figure” to determine the penalty to be imposed (at [39]).

121    ASIC’s proposed approach places undue emphasis on the maximum penalty. Its approach is also to set a penalty for each contravening act, but with insufficient recognition that the wrongdoing arose from one primary decision to introduce the Client Protection Policy that contained the introductory clause. It was one course of conduct, albeit that the defendants had opportunities to revisit the original decision to use the Client Protection Policy on a number of occasions.

122    In determining the penalty to be imposed, it is appropriate to reiterate the relevant considerations in this case.

123    First, the conduct involved a serious contravention of s 12DB(1)(i) of the ASIC Act. The conduct continued from around 25 September 2015 to around 30 March 2018. The number of clients that received the Client Protection Policy (as varied from time to time) in the relevant period was 19,402. Given the number of contraventions, the statutory maximum penalty is very large and somewhat meaningless in this case. Other factors have more relevance. In particular, it is necessary to take account of the fact that the contraventions arose out of a single course of conduct.

124    Second, it is unlikely that any consumers suffered loss or damage as a result of the contravening conduct. Nevertheless, the Client Protection Policy had real potential to cause consumers loss by misleading them into believing that they had no legal recourse against Dover in respect of financial advice given to them when that was not the case.

125    Third, the evidence does not establish that the defendants received a financial gain from the contravening conduct. Nevertheless, I have concluded that the purpose or objective of the Client Protection Policy was to exclude or limit Dover’s liability to clients to the financial benefit of Dover, while presenting such exclusions and limitations in an attractive manner using the misleading label “Client Protection Policy”.

126    Fourth, the defendants have not previously been found by a court to have engaged in any similar conduct.

127    Fifth, during the relevant period, Dover operated a substantial independent financial services advice business with around 400 financial advisers in April 2018. Its profits, though, were modest, rising from $315,385 for the 2015 financial year to $1,737,875 for the 2017 financial year while falling to a loss of $303,933 for the 2018 financial year. Mr McMaster did not draw a salary or fees from Dover during the relevant period. Although a matter of less weight, Dover now has few assets while Mr McMaster is not employed and is reliant on income generated by family trusts that he does not control.

128    Sixth, the contravention arose out of the conduct of the most senior management within Dover, being Mr McMaster.

129    Seventh, during the relevant period, Dover had inadequate compliance processes to address its obligations under the ASIC Act, particularly the prohibitions against false, misleading and deceptive conduct and other similar consumer protection obligations.

130    Eighth, the defendants’ contraventions of the ASIC Act were not deliberate. Mr McMaster was not consciously aware of the fact that the Client Protection Policy contained a false or misleading statement. The lack of awareness (of an obvious problem) was caused by Mr McMaster’s excessive confidence in his own legal qualifications and being unreceptive to concerns being raised about the Client Protection Policy.

131    Ninth, the defendants cooperated with ASIC during the investigation of Dover and in response to ASIC’s concern over the Client Protection Policy. With respect to the conduct of this proceeding, the defendants have displayed some cooperation with ASIC but ultimately defended the proceeding on the basis that the introductory clause was not false, misleading or deceptive.

132    The final two considerations require further elaboration.

133    The tenth consideration concerns the relevance of the extra-curial sanctions that have been incurred by the defendants and the adverse reputational and health effects suffered by Mr McMaster.

134    As to the former, the authorities make clear that extra-curial sanctions arising from the contravening conduct are relevant to the assessment of penalty. In ABCC v CFMEU, the Full Court observed that one of the factors relevant to the assessment of penalty is whether the company has suffered any extra-curial punishment or detriment arising from the finding that it had contravened the law (at [104]). In Australian Securities and Investments Commission v Wooldridge [2019] FCAFC 172, the Full Court approved the principle that the imposition of a disqualification order on a director is relevant to the assessment of any additional penalty to be imposed (at [56] – [58]).

135    In the present case, the defendants offered an enforceable undertaking to ASIC pursuant to which they agreed to close Dover’s business and permanently leave the financial services industry. The sanctions may be regarded as severe. However, the weight to be given to those sanctions is lessened by three interrelated considerations. First, the undertaking was given voluntarily by the defendants, and was not imposed by ASIC or the Court. Second, the evidence indicates that the undertaking was given in response to broader concerns held by ASIC about the Client Protection Policy. As noted earlier, the preamble to the undertaking recites that ASIC was concerned that the Client Protection Policy contravened s 912A of the Corporations Act and s 12BG of the ASIC Act. Those concerns extended beyond the misleading content of the introductory clause which was the subject of this proceeding. Third, the undertaking was given in circumstances where ASIC intended to conduct a hearing about the cancellation of Dover’s AFSL on the basis of its broader concerns about the Client Protection Policy. Having regard to those matters, I conclude that the enforceable undertaking was not given as a direct result of, and as a sanction for, the issues raised in this proceeding. Indeed, the sanctions suffered as a result of the enforceable undertaking might be regarded as disproportionate if they were imposed in response to the finding in the Liability Judgment that the introductory clause was false and misleading. The enforceable undertaking was given as a result of, and as a sanction for, broader legal issues arising from the Client Protection Policy.

136    I emphasise, though, that I do not disregard the enforceable undertaking in the assessment of penalty. I consider that, in a small part, it was a response to the concerns that became the subject of this proceeding. The offering of the enforceable undertaking demonstrated a cooperative approach to the relevant enforcement agency, ASIC. Furthermore, the enforceable undertaking is also relevant to the need for specific deterrence in this case, given that the defendants have undertaken to leave the financial services industry permanently.

