ASIC Enforcement wrap: July 2022 | Enforcement of DDO Regime Commences

ASIC enforcement outcomes came with a rush in the first month of FY2023, some significant.  We summarise below important cases and areas of focus that industry participants should be aware of and provide an overview of the type and number of outcomes.

Key takeaways

• ASIC made its first use of ‘stop order’ powers under the new Design and Distribution Obligation Regime introduced in October 2021 – more can be expected in time as ASIC gets a feel for this new regulatory lever
• A recipient of a summons to attend for public examination by a liquidator was prosecuted and sentenced without conviction to a six-month good behaviour bond for failing to comply with the summons – a reminder of the seriousness of complying with examination summons and orders
• ASIC cancelled two inactive AFSLs without a hearing, using the power under 916B of the Corporations Act to summarily cancel a licence where the licence has not been used at all or for six months.  Both cases followed investigation by ASIC prompted by the failure of the licensees to become members of AFCA – a reminder that someone is looking in the background in financial services

July in summary – enforcement actions and outcomes

• Civil Action:

• Federal Court found Select AFSL and its agents acted unconscionably when selling insurance products in an ASIC action arising from a Royal Commission Case Study
• ASIC commenced civil penalty action against wholesale licensee Lanterne Fund Services for risk and compliance failures 

• Financial services and credit administrative action:

• Five financial services bannings or licence cancellations
• Three financial services Design and Distribution Obligation interim stop orders issued
• A mortgage broker was banned from credit activities for seven years

• Criminal:

• Two criminal outcomes – one individual sentenced for failing to answer questions at a public examination and Griffin Coal convicted of breaching financial reporting and company officer obligations
• Two instances of criminal charges being laid, one involving 50 counts of fraud against an alleged unregistered MIS operator and the other charges of unlicensed advice and dishonesty offences relating to financial services

• SMSF – eight actions/outcomes against SMSF auditors
• Director disqualification – a hospitality industry director was disqualified from managing corporations for two years after making false statements to ASIC
• Liquidators – a registered liquidator was reprimanded and subject to other professional directions by a disciplinary committee

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ASIC’s first use of stop orders powers under the new Design and Distribution Obligation Regime

In a first, ASIC has placed interim stop orders on three financial firms in response to deficiencies in the target market determination (TMD) for their products.

In relation to UGC Global Alpha Limited and UGC Global Alpha Fund Limited (UGC), ASIC found that when publicly offering shares in a wholesale fund, UGC did not prepare a TMD. Under the interim stop order, UGC was prevented from dealing in shares in relation to retail investors, providing a disclosure document or providing financial product advice in relation to the shares to retail investors.

In relation to Responsible Entity Services Limited (RES), ASIC considered that the TMD in relation to PPM Units included categories of retail investors for whom investments in such PPM Units would not have been consistent with their likely objectives, financial situation and needs. Under the interim stop order, RES is prevented from issuing interests in PPM Units, giving a product disclosure statement for PPM Units or providing general advice to retail clients recommending investment in PPM Units.

An interim stop order lasts for at most 21 days, in the absence of a hearing.

These actions stem from the introduction of the Design and Distribution Obligations regime (DDO Regime) which commenced on 5 October 2021. The DDO Regime was implemented on the basis that the existing regulation of financial services, which relies heavily on disclosure, financial advice and financial literacy, is insufficient.

Pursuant to the DDO Regime, issuers and distributors of financial products are required to have a consumer-centric approach when designing and distributing products. A key obligation for issuers under the DDO Regime is the mandatory requirement of preparing a TMD for every product they issue or distribute. A TMD must include a description of the class of consumers that comprise the target market of their product, and specify any conditions and restrictions on distribution. Distributors must ensure that their conduct in distributing such financial products are consistent with its corresponding TMD.

If an issuer embeds the consumer-centric approach when conducting its financial services business, preparing a relevant TMD should be a relatively straightforward task.  

These actions signal that:

• Where ASIC considers there has been no TMD prepared, ASIC will take action to place an interim stop order in place; and
• ASIC is assessing the features of financial products against the TMD.

AFS Licensees should be vigilant in conducting periodic reviews of whether their TMD and distribution conduct remains appropriate, as circumstances may change over time. Otherwise, ASIC may potentially impose severe disruption of business with their administrative tools, such as the interim stop order.

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Examinee Sentenced for Refusal to Answer Questions During Public Examinations

Paul Annesley has been sentenced without conviction to a six-month good behaviour bond after pleading guilty to failing to answer questions during a public examination into the affairs of Fleurie Pty Ltd (in liquidation) (Fleurie).

It was alleged that Mr Annesley was a shadow director of Fleurie and the liquidators sought to examine him on the affairs of the company.

A public examination can occur when a company has entered liquidation. The liquidators of the company can summon officers of the company, such as its directors or company secretaries, to attend public examinations, as of right. On the other hand, the liquidator may also summon other people, if it can satisfy the Court that they may be able to give information about examinable affairs of the corporation, a scope which is construed widely.

It is an offence for a person to intentionally or recklessly fail to attend a public examination he or she is summoned to. It is also an offence for a person to refuse or fail to answer a question that the Court directs him or her to answer, or make a statement that is false or misleading, in a public examination. The maximum penalty for committing these offences is 2 years of imprisonment.

Persons being summoned to attend public examinations should be aware of their responsibility to assist the Court and liquidators in investigations into the affairs of a failed company.  If unsure, you should engage a legal practitioner to be informed of your rights and obligations in such a situation.  

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Use it or Lose it: Inactive licences cancelled without a hearing

ASIC cancelled the AFS Licences of Quattro Management Pty Limited and Global Funding Partners Pty Ltd without a hearing.

For Quattro, ASIC found that it has never provided financial services since its AFS licence was issued in 2009. 

As for Global Funding, ASIC found that it has ceased to carry on a financial services business.

Section 915B of the Corporations Act 2001 (Cth) gives ASIC the power to suspend or cancel an AFS License by written notice and without a hearing in certain circumstances, including when an AFS Licensee ceases to carry on a financial services business, or does not provide a financial service covered by the licence before the end of 6 months after the licence is granted.

Both cases were discovered following enquiries from ASIC about their failure to become a member of the Australian Financial Complaints Authority.

This demonstrates how a failure to meet a core compliance requirement, such as membership of AFCA, will be identified by ASIC and prompt investigation. Where a licence is dormant, ASIC may act to cancel it with the licensee having limited rights of hearing or redress.

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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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