Proof enough?

Two regulators commence proceedings following dramatic testimony at the Financial Services Royal Commission. In each case, the respondents contend the regulator adduced insufficient evidence to prove its claim. In one case, the Court agrees, criticising the regulator repeatedly for its failures. In the other proceeding, the Court disagrees with the respondent and congratulates the regulator for its economical use of evidence.

Why was the reaction different in each case?

Australian Prudential Regulation Authority v Kelaher [2019] FCA 1521

In the first of these proceedings APRA’s claims against two companies in the IOOF Group (IOOF) and a number of their officers failed spectacularly.

At its heart, APRA’s claim was the respondents contravened section 52 and 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). The contraventions concerned incidents affecting five superannuation funds for which one or other of the IOOF Group companies was trustee.

Without getting into the weeds of IOOF’s alleged contraventions (and they are very, very weedy), the problem with APRA’s case was that it relied on documents in which IOOF self-reported errors (both internally and to APRA) without building its fundamental case. It looks very much like the actions of a regulator not accustomed to litigation.

Jagot J summarises APRA’s evidence and its inherent problem in the following paragraph (at [134]):

As noted APRA’s principal evidence comprised IOOF documents brought into existence for the purpose of internal investigations and self-reporting. APRA said that it relied on these documents as admissions. It did so, however, without identifying the specific parts of the document said to constitute admissions and failed to distinguish between their use as against the corporate and individual respondents. In short, the documents cannot constitute any form of admission by the first and second respondents.

The reason the documents could not constitute admissions by the first and second respondents was that the first and second respondents were individual IOOF Group officers, neither of whom authored the documents. This should have been obvious.

The other problem with APRA’s use of this evidence was that APRA did not seek to merely use the documents as evidence of the existence of relevant facts but of an admission of a conclusion of law. Again, it should be obvious that the documents could not be put to use to that end.

 The types of documents APRA sought to use as admissions included breach notices in which the IOOF Group companies informed APRA of possible breaches of the SIS Act. As to this, Jagot J held (at [136]):

To the extent that APRA relied on statements involving a conclusion of law (such as to the effect hat one or more of the respondents had breached one or more of the statutory covenants) I do not consider these statements to constituted admissions. But even if they did constitute admissions I would not give them weight in the overall analysis because the issue is one which must be determined based on the evidence and consistent with principle. What will also become apparent is that the documents which form the core of APRA’s evidentiary case are not only the product of hindsight analysis but are also expressed at an unhelpfully high level of abstraction. They appear to assume the knowledge of that must be detailed and intricate systems for management and thus provide no information about those systems when assessing, with hindsight, the cause of a particular incident. As such, I consider the documents incapable of taking the weight which APRA seeks to place on them, in effect, as proof of its case.

The Court’s acceptance of the obvious here should be a relief to those entities who are obliged to self-report possible breaches. It also allows internal reports directed at responding to errors to do so without the fear that they will necessarily be proof of opinions contained in them.

Further, APRA relied on its own opinions for proof that the statutory covenants had been broken. This was another matter provoking judicial criticism. 

Essentially, APRA relied on the fact that errors occurred to provide a basis to assume there had been a contravention of the covenant requiring the exercise of due care. Of this Jagot J said (at [138]):

I do not consider it open to proceed in this way. APRA treats the trustee as an effective insurer agains all loss when this is not the law. It gives no attention to the kind of evaluative and nuanced analysis that would be required to decide whether any particular conduct failed to measure up to the requisite standard of care. There is an evidentiary vacuum when it comes to the existing systems and procedures making it impossible to perform the kind of analysis that would be required for APRA to make good its claims.

The kind of evidence APRA sought to prove its case in this proceeding was the kind of evidence put to Christopher Kelaher in the Financial Services Royal Commission. That testimony was portrayed in the media as disastrous for IOOF. It was certainly brutal. However, due to APRA commencing its proceeding, the Commissioner refrained from comment.

Perhaps unsurprisingly, APRA decided not to appeal Jagot J’s decision.

Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932

The more recent proceedings was Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932.

Again, the matters at issue in the proceeding had been aired in the Financial Services Royal Commission. In fact, Terry McMaster, the sole shareholder and director of Dover Financial Advisers Pty Ltd (Dover), collapsed when being questioned about them.

Until 1 August 2018, Dover held an Australian Financial Services Licence (AFSL), enabling it to conduct a financial services advice business. Dover had a large number of authorised representatives (up to 400 at one stage), providing financial services to clients under Dover’s AFSL.

On 1 August 2018, ASIC cancelled Dover’s AFSL. McMaster had applied for the cancellation pursuant to his and Dover’s undertaking to ASIC. 

ASIC’s claim against Dover was much simpler than that in APRA v Kelaher. In this case, ASIC alleged Dover has engaged in false, misleading or deceptive conduct in attempting to portray a document as containing important client protections when, in fact, it attempted to insulate Dover from all possible liability. As a result, ASIC alleged Dover breached s1041H of the Corporations Act 2001 (Cth) and s12DA(1) and s12DB(1) of the Australian Securities and Investments Commission Act 2001 (Cth). 

