Super trustee successful in defending ASIC proceeding: Australian Securities and Investments Commission v Diversa Trustees Limited [2023] FCA 1267

The Federal Court’s recent decision of Australian Securities and Investments Commission v Diversa Trustees Limited [2023] FCA 1267 (ASIC v Diversa) rejected ASIC’s allegation that Diversa contravened financial services laws by knowing, or ought to having known, that its promoter was engaging in concerning and illegal behaviour. 

Introduction

While this case is fact specific, it does provide guidance on determining whether an Australian Financial Services Licensee(s) (AFSL) is in breach of certain sections of the Corporations Act 2001 (Cth) (the Act). In our view, the case highlights that: 

1. a downstream agent’s knowledge will not necessarily be attributed to the upstream superannuation trustee and/or an AFSL licensee when considering whether the upstream entity has breached its obligations. The Court will consider the factual context between the parties to determine if the upstream entity actually had knowledge of the downstream agent’s conduct.
2. superannuation trustees and/or AFSL holders still cannot “wash their hands” of their obligations by simply contracting downstream. They must still ensure that sound governance and risk management structures exist so as to prevent falling foul of their obligations under the Act. 

Background

Diversa Trustees Limited (Diversa) is a superannuation trustee and AFSL licensee. Diversa provides trustee services to a wide range of APRA regulated superannuation funds. 

Mr Bhandari operated Australian Super Finder (ASF) and the Australian Dealer Group Pty Limited (ADG) (referred to together as the Bhandari Entities). The Bhandari Entities promoted a “free” super search on the ASF website that lured in prospective customers to find lost super and then advised them to transfer their “lost” (or other) superannuation into an account with YourChoice Super fund – of which Diversa was the trustee.

In March 2021, ASIC permanently banned Mr Bhandari from providing financial services due to his conduct and Mr Bhandari is currently also facing related criminal charges.

Diversa held various contractual arrangements with OneVue Wealth Services Limited (Wealth) and OneVue Super Services Pty Limited (Super) (collectively the OneVue Entities) which concerned the administration, management and promotion of YourChoice Super through use of the OneVue Entities’ secure online portal (Agreements). The Agreements required the OneVue Entities to provide Diversa with regular compliance reports including with respect to incidents and a compliance declaration with each report. Each of Wealth, Super and ADG also held their own AFSL.  

Towards the end of 2019 and the start of 2020, Diversa became aware of increased regulatory focus in relation to the Bhandari Entities. On 17 March 2020, Diversa then issued an unequivocal direction for the Bhandari Entities to cease joining new clients to YourChoice Super.

On 8 October 2021, ASIC commenced proceedings in the Federal Court against Diversa with respect to breaches of s 912A(1) of the Act (Proceedings) which sets out the general obligations of AFSLs.

ASIC’s Allegations

The question for the Court primarily concerned what Diversa knew, or ought to have known, about the conduct of the Bhandari Entities, the risks posed by that conduct to clients, and whether Diversa should have given directions earlier to prevent the Bhandari Entities joining new clients to YourChoice Super. ASIC specifically alleged that: 

• Diversa failed to do all things necessary to ensure that it performed financial services covered by its AFSL efficiently, honestly and fairly – required by s 912A(1)(a);
• Diversa contravened s 912A(1)(a) by reason of the financial services provided by the OneVue Entities; and
• Diversa did not take reasonable steps to ensure that its representatives, the OneVue Entities, complied with their own obligations, in breach of s 912A(1)(ca).

In respect of each alleged contravention, ASIC relied on knowledge that it contended Diversa had directly, as well as knowledge of the OneVue Entities, which ASIC contended was to be attributed to Diversa pursuant to s 769B(3) of the Act. 

Court’s Findings

Contraventions of the Act:

ASIC relied on various fragmented communications and reports sent by the OneVue entities to Diversa in asserting that, taken together, Diversa had sufficient knowledge of the actions of the Bhandari Entities.  

Justice Button rejected ASIC’s case with respect to the first alleged contravention because the evidence, when taken as a whole, did not satisfy her Honour that Diversa had sufficient knowledge prior to March 2020 of the actions of the Bhandari Entities. Diversa therefore did not breach s 912A(1)(a). 

