Clifford Chance

The Australian Securities & Investments Commission (ASIC) seeks to reaffirm the general obligations of Australian financial services (AFS) licensees, even where they are not dealing with retail investors and general consumers directly.

On 7 July 2022, ASIC commenced civil penalty proceedings in the Federal Court against Lanterne Fund Services Pty Ltd (Lanterne) alleging contravention of, amongst other provisions, section 912A of the Corporations Act 2001 (Cth). Section 912A sets out the general obligations for AFS licensees, including the obligation to act efficiently, honestly and fairly.

Lanterne operated a "licensee for hire" business model, in which authorised representatives (ARs) and corporate authorised representatives (CARs) provided advice and other financial services to wholesale customers under Lanterne's AFS licence for a fee. The businesses of ARs and CARs operating under Lanterne's AFS licence included venture capital funds, managed investment schemes, agricultural advisory services, digital asset funds and climate change advisory services and operated in diverse industries such as renewable energy, health care, real estate and agriculture. Lanterne did not provide financial services directly to clients.

Lanterne's ARs and CARs managed up to $1.658 billion in funds and paid Lanterne a monthly fee of approximately $180,000 throughout the relevant period. Despite this, Lanterne only had one full-time employee (who acted as its sole director and responsible manager) and several part-time employees whose roles were administrative in nature.

ASIC alleges that Lanterne breached its general obligations by failing to, amongst other things:

• have adequate risk management systems in place (for example, by failing to document any identification or assessment of the risks faced by its business, including by failing to have a risk management framework and basic risk management tools);
• have adequate resources (including financial, technological and human resources) to provide the financial services covered by the AFS licence and carry out supervisory arrangements;
• maintain competence to provide its financial services (for example, by failing to have responsible managers with sufficient time to effectively conduct their roles, and by failing to have a sufficient number of responsible managers with appropriate expertise for the businesses operated by Lanterne and its CARs);
• ensure that its representatives were adequately trained;
• take steps to ensure that its representatives complied with financial services laws (for example, by failing to have a documented and rigorous due diligence and background check process for prospective CARs and ARs, and failing to conduct ongoing checks to ensure ARs remained appropriate); and
• do all things necessary to ensure that the financial services were provided efficiently, honestly and fairly.

In addition to seeking declarations and pecuniary penalties from the Court, ASIC also seeks orders that an independent expert be appointed to review and report on Lanterne's systems, processes and controls, and that Lanterne then implement a risk management and compliance program once the report is received.

ASIC's priorities and takeaways

The civil penalty proceedings against Lanterne follow a trend of ASIC more readily pursuing alleged breaches of section 912A as a primary cause of action, ever since the civil penalty regime was expanded in 2019 to include duties under section 912A (see also our previous note on the ASIC v RI Advice Group Pty Ltd [2022] FCA 496 judgment). In fact, the "Relevant Period" the subject of ASIC's case against Lanterne begins on 13 March 2019, being the date when the civil penalty regime was expanded.

This is consistent with ASIC's 2022 priorities, in particular, their focus on proactive and ongoing management of risk and corporate governance failures.

In a similar way to how ASIC exercised its enforcement powers for the first time against RI Advice Group Pty Ltd (RI Advice), as a test case to establish expectations regarding cyber risk management, ASIC's proceedings against Lanterne seem to signal a developing approach by ASIC to using civil penalty proceedings as a tool with which to attempt to clarify general obligations. Having regard to ASIC's proceedings against RI Advice and Lanterne, we expect to see the increased prominence of section 912A in enforcement proceedings, particularly in relation to matters involving incidents where consumer harm is not immediately obvious. As the proceedings against RI Advice and Lanterne show, an ASF licence holder's compliance measures may be considered by ASIC to be deficient where incidents occur over a period of time and are viewed cumulatively rather than individually.

In addition to the above, there are two further takeaways from the commencement of these proceedings.

First, these proceedings reinforce ASIC's view that all wholesale licensees are required to develop and maintain robust risk and compliance procedures, even where they are not dealing with individual members of the general public.

Secondly, these proceedings are a good reminder that a comprehensive and holistic approach must be taken to risk and compliance responsibilities, particularly where ARs cover a vast array of entities and provide a range of services as the obligations imposed by financial services laws require organisational competence in all business activities.

From the date a licensee is granted an AFS licence, they must comply with the general obligations on an ongoing basis.

Current and future AFS licensees should pay close attention to the ASIC regulatory guidelines and seek legal advice if they are unsure about the breadth of their responsibilities.