Key Takeouts

• The Federal Court has found that Dover Financial Advisers Pty Ltd (Dover) and Dover's sole director Terrence McMaster misled and deceived clients in contravention of their legal obligations.
• The case largely focused on the question of whether Dover's conduct in providing a document entitled the 'Client Protection Policy' to clients (either with, or incorporated into statements of advice to clients) was 'misleading or deceptive' or 'likely to mislead or deceive' within the meaning of s 1041H of the Corporations Act 2001 (Cth) (Corporations Act) and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and/or a 'false or misleading representation' within the meaning of s 12DB(1)(i) of the ASIC Act.
• The court is yet to rule on what, if any, financial penalty Dover and Mr McMaster will be ordered to pay.
• The case has received wide media coverage in light of the fact that it is the first decision to deal directly with a case study considered by the Financial Services Royal Commission and in light of ASIC's 'why not litigate?' approach to enforcement.
• Commenting on the decision ASIC deputy chair Daniel Crennan is quoted in the AFR as saying that the ruling sends a clear message to financial services providers that if they mislead or deceive consumers, they should expect ASIC to take action.
• Mr McMaster has reportedly said he has no plans to appeal the decision, but does plan to commence litigation in 2020 against five law firms he claims were negligent in the advice they provided on the construction of the Client Protection Policy.

Case Note

On 22 November, Justice O'Bryan handed down his decision in Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932. Justice O'Bryan found that Dover Financial Advisers Pty Ltd (Dover) and Dover's sole director Terrence McMaster misled and deceived clients in contravention of their legal obligations.

The case, brought by the Australian Securities and Investments Commission (ASIC), has received a high level of media coverage/interest given it is the first decision to directly deal with a case study considered by the Financial Services Royal Commission.

[Note: The final case study in the second round of Financial Services Royal Commission hearings concerned Dover Financial Advisers Pty Ltd (Dover) including the use of Dover's Client Protection Policy.  For a discussion on the use of the Client Protection policy, and Commissioner Hayne's views see: Financial Services Royal Commission Interim Report, Volume 2 at p253-255.] 

The 'Client Protection Policy'

The case largely focused on the question of whether Dover's conduct in providing a document entitled the 'Client Protection Policy' to clients (either with, or incorporated into statements of advice to clients) constituted misleading or deceptive conduct. 

The Policy purported to set out a number of 'important consumer protections designed to ensure that every Dover client get the best possible advice and the maximum protection available under the law.' 

In broad terms, ASIC alleged that this was not the case because the policy 'did not ensure that clients received the maximum protection available under the law' but in fact contained numerous exclusions, limitations, restrictions and/or dilutions of clients rights.

Details: ASIC's case? 

ASIC alleged that each time 'Client Protection Policy', was provided to a client together with a statement of advice, Dover engaged in conduct that was 'misleading or deceptive' or 'likely to mislead or deceive' within the meaning of s 1041H of the Corporations Act 2001 (Cth) and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and/or made a 'false or misleading representation' within the meaning of s 12DB(1)(i) of the ASIC Act.

During the period in which the policy was in use (from September 2015 to March 2018), the policy was provided to 19,402 of Dover's retail clients.

ASIC further alleged that Mr Terrence McMaster, as Dover's sole director was knowingly concerned in the conduct..

ASIC sought declarations that Dover contravened s 1041H of the Corporations Act, s 12DA(1) of the ASIC Act and s 12DB(1)(i) of the ASIC Act; and pursuant to s 21 of the Federal Court Act, declarations that Mr McMaster was knowingly concerned in Dover’s contraventions of s 1041H of the Corporations Act, s 12DA(1) of the ASIC Act and s 12DB(1)(i) of the ASIC Act.

Both Dover and Mr McMaster (the defendants) accepted that the Client Protection policy was inaccurate, but advanced a number of arguments as to why ASIC's arguments should not be accepted, including that the approach taken by the High Court in Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 was inapplicable to the case.

Was the conduct likely to mislead or deceive?

Justice O'Bryan observed that sections 1041H(1) of the Corporations Act 2001 (Cth) (Corporations Act) and 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) are framed in very similar terms and the same principles are applicable to both provisions.

Further, His Honour observed that though section 12DB(1)(i) of the ASIC Act is framed in different terms, 'the prohibitions are similar in nature'. 

'The central question' Justice O'Byran states, 'is whether the impugned conduct, viewed as a whole, has a sufficient tendency to lead a person exposed to the conduct into error (that is, to form an erroneous assumption or conclusion about some fact or matter)'.

