The Australian conduct regulator has secured its first criminal conviction for failing to update defective disclosure statements, over the “fees for dead people” scandal that emerged from the financial services royal commission.
The regulator took an unprecedented criminal action against Avanteos Investments, a former wealth management unit of the Commonwealth Bank. The County Court of Victoria has ordered Avanteos to pay A$1.7 million in criminal penalties.
The Hayne inquiry found that Colonial First State Custom Solutions, as the business was known, charged continuing advice fees to superannuation members after their death. The Royal Commission heard that Colonial had knowingly charged around A$700,000 in fees to a total of 499 customers who had died. Hayne referred the case to the Australian Securities and Investments Commission (ASIC) for prosecution in 2019.
As the trustee of the funds, Avanteos was entitled to deduct fees from its members’ cash accounts, including an “adviser service fee”. Until May 2018, Avanteos had an internal policy of charging advice fees following the death of a customer until it was notified to stop. The court found that this was not disclosed in the Product Disclosure Statement (PDS).
Colonial’s senior managers knew as early as January 2016 that the PDS was “defective” and contained misleading or deceptive statements about the deduction of fees. Section 1021J(1) of the Corporations Act 2001 states that it is a criminal offence to knowingly distribute defective disclosure documents, or to fail to rectify anything that is found to be incorrect.
The estates of those customers have been compensated separately for their losses. Avanteos said in an emailed response to Reuters that it had completed a remediation program and refunded all unauthorised adviser service fees deducted from deceased members’ accounts.
Warning signs
The Commonwealth Director of Public Prosecutions (CDPP) submitted that the offending was “at the upper end of objective seriousness for offending of this kind and as such, its culpability is high.”
Sarah Court, ASIC deputy chair, said the seriousness of the breaches warranted the criminal action. She said the case should be viewed as a warning to the industry to “act on advice and rectify problems quickly — or face possible criminal action.”
Court said the senior managers at Colonial/Avanteos were aware they did not have a legal authority to deduct fees from members after their death.
“Despite this knowledge, there were no changes made to Avanteos’ disclosure documents and the unlawful fees continued to be charged for over two years,” she said.
Judge Trevor Wraight said the offences were due to a “systemic breakdown” in the wealth manager’s governance and compliance controls.
“The offending can only be described as a very serious failure of corporate governance and an example of a financial corporation putting its own interests above those of its investors in breach of the law,” Justice Wraight said in his judgment.
“In my view it was clearly practicable to have taken reasonable steps to remedy the defect once it became known.”
Scale and resources
The judge took into account Colonial’s scale and resources when the offences took place. Justice Wraight said that as a “very large, well-resourced company” the wealth manager was able to access top-tier legal advice.
“It is, therefore, in all the circumstances in my view a serious example of corporate offending and the company’s culpability is relatively high.”
The penalty was reduced by A$1 million due to Avanteos’ early guilty plea on a total of 18 criminal charges. The maximum penalty when the offences occurred was A$3.2 million.
Since December 2021, private equity firm KKR has been the majority shareholder in Avanteos
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This article first appeared on Thomson Reuters Regulatory Intelligence.
