Speaking on a webinar yesterday, Holley Nethercote senior associate Glenjon Aligiannis discussed ASIC’s ongoing lawsuit against Interprac and its implications for licensee risk management.
Referring to ASIC’s 53-page Statement of Claim against Interprac – which he described as “not light reading” – Aligiannis highlighted three alleged contraventions of the Corporations Act.
The first, he said, concerns Interprac’s alleged failure to take reasonable steps to ensure advisers were complying with the best interest duty.
“What that means is, obviously, the requirement to monitor your advisers. In this case, ASIC had done a prolonged investigation into the authorised representatives in question and found that in many instances, the advice that was given was what they defined as being cookie-cutter advice, in that the objectives were largely the same,” Aligiannis said.
In those instances, Aligiannis continued, ASIC found that Interprac failed to take reasonable steps to address these issues – even in cases where practices were aware of them, “or should have been made aware because they have certain processes in place”.
The second contravention relates to InterPrac’s alleged policy of automatic approved product list (APL) inclusion.
“ASIC alleges that Interprac had an auto-inclusion policy, which meant that if certain funds or products met a minimum threshold by a particular research house, they could automatically be included on the APL,” Aligiannis said.
Per ASIC’s original statement from November last year, it was this policy that led to Shield and First Guardian’s inclusion on InterPrac’s APL in 2021 – and the reason why “no one at Interprac considered the PDSs for either fund until July 2023”.
While both funds were subsequently put on hold between July and August of 2023, ASIC said that around $67.3 million of client money was invested in First Guardian and $75.6 million was invested in Shield during and after this period.
“So, it’s not a matter of having the control in place; it’s always a question of effectiveness. It’s always a question of, ‘Is it actually controlling the risk that’s there?’ [Because] in reality, funds were still being placed into [those products],” Aligiannis said.
The third contravention pertains to ASIC’s concerns about InterPrac’s auditing process for its advisers.
“What ASIC found, and what they’re saying is inappropriate, is that advisers were allowed to self-select the files that were subject to the audit,” Aligiannis said.
“And in some sense, you’re always going to put forward your best homework when you’re being marked, right? And so that’s exactly what was done. They’re putting forward advice files that they think are likely to pass.”
Ultimately, Aligiannis said that the “three big issues in this case” illustrate the idea that adequate risk management controls, in and of themselves, aren’t enough; processes need to be enforced.
As he put it: “You need to do what you say.”
“You’re not just looking the advice aspect of it. It’s being required to look at that broader point around the financial information as well. And that’s what ASIC is saying: Interprac should have been doing this to make itself aware that there were those issues.”
FAAA general manager of policy, advocacy and standards Phil Anderson, also speaking on the webinar, described the InterPrac case as “compulsory reading for licensees.”
“One lesson from this is that where there’s smoke, more than likely there’s fire. Don’t disregard it,” Anderson said.
“If you get reports that show major issues, look at it closely, enforce any penalties that you apply – whether that’s pre-vet or any actions that you put in place, like putting products on hold, you have to enforce it.”
One of the key issues not being openly discussed is that many investment decisions were not made by individual advisers alone. Template advice structures, approved products, and model portfolios were often developed and approved by the licensee, Investment Committee (IC), and compliance teams.
Products such as Shield and First Guardian were allegedly researched, reviewed, and approved through these governance processes before being included in portfolios advisers were expected to follow. Advisers were deliberately kept focused on strategy and client relationships, while investment selection was centralised through the IC framework.
The purpose of an Investment Committee is to ensure investment decisions are properly researched, challenged, and governed before implementation. Yet when things go wrong, the statutory burden falls overwhelmingly on the adviser, despite the significant role played by the licensee, IC, compliance, auditors, research houses, and super trustees in approving and overseeing those investments.
If advisers are expected to carry full legal responsibility, they must also be given genuine independence and flexibility in selecting investments. Otherwise, where investment decisions are effectively centralised and approved through licensee governance structures, equivalent statutory accountability should also apply to the entities and individuals responsible for those decisions.
Exactly, if they are on the APL, the adviser should absolutely expect that they have been vetted to the highest standard.
Sorry but this is absolute twaddle. This was not partial allocation to a fund on the APL, this was dumping nearly all client money into a single option then collecting a “marketing fee”. While I agree advisers should be able to trust funds on their APL and the licensee should perform adequate due diligence, we are not talking normal adviser behavior here. APL aside, Interprac have failed massively and catastrophically in their supervision of their AR’s.
Many boutique licensees have an ‘open APL’ that provides for any financial product providing it is recognised as ‘investment grade’ or above from any of ‘the major rating houses’.
Where does the liability of the rating houses come in to play? Surely the PI insurance of the rating houses should be held to account if the investments were made in accordance with the most recent rating and parameters for investing in the fund.
I suspect that there would be greater consumer harm if these licensees did the research themselves without the expertise of the rating houses.