the question of material breach
240 As explained above, Ms Ruano's first reaction when she first reviewed the six client files of Mr Cunningham provided to her by Mr Nguyen on 28 May 2008 at the Perth PD Day, was that they were "useless to read" and that Mr Cunningham did not "even have any idea from where the funds are coming". The superannuation amounts and the source of the superannuation funds were not recorded on the SOA in each case and he regularly used the expression "TBA" in relation to those items, which she considered quite unsatisfactory. Soon after she was also concerned that Mr Cunningham had failed to have his SOAs pre-vetted, as required following the November 2007 audit and December action plan. Then, as noted above, in early June, for the purposes of the June 2008 compliance committee meeting, Ms Ruano reported her concerns to the meeting.
241 For the purposes of the subsequent July meeting of the compliance committee, Ms Ruano formalised her views in a report dated 5 July 2008 on the subject "Interim Audit Report - Pre‑Vetting". She labelled the report as "Compliance review report conducted on 27 May 2008". As can be seen from the sequence of events, her report dated 5 July 2008, whilst supplemented with information from M3FS's Myworkspace system, discussions with Dale Hare and some passing discussions with Mr Nguyen, as well as an exchange of email correspondence with Mr Cunningham, was primarily dependent upon the review she had made of the six files on 27 May 2008.
242 The report dated 5 July 2008 stated that the purpose of the review was to assess whether requirements "as per the compliance induction review report" issued by Dale Hare in November 2007, had been met; particularly the aspects of pre‑vetting as described in the December action plan.
243 Ms Ruano noted that according to M3FS records, there was no indication of the pre‑vetting requirements procedures having been carried out during the period from the date of the initial induction review held in November, to the date of her review on 27 May 2008. Ms Ruano then referred to the six files she had received from Mr Nguyen and noted the following deficiencies:
· All files presented involved advice pertaining to pre‑existing superannuation transfers with life risk insurance considerations - that is to say they were not files provided for the purposes of pre‑vetting.
· These files were deficient in all areas, both under the requirements of industry standards and M3FS.
· File notes were very little to no file notes. Any files notes recorded were not adequate to "tell the story" of the client's circumstances, basis of recommendation was not established, and sequence of events was not thorough.
· Fact finders - information collected on the fact finder would be considered not supportive of the eventual personal advice given.
· Research - no evidence of research, nor an indication of an attempt to obtain research was evident on the files. It should be noted that entries such as "TBA" or "not known" are an indication that advice given had no reasonable basis to be given.
· Know Your Client and Know Your Product requirements were not met in any of the client files presented.
· Statements of advice - it was noted that handwritten template SOAs were used. Observation of the quality of the "personalization" of the SOAs was ranked poor and did not meet the "Clear, Concise and Effective" policy. These were not edited to meet the client's situation, nor were "ticks" placed in boxes to show the advisor's selection or some form of rationale as to the basis of the recommendations. No rationale was recorded in the SOAs as to why the pre‑existing super funds were transferred to a newly set up superannuation fund. Mr Cunningham had not even "known" what type of super fund was being assessed - items such as the fund's provider, fund name, investment values, insurance values, whether it was accumulation or defined benefit etc etc, what risk tolerance the funds were being held as.
· Sum insured values not even noted.
· Replacement of a financial services product areas of the SOAs were not completed, either at all or partially (namely "TBA" or "unknown").
· Rationale as to why the new product was selected were not completed.
· Commission percentage values were stated but not any amounts and dollar values calculated.
· Referral sections were not completed in their entirety.
244 In summary, Ms Ruano, in her report, stated:
Based on the findings of this review and comparing that to findings in the review conducted in November 2007, there has been no improvement at all. It would be considered 'unacceptable' practice and pre‑vetting obviously had not been sought.
The activities shown here are noted as 'high risk'.
It is recommended that all files be reviewed and rectified by Martin, intense retraining be conducted for Martin and his ability to follow procedures as required by industry and M3 be reassessed.
Suspension of authority is highly recommended.
245 Ms Ruano was cross examined about the six files she reviewed on 27 May 2008, which were the subject of her 5 July 2008 report. I found Ms Ruano a straightforward witness, without guile who gave evidence that could be relied upon. I generally accept her evidence. When the suggestion was put to her that her only complaint was that file notes were not adequately completed, Ms Ruano made it plain (transcript 347 - 348) that was not correct and that:
If you go through the document, the actual template for file notes were not present but there were writings by Martin Cunningham and/or other members of his staff all over existing documents. Like, for example, on one of the files I noted that he put "10.30am appointment" on the bottom of a fact finder, all these little items all over the place. Together they did not add to what would tell the story about the client.
