A Number of ‘Firsts’ and Record Number of Interim Stop Orders Issued in DDO Enforcement

ASIC fired all cylinders in June month, with the largest ever penalty against for contravention of a financial services consumer protection law in relation to insurance, a number of ‘firsts’ in enforcement of design and distribution obligations (DDO) and use of the full suite of administrative enforcement actions. Of particular note:

• The Federal Court has ordered a penalty of $40 million against the issuer of NRMA branded insurance policies, which makes it the largest ever penalty against an insurer for breaches of financial services customer protection laws.
  It was found that IAL applied an algorithm in setting policy renewal prices which resulted in the prices failing to meet discounts previously promised to customers. ASIC has described pricing failures like this as an industry-wide issue, and the significant penalty should put insurers on alert if their processes could expose them to similar enforcement actions, including RACQ which had a civil penalty proceeding commenced against them in February 2023 for misleading pricing discount statements. For more information, please read our article here.

• ASIC continues push in enforcement of the design and distribution obligations (DDO) issuing 44 interim stop orders in June alone, more than the total of all interim stop orders issued on DDO contraventions previously. There were also many firsts, such as the first DDO enforcement action in relation to an insurance product, a superannuation product, and in relation to an alleged failure to take reasonable steps in distribution of a financial product. This significant enforcement activity in relation to DDO demonstrates ASIC’s focus on ensuring compliance with this relatively new regime across the full range of financial products available on the market and highlighting that DDO applies to both issuers and distributors of financial products.

• ‍A broad range of administrative enforcement outcomes achieved this month, including the now rare court enforceable undertaking (EU) and public warning notice. EUs were much more commonly used by ASIC prior to the 2019 Royal Commission, which was strongly critical of ASIC’s willingness to enter EUs rather than pursue adversarial enforcement through litigation. The use of an EU shows that it is still part of ASIC’s regulatory toolkit, albeit for use in much more limited and specific circumstances.

June in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Penalties Ordered:

• The Federal Court ordered a penalty of $375,000 against Layaway Depot Pty Ltd, and that it be permanently restrained from engaging in credit activity. Layaway marketed consumer electronics to financially vulnerable consumers, offering payment arrangements to be made by periodic instalments, but the total amount to be paid was often multiple times the retail value of the product. The Federal Court found that Layaway engaged in unlicensed credit activity, and the credit contracts had an annual rate of over 48%, which is prohibited under the National Credit Code.
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• The Federal Court ordered a penalty of $40 million against Insurance Australia Limited for failing to honour discount promises made to customers in NRMA branded insurance products. This is the largest ever penalty imposed by the Court against an insurer for breaches of financial services consumer protection laws, and a big win for ASIC in its prosecution of pricing failure in the insurance industry. It was found that IAL applied a process where during a customer’s renewal of their insurance policy, if the customer’s new premium after loyalty discounts and/or no claim bonuses compared to the previous year resulted in a decrease of premium greater than asset percentage, the customer’s base premium for the new year would be recalculated and increased.

Civil Judgments Obtained:

• The Federal Court ordered that Monica Kaur be permanently restrained from carrying on a financial services business and that her unregistered managed investment scheme be wound up. Ms Kaur and her husband were directors of MKS Property, which encouraged 300 investors to establish self-managed super funds and to invest in property investments set up by MKS Property. The Court found that Ms Kaur and MKS Property operated an unregistered managed investment scheme without a license.

Travel Restraint Orders:

• The Federal Court has made interim travel restraint orders against two individuals in two separate cases, restraining them from leaving Australia, while ASIC investigates.

Criminal:

Guilty Pleas:

• Two defendants pleaded guilty to offences of breaching director duties and dishonestly obtaining a financial advantage. One case involved the fallout from the collapse of stockbroking firm BBY Limited, where Fiona Mae Bilton, the former head of operations, was found to have deceived St George Bank to claim additional funding from an overdraft facility for BBY on 115 separate occasions.

