ASIC Enforcement Wrap: April 2023 | ASIC Takes Swipe at Unfair Insurance Contract

ASIC Enforcement in April 2023 has ASIC has traversed a wide range of actions and outcomes.  Of particular note:

• Binance Australia Derivatives had its AFSL cancelled. It follows a targeted review by ASIC of Binance’s financial services business in Australia, focused on its classification of retail and wholesale clients.  ASIC had commenced administrative action to cancel or suspend the licence on 29 March 2023, and the cancellation was at Binance’s request. This outcome is part of ASIC’s focus on crypto as an Enforcement Priority.
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• ASIC commenced the first proceedings alleging unfair contract terms in an insurance contract under the expanded unfair contract terms protections under the ASIC Act.  These provisions were extended to include insurance contracts with consumers and small business in April 2021.  From November 2023 onwards contraventions of the ASIC Act unfair contract term provisions will be civil penalty provisions.  
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• Criminal charges against David Anderson, former CFO of Octaviar Limited, were withdrawn by the Commonwealth Director of Public Prosecutions. The charges, relating to alleged fraud committed between 2012 and 2015 in relation to Octaviar Investment Holdings No3 Pty Ltd, were withdrawn on the basis that the CDPP considered it was no longer in the public interest to pursue them given Mr Anderson’s failing health.  The withdrawal of the charges is the close of another chapter in the long running fallout of the collapse of the Octaviar Group in 2008 (formerly known as MFS).
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• ASIC continued to issue stop orders for non-compliant target market determinations in relation to the design and distribution obligations regime. In one case, the stop order was lifted in 3 business days of its issue because the product issuer was able to efficiently address ASIC’s concerns.
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• Robert George McClelland and his companies Roadships Australian International Intermodal Marine Lines Pty Ltd and Roadships Cycclone Pty Ltd were acquitted of criminal charges relating to alleged non-compliance with ASIC notices.

April in summary – enforcement actions and outcomes

Civil Action:

Civil Judgments Obtained:

• ASIC obtained judgment in the Federal Court against four directors for breaching their duties as officers of a responsible entity of a registered managed investment scheme. The Court found that they failed to act in the best interest of members and failed to take all reasonable steps to ensure that the responsible entity complied with its compliance plan.  It was also found two of the directors improperly received unsecured loans from the MIS for their personal use. ASIC will now seek orders from the Court to impose pecuniary penalties and period of disqualification.
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• ASIC obtained permanent injunctions in the Federal Court against “finfluencer” Tyson Robert Scholz, prohibiting him from carrying on a financial services business in Australia in contravention of the Corporations Act. Scholz does not hold an Australian financial services license. Previously, Scholz hosted online groups which charged membership fees, where members would exchange messages about share trades. Scholz also offered various levels of share trading training.
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• The Federal Court ordered that Ascent Investment and Coaching Pty Ltd be wound upon just and equitable grounds, together with the managed investment scheme operated by Ascent. ASIC is currently investigating Ascent, with concerns that investors may have been misled in fundraising, that investor funds may have been improperly dealt with, and that Ascent may have been operating an unregistered MIS.

Civil Proceedings Commenced:

• As noted above ASIC commenced its first proceedings alleging unfair contract terms in an insurance contract under the ASIC Act against Auto& General Insurance Company Limited. The insurance contract required customers to notify the insurer “if anything changes about your home or contents”. ASIC alleges this is unfair because it imposes an obligation on customers which it cannot practically meet and suggests that the insurer had a broad right to refuse claims or reduce the amount payable under claims. ASIC is seeking declarations that the term is void, and injunctions and corrective orders.

Criminal:

• Sentencing– Significant sentences were imposed on three defendants in three separate fraud cases. In particular, one defendant was sentenced to eight years and six months with a non-parole period of two and a half years for defrauding pensioners of $1.815 million in purporting to use their funds for property development.
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• Charges Laid – Charges laid against 2 defendants involving offenses such as engaging in credit activity without a license, and altering books supplied to ASIC.
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• Charges Withdrawn – 27 charges of fraud against Mark Anders were withdrawn as noted above.
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• Verdicts – as above, the Roadships Companies and their director Robert McClelland were acquitted of failing to comply with ASIC notices to produce books and records.

Administrative Action:

• Interim Stop Orders – One interim stop order was issued by ASIC related to non-compliance with the Design and Distribution Obligations. ASIC was concerned that the target market described in the relevant Target Market Determination was too broad, and the target market was based on features that the product did not provide. The issuer responded quickly by making the necessary changes to the origin TMD, and ASIC revoked the stop order on 4 April 2023, three business days after the interim stop order was issued.
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• Financial Services Bannings – Three individuals were banned from providing financial services.  The reasons included: transacting unlisted shares between clients at significant price differentials, and using the price margin for own benefit; making a false statement to ASIC during a compulsory examination; promoting and assisting early release of superannuation for consumers who did not meet the early release conditions; and misleading clients into believing they were investing in property developments which did not exist.
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• License Cancellation/Suspension – Four companies had their AFS licence cancelled or suspended. As noted above, a notable cancellation was the AFS licence of Binance Australia Derivatives, a trader of crypto derivatives. ASIC is currently conducting a review of Binance over concerns on its client classification, and its group entities around the world were also subject to regulatory warnings or actions from a number of overseas regulators. Other licensees had their licence cancelled or suspended for failure to maintain required organisational competence; failure to meet its financial reporting obligations; and not holding the required professional indemnity insurance cover.
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• Actions Against SMSF Auditors –In past 6 months, ASIC acted against 11 SMSF auditors, disqualified seven, imposed additional conditions on three, and cancelled one SMSF auditor’s registration.10 of these SMSF auditors were referred to ASIC by the ATO.

 Surveillance

• Listed Entity Disclosure (Financial Reporting Surveillance Program) – ASIC regularly reviews financial reports of listed companies on a risk-basis. This month, a listed company derecognised trade receivables of $8,689,000 and its corresponding deferred revenue of$8,689,000 in the 30 June 2022 comparatives of its latest financial report for the half year ended 31 December 2022. ASIC was concerned that the revenue corresponding to the receivables were deferred, which meant the revenue had not been earned, so the receivables should not be recognised.

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

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.