The Australian Securities and Investments Commission (ASIC) has commenced civil penalty services against s for its risk and compliance failure

CASE SUMMARY

On 06 July 2022, ASIC has issued court proceedings against a financial service ‘Licensee for hire’, alleging various breaches of its obligations as an AFSL holder.

The proceedings emphasize the importance of adhering to the financial services laws if you are an AFSL holder – and in particular, having sufficient resources to do the job.

Lanterne operated under a ‘licensee for hire’ business model in which over 200 authorized representatives (ARs) and over 60 corporate ARs provided financial services to wholesale customers under Lanterne’s AFSL.

These included venture capital funds, wholesale property funds, managed investment schemes and corporate advisory services. These Ars operated in a wide range of different industries, from renewable energy and real estate, to biotechnology and agriculture.

Lanterne was responsible for over $1 billion in funds under management and its authorised representatives were paying monthly fees of around $18,000 during the period.

ASIC deputy chair, Sarah Court, said: “ASIC is concerned that for an extended period there was a real risk of investor harm due to shortcomings in Lanterne’s systems and processes.

“It appears to ASIC that Lanterne operated a wholly deficient business, with no compliance staff and almost no risk management processes in place.”

ASIC alleged that Lanterne failed to:

1. Have in place adequate risk management systems;
2. Have adequate resources (including financial, technological, and human resources) to provide the financial services and carry out supervisory arrangements;
3. Maintain competence to provide its financial services;
4. Ensure that its representatives were adequately trained;
5. Take steps to ensure that its representatives complied with the financial services laws; and
6. Do all things necessary ensure that the financial services were provided efficiently, honestly, and fairly.

ASIC was seeking declarations and pecuniary penalties from the Federal Court and also sought an order that an independent expert be appointed to review Lanterne’s systems, processes and controls. Lanterne was also ordered to implement a risk management and compliance program once the report was received.

Important lesson for AFSL holderS

ASIC’s pursuit of Lanterne is another example of the corporate regulator’s ongoing crackdown on financial services misconduct.

To avoid regulatory scrutiny (or worse, punitive penalties), this matter emphasises the need for AFSL holders to:

1. Implement and keep formal systems which identify and mitigate risk. These systems need to be monitored and reviewed persistently. Such systems also need to be subject to independent oversight;
2. Maintain competence to provide its financial services; on the aspect of financial and other resources;
3. Establish a training and competency program which documents the skills and competencies required by representatives. This should assess each representative against the required skills and competencies;
4. Take reasonable steps to have an effective and documented process for background checks and due diligence of representatives of prospective ARs.
5. Do all things necessary to ensure that financial services covered by the licence are provided efficiently, honestly and fairly.

This case demonstrates that There will be serious penalties and repercussions for AFSL holders failing to abide by their obligations under the AFSL regime.