137    In relation to the damage to Mr McMaster’s reputation and health, the authorities support the view that such matters may be taken into account, but must be balanced against the importance of general deterrence. In Australian Securities and Investments Commission v Healy (No 2) (2011) 196 FCR 430, Middleton J observed (at [122]-[124]):

122. Again, I accept that the courts have emphasised the importance of general deterrence, and the need to ensure that the detriment suffered by a defendant does not undermine the need to impose penalties that will achieve general deterrence.

123. In Australian Competition Consumer Commission v High Adventure Pty Ltd [2005] FCAFC 247 at [11], the Full Court of the Federal Court stated:

[By] focusing on the detriment to the respondents the judge ignored both the seriousness of the contravention as well as the need to fix upon an appropriate penalty by reference to the need to deter future contraventions. As the cases to which the judge was referred show, the principal, if not the sole, purpose for the imposition of penalties for a contravention of the antitrust provisions in Part IV is deterrence, both specific and general. … [A]s deterrence (especially general deterrence) is the primary purpose lying behind the penalty regime, there inevitably will be cases where the penalty that must be imposed will be higher, perhaps even considerably higher, than the penalty that would otherwise be imposed on a particular offender if one were to have regard only to the circumstances of that offender. In some cases the penalty may be so high that the offender will become insolvent. That possibility must not prevent the Court from doing its duty for otherwise the important object of general deterrence will be undermined.

124. The importance of general deterrence — including in cases where the defendant has already suffered significant detriment as a result of his conduct — was echoed by the NSW Supreme Court in R v Fodera [2007] NSWSC 1194 at [66]-[67], where Bell J noted the following in sentencing a professional defendant:

[66] Mr Tobin submitted that it was appropriate to have regard to the fact that the offender has suffered the loss of his ability to practice as a chartered public accountant and that he had been subject to widespread publicity and public vilification connected with the present charge against the background of the collapse of HIH. The extra curial punishment to which the offender has been subject is a matter that I take into account but, again, it is not a factor that is to be given significant weight.

[67] In sentencing the offender for the Soc Gen prospectus offence Latham J extracted a passage from the judgment in DPP v Bulfin [1998] 4 VR 114 at 131–132 in which the Victorian Court observed that the prospects of rehabilitation of white collar offenders are generally high and that the consequences of discovery and punishment on the offender and his or her family are frequently devastating. The court pointed to the risk of allowing considerations of this kind to distract attention from the importance of general deterrence. I agree with her Honour that these observations are apposite in dealing with the present offender.

138    I accept the evidence given by Mr McMaster that he has suffered substantial damage to his reputation and has suffered adverse health effects. However, the evidence also shows that those effects were largely the result of Mr McMaster’s appearance at the Royal Commission, rather than the action taken by ASIC to address its concerns about the misleading nature of the introductory clause in the Client Protection Policy. Given the importance of the principle of general deterrence, and the limited extent to which this proceeding has caused adverse reputational and health effects to Mr McMaster, I give this factor limited weight.

139    The eleventh consideration, which also requires further elaboration, is the relevance of my finding that Mr McMaster lacks contrition for the contravening conduct. The defendants submitted that it is well established that the object of a pecuniary penalty is deterrence, not punishment. They further submitted that contrition is only relevant to the objective of specific deterrence and, in circumstances where specific deterrence has no role to play (because there is no risk of future contraventions), contrition has no relevance to the assessment of penalty. In support of that submission, the defendants relied on the following passage of the Full Court judgment in Reckitt Benckiser at [159]:

The need for specific deterrence can be informed by the attitude of the contravener to the contraventions, both during the course of the contravening conduct and in the course of the proceedings both at first instance and on appeal. The analogy that can be drawn with criminal sentencing are the concepts of contrition or remorse, which conventionally give some comfort to a court that re-offending is unlikely and therefore specific deterrence less important.

140    The defendants also referred to a similar observation made by Mortimer J in Director, Consumer Affairs Victoria v Gibson (No 3) [2017] FCA 1148 at [50]:

…where a respondent accepts responsibility for the contravention, adduces evidence of steps taken to ensure such a contravention will not occur in the future, expresses remorse or contrition or otherwise indicates consciousness about the seriousness of the contravening conduct, these attitudes may persuade a court in a given circumstance that it is appropriate to impose a lower penalty than might otherwise be the case. Such attitudes might, for example, persuade a court that a greater penalty is not necessary for purposes of specific deterrence because a respondent has accepted her, his or its conduct was unlawful and should not be repeated.

141    I accept those submissions. In the present case, the need for specific deterrence does not arise in circumstances where the defendants have left the relevant industry and given an enforceable undertaking not to return. It follows that Mr McMaster’s lack of contrition for the wrongful conduct is of no particular relevance to the assessment of penalty.

142    Taking account of all of the matters referred to above, in my view an appropriate aggregate penalty to be imposed on Dover in respect of all 19,402 contravening acts is $1.2 million. In imposing a penalty of that size in circumstances where Dover no longer conducts business and has limited assets, I am most conscious of the importance of general deterrence and the need for the Court to mark its disapproval of the contravening conduct. In respect of Mr McMaster, in my view an appropriate aggregate penalty is $240,000. In this case, there is no relevant difference in the degree of culpability of Dover and Mr McMaster for the contravening conduct, as Mr McMaster was the owner and controller of Dover and made all relevant decisions. It is appropriate to impose a penalty on Mr McMaster that reflects the statutory ratio of corporate and individual penalties, being one fifth.

143    The defendants did not resist an order that they pay ASIC’s costs of the proceeding (both as to liability and relief) and I will make such an order.

Associate:

Dated:    5 March 2021