The Australian Federal Court recently issued a staggering $1.25 million penalty against a wholesale licensee.
The Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against the firm in July 2022, alleging multiple failures to meet the obligations of its Australian Financial Services (AFS) licence.
The action is a resounding warning for the “licensee for hire” business model. Under this model, an AFS licensee grants a Corporate Authorised Representative (CAR) permission to provide financial services to clients on behalf of that licensee.
CARs operating under this model must demonstrate compliance with the AFS licensee’s obligations, including licensing, disclosure, and record-keeping requirements.
A Dangerously Short-Sighted Approach by the AFS Holder
The AFS holder, in this case, operated with a sole full-time employee, the firm’s CEO, and oversight of 60 CARs and, within them, 205 authorised representatives (ARs).
ASIC commissioner Alan Kirkland commented how the firm had “authorised dozens of representatives to operate under its licence—who together had up to $1.685 billion in funds under management.”
Despite charging representatives significant fees, the firm in question “failed to maintain basic risk and compliance management systems”, according to Kirkland. He continues, “It maintained records using a paper filing system and, as the Court noted, had only one full-time employee, its CEO and sole director.
“These arrangements were woefully inadequate for a business of this scale and posed significant risk to investors. It is vital for the protection of consumers and investors that licensees take their compliance obligations seriously, and the penalties ordered in this matter highlight that importance.”
Multiple Breaches of the Firm’s AFS License
The firm was found to have breached its obligation to take all reasonable measures to ensure representatives comply with financial services laws under Section 912A of the Corporations Act, which sets out the general obligations for AFS licensees.
In proceedings brought by ASIC, the Court found the firm in question had breached its AFS licence obligations between March 2019 and October 2021 by failing to:
- Have adequate risk management systems.
- Have adequate technological and human resources to provide the services covered by its AFS licence.
- Ensure that its representatives were adequately trained.
- Maintain the competence to provide financial services covered by its AFS licence.
- Take reasonable steps to ensure that its representatives complied with Australian financial services laws.
- Do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly.
Among other admissions, the firm acknowledged that it:
- Did not have a formal or documented risk management system or any systems or processes in place to identify, assess or mitigate risks.
- Was reliant on CARs self-reporting any exceptions to compliance with their obligations with no formal or documented review or audit process to assess whether a representative complied with financial services laws.
- Conducted no discernible due diligence on the CAR and only limited background checks on the individuals involved with the CAR.
- Did not have enough appropriately qualified responsible managers with sufficient time to conduct their roles.
- Did not offer or provide training to its CARs or ARs, did not require evidence or information about training, and did not maintain any records of training.
A Stern Reminder of Regulatory Obligations
The ASIC action resulting in the hefty $1.25 million fine of this “licensee for hire” firm serves as a stern reminder to all Australian financial firms that the regular is keeping a watchful eye on financial services activity.
It is not adequate for AFS licensees to allow CARs to operate unchecked. Licensees have a responsibility to ensure that CARs and ARs and deemed “fit and proper” and fulfilling their obligations with:
- Honesty, integrity and reputation
- Competence and capability
- Financial soundness
This case reinforces ASIC’s view that wholesale licensees must maintain solid risk and compliance processes and procedures in all dealings—not just when dealing directly with the general public. It also highlights that AFS licensee holders must comply with their regulatory obligations on an ongoing basis.
Regardless of operating structure, all financial firms must have the appropriate systems in place to ensure roles and responsibilities needs are being satisfied, uphold representative registrations and licensing requirements, and identify and report compliance exceptions in the appropriate manner.
Learn more about how regulatory technology (RegTech) like MyComplianceOffice (MCO) can help your firm to efficiently and effectively:
- Ensure that employees meet Fit and Proper requirements under global accountability regimes
- Manage employee registration and licensing requirements
- Track employee knowledge needs, training, continuing education and continuing professional development activities
For further detail about this case, see the ASIC media release.
Also, access your detailed brochure with information about MCO's class-leading Representatives, Registrations, and Licensing technology.
