No legal advice on whether the Referral Agreement involved conflicted remuneration
314 I will deal with ASIC's allegations specific to the situation with SMSF Club in reverse order, and so start with the claim that RM Capital should have taken legal advice about the Referral Agreement.
315 Mr Richardson's view was that the fees payable under the Referral Agreement were not conflicted remuneration because property was not a financial product and the arrangement did not involve SMSF Club giving any financial advice [113]. One might wonder why it was necessary to place PRE on the approved products list if SMSF Club was not giving financial advice about it (or anything else). But Mr Richardson was not cross examined on the genuineness of his view and I find that he did indeed hold it at the relevant time, being early 2014.
316 However the test for what constituted reasonable steps is objective. I consider that in all the circumstances just outlined, the risk that the arrangement involved conflicted remuneration was sufficiently acute to mean that any financial services licensee in RM Capital's position who was taking reasonable steps to ensure that its authorised representative SMSF Club did not accept conflicted remuneration would have obtained legal advice on whether the Referral Agreement was, indeed, caught by the prohibition.
317 In particular, throughout the relevant period, and even more so from December 2014, when Mr Richardson visited SMSF Club's offices, and further from September 2015, when Ms Shah raised concerns about SMSF Club not giving personal advice as distinct from general advice, a licensee in RM Capital's position would have understood that one of the pillars of Mr Richardson's view that SMSF Club was not accepting conflicted remuneration - that SMSF Club was not giving financial advice - was highly doubtful.
318 RM Capital did not take that step. In considering whether it was necessary to be taken in the circumstances in order for RM Capital to have taken reasonable steps, it is relevant to consider Mr Richardson's evidence about why he did not perceive any need to take legal advice.
319 Mr Richardson's explanation was that nobody from whom he sought advice, internally within RM Capital or externally, suggested to him that there were any issues that may warrant legal advice. This follows on from evidence about a meeting with Ms Stewart and Ms Shah at which Mr Richardson asked for advice. That evidence is set out at [113], just before setting out possibly inconsistent evidence given by Ms Shah. I said at that point that it would be necessary to analyse the respective accounts given by those two witnesses of their discussions about the Referral Agreement in 2013 or 2014.
320 Mr Richardson's affidavit described a meeting with Ms Stewart and Ms Shah in 2013 or 2014. Ms Shah's affidavit described a meeting with Mr Richardson and Ms Kosonen in 2014. Mr Richardson's affidavit states that he asked them whether the Referral Agreement had any potential implications regarding FOFA. This implies that he told Ms Stewart and Ms Shah what the Referral Agreement involved, or that somehow he already knew that they knew what it involved. But Ms Shah's evidence is that at the meeting she speaks of, Mr Richardson said he would give her the details of the arrangement later. Ms Shah's affidavit makes no reference to Mr Richardson asking her for advice about the Referral Agreement.
321 Of course, it is not clear that the witnesses are talking about the same meeting, especially given the difference in attendees. The relevant cross examination of Mr Richardson about his dealings with Ms Shah in 2013 or 2014 concerning the Referral Agreement was as follows (ts 88-89):
Now, sir, you say in your affidavit that you first raised this referral agreement with your consultants in late 2013 or early 2014, and they didn't raise any concerns; do you recall that? That's your evidence?---Yes, Dr Peden.
And by the time you raised the referral agreement, it had already been approved, hadn't it, but you were just checking?---Dr Peden, what do you mean by approved?
You had found out about it from Mr Beeton, and you were content for that arrangement to continue?---Dr Peden, I discussed it with Mr Le Page and Ms Pavlinovich internally, and I believe I discussed it with Jacquie Stewart, and then someone gave advice to Mr Beeton that we were comfortable with the arrangement, provided it was as per the referral agreement - verbal referral agreement that he advised me that it was.
…
So from what you've said earlier, do I take it that you're - you are not aware that Ms Shah says in her affidavit that you did not provide the detail of this referral agreement to her; are you aware of that or not?---No, Dr Peden, I'm not aware of that. At the time - Dr Peden, at the time Mr Beeton became a corporate authorised rep of RM Capital, my primary dealings were still with Ms Jackie Stewart of GRC, and Ms Shah was a consultant to GRC. My dealings with Ms Shah were amplified following Ms Stewart selling the business to people moving from GRC and Compliance Plus taking over.
So Ms Shah's evidence is that her recommendation to you was in circumstances where she was not provided the detail of the agreement, but she recommended that the agreement be documented, and that pay - if payments were being received, they needed to be disclosed to clients?---Yes.
Do you recall that?---Yes, Dr Peden.
And do you agree with that?---Yes, Dr Peden.
And so it could well be the case that you never gave Ms Shah the full information about the agreement, couldn't it, because you told Ms Stewart?---Yes, Dr Peden.
322 Thus, a third account of the advice Mr Richardson received about the Referral Agreement emerged. According to this account, he discussed it internally with Mr Le Page and Ms Pavlinovich (Karla Pavlinovich, an accountant employed by RM Capital). And he discussed it externally (he believed) with Ms Stewart. And then someone told Mr Beeton, likely orally, that RM Capital was comfortable with the (unwritten) Referral Agreement, provided that it was as Mr Beeton had described it to Mr Richardson. This evidence suggests that Mr Richardson did not discuss the Referral Agreement with Ms Shah before this verbal approval was given.
323 I am satisfied that the cross examination set out above was sufficient to put Mr Richardson on notice that his evidence that he had a meeting with Ms Stewart and Ms Shah where he asked for advice about the Referral Agreement might not be believed. He was told that Ms Shah's evidence was that he had not given her details about the Referral Agreement, tending to contradict the implication in his evidence that she knew enough about it to give him advice about it. Mr Richardson had the opportunity to offer an explanation and did provide one, albeit one that was inconsistent with the suggestion in his affidavit evidence that he sought advice about the Referral Agreement from both Ms Shah and Ms Stewart. The explanation was to the effect that he was not dealing much, if at all, with Ms Shah at the relevant time and that he is likely to have asked for advice from Ms Stewart.
