The Federal Court’s decision in the Australian Securities and Investments Commission’s (ASIC’s) fee for no service proceedings against certain licensees within the NAB Group highlights the principles to which a Court will have regard in determining the quantum of civil penalties. The judgment emphasises for licensees the importance of pre-litigation conduct and remediation of affected customers as relevant factors likely to be taken into account in determining penalty. It also reinforces the utility of the “course of conduct” principle in determining an appropriate penalty in respect of a single course of conduct resulting in potentially numerous contraventions.   

On Friday 11 September 2020, Justice David Yates handed down his decision in Australian Securities and Investments Commission v MLC Nominees Pty Ltd [2020] FCA 1306. The case concerned the charging of fees for advice, and representations about the right to charge for such fees, to members of two superannuation funds operated until July 2016 through MLC Limited, a part of NAB Group.  The case is the first fee for no service case arising from the Financial Services Royal Commission.

ASIC had agreed with the two defendants, MLC Nominees Pty Ltd (MLC Nominees) and NULIS Nominees (Australia) Limited (NULIS), that penalties should be imposed under s 12GBA of the ASIC Act in respect of contraventions of ss 12DB(1)(g) and (i), which concern making false or misleading representations. However, the parties were significantly apart on the appropriate penalty: ASIC contended that the total penalties could be higher than $140 million, whereas the licensees contended around $20 million. The Federal Court ordered penalties of around $57.5 million.

Key Takeaways

In the judgment, the Court outlined considerations of fact and principle which will be relevant to other cases in which regulators pursue pecuniary penalties.

• The Federal Court rejected ASIC’s submission that it not use a “course of conduct” analysis in the assessment of penalty, and instead applied such an analysis. Rather than calculating a penalty based on each contravention to the approximately 222,000 affected customers, the Court grouped the contraventions under multiple courses of conduct – these being, conduct constituted by sending letters, “welcome kits” and annual statements.
• The assessment of penalty will be influenced by the defendant’s conduct. The Court will have regard to the nature and extent of the act or omission giving rise to the contravention, and the circumstances in which the act or omission takes place. Because of the variety of facts and circumstances, prior case law in assessment of penalty may have very limited or no analogical value.
• In calculating penalties in this instance, the Court considered the following factors “must be taken into account”:
  • the fact that affected customers had been fully remediated amounts wrongly deducted on the initiative of the licensee; and  
  • the licensees’ acknowledgement of contraventions and working cooperatively with ASIC, particularly in relation to the proceeding.

Analysis of Penalties

Justice Yates made declarations of contravening conduct in relation to two broad categories of conduct.

1. The first category related to the charging of $33.62 million of advice service fees to about 220,000 superannuation accounts for which MLC was responsible in which there was no linked financial advisor (No Advisor Members). For this conduct, Yates J awarded a pecuniary penalty of $22.5 million. ASIC had sought a penalty of $60 to $70 million, while the defendants argued for a penalty of $10 million.
2. The second category related to representations made by MLC and, from July 2016, from NULIS, that members of superannuation funds did not have the right to turn off service fees and the representation that members instead had the right to negotiate lower fees (Linked Members). 
   • In relation to the Linked Members during MLC Nominee’ time as trustee, Yates J awarded a penalty of $27 million. ASIC had sought a penalty of $50 to $60 million, while MLC contented a penalty of $8 million was appropriate.  
   • In relation to Linked Members during NULIS’ time as Trustee, Yates J awarded a pecuniary penalty of $8 million. ASIC had sought a penalty in the range of $10 to $12 million, while NULIS argued for a $2 million penalty.

In considering the submissions made by ASIC and the defendants in relation to the quantum of penalties, the Court made, among others, the following observations and determinations:

• The remediation of members was taken into account in assessing the penalties. In their submissions, ASIC and the defendants differed in their construction of the importance of past remediation. In circumstances relating to the No Advisor Members, where the funds should not have been collected by MLC Nominees, ASIC argued that the remediation did not have an adverse consequence for NAB or MLC, because they should not have had access to the funds in any event. However, in relation to both the remediation of the No Advisor Members and the Linked Members, the Court accepted that the remediation should be taken into account for the purposes of penalty.
• Because ASIC had agreed in a Statement of Agreed Facts and Admissions that false or misleading representations were not deliberately made, inferences could not be drawn about the deliberateness or otherwise of MLC’s conduct in relation to no-advisor members. In its submission on penalties, ASIC had pointed to a course of conduct that “consistently prejudiced the members’ interests and advantaged those who received the plan service fees (MLC and plan advisers)”. However, Yates J said: that he did “not understand how MLC Nominees’ contravening conduct in relation to linked members reflects on the deliberateness or otherwise of its conduct in relation to no-adviser members, particularly when ASIC also accepts that the statements and admissions in the SAFA do not permit a finding that MLC Nominees’ false or misleading representations to linked members were deliberately made”.
• “The superannuation context” was relevant but not determinative to the consideration of appropriate penalties. Both parties accepted that it was relevant that the conduct occurred in relation to funds invested through compulsory superannuation. However, the Court did not accept ASIC’s submission that a more substantial penalty was necessarily warranted in circumstances when the contravening conduct is undertaken by a trustee towards a beneficiary.
• A “course of conduct” approach (that holds that when there is a sufficient interrelationship in the legal and factual elements of multiple or many acts or omissions constituting the contravening conduct, Courts may penalise them as a single “course of conduct”) was appropriate to determining a penalty in a situation in which representations were made to about 220,000 members. ASIC had argued that a course of conduct approach was not apposite, in part because of the personalised nature of the representations (by letters and welcome kits) provided to members over the period. ASIC had argued that the more appropriate approach was to assess the penalty on the basis that there were 222,000 separate contraventions, and then “temper” the total or aggregate penalty. Although the Court accepted that letters and welcome kits sent to members were personalised, they were sent to members in standardised circumstances.
• There is limited utility in prior case law in assessing the quantum of pecuniary penalties under the ASIC Act and Australian Consumer Law. Justice Yates stated, “As I have previously remarked, because of the variety of facts and circumstances presented, the analogical value of such cases can be very limited or even non-existent. I have found that to be the case here. The facts and circumstances of the present case are unique.”