246 It also became clear that Ms Ruano expected to find, particularly after she had raised the pre‑vetting issues with Mr Cunningham by email, that there were in fact files (SOAs) that had been pre‑vetted on behalf of M3FS. This turned out not to be the case. In fact she could find no evidence of pre‑vetting of any files, including the six files she had been provided with.
247 Ms Dale Hare also gave evidence on behalf of M3FS and was cross examined on behalf of the applicants. At all material times she was the Risk and Compliance Manager for M3FS. Ms Hare, like Ms Ruano, was a straightforward witness who did not embellish her answers and whose testimony could be relied upon.
248 Ms Hare evinced appropriate understanding, from a practical point of view, of the statutory obligations an adviser, such as the applicant, labours under in providing financial services advice and also the details of the responsibilities an advisor has to M3FS. Ms Hare in particular was pressed about her understanding of s 945B of the CA in respect of the content of a SOA in circumstances where it is not the means by which the advice is provided. Ms Hare explained that while advice could be given verbally, it must be followed up by a written statement of advice, within five days, which sets out recommendations and reasons for the recommendation of a product. When pressed as to whether she and the compliance committee had considered Mr Cunningham was in serious breach of his obligations under this provision, she explained that the committee "based it on the whole review of the situation, not just on that particular aspect" (transcript 255). In this regard, Ms Hare further explained (transcript 255):
With any review of any adviser we look at the file as a whole to see whether the file provides a story and see whether the file tells and provides a summary of the recommendation that has been provided to the clients. Now, what we look at in a file is whether there are file notes, whether a fact finder has been completed and whether an SOA has been completed and whether there has been research conducted. From that information, we assess whether the advice is appropriate and whether the client has enough information to make an informed decision whether to accept that advice.
249 Ms Hare was also pressed in cross examination about the steps that an adviser should take to obtain the authority of a client to request information from an existing fund manager in order to complete an SOA correctly and Mr Cunningham's statement that, in effect, he was promised by Mr Nguyen the provision of a form that he could use to obtain authority from a client in this regard.
250 In cross examination (transcript 265), Ms Hare, while not recalling anything that Mr Nguyen may have told her about the provision to Mr Cunningham of a pro forma authority form, recalled that Mr Cunningham had raised the issue on 13 November during the audit. She said that what she told him then was that, "All you need is a letter of authority from the client. Just simply get the client to issue you with a letter of authority" (transcript 265). She further explained that all the client needed to do was write a letter saying:
I give you permission to go to … for example to obtain information on my existing policies. Signed …
251 Ms Hare had produced to her by counsel for the applicants, a form of authority that she explained M3FS had developed in the past for such use. Ms Hare (transcript 266) said that M3FS had that form for people to use if they wish. She explained that some advisers do not like using standard forms and prefer to get clients to write it themselves.
252 The real point about Ms Hare's evidence on this point was the preparation and signing of an authority is not a matter of expert knowledge. It is a simple matter that any experienced representative can do for themselves. I accept Ms Hare's evidence in this regard.
253 In the event, M3FS, through the compliance committee was concerned that in the provision of advice, Avoca and Mr Cunningham may not have been compliant with statutory requirements in respect of SOAs. Following the suspension of Mr Cunningham, M3FS conducted its own review.
254 Ms Hare confirmed that no client of Avoca or Mr Cunningham suffered any loss or was the subject of any fraud in relation to advice he had provided. She rejected, however, that the clients got "good advice". She explained (transcript 277) that:
No. They got the right document. The document wasn't completed with enough information for the client to make an informed decision on whether to act on that advice.
255 Ms Hare also confirmed that while most advisors provide verbal advice to a client, they then follow up by confirming that advice in a written advice that sets out the advantages and disadvantages of the recommendations and how those recommendations meet the client's needs.
