Breaches by service providers: not always a trustee’s problem

By Selina Nutley, Jacob Uljans and Elizabeth Vorbach

The corporate regulator failed in its recent Federal Court case against Diversa Trustees where it attempted to impose liability on a trustee for the acts of third parties involved in the administration of a superannuation fund. This decision has important practical implications for all those involved in the management and operation of funds.

Key points

  • A licensee will not automatically be exposed to a penalty for the misconduct of a party contracted to provide services to a fund.
  • What the licensee actually knew is highly relevant. The knowledge of a contractor cannot automatically be attributed to a licensee.
  • Licensees need to show they have adequate systems to detect and deal with misconduct of contracted parties and to ensure they comply with the financial services laws.

Background

Diversa was the trustee of YourChoice Super and had appointed OneVue to provide administration, management, and promotion services. As part of these duties, OneVue operated an online portal that allowed third parties to open YourChoice Super accounts. The Bhandari Entities promoted a ’free’ superannuation search through which customers could locate their ‘lost’ super and the Bhandari Entities would then, using OneVue’s online portal, roll it or other super into an account with YourChoice Super. The Bhandari Entities earned substantial fees through the rollover. However, ASIC was concerned customers became liable to pay additional fees, risked losing insurance benefits, and signed up to a super account that may not have been in their best interests.

ASIC’s allegations

The underlying conduct of concern to ASIC was that of the Bhandari Entities. However, the proceedings were commenced only against Diversa; the BhandaEri Entities and OneVue Entities were not parties. ASIC’s key arguments were, given what Diversa knew, or ought to have known, about the conduct of the Bhandari Entities and the risks posed by that conduct, Diversa:

  • should have cut the Bhandari Entities off and no longer issued interests in YourChoice super to their clients; and
  • had not taken reasonable steps to ensure the OneVue Entities complied with the financial services laws.

ASIC said both of these failures constituted breaches of the general duties obligation under s912A of the Corporations Act to provide services efficiently, honestly and fairly.

ASIC also maintained that as OneVue was Diversa’s agent, its knowledge was effectively Diversa’s knowledge because of the statutory attribution provisions in s769B of the Corporations Act 2001. While this section of the Act is quite technical, in broad terms it is intended to make it clear body corporates are responsible for the conduct of their agents and employees and can be prosecuted by ASIC accordingly.

Key findings and takeaways

ASIC failed to establish any of the alleged contraventions. Some of the court’s key findings were:

  • The relevant conduct for the court to consider was Diversa’s, not OneVue. OneVue’s knowledge could not automatically be attributed to Diversa.
  • Whether there are deficiencies in ‘downstream’ operations that would result in a licensee breaching the law will depend on what it knew of the deficiencies, its relationships and contracts with downstream entities, and how the deficiencies bear on the financial services provided by the licensee.
  • A key consideration will be what the licensee actually knew and what it should have done with that knowledge. Ultimately, the court held Diversa did not have sufficient knowledge of the operations of the Bhandari Entities.
  • ASIC’s case overlooked several key matters, including:
    • the systems and processes Diversa had in place, including that its contracts required OneVue to ensure the services provided were provided properly and in accordance with applicable regulatory requirements;
    • the OneVue Entities had their own AFSLs, and
    • the OneVue Entities had compliance functions and were actively monitoring the Bhandari Entities.
  • Whether a licensee fails to take ‘reasonable steps’ requires a holistic analysis of matters of systems and processes.
  • The obligations imposed on licensees to ensure its representatives take reasonable steps to comply with the law is a forward-looking obligation and is concerned with systems and processes – it does not require a licensee to ’find and take the optimal steps’.

The court’s decision was heavily influenced by the specific factual circumstances of the matter, and the way ASIC framed its case. Cases with different facts may of course produce a different result. However, it is a significant judgment because the court rejected ASIC’s broad interpretation of the statutory attribution provisions.

Reach out to Selina Nutley, Jacob Uljans, Elizabeth Vorbach or a member of the HW Funds team to learn more about the practical implications of this case for the investment funds industry and how we can help.

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