ASIC successful in restraining financial advice services - property sales group who encourages investors to invest through SMSFs

 

During October and November 2015, the New South Wales Supreme Court in the case of Australian Securities and Investments Commission (“ASIC”) v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527, upheld an application by ASIC to restrain Park Trent Properties Group (“Park Trent”) from providing financial advice.  ASIC sought declaratory and injunctive relief.  The Court held that Park Trent was unlawfully carrying on a financial services business for a period of over five years by providing advice to clients to purchase investment properties through Self-Managed Super Funds (“SMSFs”).

This case has implications for anyone making recommendations in respect of SMSFs. 

There are two groups who we believe will be particularly affected by this decision:

  1. Accountants, particularly since the accountants’ exemption expired on 30 June 2016; and
  2. Property developers and other groups associated with the sale of property who encourage the use of SMSFs.

This case and the principles from this case deserve careful consideration.

Background

Park Trent was fundamentally a real estate business with agencies located in at least six states of Australia, holding real estate licenses in their state locations.  Park Trent acted mainly in its capacity as a real estate business to sell properties as agents for vendors receiving commission based payments. In addition to this, Park Trent also engaged in some real estate development activity.

In 2010, Park Trent developed a strategy to encourage its clients to purchase property through SMSFs.  The Court noted this more or less coincided with amendments to the Superannuation Industry Supervision Act (“SIS Act”), making it easier for SMSFs to borrow to acquire property. 

Park Trent were described as enthusiastic marketers with a very active marketing program which extended to unsolicited telephone calls and approaches, seminars, and appointments at potential clients’ homes which ran for several hours.  Justice Sackville described the sales and marketing process used by the CEO as being “a carefully constructed strategy of encouraging clients to invest in real property using SMSFs”.

Over 860 clients received advice from Park Trent in relation to starting a SMSF and transferring their existing superannuation funds into their newly established SMSF in order to buy investment properties.  The Court held that at all stages, Park Trent encouraged clients to use their superannuation balances to purchase property through Park Trent.

Park Trent had relationships with accountants to assist with the establishment of SMSFs and in some cases, Park Trent required the accountants to provide limited advice to the potential client.  The Court found, prior to clients receiving advice or assistance from an accountant, Park Trent had provided advice to the client on how to implement the purchase of the property through a SMSF.

Legal Claims

ASIC alleged that:

  1. Park Trent’s conduct was in contravention of section 911A of the Corporations Act as it was carrying on a financial services business without an Australian Financial Services Licence (“AFSL”).
  2. Park Trent made recommendations and stated opinions which were intended to influence a person in making a decision in relation to a superannuation interest under the SIS Act.

ASIC sought an order under section 1324 of the Corporations Act, to restrain Park Trent, by itself, its officers, servants, employees, agents or otherwise from providing financial services advice.  This was inclusive of supplying, providing or arranging the supply or provision of any form of financial investment analysis and making recommendations or statements of opinion to a person with the intention to influence. 

ASIC also sought a declaration pursuant to section 1101B(1) of the Corporations Act, that Park Trent contravened and continued to contravene section 911A of the Corporations Act.

The decision

Justice Sackville found that Park Trent had contravened section 911A(1) of the Corporations Act, throughout the period from March 2010 until at least the date of trial.  ASIC’s application was upheld.

Did Park Trent make recommendations or state opinions?

Park Trent was deemed to have carried on an extremely well-organised national operation designed, among other objectives, to maximise sales of real property on a commission basis.  The operation was found to be designed to promote to clients the advantages of purchasing property through SMSFs.  This included providing clients with the services required to establish the SMSFs and to transfer existing superannuation balances to enable the purchase of the selected investment properties.

It was found that Park Trent used numerous strategies to make representations and statements of opinions.  The transcripts of seminar presentations obtained by ASIC suggested that presenters, and in particular the CEO, were actively urging attendees to establish or use existing SMSFs to invest in property and make large tax free gains.  The use of Property Investment Analysis (“PIA”) documents were held to strategically demonstrate that the purchase of property through a SMSF was not only feasible, but highly desirable, irrespective of the client’s personal and financial position.  The PIAs were labelled as a series of assumptions which suggested few clients read the material carefully and even fewer understood its content.

Intention to influence decisions

Mr Cross, as the controlling mind of Park Trent, was considered to have intended that the recommendations made and opinions expressed in the course of the marketing process should influence clients to make decisions in relation to SMSFs.  This was due to the fact the CEO was fully aware of the content of the seminar presentations and designed the presentations to be persuasive.  The evidence of the investor witnesses showed that some were influenced by the presentations at the seminars and meetings, in particular through the PIAs. This influenced the investors to pay the holding deposit and to initiate the process of establishing a SMSF.  The fact that some clients knew they could seek advice from a nominated third party accountant did not affect Park Trent’s intention to influence.

An “exempt service” – regulation 7.1.29

An interesting question which could have arisen, but was not heard by the Court, was whether the service provided by Park Trent was an “exempt service” under Corporations Regulation 7.1.29.  This regulation states circumstances in which a person is taken not to provide a financial service and covers a number of aspects including taxation, reports, SMSFs and so on. 

During what was a nine day hearing, Park Trent made an application to amend its defence on day six, to include a ground of defence that the service provided by Park Trent was an exempt service.  The Court report does not detail which subsection of Regulation 7.1.29 Park Trent attempted to include within its defence at that late stage.  Given the late application for this amendment, and the difficulties this would have created in the hearing, the application to amend the defence was refused by the Court.  It would have been interesting to know the Court’s view in respect of whether Park Trent’s activities did constitute an exempt service.  From our reading of the judgement, it seems unlikely that Regulation 7.1.29 would have had application in any event.

This shows the importance of structuring pleadings in litigation, as a potentially important defence appears to have not been included.

Importance of the decision

The decision acts as a reminder to financial advisers that conducting financial services without appropriate licencing or authorisation can attract severe consequences.  ASIC is active in pursuing cases in this area, and it appears that ASIC has particular interest in relation to both property and SMSFs.  The ASIC SMSF report (March 2015) shows an increase from 414,190 to 550,706 established SMSFs between June 2010 and March 2015. It is likely the more popular SMSFs become, the more ASIC will pay attention to this area.

The Court decision has significant implications for property advisers and accountants.

The decision also shows the importance of ensuring that litigation is structured to include all of the potential grounds and defences, especially in an area as complex as financial services.

 

For more publications: click here.