ASIC Enforcement Wrap: March 2024 | Busy month for ASIC headlined by important conflicted remuneration decision and Regulator greenwashing win against Vanguard

Key March Takeaways:

• ASIC succeeded in its first ever greenwashing civil penalty case against Vanguard Investments Australia. The Court held Vanguard’s claims that it excluded companies from a range of industries from its index fund, such as fossil fuels, when in fact a number of those companies were not researched or screened against applicable ESG criteria.
• Federal Court decides conflicted remuneration case against Licensee in respect of authorised representative’s conduct. Read more in the ‘Spotlight’ below.
• ASIC commences its first prosecution of a director for failing to have a director identification number. This requirement has been in place since November 2022. The maximum penalty for this offence is a fine of $16,500.
• ASIC lost its first ever unfair contract term case with regards to insurance policies, made against Auto & General Insurance Company. The Federal Court found that the clause requiring customers to notify Auto & General if ‘anything changes about your home or contents’ was not unfair, because it’s scope should be construed as only applying to changes to information already provided to the insurer.

Spotlight – Federal Court decision highlights importance of monitoring representative’s compliance with conflicted remuneration and best interest obligations

On 29 February 2024, the Federal Court ruled that R M Capital Pty Ltd (RM Capital), AFSL holder, failed to take reasonable steps to ensure that its authorised representative, SMSF Club Pty Ltd (SMSF Club), did not accept conflicted remuneration.

Under s963F of the Corporations Act 2001 (Cth) (Corporations Act), an AFSL holder is required to take reasonable steps to ensure that its representatives do not accept conflicted remuneration. There is also an analogous requirement in the Corporations Act with regards to best interest obligations.

RM Capital held an AFSL which authorised it to provide financial product advice. SMSF Club, an authorised representative of RM Capital, provided financial product advice and accounting and administrative services for self-managed superannuation funds.

The case concerned a referral agreement between Positive Real Estate Pty Ltd (PRE), who provided property investment services, and SMSF Club. PRE would pay SMSF Club a fee of $5,000 each time a client established an SMSF bare trust through SMSF Club and used it to purchase property through PRE. ASIC alleged this was conflicted remuneration.

When setting out what constituted reasonable steps, the Court made it clear that:

• ASIC will not establish a contravention of s963F of the Corporations Act by merely pointing to particular steps that were reasonable, but were not taken by the AFSL holder;
• There is no ‘one true path’ that must be followed; and
• What constitutes reasonable steps will be a question of fact determined by all the circumstances of the business.

RM Capital’s main defence was that it maintained an approved products list, and that its authorised representatives were only authorised to promote or advise on financial products that were on that list. PRE came to be on the approved products list in July 2014.

The Court found RM Capital’s argument unconvincing, observing that:

• There was a paucity of evidence about how products came to be placed on the approved product list. The Court inferred that that there was no consistently applied procedure by which proposed products were considered for compliance with the Corporations Act, including the ban on conflicted remuneration[1]
• There was no separate occasion on which PRE was assessed in respect of conflicted remuneration for the purpose of placing it on the approved product list.

RM Capital also submitted there were other steps it took to ensure compliance, such as a compliance programme, selecting suitable personnel and training, policies, and monitoring and supervision, but these steps were deemed insufficient by the Court.

In particular, the Court was referred to a draft Conflicted Remuneration policy, but this draft policy was never circulated to RM Capital’s representatives or used for training. In any event, the draft policy was fundamentally incorrect for assuming that the ban on conflicted remuneration would not apply if it was consented to by or disclosed to the client. The Court noted that Mr Richardson, the director of RM Capital, did not have ‘a firm grasp on the details of the regulatory environment’.

The key takeaway from this case for AFSL holders is that the first step in monitoring compliance of their authorised representatives is having a good understanding of the regulatory environment and its requirements, and from that develop, implement and follow effective policies and procedures. It may be prudent to hire internal legal counsel, ‘fractional general counsel’ or engage external lawyers or to provide the relevant advice. Another trap is getting a suite of policies and procedures out at the outset from a specialist firm, but failing to finalise and/or follow them, or get regular input from specialists as you go.  

The preparation and execution of the relevant policies and procedures can only be effective with a correct understanding of the regulatory environment, and specialist input or checks and balances along the way.

March in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Penalties

• The Federal Court has ordered ASX-listed Holista Colltech Ltd to pay a civil penalty of $1.8 million for breaching its continuous disclosure obligations and making misleading representations.

On 9 April 2020, during the COVID-19 pandemic, Holista to the ASX that Health Therapies LLC placed orders for 415,000 bottles of Natshield, a product said to be effective against COVID-19, with expected revenue totalling $3.8 million, when in fact such orders had not been placed. In addition, Holista’s Chief Executive Officer at the time, Dr Rajendran Marnickavasagar, was also found to have made available or authorised false or misleading information, with regards to the 9 April 2020 announcement itself, and in two letters to the ASX dated 17 and 20 April 2020, with relation to execution of a binding term sheet. Dr Marnickavasagar was ordered to pay a penalty of $150,000 and disqualified from managing a corporation for 4 years.

