Airbnb AFSLs in the gun? ASIC commences civil penalty proceedings against under-resourced ‘licensee for hire’ firm

“‘Wholly deficient business’: ASIC mounts legal proceedings against ‘licensee for hire’ firm” is the headline of a Sydney Morning Herald article reporting on ASIC’s recent commencement of civil penalty proceedings against Lanterne Fund Services Pty Ltd (Lanterne). 

Lanterne operated as a ‘licensee for hire’ – it engaged in a business model where it, as the holder of an Australia Financial Services Licence (AFSL) authorised other financial service providers as authorised representatives to financial services under its AFSL, in exchange for fees. The Herald’s headline quoted above raises the question of whether this is a broader move against the ‘outsourcing model’ which is common and important in the provision of financial services, but a closer look at ASIC’s own media release and Court documents points to a more nuanced picture.

ASIC’s case against Lanterne

In the Concise Statement filed in the Federal Court, ASIC alleges the following against Lanterne:

• Around 200 corporate authorised representatives (CARs) and authorised (ARs) representatives operated under Lanterne’s AFSL;
• At some points during the relevant period, the CARs operating under Lanterne had over $1 billion funds under management;
• The businesses of the CARs operating under Lantern’s AFSL ranged from venture capital funds, managed investment schemes, corporate advisory services and wholesale property funds;
• Despite having to supervise so many CARs and ARs operating in diverse industries and businesses, Lanterne only had one full time employee, Peter Cozens, who was also Lanterne’s responsible manager and its sole director;
• Until September 2020, Lanterne only used a hardcopy filing system;
• Lanterne did not document the due diligence process of taking on prospective CARs, or any of the meetings with representatives of CARs or ARs;
• Lanterne did not conduct audits, supervision or oversight of the CARs or ARs.

In a nutshell, ‘wholly deficient’.

Based on the above ASIC alleges the following in seeking civil penalties - that Lanterne failed to:

• Have adequate risk management systems (in breach of ss 912A(1)(h) and 912A(5A) of the Corporations Act 2001 (Cth)(Corporations Act));
• Maintain competence to provide financial services (in breach of ss 912A(1)(e) and 912A(5A) of the Corporations Act);
• Ensure its representatives are adequately trained and are competent to provide the financial services (in breach of ss 912A(1)(f) and 912A(5A) of the Corporations Act);
• Take reasonable steps to ensure that its representatives comply with the financial services law (in breach of ss 912A(1)(ca) and 912A(5A) of the Corporations Act);
• Have adequate resources (whether financial, technological or human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements (in breach of ss 912A(1)(d) and 912A(5A) of the Corporations Act); and
• Ensure the financial services were provided efficiently, honestly and fairly (in breach of ss 912A(1)(a) and 912A(5A) of the Corporations Act).

The wash-up

Importantly, on closer inspection, ASIC is not coming after the outsourcing business model, but after Lanterne for failing to do what is required of an AFSL holder operating that model.  

A number of our clients hold AFSL’s and authorise CARs and ARs, some as a ‘licensee for hire’, and a number are authorised as CARs or ARs.  It is critical to understand how to make the model work.  The key is to maintain satisfactory supervision over the CARs and ARs, be focused on an industry that you are familiar with or even better specialise, bring in external expertise for new business lines, and scale your operations and supervisory framework to the authorisations you have in place or plan to make. On the other hand, a hands-off approach to supervision, and involvement in many different industries carries a significant risk, and will attract the attention of regulators. 

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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.

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