256 Ms Hare was also pressed about the position the compliance committee took in the light of the compliance report prepared by Ms Ruano dated 5 July 2008 and was asked to assume that the file note completed by Mr Nguyen on 4 July 2008, was not a correct account of what had happened on 15 January 2008. She was asked whether the same decision to suspend would have been taken in those assumed circumstances. Ms Hare explained (transcript 291 - 292) as follows:
No, I can't give you yes/no answer, because the reason to suspend or terminate is not based on one particular facet, and that being the pre‑vetting. The reason to suspend or terminate was based on the whole situation and the whole situation was, we did not believe that the SOAs that were issued to the clients contained enough information for the clients to make an informed decision on whether to accept the advice or not, they did not disclose or discuss the advantages and disadvantages of moving from one product to another product. The file notes were not in the files, the fact finders were only partly completed, there was no true record of discussion held in relation to the risk profile situation. So the pre‑vet was just one small issue in the whole matter.
257 When challenged that the "pre‑vet" was the major issue leading to suspension, Ms Hare responded:
No, the pre‑vet was one issue in the whole matter. Because what you look for is, on 30 November 2007, I went and conducted a compliance review. On that review, I sat down with him, with Martin and said to him, 'Okay, your files do not tell the correct story. They do not have enough information in there to protect you if you get a complaint or to provide enough information of a client to accept the advice or not. You need to have supporting information in there.' So supporting information means having file notes of discussions you've had with the client, all the way through, having file notes of discussions in relation to the risk profile questionnaire, to make sure the client understands what the risks profiles about, the fact finder, what's the client's needs and objectives. They weren't in the fact finder at all, okay. In regard to the SOA, the SOA did not contain information, there were blank sections throughout the SOA, there was a 'TBA' in there, there was 'non applicable' in there, it did not discuss what the advantages and disadvantages are. That is the reasons why we suspended Martin and eventually terminated him.
258 I accept the evidence of Ms Hare, that these were the reasons why the compliance committee eventually decided to suspend and finally decided to terminate the authority of the applicants when it did. In particular I find that it was not simply because M3FS was concerned that Avoca and Mr Cunningham had failed to meet the pre‑vetting requirements initially established by the audit in November 2007 and action plan in December 2007. Rather, it was the range of failings and deficiencies identified by Ms Hare in the transcript passages just recited that led to this decision.
259 Having considered evidence relating to the six files in question and the evidence of Mr Cunningham both in examination and cross examination concerning his practices and the reasons why he completed the documentation in the way he did, and what documentation he completed and provided, I consider M3FS had proper grounds for concern, that Mr Cunningham was in breach of his material obligations under the CARA, and so M3FS were justified in suspending Mr Cunningham's authority in July and ultimately terminating the CARA.
260 It is understandable, in the circumstances, however great the impact was then and subsequently on Avoca and Mr Cunningham, that M3FS through the compliance committee should have taken the steps it did to ensure the integrity of its business, the quality of advice provided to clients and overall the extent to which it and its representatives were compliant with the financial services obligations created by the CA and its own procedures laid down for representatives.
261 The compliance committee engaged Maria Good, a compliance consultant specialising in financial services compliance, from about 8 July 2008 to provide advice in relation to aspects of the circumstances concerning Avoca and Mr Cunningham. Ms Good prior to joining M3FS was employed for a number of years as a senior analyst in the compliance directorate at ASIC. Prior to joining ASIC she had been employed by the New South Wales Corporate Affairs Commission in the investigation and corporate finance areas. Ms Good was well qualified to provide advice in relation to compliance matters. She was aware of Regulatory Guide 84, published by ASIC for the first time in 2005, which set out the expectations on the substance and form of superannuation advice provided to retail clients. It is the document that ASIC uses in its surveillances of licensees and their representatives and is widely published in the industry.
262 Ms Good was made conversant by Dale Hare with Ms Ruano's review of Mr Cunningham's files. On 9 July 2008, she indicated to Mr Barry Martin and Ms Dale Hare that the deficiencies disclosed by the Ruano review were serious because clients were not in a position to make an informed decision to switch superannuation. They were not provided with adequate information about the costs, benefits and consequences from switching from one superannuation fund to another.
263 Ms Good explained that she was acutely aware that ASIC take seriously any breach of financial services rules that would adversely impact on consumers. Based on what she was advised by M3FS she considered the deficiencies in the files of Martin Cunningham to be significant and appropriate to be reported to ASIC.
264 Ms Good expressed the opinion that the deficiencies were serious and likely to be considered as such by ASIC. Further she believed that the deficiencies fell substantially short of the conduct and activity expected of a competent advice professional. In light of the significant regulatory focus by ASIC on superannuation advice from 2005 onwards, Ms Good believed that it was not reasonable for advice provided by an authorised representative, acting with reasonable care and diligence to demonstrate a lack of a reasonable basis for the advice, fail to consider the client's circumstances, identify and compare the "to" and "from" funds or fail to consider, disclose or quantify the consequences and implications of the recommendations.
