The Federal Court has recently found that R M Capital Pty Ltd (RMC) failed to take reasonable steps to ensure that its authorised representative (AR), the SMSF Club Pty Ltd (SMSF Club), did not accept conflicted remuneration and in doing so, contravened section 963F of the Corporations Act 2001 (Cth) (Act). This article examines the principles identified in Australian Securities and Investments Commission v R M Capital Pty Ltd [2024] FCA 151 and how these apply to other provisions in the Corporations Act 2001 (Cth) (Act), which require a licensee to take ‘reasonable steps’.

Background: RMC did not take reasonable steps

RMC is an Australian financial services licensee authorised to provide financial product advice in respect of superannuation products. RMC had appointed SMSF Club as its AR to provide financial product advice on its behalf.

SMSF Club advised clients in relation to setting up self-managed superannuation funds (SMSFs) to acquire property marketed by Positive RealEstate. ASIC alleged that between December 2013 and July 2016 Positive RealEstate paid SMSF Club a fee each time a client bought a property through them using their SMSF and RMC did not take reasonable steps to ensure that SMSF Club did not accept these payments.

What are ‘reasonable steps’?

In the judgment, Jackson J made the following observations on what the requirement to take reasonable steps means:

• It is not an obligation to take all reasonable steps and it does not require identification or performance of either the totality of all possible steps or alternatively the following of one ‘correct’ approach.
• It is a question of fact that depends on the circumstances of the business and activities carried out by the licensee and its AR (or ARs).
• The steps taken by a licensee must be reasonable in their totality. It is not a defence to merely point to one or two reasonable steps taken. The steps, in context and when examined together, must be reasonable.
• The question is an objective one and is made on the understanding that the licensee knows the law. Erroneous understandings of the law do not provide a defence as the taking of reasonable steps inherently implies that the licensee informs itself as to the nature of the obligation.
• Despite the objectivity of the test, a licensee’s knowledge of all the circumstances informs what it reasonably could have done, including with regard to the difficulty, practicality and costs of any steps the licensee could have taken.
• The nature of the representative informs what steps are reasonable. Experienced ARs may reasonably attract less oversight and supervision.
• The interpretation of ‘reasonable steps’ must have regards to the importance and purpose of the provision. Given the civil penalties that may be imposed for contravention of section 963F and the fact it only applies to retail clients, it should be read as safeguarding a vulnerability that should be taken into account when determining what actions should be taken to ensure compliance.
• The broader context of the licensing regime should be considered. As licensees have a broad remit to appoint the ARs they choose, this is accompanied by a strict obligation to supervise the actions of their ARs.

Examples of ‘reasonable steps’

While acknowledging that there is no bright line test, the Court considered in the circumstances, the following processes would have been examples of reasonable steps taken by RMC:

• various compliance policies identifying what constitutes conflicted remuneration, any relevant exceptions to this rule and examples of specific benefits that may offend the prohibition;
• review mechanism for any agreements that may give rise to conflicted remuneration concerns;
• the clear documentation of compliance steps to ensure the prohibition was complied with;
• training programs in respect of the prohibition;
• monitoring compliance with conflicted remuneration provisions;
• if in doubt, obtaining legal advice with respect to the operation of the prohibition;
• refusing to authorise any arrangements that may contravene the prohibition until these were amended; and
• annual audits of client files to check which, if any, benefits were received and further investigating any concerns.

'Reasonable steps' and the Corporations Act 2001 (Cth)

While the Court considered the meaning of ‘reasonable steps’ in the context of section 963F of the Act, the principles identified in this case are relevant to other provisions which require a licensee to take ‘reasonable steps’, such as:

• the obligation in section 912A to take reasonable steps to ensure ARs comply with financial services laws;
• the obligation in section 994E to take reasonable steps to ensure retail product distribution conduct is consistent the target market determination;
• the obligation in sections 952H and 1021G to take reasonable steps to ensure ARs provide disclosure documentation;
• the obligation in section 949A to take reasonable steps to ensure ARs comply with the general advice warning requirements; and
• the obligation in section 961L to take reasonable steps to ensure ARs comply with obligations including in relation to the accuracy and appropriateness of advice.

Licensees should ensure they consider their arrangements with representatives in light of this judgment. Please do not hesitate to contact us if you have any queries about the judgment and how this could impact your organisation.