Navigating the $12m Mercer Financial Advice penalty

Affected clients of Mercer Financial Advice (MFA) paid over $14 million in inappropriate ongoing fees, as court documents show ASIC had pushed for a penalty of $20 million.

Last week, MFA was ordered by the Federal Court to pay $12 million for fees for no service and failures in its fee disclosure obligations. 

Justice Timothy McEvoy said MFA failed to provide fee disclosure statements to certain retail clients. Other retail clients received fee disclosure statements that were deficient in that they failed to adequately disclose and were misleading as to significant financial services to which the client had been entitled but had not used.

Affected clients suffered $14,465,343 in inappropriate ongoing fees.

Mercer was found to have breached sections of both the Corporations Act and ASIC Act over a three-year period from 1 July 2016 to 30 June 2019 when it: 

• Failed to invite more than 800 clients to attend annual review meetings, despite those clients being entitled to attend the meetings.
• Failed to provide fee disclosure statements to over 500 clients.
• Issued over 3,000 non-compliant fee disclosure statements to more than 2,000 clients.
• Charged 761 clients a combined total of more than $4.7 million in fees for services clients did not receive.

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The judge determined a penalty of $12 million but ASIC had pushed for $20 million while Mercer sought one of $8.5 million.

ASIC argued that Mercer’s size and financial position meant a larger fine was necessary to act as a deterrent for a company with significant resources, but Justice McEvoy said it did not alone justify a higher penalty.

The regulator highlighted Mercer’s conduct was extensive, very serious and affected many clients.

“ASIC submits that the contraventions arose from concerning deficiencies in Mercer’s policies, procedures and systems. It is said that these systems, and Mercer’s internal audit processes, were incapable of identifying the failures or raising alerts, and, most significantly, that Mercer’s systems and records have not allowed it to identify the genesis of the deficiencies. ASIC contends that this should have important consequences in relation to penalty determination.”

Earlier fees for no service cases had resulted in penalties of $40 million for Westpac, $20 million for Aware Financial Services, $18.5 million for National Australia Bank (NAB) and $14.5 million for AMP. 

On the other hand, Mercer contested its systems and processes had been improved, its board and management had been changed, and the contraventions did not involve wilful breaches of the law. A penalty of $8.5 million would “represent approximately 1.4 to 2.1 years of normalised profits, and is equivalent to approximately one-fifth of Mercer’s net assets”. 

Justice McEvoy said: “While the civil penalty should not be so high that it is oppressive, it should not be so low as to be regarded by the contravener as an acceptable cost of doing business.

“Whatever penalty is to be imposed must be ‘proportionate’ and ‘appropriate’ in the sense that it strikes a reasonable balance between oppressive severity and deterrence in the circumstances of the case.”

ASIC acknowledged that MFA had not engaged in a similar conduct in the past, had been the subject of previous regulatory action, had cooperated with ASIC during the investigation, and had acted promptly to remediate affected clients.

Justice McEvoy ruled on a penalty of $12 million, which he said reflected the fact there was no suggestion that the relevant contraventions were intentional and no evidence that they were reckless as well as MFA’s remediation activity.

“It is in weighing all these matters, and endeavouring to balance the need for specific and general deterrence with the importance of ensuring that the amount of the pecuniary penalty is not so high as to be oppressive, that I consider the pecuniary penalty of $12 million to be appropriate in the circumstances of this case.”