Justice Button also did not accept ASIC’s argument that the OneVue Entities’ knowledge was to be attributed to Diversa pursuant to s 769B(3) because the conduct in question in the proceeding was that of Diversa – not its agents. As per her Honour:

In addition, Button J held that ASIC did not make any attempt to articulate a case that any particular member of the OneVue personnel had knowledge that, without aggregation of other OneVue personnel, was material such that it would make out ASIC’s case against Diversa. Her Honour described the evidence as “a bundled-up narrative of facts derived from emails”. 

Her Honour also held that ASIC’s case regarding the second contravention of s 912A(1)(a) failed on two points:

1. that s 912A(1)(a) operates in relation to financial services provided by the Licensee and that: “where the person performing the financial service has its own AFSL, its AFSL is in play”. In other words, if the OneVue Entities did provide financial advice, it was those entities’ AFSL “in play” not Diversa’s;¹ and
2. that ASIC did not establish that the OneVue Entities provided general financial advice. 

Justice Button held that context is of central importance when determining a breach of s 912A(1)(a), stating:

Alleged contravention of s 912A(1)(ca) of the Act:

Justice Button also held that ASIC failed in relation to the alleged contravention s 912A(1)(ca) because it did not establish that OneVue Entities were providing financial services, which her Honour described as “an immediate, and fatal” flaw in ASIC’s case. 

Secondly, Button J stated that “the obligation imposed by s 912A(1)(ca) is primarily forward-looking, and concerned with systems and processes”. Flowing from this, her Honour held that ASIC’s case (assuming that the OneVue Entities were Diversa’s representatives and performed financial services as alleged), overlooked the processes Diversa had in place as required by s 912A(1)(ca). These processes included a requirement that each of the OneVue Entities had their own AFSLs, that the OneVue Entities had a compliance function, and were actively monitoring the Bhandari Entities.

Ultimately, Button J stated that the submissions put forward by ASIC were “altogether too superficial to be accepted”. As they "overlooked the detailed web of mutual obligations on which Diversa’s arrangements with Wealth and Super were based” as outlined in the Agreements.

Take-aways from ASIC v Diversa

The decision was factually distinct, however there are a number of take-aways for superannuation trustees and arrangements involving numerous AFSL licensees. 

Justice Button noted throughout her analysis that superannuation trustees may not insulate themselves by merely contracting with service providers – noting that they cannot “wash their hands” by contracting downstream. However, ultimately Button J was comfortable that the relationship between Diversa and the OneVue Entities did not result in Diversa simply ‘washing their hands’ of the problem as the OneVue entities was required to (and did) provide regular compliance reports to Diversa. 

Moreover, knowledge will not be attributed to a superannuation trustee (and/or a holder of an AFSL) merely because it has a downstream relationship with another entity. There needs to be sufficient specific instances of communication of the real issue before a trustee will be considered to have the knowledge. Further, for knowledge to constitute a breach of s 912A(1)(a) it must be material, such that once communicated upstream it would cause an upstream entity (acting reasonably) to act.

However, we flag that the decision was focused only on Diversa’s conduct in relation to its obligations under s 912A(1)(a) of the Act: a financial services licensee’s obligation to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. It does not have any impact on an AFSL holder’s more general liability for the actions of its representatives per ss 917E and 917F of the Act - the provisions usually relied on by clients claiming against licensees arising from the conduct of the licensee’s representatives.

In that respect, the decision clarifies that when determining whether an AFSL holder is in breach of s 912A(1) of the Act, that the Court will look to and give weight to the factual context “in which the alleged contravention is said to have occurred” which will understandably “vary from case to case”.  

With respect to superannuation trustee and AFSL licensees, the decision confirms that if the person providing financial services has its own AFSL, the mere fact that it has an upstream relationship with another AFSL licensee will not require the upstream licensee to ensure that the downstream provider is compliantly providing financial services.

The decision also highlights the importance of sound governance and risk management structures and procedures to prevent failures. ASIC pursued a specific conduct case arising from omissions made by Diversa – in respect of that case Button J held:

As such, if a superannuation trustee seeks to put into place agreements such as the ones put into place by Diversa, it is important that care be taken when drafting any such agreement so that the requisite structures and procedures also exist to ensure that the trustee will not be liable for a downstream breach of the Act. 

¹ See paragraph [357] of Justice Button’s reasons.