What is ASIC v Dixon Advisory?
In September 2020, ASIC commenced civil penalty proceedings against Dixon Advisory and Superannuation Services Limited (Dixon Advisory) for alleged conflicts, best interest failures, and inappropriate advice.
On 15 October 2021, Dixon Advisory admitted to several allegations, their licence was suspended in April 2022 following their placement into voluntary receivership in January of this year.
A hearing on liability and penalty took place on 2 August 2022, and judgement was handed down on 19 September 2022. It was found that Dixon Advisory was the responsible licensee of six representatives who failed to act in the clients’ best interests and failed to provide advice appropriate to the clients’ circumstances. Dixon Advisory was penalised $7.2 million for breaches of best interest obligations.
How it happened
The court found 53 occasions between October 2015 and May 2019 where representatives of Dixon Advisory did not act in the best interests of eight clients when they advised these clients to either acquire, roll-over, or retain interests in the US Master Residential Property Fund (URF) and other URF-related products.
It was found that these representatives did not conduct a reasonable investigation of the clients’ circumstances before providing the advice, resulting in some client self-managed super funds being insufficiently diversified and therefore exposed to risk of capital loss.
It was determined that there was no evidence that the Dixon Advisory representatives conducted necessary reasonable investigations into:
- the recommended financial products
- possible alternative financial products, nor
- the personal circumstances of the clients.
The Personal Circumstances Ruling
The court ruled that on 28 occasions, there was insufficient evidence that the representatives had conducted reasonable investigation into whether the products met the needs of the client. A point of note is that on 13 occasions, the recommendation to retain the product was the act deemed to be in breach of the best interest duty.
So, what can reasonably be determined is that relying on the original investigation into the clients’ needs and the products available at the time of initial investment, may not be sufficient to satisfy the best interests duty obligation when later providing product advice to the client.
The Corporations Act 2001 has the following to say on this matter:
- Section 961B(1) imposes the ‘best interests duty’ on the providers of relevant financial advice, thus requiring the provider to act in the best interests of the client in relation to any advice provided.
- Section 961B(2)(e) imposes that if an adviser thinks it is reasonable to recommend a financial product, the adviser must conduct a reasonable investigation into relevant alternative options and exercise professional judgment in product selection.
The Sticking Point
Throughout the proceedings, it was determined that the representatives were following a standardised advice process set out by the licensee:
- Using a Dixon-mandated risk profiling process, and
- Depending on the client’s profile, matching them to Dixon’s Approved Product List (APL).
The products on the APL were reviewed and approved for clients with a specific risk profile, and it included the US Masters Residential Property Fund (URF), an ASX-listed property fund that was established in 2011 by Dixon Advisory’s parent company and gives investors exposure to the US residential property market.
The judge found that recommendations to hold URF resulted in the clients having a disproportionately high percentage of high-risk products, and that the adviser should have realised that the SMSFs were insufficiently diversified and therefore exposed to an inappropriate risk of capital loss.
So, even though the advisers followed process and invested clients into an approved product based on their licensee’s APL, it was determined that the advisers, based on the clients’ circumstances, should have conducted a ‘reasonable investigation’ into both the recommended products and any alternatives to them.
The advisers relied on the research done internally by Dixon’s when compiling the APL, it was determined that this research was not sufficient when regarding the clients’ circumstances, so the advisers were deemed to be in breach of their personal best interest duty to the clients.
This case has revealed some very important things to note:
- The law does not distinguish between recommendation to buy or hold/retain a product when determining the duties applicable when personal advice is provided
- Specialist advice firms that include their own products on their APL can expect to be held to a higher standard by ASIC when it comes to demonstrating compliance to their obligations, and
- It is critical that advisers build robust and detailed files that support the advice they provide, particularly when demonstrating their investigations regarding product investment.
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