The corporate regulator has received a favourable ruling in a case on conflicted remuneration involving real estate referrals in SMSFs from around a decade ago.
On 29 February, the Federal Court found RM Capital failed to take reasonable steps to ensure that its authorised representative, the SMSF Club, did not accept conflicted remuneration.
ASIC’s win in the case comes six months after losing its appeal against Commonwealth Bank and Colonial First State on conflicted remuneration.
The regulator’s case alleged that SMSF Club advised its clients to set up SMSFs to buy property marketed by real estate agent, Positive RealEstate (PRE), and received $5000 each time a client bought a property using their SMSF.
The timeframe spanned from December 2013 to July 2016, when conflicted remuneration was banned by the Future of Financial Advice reforms.
ASIC argued SMSF Club contravened s963G of the Corporations Act by accepting payments from Positive RealEstate, and RM Capital contravened s963F of the Corporations Act by failing to take reasonable steps to ensure SMSF Club did not accept the payments.
There will be a separate hearing on 7 March to outline remedies against the SMSF Club and RM Capital.
The court argued that if RM Capital had not placed PRE on an approved product list, it could have could have influenced the SMSF Club’s behaviour.
“The fact that RM Capital placed PRE on the list indicates that someone thought there was a need for it, in order for SMSF Club to be able to give relevant advice, from which it follows that leaving it off the list may have been an effective sanction,” the court judgement said.
The licensee believed the fees paid under the referral agreement were not conflicted remuneration because property was not a financial product, and the arrangement did not involve giving financial advice.
“One might wonder why it was necessary to place PRE on the approved products list if SMSF Club was not giving financial advice about it (or anything else),” the judgement said.
In his testimony, RM Capital managing director James Richardson said he did not seek legal advice about the referral agreement.
“I did not perceive any need to do so,” Richardson said.
He had received internal advice from director Guy Le Page and externally from licensee compliance firm GRC Essentials, who did not suggest the arrangement constituted conflicted remuneration and that legal advice was not needed.
“Specifically, I recall having a meeting with Ms Stewart and Ms Shah from GRC Essentials at RM Capital’s offices in late 2013 or early 2014, during which I asked them to the effect if the referral agreement had any potential implications regarding FOFA,” Richardson said. “Neither Ms Stewart nor Ms Shah raised any issues.”
While the alleged misconduct is from around seven to 11 years ago, SMSF advice has remained a key area of interest for the regulator with updated regulatory given over a year ago and a review into industry compliance announced last month at the national conference for sector’s peak body.