ASIC also sought declarations against McMaster as a person involved in the contraventions.

Where this proceeding was similar to that in the other case discussed was in the economy of evidence adduced. As O’Bryan J summarised (at [11]):

The evidence at the hearing was very confined on both sides. The defendants argued that ASIC’s economical evidentiary approach resulted in a failure to prove its case. For the reasons I discuss below, I disagree. The evidence adduced by ASIC was sufficient to prove its allegations and in that respect its economy was commendable. It was open to the defendants to adduce further evidence to contradict ASIC’s allegations, but they did not do so.

Here, the reasons for ASIC’s ability to be so economical with the evidence was that the documents spoke for themselves, condemning Dover and McMaster.

The defendants were left to argue that ASIC had not proven that any clients were, in fact, misled by Dover’s statements. But, as O’Bryan J held (at [16]):

The question whether conduct is misleading or deceptive or contains a false or misleading representation is an objective question to be determined by the Court by reference to the impugned conduct; the fact that a client may have been misled, and may have made a complaint about being misled, is admissible on the question but is neither necessary nor determinative. 

It is true that to be able to make out a claim for compensation for misleading or deceptive conduct, a plaintiff must show loss caused by the conduct. That requires proof that the individual plaintiff had been misled or deceived. But that was not the basis of ASIC’s claim here.

ASIC’s case was much simpler, it was that starting in about September 2015, Dover required its authorised representatives to provide clients with Dover’s “Client Protection Policy” with any statements of advice prepared for those clients. 

Ultimately, 19,402 clients were provided statements of advice with a hyperlink to the Client Protection Policy.

The Client Protection Policy’s introductory clause stated that it set out a number of important consumer protections. In fact, the Policy attempted to limit Dover’s liability almost to non-existence. For example, it purported to limit authorised representatives’ authority to exclude, amongst other things:

any act that breaches a law of Australia or a State of Australia including the law of negligence, the criminal law and the corporations law or any ASIC regulation or regulatory guideline.

O’Bryan J said of this exclusion (at [41])

The purported effect of the Authority Liability Exclusion was to exclude Dover’s liability for most foreseeable breaches of law by its authorised representatives. In that light, the statement included in section 1 [ie the introduction] that the “warning is part of Dover’s commitment to the highest possible compliance standards” can only be regarded as cynical.

While O’Bryan J doubted this exclusion was legally effective, ASIC’s case did not rely on it being so. As O’Bryan J summarised (at [42])

ASIC’s case is based on a simpler proposition: by extracting the promise from clients in the form of the Authority Liability Exclusion, Dover purported to exclude its responsibility for the conduct of its authorised representatives and, as a consequence, lessened clients’ protections under the Corporations Act and general law. That proposition is not contested by the defendants and should be accepted.

But this was not the only liability Dover attempted to exclude. The specific exclusions developed over time and included, at one time or another, exclusions from liability for:

• Clients not understanding anything contained in the statement of advice;

• Authorised representatives recommending insurance arrangements that may be seen as churning or that were not in the clients best interests;

• Clients not requesting the authorised representative review and update advice every six months;

• Clients ceasing to engage Dover’s authorised representative as an adviser;

• Clients not holding investments for at least ten years;

• Advice that results in underinsurance;

• Clients not maintaining risk insurance policies for at least two years; and

• Clients’ delays in implementing the authorised representatives’ advice.

None of these exclusions apply to Dover’s obligations under the Corporations Act or the general law.

As can be seen from this summary, ASIC’s claim did not need voluminous evidence. Unlike APRA v Kelaher, it did not need to prove business systems. It was not asking the Court to make a complicated assessment of whether certain actions were or were not in consumers’ best interests. All ASIC needed to prove was that “the conduct has a sufficient tendency to induce error.” (O’Bryan J at [99])

Ultimately, O’Bryan J concluded that Dover’s conduct was misleading or deceptive or likely to mislead or deceive for the purposes fo s1041H of the Corporations Act and s12DA(1) of the ASIC Act. It was also a false or misleading representation for the purposes of s12DB(1) of the ASIC Act.

His Honour also made a declaration that McMaster was knowingly concerned in Dover’s contravention of s12DB(1) of the ASIC Act.

Conclusion

Comparing these cases, it is clear that at the outset of a trial a clear-eyed assessment needs to be made as to the evidence needed to prove the claims in issue and the strategy through which they will be proved.

APRA v Kelaher shows that it is not sufficient to rely on a defendant’s expression of opinion as to their legal liability to prove that liability. Apart from questions of admissibility related to the opinion-giver’s expertise, the question of liability is for the Court to determine. It also shows that mandatory breach notices should not be the end of the matter when it comes to proving a claim. While they may be sufficient for a Royal Commission, exercising executive power, it is not sufficient to convince the judiciary.

On the other hand, ASIC v Dover shows that when a breach is clear on the face of the documents, those documents may, absent any contradictory explanation, speak for themselves. In that case, economy of evidence is something to be praised and, for a respondent, to be answered (if possible).

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As a final note, I have prepared this update as a part of a presentation I am giving later this week for a corporate client. If you are interested in a similar presentation, please contact me by email or phone.