265 On this basis, Ms Good then assisted M3FS to report to ASIC what she considered to be notifiable breaches in accordance with s 912D of the CA.
266 In September 2008, Ms Good provided further advice to Mr Barry Martin concerning Mr Cunningham's suspension.
267 Mr Barry Martin gave advice that confirmed the evidence of Ms Ruano and Ms Hare, and also confirmed the involvement and advice received from Ms Good concerning Avoca and Mr Cunningham.
268 Mr Martin indicated that he supported the decision to suspend the authority of Martin Cunningham on 8 July 2008 on the basis of a recommendation from Dale Hare and advice of Maria Good that:
· the quality of the personalisation of the SOAs with regard to each individual client was very poor;
· no rationale was recorded in the SOAs as to why the pre‑existing super funds were transferred to a new set up superannuation fund;
· there was inadequate information collected and recorded in the client files about the client's needs and objectives;
· there was no or insufficient product research contained within the client file and no adequate basis for the advice was documented as required by s 945A of the CA.
269 In taking the suspension decision, Mr Martin indicated that he also had to consider what liability M3FS would incur from the actions of Mr Cunningham as its authorised representative. He also needed to consider the interests of all other authorised representatives of M3FS who needed M3FS's licence to remain in good standing so that their businesses could continue to operate. Based on the advice of Ms Good and Ms Hare, he decided to suspend the authority of Martin Cunningham as a representative of M3FS.
270 Mr Martin said that he had his first conversation, by telephone, with Mr Cunningham, following the suspension, on 9 July 2008. He confirmed to Mr Cunningham that as a result of his suspension he could not provide any advice to clients until the matter was sorted out. He also advised Mr Cunningham that he would be obliged to report him to ASIC.
271 Mr Martin indicated there would be a review of Mr Cunningham's client files to find out if any clients had been disadvantaged. M3FS needed to do this to ascertain whether there had been any financial loss to clients. Evidence of any client financial loss would indicate a significant breach of financial services laws under s 912D of the CA and would be reportable by law to ASIC.
272 Mr Martin said that he told Mr Cunningham:
Your files have indicated a whole series of problems, including recording of TBA where dollar amounts should have been, no reasonable explanation of the effects or reasons for the transfer of superannuation, no explanation as to the effect your advice could have on the expected retirement benefit of the client. Your files also have a lack of documentation.
273 Mr Martin says that Martin Cunningham told him:
Nobody has told me that it was a Millennium3 requirement that the disadvantages of financial advice be set out in a SOA.
274 Mr Martin said he replied that he would not have expected to have to tell Mr Cunningham because it was not an M3FS requirement, it is a requirement of the law, "something every qualified financial advisor would know and not have to be told".
275 Mr Martin further states, something that Mr Cunningham does not dispute, that during the conversation Mr Cunningham said to him words to the effect "then there are 200 (files) of them because they are all the same as the files you reviewed". Mr Cunningham also indicated during the phone call that he thought he should "just resign and go somewhere else". Mr Martin indicated he could do that, but he could not be released until M3FS had rectified all the problems on his files that they were ultimately responsible for, which they would attempt to do as soon as possible.
276 Mr Barry Martin says this telephone conversation was of a duration longer than the two minutes Mr Cunningham has estimated in his evidence.
277 Subsequently, Mr Martin received and considered a compliance report from Dale Hare of her audit of Martin Cunningham's client files on 14 July 2008.
278 On 15 July 2008, Mr Martin became aware that the applicants maintained a website which promoted the repatriation of UK pensions to Australia. With this knowledge Dale Hare sent an email to Mr Nguyen on 16 July 2008 instructing him to contact Mr Cunningham's office and direct Avoca to take the webpages down and to confirm in writing that it had been done. Mr Martin says that prior to 15 July 2008, M3FS was not informed about the website and unaware of its existence until 15 July 2008. He was concerned that the reference to Mawson on this website might be misleading and deceptive and needed to be removed without delay.
279 Mr Cunningham and Avoca were not accredited by M3FS to provide advice in relation to UK pensions.
280 On 4 September 2008, Mr Martin and Dale Hare spoke to Mr Cunningham by telephone. Mr Martin asked Mr Cunningham if he had given advice to clients who had UK pensions. Mr Cunningham replied: "No, I am only the facilitator". Mr Martin advised Mr Cunningham that this meant that there were about 40 files that M3FS did not need to reissue SOAs for.