Unnecessary for ASIC to prove that any individual client was subjectively misled

Justice O'Bryan rejected the defendant's argument that it was necessary for ASIC to plead/prove that any individual client (who had received the Client Protection Policy) was misled or deceived by the inaccuracy Client Protection policy or had suffered loss as a consequence.  

'I regard the enquiry as to whether any individual client was subjectively misled by the Client Protection Policy as not determinative of the question whether Dover’s conduct contravened the statutory prohibitions. 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…I do not consider that the absence of client complaints establishes that no clients were misled…the inference that the defendants ask me to draw requires speculation about a matter which is not essential to the causes of action advanced by ASIC' Justice O'Bryan writes.

Further, Justice O'Bryan states that whether the conduct in question was directed to the public generally/section of the public (to a class of persons) or to an identified individual, the question of whether the conduct is likely to mislead or deceive should be assessed 'in light of the objective circumstances'.  

'In both cases, the relevant question is objective: whether the conduct has a sufficient tendency to induce error. Even in the case of an express representation to an identified individual, it is not necessary (for the purposes of establishing liability) to show that the individual was in fact misled'.  

The client protection policy was false, misleading or deceptive

Justice O'Bryan agreed with ASIC that the client protection policy in this case, 'did not protect clients' but instead 'purported to strip clients of rights and consumer protections they enjoyed under the law'.  

The 'Introductory Clause was false, misleading or deceptive because [despite purporting to do so] the Client Protection Policy did not ensure that clients received the maximum protection available under the law. Rather, the Limiting Clauses in the policy (other than the Best Efforts Clause and the Continued Retainer Clause) purported to remove or dilute the protections that clients would otherwise have under the law.  In effect, the Introductory Clause represented that the Limiting Clauses constituted the maximum protections available to clients under the law when that was not the case' Justice O'Bryan writes.

Further, Justice O'Bryan considered that the fact that the Client Protection Policy was provided electronically to clients, and may not have been immediately read by them, to be irrelevant in the context of determining whether the document was misleading or deceptive. 'The conduct of electronically providing the document to clients in conjunction with statements of advice enabling the client to file the document electronically is equivalent to sending a paper copy by post, enabling the client to file the document in paper form. In both cases, the client may not read the document immediately, but may file the document for later use if it becomes necessary. In my view, if the contents of the document are likely to mislead or deceive when read, a person has engaged in misleading or deceptive conduct by successfully providing the document to the client'.   

As such, his Honour found that the Introductory Clause contained in the Client Protection Policy was 'misleading or deceptive' or 'likely to mislead or deceive' within the meaning of s 1041H of the Corporations Act 2001 (Cth) (Corporations Act) and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and a 'false or misleading representation' within the meaning of s 12DB(1)(i) of the ASIC Act.  

Justice O'Bryan also accepted ASIC’s submission that, on each of the 19,402 occasions when a statement of advice was given to a client along with the Client Protection Policy, there was a separate contravention of the statutory prohibitions because there was a separate communication to a client that was misleading.

Mr McMaster was 'knowingly concerned' in Dover's contraventions

Justice O'Bryan observed that 'A person will be knowingly concerned in a contravention if that person was an intentional participant in the contravention, with knowledge of the essential elements constituting the contravention at the time of the contravention'.

In this instance, Justice O'Bryan found that as a question of fact, Mr McMaster, who was responsible for: a) determining the content of the Client Protection Policy; b) approving the content of the Client Protection Policy; and/or c) requiring Dover’s authorised representatives to incorporate the Client Protection Policy into/provide the Client Protection Policy with, the statements of advice provided to clients, was 'knowingly concerned' in Dover’s contraventions of the Corporations Act and the ASIC Act.

Next steps?

Justice O'Brien said he would hear further from the parties as to the forms of declaration that should be made and as to the orders timetabling a further hearing in respect of pecuniary penalties.  

In particular, Justice O'Brien questioned whether there is a 'proper basis for the Court to make declarations that Mr McMaster was knowingly concerned in Dover's contraventions of s1041H or s12DA in circumstances where ASIC is not seeking remedial relief under any statutory provisions that requires such a finding.'

ASIC's response

The AFR quotes ASIC deputy chair Daniel Crennan as commenting that the decision sends a clear message to financial services providers that if they mislead or deceive consumers, they should expect ASIC to take action. 'We've brought the case to the court and we've succeeded and [McMaster] is going to have to deal with the consequences of that' Mr Crennan is quoted as saying.

No appeal? 

The AFR reports that Mr McMaster has said he will not appeal the Federal Court's decision but is planning to commence litigation in 2020 against five law firms he claims were negligent in the advice they provided on the construction of the Client Protection Policy.

[Sources: Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd [2019] FCA 1932; [registration required] The AFR 25/11/2019]