The Australian Securities and Investments Authority is taking NSG Services Pty Ltd to court for being in dereliction of its 'best interests duty' introduced under the ‘Future of Financial Advice’ (FOFA) reforms.

This is the first civil penalty action ASIC has taken against a licensee in respect of that duty and is seeking "declarations of breaches" and financial penalties.

Since April 2008, NSG has been licensed to provide personal advice on risk insurance and retirement products to retail clients, employing advisors to provide financial services advice on its behalf as its representatives and authorised representatives.

ASIC alleges that it failed to do its duty on numerous occasions and that its advisors did not act in the best interests of their clients. It also alleges that the firm has not provided appropriate training to its advisors to ensure that clients receive advice in their best interests. Instead, the go-ahead regulator contends that NSG has trained its advisors to believe that it is almost always in a client's best interest to take out some form of life risk insurance, regardless of that client's financial situation.

NSG's written policies relating to legal and regulatory compliance and risk management have been described as "inadequate, and in any event, not followed or enforced." Between July 2013 and today, on eight occasions, the regulator believes that clients were sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable, and unnecessary financial arrangements as a result of NSG's advice. It does not think that NSG has conducted regular and/or substantive performance reviews of advisors have not been conducted, or disciplined the ones who have shied away from their obligations under the Corporations Act.

ASIC seeks declaratory relief (i.e. obtaining a pronouncement on something - which in theory could be anything - from a court) and pecuniary penalties against NSG for contravening some of its 'best interests obligations' in Division 2, Part 7.7A Corporations Act 2001.

NSG, which is based in Melbourne, was the responsible licensee in relation to contraventions against s961B (which obliges the provider of advice to act in the best interests of the client in relation to it) and s961G (which says that one must only provide advice to the client if it is appropriate) by Mustafa Ozak and Van Trinh, two of its representatives. ASIC accuses it of failing to take reasonable steps to ensure that they complied, wants to punish them under s961K(2) (having a representative breaking s961B and s961G) and s961L (which obliges a firm to take reasonable steps to ensure that its reps comply with those provisions) and wants NSG to pay its costs.

Other FOFA reforms come into force on 1 July. They include:

• a three-year phase-down of up-front commissions paid to advisors to a maximum of 60% from 1 July 2018 onwards, together with the introduction of a maximum rate for continuing commissions of 20%; and
• the introduction of a two-year commission ‘clawback’ period, which will extract 100% of a commission in the first year and 60% in the second year, should a policy lapse occur.