281 In late July 2008, M3FS arranged for a financial planning consultant to prepare and provide revised SOAs for clients of Martin Cunningham. The compliance committee meeting of 4 August 2008 dealt with these files, as a result of which 165 client files, held by Martin Cunningham, were sent to the Brisbane offices of M3FS for the purpose of remedying previously reported deficiencies on the files. The expected outcome was the reissue of SOAs.
282 On 28 August 2008, Mr Rick Dougherty contacted Mr Martin and requested the lifting of the suspension on Martin Cunningham. Mr Martin indicated to Mr Dougherty that could not be considered until all the SOAs had been rectified, which had not happened at that point. During the call Mr Dougherty said:
You were aware of the problem with Martin Cunningham's files in December (2007), but you didn't do anything about it until June. It seems like you guys stuffed up.
Mr Martin says he replied:
Those circumstances don't change the situation, what the bloke has done with the clients files requires serious work to fix it up and we are duty‑bound to fix it up. There is no reason to lift the suspension until the client files are fixed up.
283 Mr Dougherty then emailed Mr Martin on 29 August 2008 requesting the lifting of Mr Cunningham's suspension. At that point, Mr Martin directed that M3FS engage its solicitors to reply on behalf of M3FS. A letter was sent to Mr Dougherty on 9 September 2008.
284 During September the 165 affected client files were being considered on behalf of M3FS. Mr Cunningham was requested to provide further information. By email dated 8 September 2008, Mr Cunningham responded explaining his manner of conducting business and providing advice. Mr Cunningham emphasised that he abided by the number one rule in all advice, namely, to "know your client" and gain their trust and understand that every client's circumstances are "slightly different". Mr Cunningham's email information plainly indicated that he considered that he had acted reasonably and at all times had met the best interests of his clients. Plainly he still held out hope that M3FS would lift his suspension.
285 On 10 September 2008, Mr Martin sought the advice of Ms Maria Good as to whether or not it was possible for M3FS to lift Martin Cunningham's suspension. She indicated "No".
286 By early November 2008, as a result of the review conducted by Ms Hare, amended SOAs had been sent out to clients whose files were affected by the deficiencies perceived by M3FS. A report to that effect was provided to the 3 November 2008 compliance committee meeting.
287 At the 2 December 2008 compliance committee meeting Dale Hare reported that the final report had been sent by M3FS to ASIC on 17 November. ASIC confirmed by email on 18 November 2008 that they did not propose to make any further inquiries in relation to the breach. However, they reserved their right to do so.
288 Mr Martin stated that at the December meeting of the compliance committee, he decided to terminate the authorisation of Avoca and consequently the individual authorities of Mr Cunningham and Mr Gyi. A termination letter dated 10 December 2008 was then sent to Mr Cunningham by email on 11 December 2008.
289 Mr Martin said that the grounds for termination were for a breach of items 3 and 10 of cl 12.2 of the CARA, namely:
· Item 3 - authorised representative breaches any material obligation under the deed.
· Item 10 - distribution entity (M3FS) forms the reasonable opinion that the authorised representative or any of its representatives has failed to perform or observe their material responsibilities under the terms of the deed or engaged in any conduct which is prejudicial to M3FS, unprofessional or unethical or in breach of the relevant code.
290 Mr Martin said in cross examination (transcript 391) that M3FS did nothing to resolve and terminate the suspension within two weeks of imposing it in July 2008, because of what he learned in his July telephone conversation with Mr Cunningham:
We did nothing because we had subsequently had a phone conversation with Mr Cunningham which showed to us that the problem was far bigger than we expected. In fact in that conversation when we told Mr Cunningham what we believed was wrong with the files he indicated words to the effect, 'Well, if that's the case, there's 200 the same'. So we went from a situation of having recognised that there's six that we know of to now finding out within one day of his suspension that there was 200 which put a totally different perspective on what we needed to do.
291 Mr Martin further explained (transcript 392) that he did not accede to the representations of Mr Dougherty to remove the suspension because:
By that stage we had taken possession of 165 files. We still thought that we could correct the files that we found deficient in a reasonably short period of time. But when we got those files there was so - they were so lacking in any information that it was impossible for anybody to be able to correct them without getting considerable information from the funds that accepted the transfers. Now, in this situation it was probably - it could have been worse because in most cases all of the money that was coming over from other funds was going into the one company, which was Asteron. So we were totally reliant upon getting information from Asteron before we could fix those files.
