“In relation to” a financial service: Federal Court reaffirms wide angle lens

The Federal Court has recently reaffirmed that the phrase “in relation to” a financial service is necessarily of wide import. In this context, it is timely to reiterate the practical consequences of this broad interpretation in the context of financial services.

“in relation to”

In Australian Securities and Investments Commission v Hutchison [2020] FCA 978, the relevant circumstances involved adviser misconduct relating to the improper cashing of payments for the provision of financial advice to retail clients. As a result of this conduct, ASIC imposed a banning order on the adviser for, among other things:

  • engaging in dishonest conduct “in relation to a  financial service” under section 1041G of the Corporations Act; and
  • engaging in conduct, “in relation to a financial service, that is misleading or deceptive or is likely to mislead or deceive” under section 1041H of the Corporations Act.

ASIC’s banning order was overturned by the Administrative Appeals Tribunal (AAT), on the basis that the conduct was not “in relation to” a financial service. The AAT came to the view that the requirement that conduct be “in relation to” a financial service in sections 1041G and 1041H should be understood narrowly as requiring a direct or substantial relationship.

On appeal to the Federal Court, the primary question before Banks-Smith J was whether the relevant conduct was conduct that was “in relation to a financial service” for the purposes of section 1041H of the Corporations Act. Her Honour overturned the AAT decision and concluded that the phrase “in relation to” a financial service requires only “an indirect or less than substantial connection” between the conduct and the financial service. In adopting this approach, Her Honour applied the previous decision in Australian Securities and Investments Commission v Narain [2008] FCAFC 120, which also held that that the relationship contemplated by the words “in relation to” is such that an indirect or less than substantial connection is sufficient.

Provision of a financial service vs “in relation to” a financial service

We have previously commented on the scope of a “financial service” in our article discussing the obligation to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly. In this context, we noted that the scope of a financial service may, in fact, be narrower than is commonly understood. The scope of a financial service is a function of the core of that service, as well as the necessary incidents of such service. For example, dealing does not encompass the administration activities of operating the financial product, unless integral to the dealing itself. By way of counterpoint, the financial service of providing financial product advice would ordinarily encompass the charging of fees in respect of such advice, as this is either core to the provision of the advice (in terms of how it is provided) or a necessary incident of it. Contrast the handling of complaints relating to financial advice; that is not a financial service per se, but it is arguable that it is a necessary incident of providing advice, as is remediation of poor or deficient advice.

This is important, because a number of key obligations in Chapter 7 of the Corporations Act are enlivened only when a financial service is being provided. Most notably, the general licensee obligations in section 912A of the Corporations Act apply in respect of the provision of a financial service.

However, importantly, a number of obligations and prohibitions in financial services law apply in a broader set of circumstances. In particular, market misconduct provisions in the Corporations Act and ASIC Act such as misleading or deceptive conduct, false or misleading representations, dishonest conduct and unconscionable conduct apply when the conduct is either “in relation to” or “in connection with” a financial service. This means that these misconduct provisions may apply, even where the general licensee obligations in 912A of the Corporations Act do not.

As a result, a licensee must always give due regard to the broader administrative and other operations of its financial services business (which may not require a particular AFSL authorisation), to ensure that they do not fall foul of these broad conduct obligations.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160