Bali trips and a Vespa: Federal Court throws out ASIC conflicted remuneration case

On Thursday, the Federal Court of Australia dismissed the Australian Securities and Investments Commission’s (ASIC) claims against a former director and a former consultant of deregistered financial services provider, Freedom Insurance.

The regulator had alleged that Keith Cohen, the former director of the Freedom Group, and Robert Oayda, a former quality assurance manager acted unlawfully through their involvement in the Freedom Group’s sales incentive programs.

ASIC brought the case against Cohen and Oayda in October 2021, and the matter was heard by the Court in July 2023, however it had reserved judgement.

The action followed Freedom being skewered during the financial services royal commission over a range of failures, ranging from high-pressure sales tactics to its practices selling insurance to vulnerable customers, as well as conflicted remuneration.

In the royal commission’s final report, commissioner Kenneth Hayne included the firm as a case study in potential misconduct, noting that Freedom had acknowledged it may have breached the Corporations Act “in respect of the non-monetary benefits that it provided to its representatives between January and April 2018” – when the Life Insurance Framework changes went into force.

“In its submissions to the Commission, Freedom accepted that it may therefore have historically failed to have in place adequate arrangements for the management of conflicts of interest that arose between its representatives and its policyholders, in breach of section 912A(1)(aa) of the Corporations Act,” Hayne wrote.

“Again, I have no reason to doubt the appropriateness of those acknowledgments.”

During the period between November 2017 and January 2018, Freedom ran a sales incentive scheme that would reward any of the sales team that hit their target with a seven-day trip to Bali, including flights, accommodation, and “complimentary treats”.

A total of 28 sales staff received this package, while a further eight qualified for a second Bali trip incentive that Freedom ran a few months later.

It also ran a “Vespa incentive”, which saw the winner of the sales agent that sold the most policies during the incentive period rewarded with a Vespa scooter.

While the parties agreed on a number of the facts in the case, Justice Scott Goodman did not accept ASIC’s claims that Cohen and Oayda were involved in alleged contraventions of conflicted remuneration laws, nor that Cohen breached his directors’ duties.

Instead, Justice Goodman dismissed the case entirely.

According to the judgement, ASIC failed to establish that sales agents for Freedom provided financial product advice.

“The [statement of claim] does not identify what the ‘financial product advice’ was. As noted above, no particular statements are identified. Nor is there an allegation that a particular statement had characteristics which met the definition of ‘financial product advice’,” Justice Goodman said.

“This is, of itself, fatal to ASIC’s case that financial product advice was provided.”

He added that, at an evidentiary level, the regulator did not identify the statements the prize-winning sales agents made that would constitute providing financial product advice.

ASIC entered call recordings of 15 sales agents and scripts that Freedom’s team used, however it did not address which parts of the calls were alleged to constitute financial product advice.

This led to Justice Goodman being “unpersuaded that the Incentives could reasonably be expected to influence the financial product advice given by the sales agents”, as there was not “clear articulation of the statements made which are alleged to constitute financial product advice given”.

“This is a necessary step in considering whether the Incentives could be expected to influence advice given,” he said.

“In other words, no meaningful assessment of whether there is a reasonable expectation of influence can be undertaken without identifying the statements made and then considering the likely effect of the benefit upon future statements.”

Additionally, section 963A(b) of the Corporations Act is “concerned with the capacity of a benefit to influence the content of financial product advice, not whether the benefit will influence a decision to give (or not give) such advice”.

“In the present case, the content of the financial product advice has not been identified. Thus, no meaningful assessment can be made of the capacity of the Incentives to influence such content,” Justice Goodman said.

In relation to the first Bali trip incentive program, which was originally meant to conclude before 1 January 2018 when the LIF regulations began, the company extended the eligibility period for some sales team members to allow them to make up for sick days taken in the initial period.

Similarly, the Vespa incentive period ran across December 2017 and January 2018, clearly crossing into the period covered under LIF.

The second Bali trip incentive period was wholly in 2018.

Despite the sales incentives extending into the period following the LIF regulations coming into effect, the regulator was unable to establish that conflicted remuneration occurred.

The amendments to the Corporations Act stemming from the LIF legislation includes a provision in the regulations when assessing conflicted remuneration as to whether the information was “not given in the course of or as a result of the sales agent providing financial product advice”.

Justice Goodman noted that, while ASIC had not established that the sales agents were providing financial product advice, “it does not follow from that conclusion that the sales agents were not providing financial product advice”.

“The true position is that ASIC has proven neither the positive nor the negative proposition,” Goodman said.

Therefore, the judge said, this element of the regulation had also not been established and, as a consequence, ASIC had not established that the prizes were conflicted remuneration.

Freedom entered liquidation in 2020 and ASIC subsequently announced in August 2022 that it had secured $102 million for around 83,600 customers who were, or may have been, mis-sold insurance policies over the phone by Freedom Insurance between 2010 and 2018.

ASIC also noted that this matter was the final remaining action it had brought as part of case studies and investigations arising from the royal commission.