292 Mr Martin further indicated (transcript 395) that he did act on the request of Mr Dougherty to consider removing Mr Cunningham's suspensions. However, when he spoke to Maria Good she indicated, in emphatic terms, that he should not. He accepted this advice.
293 Mr Cunningham, in his responsive witness statement (Exhibit B) and in his testimony more generally endeavoured to respond to the complaints made about his advice practices by Ms Ruano, Ms Hare and Mr Martin. Concerning superannuation advice, Mr Cunningham said that for clients who are switching superannuation funds he always advised them about the difference in fees between the new fees he was recommending to them and their current and dormant funds.
294 Mr Cunningham said he had a schedule of fees he took to client meetings, which he updated regularly. He showed the schedule to the client at the initial meeting and wrote the fee comparison details in the comment box at the end of the document called "Realities of Superannuation", which was one of the documents in the folder he gave to his client at the initial meeting. He gave the Realities of Superannuation worksheet to the client and it was kept in their folder, which they retained, so that the details were with them when their completed SOA subsequently arrived.
295 Mr Cunningham says that he filled out a Financial Needs Analysis for every client he saw, and took into account all of the details when giving advice.
296 If the clients were interested in taking out risk insurance (whether it be life, TPD, trauma or income protection insurance) he filled out at the initial meeting a document called "Why do we need personal insurances?", which was contained in the client folder that he gave to the client. The worksheet explained the four different types of risk insurance. He wrote on the worksheet his advice as to what insurances the client should have. He gave that completed worksheet to the client and they kept it in their client folder and retained it when they received their completed SOA.
297 Mr Cunningham said he kept his laptop switched on at all times at client meetings so that he could immediately give a client a quote of premiums that would be applicable to the different products he recommended.
298 For clients who wanted to tidy up their superannuation into one fund, Mr Cunningham said he gave the advice mentioned earlier about the comparison of fees between the old and new fund. He also provided a comparison of fees, even though the SOA template he received from M3FS in December 2007 did not have a section to set out this comparison.
299 Mr Cunningham said he always advised his clients to the effect that the benefit of combining their superannuation in one fund is that they will save on fees which otherwise might lead to their dormant superannuation funds being reduced to nothing.
300 Mr Cunningham emphasised that a client's existing superannuation fund cannot be replaced immediately if there are insurances, such as life insurance or TPD insurance attached to it. For a client who wants to combine their superannuation into one fund but has insurances attached to their current fund, his first priority is to transfer the funds held in their dormant superannuation funds into their new fund. It can take some time to transfer funds held in a client's existing superannuation fund into a new fund, if it has insurances attached to it.
301 In cross examination, Mr Cunningham said he was aware of his obligations as an advisor under s 945B of the CA when giving advice based on information relating to a client's circumstances that is "incomplete or inaccurate".
302 He also acknowledged that prior to the November 2007 audit, he had written "TBA" on some advice that he gave. He acknowledged that this was an issue raised at the audit meeting. He said however, that he was informed by Mr Nguyen that he would be given necessary paperwork to alleviate this problem.
303 Mr Cunningham explained that, after the audit, he only continued to insert the letters "TBA" in one place on SOAs, namely, against the superannuation of the client or prospective client. He said Ms Hare had told him that on commissions, he could use an example of $1,000.00 on the SOA. In other words, where it was not clear what commission was to be earned, the sum of $1,000.00 was entered. He did this instead of writing "TBA". He accepted that he did not give a warning that this was an inaccurate sum, but did it because he was advised to do so by Dale Hare.
304 Mr Cunningham insisted that, at all material times, he was waiting for Mr Nguyen to provide him with the authority pro forma. In cross examination he was asked (transcript 92):
Counsel: Yes, my question - is it your evidence that it did not dawn on you at any time after your appointment as one of Millenium3's representative in July 2007, that the simple and obvious solution to this problem that you'd been saddled with, was to have the client write a simple letter to the insurer or insurers concerned to request authorising that insurer to provide you with the relevant information that you needed? --- Yes, correct.
It didn't dawn on you? --- No.
I see. May I take it that when you were assured in November 2007, by Mr Nguyen that he would provide you with this magic key --- ? --- Yes.
