The Australian Securities and Investments Commission has asked the federal court in Melbourne to take action against Dixon Advisory and Superannuation Services Ltd, which offers advice about wealth management and pensions, alleging many breaches of the “best interests obligations” in the Corporations Act 2001 between September 2015 and 31 May 2019.

In this case, ASIC alleges that representatives of DASS contravened ss961B, 961G and/or 961J Corporations Act 2001 and DASS contravened s961K(2) of same. These are some of the “best interests obligations” in Division 2 Part 7.7A Corporations Act and allegedly occurred between 2 September 2015 and 31 May 2019. The defendant (DASS) holds an Australian Financial Services Licence which permits it to provide financial product advice (including ‘personal advice’ within the meaning of s766B(3)) for certain classes of financial products, including interests in managed investment schemes and securities. It also allows it to deal in a financial product and operate certain kinds of registered managed investment schemes.

The US Masters Residential Property Fund

Since 22 June 2015, Walsh & Company Investments Ltd has been the Responsible Entity (RE) of the US Masters Residential Property Fund (the URF), a unit trust and registered managed investment scheme. The URF is a property investment fund that, through its ownership of the US Masters Residential Property (USA) Fund, a Maryland real estate investment trust (US REIT), invests in residential property in New York and New Jersey. From time to time, the RE of the URF has raised funds by issuing units in the URF which count as ‘financial products’ under the Corporations Act. The RE of the URF has also raised funds to the value of A$615 million by issuing other ‘financial products’ such as URF notes and convertible step-up preference units (CPUs) in the URF.

Related-party payments to associates of DASS

Evans Dixon Ltd is DASS’s ultimate holding company. This and various other companies in the Dixon Advisory Group – Walsh & Company, URF Investment Management, AFA, Dixon Projects, Dixon Advisory USA counted as ‘associates’ of DASS for legal purposes and received significant payments from the RE of the URF or the US REIT pursuant to agreements with those entities.

Financial advice provided by representatives of DASS

Financial advisors, who were representatives of DASS, provided ‘personal advice’ to many HNW clients, including the eight clients that are the subject of this case (the sample clients), each of whom hired DASS to provide investment advice, generally in relation to a self-managed superannuation fund (SMSF). Each of the HNWs was a ‘retail client’ for the purposes of the Act. DASS kept an approved product list, which included a number of ‘house products,’ i.e. financial products issued by entities related to DASS, including the URF units/notes and CPUs. The sample clients received personal advice to buy (including to buy more where the client had an existing holding of the product) or to continue to hold one or more of these URF products between 4 September 2015 and 31 May 2019.

ASIC does not think that the representatives of DASS acted in the best interests of the HNW clients, thereby contravening s961B(1), especially because: (i) they did not conduct reasonable investigations regarding the financial products that might achieve their clients’ objectives; and (ii) they failed to base all judgments in advising the clients about their relevant circumstances (s 961B(2)(f)).

Furthermore, in providing their recommendations to the sample clients, they did so in circumstances where it was not reasonable to conclude that the advice was appropriate to the client, had the provider satisfied the duty under s961B to act in the best interests of the client. ASIC says that the representatives therefore contravened s961G on each occasion. Also, in recommending the purchase of several URF products, they ought reasonably to have known that, by reason of the various fees paid to DASS and its associates, there was a conflict between the interests of the clients and the interests of DASS and they therefore contravened s961J(1) on those occasions.

Punishment

ASIC wants the federal court to impose the following relief against DASS: declarations pursuant to s1317E (publicising the names of the perpetrators, funds etc.) in relation to its contraventions of s961K; pecuniary penalties pursuant to s1317G for its contraventions of s 961K(2); and certain orders under s1101B. The notice of filing does not say what orders these might be (the provision allows the court to stop a firm from doing business or a class of business) but ASIC's website says that it wants DASS to be ordered to set up better systems, policies and procedures and provide a written report from an independent expert that confirms this compliance.

The representatives are called: Hazel Tan; Courtney Mandel; Lee Moore; Alice Cowper; Daniel Thompson; and Amiee Telfer. ASIC accuses them of 51 counts of bad advice.

The maximum civil penalty for contraventions alleged against DASS is A$1 million for every contravention prior to 13 March 2019 and A$10.5 million per contravention after that date.