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07.03.2018

News

Licensing Lessons

Australian financial services (AFS) licensees have important obligations in relation to the appointment of authorised representatives pursuant to their AFS licence, as well as to the ongoing supervision of its representatives.

A recent case involving Global Financial Markets Pty Ltd and ASIC serves as an important reminder to AFS licensees about the gravity of those obligations, and that those obligations cannot be satisfied by merely having the correct procedures in writing. Funds Management partner Elliott Stumm sums up what you need to know.


Background

Mark Power Financial Pty Ltd (MPF) and Mr Mark Power both held AFS licences and authorised entities to provide financial services under their AFS licences.

Corporate authorised representative (CAR) agreements between the licensee and each authorised representative meant the representative undertook to comply with the following:

  • The Corporations Act (Act) and all other statutory and common law requirements and all applicable terms and conditions attaching to the AFS licence.
  • All terms of the AFS licensee's compliance manual.

Each agreement also provided that a third party entity would be appointed to perform a due diligence investigation prior to the signing of the CAR agreement, and to run ongoing compliance meetings to ensure all compliance and legal obligations were being met.

Despite these seemingly fulsome procedures, ASIC cancelled the AFS licences held by Mr Power and MPF in November 2011. Also, due to the conduct of these licensees and the conduct of Mr Power following cancellation of the licences, ASIC formally refused an application for a new AFS licence by Mr Power in 2014.


Cancellation of AFS licences

In summary, ASIC's concerns about the two cancelled licences were:

  • Authorised representatives were formally appointed before they were adequately qualified. Specifically, they were authorised to provide advice to retail clients before those individuals were compliant with RG 146 Licensing: Training of financial product advisers. ASIC said this was a breach of the licensee's obligation to—

    • ensure representatives are adequately trained to provide financial services
    • take reasonable steps to ensure representatives comply with financial services laws, and
    • ensure the completion of appropriate training courses and assessments for persons providing advice on behalf of the licensee.

This concern was not alleviated by the fact the CAR agreement prohibited the authorised representatives from providing advice until they were properly qualified.

  • The authorised representatives were not adequately supervised once appointed. ASIC said it was not adequate that the representatives were provided with a compliance manual, and were contractually obliged to comply with the manual and the Act.

This lack of supervision resulted in authorised representatives engaging in misleading and deceptive conduct, much of which went unnoticed or was otherwise dealt with only following a significant delay.

ASIC said this conduct breached the licensees' obligation to take reasonable steps to ensure representatives comply with financial services laws.

  • Due to these matters, ASIC said Mr Power did not understand the obligations of an AFS licensee, and Mr Power and MPF had breached the obligation to comply with financial services law.

Rejection of new AFS licence application

ASIC rejected Mr Power's application for a new AFS licence in 2014 because it believed the new licensee was likely to contravene the Act if the licence was issued. This was principally due to Mr Power's conduct in relation to MPF.

In refusing to grant a new licence, ASIC—

  • acknowledged the reasons for cancelling MPF's licence chiefly related to Mr Power's failure to ensure the licensee took reasonable steps to ensure its representatives complied with the financial services law. ASIC said it was highly relevant that the general obligations regarding representatives, which Mr Power was found to have failed to comply with, are fundamental compliance duties
  • was not satisfied 300 hours of reading without being complemented by practical industry experience gave ASIC reason to believe there had been a material change in Mr Power's understanding of the obligations on a financial services provider such as to give confidence that he now had the appropriate technical knowledge and skills to provide financial services and to properly monitor ongoing compliance with the general obligations under section 912A of the Act
  • was not satisfied Mr Power had demonstrated he had acquired the requisite skills since the cancellation of the licences of MPF and Mr Power, and
  • found the new licensee had not demonstrated it could comply with the organisational competence obligation and the compliance obligations in the Act.

Administrative Appeals Tribunal

Mr Power applied to the Administrative Appeals Tribunal (AAT) in 2014 seeking a review of ASIC's decisions.

In making submissions to the AAT, Mr Power largely did not concede he had breached financial services law in relation to the cancelled licences. Instead, he argued he and MPF had always complied with the general obligations in the Act and in the ASIC Regulatory Guides, and there was merely a divergence in procedure between his compliance procedures and ASIC's preferred approach.

The AAT found Mr Power and MPF had failed to comply with their obligations as AFS licensees on multiple occasions. The AAT said there were reasonable grounds to believe Mr Power and MPF would be likely to contravene their obligations in the future. The AAT concluded the AFS licences should have been cancelled.

Similarly, the AAT found the new AFS licence must not be granted, because it was not satisfied the new licensee would comply with its obligations as an AFS licensee.


Lessons learnt

The AAT's determinations were largely influenced by the actions of Mr Power in relation to the cancelled licences. However, the determination in relation to the new licence application was also partially due to Mr Power's conduct during the proceedings, which suggested he still failed to understand the obligations of an AFS licensee.

This decision provides an important reminder to AFS licensees about how to appoint and monitor authorised representatives. It also highlights how persons can work towards redeeming themselves if they have had an AFS licence cancelled by ASIC, and wish to continue working in the financial services industry.


Authors

Elliott Stumm

Elliott Stumm

Partner

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