324 ASIC submitted that there was no reason to doubt the evidence of Ms Shah and that to the extent that Mr Richardson's evidence differs, it ought not be preferred. In my view, the cross examination just described means that it is indeed open to me not to accept Mr Richardson's affidavit evidence that he had a meeting with Ms Shah and Ms Stewart where he asked for advice. That does not involve unfairness to Mr Richardson, particularly where, as here, there is no suggestion that his evidence was given dishonestly.
325 Further, I accept ASIC's submission. Mr Richardson's evidence was vague and he contradicted himself, while Ms Shah's evidence is specific and more detailed and, as a compliance professional, she can be expected to have recalled those details accurately. Mr Richardson himself accepted that he did not give Ms Shah full information about the Referral Agreement, albeit because he had told Ms Stewart. Mr Richardson said that he 'would have' sought advice internally and externally but, as I have said, senior counsel for RM Capital accepted, properly, that this was probably evidence of a general practice rather than a specific recollection [114].
326 I therefore find that a meeting did occur as Ms Shah recalls it. I also find that at some point, someone told Mr Beeton that RM Capital was comfortable with the Referral Agreement. That can be inferred from the fact that PRE was added to the approved products list in July 2014. That timing, and the fact that referral fees started to be received in February 2014, indicates that the verbal approval was given in early to mid-2014.
327 Ms Shah's evidence, which I accept, was that Mr Richardson told her that Mr Beeton was 'working on an arrangement' and that he would let her know the details once it was put in place. This suggests that the terms of the referral agreement were not firm at that stage, so that it was before the time when RM Capital's (seemingly informal) approval was given. Ms Shah's evidence also indicates that it was she who said that there should be a 'formalised agreement in place', further suggesting that the arrangement Mr Beeton was 'working on' was the unwritten one; he was not at that stage trying to obtain a written agreement. This means that the meeting Ms Shah recalls, and which I accept took place, probably took place before the verbal approval of the (still nascent) arrangement was given.
328 I have no reason to doubt that Mr Richardson had discussions about the Referral Agreement with Mr Le Page, Ms Pavlinovich, and Ms Stewart before that. But Mr Richardson's imprecise, generally expressed and internally contradictory evidence does not persuade me that, before the informal approval (or at any time), he asked Ms Shah or Ms Stewart for advice about the Referral Agreement at a meeting where, before or after that meeting, they had details of the arrangement.
329 Indeed, Mr Richardson's evidence at paragraphs 114-115 of his affidavit suggests that he did not seek advice specifically about whether the Referral Agreement involved conflicted remuneration, because he had already formed the view for himself that it did not. If, despite that view, he decided to take advice about that particular subject, one would expect him to have said so in his affidavit. His omission to say so specifically is therefore telling. His evidence is only that he asked whether 'the referral agreement had any potential implications regarding FOFA'. So the fact that, as Mr Richardson says, no one suggested to him that the arrangement did involve conflicted remuneration means little in the absence of evidence that they were specifically asked about that and where, I have found, in early 2014 Ms Shah at least did not have details of the arrangement. That does not provide any good explanation for why RM Capital did not obtain legal advice about the arrangement.
330 In any event, Mr Richardson took comfort in the fact that none of the persons with whom he discussed the arrangement, none of whom were practising lawyers, raised any issues. But a financial services licensee in RM Capital's circumstances taking reasonable steps to ensure that SMSF Club did not accept conflicted remuneration would have sought specific legal advice on that specific question.
331 Mr Richardson's affidavit stated, in typically vague terms, that he was aware that while Ms Stewart and Ms Shah were not lawyers, they 'had qualifications that involved some legal qualification' and operated a professional compliance business [113]. He therefore expected that they would be able to identify any potential legal issues and at least advise him if legal advice should be obtained. But a licensee in RM Capital's position taking reasonable steps would not have rested there, at least not without having put the specific area of potential concern to the non-lawyer from whom he was taking advice, and being assured that there was no need to obtain legal advice. It is notable that Mr Richardson's evidence is framed in terms that no one suggested to him that they should get legal advice. This is only evidence of absence. It is not evidence that anyone even responded to his general query, let alone that they actually told him that there was no need to get legal advice.
332 In short, Mr Richardson's evidence, while honestly given, was unsatisfactorily general and inconsistent with the evidence that RM Capital adduced from Ms Shah. It does nothing to dispel the need that arises on the face of the circumstances canvassed above to obtain specific legal advice on the concern that arose, in my view quite obviously, from those circumstances. There is no suggestion that RM Capital was not able to take legal advice on the subject or that the cost of doing so was prohibitive. And yet, instead, RM Capital told SMSF Club after unsatisfactory internal discussions and discussions with its consultants, that it was comfortable with the arrangement embodied in the (then oral) Referral Agreement. A financial services licensee in RM Capital's circumstances taking reasonable steps would not have done that.
333 Further, and in any event, I have found that RM Capital did not seek advice on the Referral Agreement even after it was reduced to writing in September 2015 [123]. While legal advice should have been taken before then, a financial services licensee taking reasonable steps who had not already taken that advice would have obtained it once the Referral Agreement was in written form.
334 It also follows from these conclusions that the mechanism of the approved products list did not serve as a reasonable step to ensure that SMSF Club did not accept conflicted remuneration. The only evidence of any real consideration of the issue at around that time is Mr Richardson's evidence of why, subjectively, he formed the view. As I have explained, I do not consider that a licensee taking reasonable steps would have rested there.