12 October 2022
4 min read
#Dispute Resolution & Litigation, #Superannuation, Funds Management & Financial Services
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The Federal Court has recently provided guidance on the application of the conflicted remuneration provisions of the Corporations Act 2001 (Cth) (Act) in the case of Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1149.
The Federal Court dismissed civil penalty proceedings brought by the Australian Securities and Investments Commission (ASIC) against the Commonwealth Bank of Australia (CBA) and its subsidiary, Colonial First State Investments Limited (Colonial), relating to Colonial’s distribution of CBA’s “MySuper” superannuation product called Essential Super.
It was alleged that from July 2013 to June 2019, Colonial gave, and CBA accepted, benefits to CBA to promote Colonial’s Essential Super product to CBA customers.
It was contended that this amounted to a contravention of the prohibition against:
The arrangements between CBA and Colonial were the subject of a case study in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
CBA and Colonial entered into a written agreement on 27 June 2013 for an initial five-year term (Agreement). Under the Agreement, CBA was obliged to provide services to Colonial. In return, CBA was entitled to a payment of 30 per cent of the total net revenue derived by Colonial from Essential Super in each fiscal year. As part of the Agreement and subsequent agreements made between the parties, CBA trained its retail branch staff to sell Essential Super to retail customers and it was the default fund used for employees who did not choose a superannuation fund.
The ban on conflicted remuneration is contained in Division 4 of Part 7.7A of the Act, which extends from sections 963 to 963P (Conflicted Remuneration Provisions). The Conflicted Remuneration Provisions were introduced because Parliament recognised that conflicts of interest affect the quality of financial product advice and that mere disclosure of conflicts of interest is ineffective in combating poor advice and poor consumer outcomes.
Section 963A of the Act defined ‘conflicted remuneration’ for the purposes of sections 963E and 963K as follows:
“Conflicted remuneration means any benefit, whether monetary or non-monetary, given to a financial services licensee … who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
(a) could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
(b) could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.”
Justice Anderson of the Federal Court (Court) found that payments made by Colonial to CBA did not constitute a ‘benefit’ and thus did not fall within the definition of ‘conflicted remuneration’ under the Act. His Honour indicated that the statutory context of the Conflicted Remuneration Provisions was focused on circumstances that generate a “genuine conflict of interest”, such as where advisers have financial incentives to recommend products to clients.
The Court also held that it was not established that the Agreement could reasonably be expected to influence CBA’s distribution of Essential Super. Rather, it found that CBA distributed Essential Super because it was CBA’s MySuper product. The alleged benefits which CBA received from Colonial were “mere intercompany arrangements that no impact on the overall financial position of CBA and were not apt to influence with the choice of financial product recommended or the financial advice given by CBA to its retail clients.”
In dismissing the claims, the Court held that to do otherwise would be “to elevate form over substance”. That is, it would be to focus on the text of the Conflicted Remuneration Provisions in a way that the Court held was inconsistent with their context and purpose. The claim under the Conflicted Remuneration Provisions failed to consider important contextual considerations, including the environment in which the Essential Super product was developed and distributed and the commercial realities of the Agreement.
For companies, this decision illustrates that breaching the Conflicted Remuneration Provisions under the Act requires a genuine conflict of interest. The possibility that commercial dealings may generate a conflict of interest is not enough. Additionally, this decision demonstrates that a company can rely on factual circumstances, such as the commercial realities of parent-subsidiary dealings, to justify its adherence to the Conflicted Remuneration Provisions.
For regulators, it is important to consider contextual factors such as the realities of the commercial environment when construing statutory provisions. Failure to properly consider the context and purpose of applicable statutory provisions may result in the court rejecting a claim.
If you have any questions about possible conflicts, please contact us below or send us your enquiry here.
Authors: Millie Clayton & Paul Libreri
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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