--- to solve this insoluble dilemma, you waited patiently for the key until July 2008, without chasing him up to say, 'Mr Nguyen, Mr Nguyen could I have the key please to this insoluble dilemma' or words to that effect? --- You are absolutely correct.
Okay, you sat by and allowed Mr Nguyen to keep the magic key and you didn't chase him for it, is that it? --- Absolutely correct.
305 Mr Cunningham when pressed that Ms Hare had told him at the November 2007 audit words to the effect that the recommendation in the SOA must provide the advantages and disadvantages of the advice, especially when you are recommending they replace a financial product and that the files do not provide a rational basis for the advice provided, he did not agree. He denied that that was the substance of what Ms Hare had said to him at that meeting. He said (transcript 99): "She told us we have to discuss it with the clients." Mr Cunningham accepted however (transcript 100) that when Ms Hare said that, she was commenting critically about the advice given in all of the SOAs that he had prepared up to that point. He "assumed" that was so.
306 Notwithstanding his earlier evidence, Mr Cunningham (transcript 108) acknowledged that an SOA provided to a Mr D in February 2008 was a statement that notwithstanding the November 2007 audit, contained the letters "TBA". Mr Cunningham justified his continued use of the letters "TBA" solely on the ground that Mr Nguyen, at that stage, had not provided him with a letter of authority in order to obtain information and provide an accurate account of it in the SOA.
307 At this point, Mr Cunningham was also continuing to ascribe a fee of $1,000.00 (not a rate per $1,000.00 in the "last resort" circumstances described by Ms Hare in her evidence) as a nominal sum where he did not have the information currently to provide a more accurate estimate of the fee.
308 Mr Cunningham also contended that, in relation to the advice given to Mr D, he was committed to providing him with an unlimited scope of advice on a full financial needs basis. When challenged that he did not do so, Mr Cunningham insisted that he did. He said it must have been done the week before. He accepted, however, that this was not in the SOA. His explanation (transcript 110) was:
Well, there's nothing filled in, sir, because he's a single man with no wife, lives in … Road, he has no debts, he owns no car, he's a typical 25 year old chef.
309 Ultimately Mr Cunningham conceded (transcript 110) that there were materials missing that should have been included in that SOA, as identified in Ms Hare's responsive witness statement at pages 22 - 26, and that these were materials that should have been provided in discharge of his responsibilities as one of M3FS's representatives.
310 Mr Cunningham also accepted (transcript 138) that when following his suspension he spoke with Mr Martin by telephone and Mr Martin made criticisms of the files he had created, he had said words to the effect: "Then there are 200 of those files, because they are all the same as the files you reviewed".
311 So far as a regular complaint in the course of evidence made by Mr Cunningham is concerned, that he could not do anything about the "TBA" notation difficulty in SOAs until such time as Mr Nguyen provided him with a letter of authority, I find that this innocuous observation, which was probably made by Mr Nguyen during the audit in November, has become something of a straw clutched at by a drowning man to save himself. There is little or nothing to it.
312 As observed earlier, in relation to Ms Hare's evidence on the point, the fact of the matter is that a financial adviser with Mr Cunningham's experience should have known what was required of him in order to have a client sign a simple letter of authority that he could provide to a financial organisation in order to obtain information concerning the client's current superannuation or other financial investments. The suggestion by Mr Cunningham that he was powerless to rectify this deficiency until such time as he was given a pro forma letter of authority, as senior counsel for the respondent submitted, beggars belief. If he truly believed he required the pro forma letter, one would have expected him to follow up on it long before he did in July 2008.
313 In my view, having regard to the factual findings made above, M3FS were justified in suspending Mr Cunningham in July 2008, considering Mr Cunningham to be in breach of his material obligations under the CARA, and then terminating the applicants' authorities in December 2008 for material breach of the CARA deed. The applicants have failed to discharge the onus they bear of proving that the respondent acted for reasons other than material breach and that there was no material breach.
314 While, as I have found above, the conduct of Mr Nguyen in the period January to May 2008 is in many ways inexplicable, and did nothing to cause Mr Cunningham to think he may not have been compliant with M3FS's requirements, by the time M3FS's compliance committee first in June, and then in July 2008, came to look more closely at the conduct of the financial services business of Avoca and Mr Cunningham, firm advice to the contrary was then communicated.
315 In my view, while Mr Cunningham, on his own behalf and on behalf of Avoca during the first half of 2008, may have been conducting a financial services business in much the same way as he had for years, utilising documents he was familiar with - as the evidence strongly suggests was the case - he was in fact failing to meet the strict requirements of the CA, and so of M3FS under the CARA.