Charges Laid/Committal for Trial:

• Nine individuals had charges laid against them or were committed to stand trial involving offences such as dishonestly using position as a director, dishonest conduct in relation to financial services, making a false and misleading statement in a document submitted to ASIC, giving false or misleading information to an auditor, insider trading, lodging a false document with ASIC and preventing the recovery of employee entitlements.

Administrative Action:

Interim Stop Orders:

• ASIC issued 44 interim stop orders for breaches of the design and distribution obligations (DDO), more than the total number of interim stop orders made prior to June 2023. A number of firsts were also achieved, including first interim stop order for deficiencies of the target market determination (TMD) of a superannuation product, first interim stop order for deficiencies of the TMD of an insurance product, and first interim stop order for not taking reasonable steps in distribution of a financial product. A further interim stop order related to a buy now pay later product, which is a fast growing but controversial area being monitored by ASIC.
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• Prior enforcement action by ASIC on DDO have focused on issuers of financial product and TMDs, but the action against the distributor shows that the distribution aspect of the DDO obligations is on ASIC’s radar and will see the law enforced under that order, Mitrade was prevented from opening trade accounts in contracts for difference or margin foreign exchange contracts with retail investors. ASIC was concerned that Mitrade relied on a flawed retail investor questionnaire (which prompted the investor to review their ‘unacceptable answers’ – answers that indicated the investor was not likely to be in the target market for its products), and allowed the investor unlimited attempts to pass the questionnaire.

Financial Services Bannings:

• Six individuals were banned from providing financial services for reasons such as dealing in financial products without the necessary authorisations or license, failure to provide adequate disclosure to investors, failure to act in the best interest of investors and prior conviction of dishonesty offences.

License Cancellation/Suspension:

• Two companies had their AFS license cancelled or suspended, the reasons including failure to lodge financial statements, audit reports and compliance plan for a management investment scheme, and cessation of carrying on a financial services business.

Director Disqualification:

• Four individuals were disqualified from managing a corporation for their involvement in the failure of 11 companies, which owed unsecured creditors a total of over $14 million, of which over $2.5 million were owed to ATO.

Infringement Notices:

• ASIC issued one infringement notice with a penalty of $333,000 for contravention of Market Integrity Rules by Morrison Securities. It related to alleged breaches on seven occasions of the requirement not to do anything which results in a market for securities not being fair and orderly. Morrison Securities’ actions impacted the market in shares of 7 listed companies, including blue chips such as Telstra and Westpac, resulting in those securities opening price increasing or decreasing in a range of 6-12%, which momentarily shifted the companies' market capitalisation in the range of billions.

Court Enforceable Undertaking:

• ASIC has accepted a court enforceable undertaking when its investigation has revealed that Mr Blackaby failed to keep adequate and up-to-date records to show he had provided clients with financial services that they were entitled to. Under the terms of the undertaking, Mr Blackaby has agreed not to, amongst other things, carry on a financial services business or provide financial services.

SMSF Auditor Cancellation:

• A further 29 auditors of SMSFs had their registration cancelled for failure to lodge annual statements this month. This follows the 374 SMSF auditors whose registration was cancelled in January 2023.

Public Warning Notice:

• This is a rarely used tool, last used in February 2018.  When ASIC has reasonable grounds to suspect that one or more other persons has suffered, or is likely to suffer, detriment as a result of the contravention of financial services laws, and it is in the public interest to do so, it can issue the notice. In this case, ASIC issued a public warning notice in response to David Alan Zohar making unsolicited communications in relation to at least 4 different companies, Lithium Lakes Limited, Greensand Mining, Silver River Resources and Wattle Gully Nickel, indicating these companies were about to issue a prospectus. As at today’s date, none of the companies have issued a prospectus, and ASIC wants the public to carefully consider any offers of securities from Mr Zohar or from the above companies.

If any of the above is relevant to you or you want to know more, please feel free to get in touch.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.