316 The various deficiencies identified by Ms Ruano, Ms Hare, Ms Good and Mr Martin in the inspected six client files provided to Ms Ruano by Mr Nguyen in late May 2008, in fact represented Avoca's and Mr Cunningham's usual mode of providing financial services advice to their clients. Mr Cunningham himself confirmed that to Mr Martin when they first discussed the matter of the suspension by telephone on 9 July 2008.
317 While, following the suspension of Mr Cunningham, M3FS reviewed 165 files of which 11 required fresh SOAs to be issued - in order to make the advice compliant with the CA for those clients - the nature of the deficiencies in practice identified by the Ruano review justified M3FS holding the view that the authorities of the applicants should be suspended and then terminated for material breach of the CA.
318 An important contention put on behalf of the applicants is that the compliance committee, both at the point of suspension and subsequently at the point of termination, were significantly influenced in coming to these decisions by Avoca's and Mr Cunningham's alleged conduct on 15 January 2008, as represented in a file note of that meeting made by Mr Nguyen that he completed on or about 4 July 2008. The applicants contend that, but for the incorrect account Mr Nguyen gave of his attendance at the offices of Avoca on 15 January 2008, when he stated that Mr Cunningham, in effect, failed to produce requested files for pre‑vetting, the compliance committee and M3FS would not have suspended Mr Cunningham in July and would not ultimately have terminated their authorities in December 2008.
319 For the reasons expressed by Ms Hare in her evidence, which I have quoted earlier in these reasons, and the evidence of Mr Martin, it is plain that, while the compliance committee and M3FS believed there had been no pre‑vetting conducted as required, their substantive and real concerns were that, despite the audit review of November 2007, there had been no meaningful steps taken to remove the deficiencies identified at that time and the subject of the action plan of early December 2007, which left M3FS at risk of having in the field a representative who was not only, not strictly complying with the CA requirements concerning disclosure, but also seemingly not capable of remedying his deficient practices.
320 Accordingly, while I have found that the conduct of Mr Nguyen in the period between 15 January and 27 May 2008 is inexplicable, in that he did absolutely nothing in terms of reviewing, either for the purposes of pre‑vetting or general auditing, the files of Avoca and Mr Cunningham, that was not, in the final analysis, the reason for the suspension in July and the termination in December 2008.
321 The factual reality, as I have found it, is that while Mr Cunningham apparently believed he was compliant with the action plan requirement to submit five client files for pre‑vetting by making five files available at Avoca's offices for inspection by Mr Nguyen on 15 January 2008 - he did very little, if anything, thereafter otherwise to meet or remedy the broad range of recommendations or deficiencies identified in the November 2007 audit, as Ms Ruano discovered in late May 2008.
322 It is surprising, to say the least, that Mr Cunningham would not himself have followed up Mr Nguyen following 15 January, to get "feedback" from Mr Nguyen on the files that had been provided for pre‑vetting purposes, especially as he knew from Mr Gyi that Mr Nguyen had only made a quick inspection of the file before leaving Avoca, but that seems to have been the way he conducted his business affairs.
323 It is also surprising that Mr Cunningham would not have followed up Mr Nguyen during April, May or June following the collection from him by Mr Nguyen of six client files on 8 April 2008. Rather, he seems to have assumed there were no problems unless advised to the contrary. Again, his conduct was consistent with his usual business practices.
324 In these circumstances, I reject the applicant's claim that M3FS breached the CARA by suspending Mr Cunningham and later terminating the applicants' authorities when the applicants had not committed any material breach and did not have any reasonable grounds to suspect they had committed any material breach of the deed.
325 I also reject the applicant's related claim that M3FS engaged in misleading or deceptive conduct under s 52 of the TPA in representing that it would not suspend or terminate the authorities of the applicants for anything other than a material breach or whether there were reasonable grounds to suspect a material breach of the deed. I expressly find that at the time such representations as were made by M3FS, it had reasonable grounds for making them, and that such representations were not misleading or deceptive. Indeed, M3FS acted at all times on the basis there was a material breach of the deed.
326 For the reasons given above I do not consider that the suspensions and terminations complained of, were made by M3FS other than by reference to material breach of the CARA, in circumstances where they had reasonable grounds for considering or suspecting material breach of the deed. Consequently, the applicants claim on these grounds must fail.