Civil Judgments

Judgments were delivered in four civil proceedings. ASIC succeeded in two but was unsuccessful in the remaining two:

• The Federal Court found that Vanguard Investments Australia made misleading ESG claims about the application of exclusionary screens to one of its index funds, following Vanguard’s admission of the conduct. Investments in the fund were based on an index branded by Bloomberg, Barclays and MSCI. While Vanguard claimed the index excluded companies from a range of industries, such as those involving fossil fuels, Vanguard admitted that many of the companies from the index were not researched or screened against applicable ESG criteria. This was ASIC’s first greenwashing civil penalty case. The matter is listed for further hearing to consider penalty.
• The Federal Court found that Finder Wallet Pty Ltd did not provide unlicensed financial services in relation to crypto-asset related product Finder Earn. ASIC alleged that Finder Earn was a debenture, because customers deposited money with Finder Wallet on the understanding that their money will be repaid, together with a return for allowing Finder Wallet to use their capital. The Court disagreed, finding that the assets being deposited or loaned to Finder Wallet was ‘TrueAUD’, a cryptocurrency stablecoin pegged to the Australian dollar, not money.
• The Federal Court found that Auto & General Insurance Company did not include an unfair contract term in its insurance contracts when it required customers to notify Auto & General if ‘anything changes about your home or contents’. The Court did not find the clause unfair, because it construed the scope of the required notification to extend only to changes to information that customers had provided to Auto & General when applying for an insurance policy. The Court also noted that the implied duty of good faith contained in section 13 the Insurance Contracts Act 1984 (Cth) would prevent Auto & General from opportunistically relying on the notification clause, such as denying claims when the insurer did not suffer any loss. This case was the first unfair contract term case commenced by ASIC with regards to insurance policies.
• The Federal Court found that RM Capital Pty Ltd failed to take reasonable steps to ensure that its authorised representative, the SMSF Club Pty Ltd, did not accept conflicted remuneration. See the 'Spotlight' above for more detail. The matter has been adjourned to consider relief against RM Capital, and orders to be made against SMSF Club.

Appeals

• The Full Federal Court has dismissed an appeal by Provide Capital. This was an appeal against the Federal Court’s decision in September 2023 ordering Provide Capital to comply with a notice issued by ASIC under section 33 of the Australian Securities and Investments Commission Act 2001 (Cth) requiring production of documents. The Full Federal Court rejected Provide Capital’s argument that the Court did not have jurisdiction to rule on ASIC’s application to enforce the section 33 notice, because ASIC did not include the words ‘without reasonable excuse’ in the certification regarding Provide Capital’s failure to comply with the said notice. Provide Capital has further appealed this decision to the High Court of Australia.

Other Actions

• ASIC has applied to wind up Prospero Markets Pty Ltd, a retail OTC derivative issuer. ASIC is concerned about the management of Prospero’s business, including in relation to its compliance with its AFS license conditions. Prospero’s AFS license was suspended in December 2023, after Prospero failed to lodge its 2023 audited financial accounts. ASIC understands that Prospero holds substantial client funds and considers appointment of liquidators to be the best way to return such funds to clients. The Australian Federal Police has charged the former officers and responsible managers of Prospero for money-laundering offences relating to Changjiang Currency Exchange.
• ASIC secured interim travel restraint orders against Stephen Vincent McGovern and Mark Madafferi, who will be prevented from leaving Australia until 13 September 2024 or until further order. ASIC was concerned that Mr McGovern and Mr Madafferi may have misused term deposit funds of Dubber Corporation, an ASX listed company, and that $26.6 million is still unaccounted for.
• ASIC secured interim travel restraint orders against Krishnakumar Sitaram Agrawal and Shashikumari Krishnakumar Agrawal, who will be prevented from leaving Australia until 31 August 2024 or until further order. ASIC is currently investigating Mr and Mrs Agrawal over their roles in the collapse of the Mansa Group of companies in July 2023.

Criminal:

Sentencing – four Defendants were sentenced, being:

• Ronald Lester Cardwell was sentenced to 2 years imprisonment, to be served by way of intensive correction order, for one count of dishonestly using his position as liquidator of a corporation to gain an advantage for himself and one count of failing to comply with a notice issued to him under section 33 of the ASIC Act.
• Jane Rosemary Flegg was sentenced to 3 years 6 months imprisonment with a non-parole period of 21 months, on one count of making available false or misleading information to the ASX, one count of stealing approximately $2.2 million and one count of forging and uttering a bank statement that falsely showed $675,658 in a Citation bank account.
• Cameron Waugh was sentenced to 2 years imprisonment for insider trading in relation to shares of Genesis Minerals Limited. He is to be released after nine months upon entry into a recognisance to be of good behaviour for 15 months.
• Janet Heather Cameron was sentenced to pay a total fine of $8,000 for one count of failing to lodge a substantial holder notice regarding her interests in Bellamy’s and one count of making a false and or misleading statement to ASIC. As a result of her conviction, Ms Cameron is automatically disqualified from managing corporations for five years. Ms Cameron has appealed against her conviction.

Guilty Plea:

• David Sipina pleaded guilty to one count of carrying on (with others) a financial services business without a license and one count of dealing in the proceeds of crime worth $1 million or more, in relation to his role in the Courtenay House Ponzi scheme.

Charges:

• An unnamed defendant was charged with one count of failing to have a director ID. This is ASIC’s first prosecution against a director for failing to comply with the obligation to have a director identification number. The maximum penalty for this offence is a fine of $16,500.

Administrative Action:

Financial Services Banning

Two individuals were banned by ASIC from financial services:

• Shane Rose was permanently banned from providing financial services.  ASIC was concerned he used client invested funds for purposes other than which they were given.
• Brian Jacques Creigh was permanently banned from providing financial services, for allegedly operating a Crypto Fund while being unlicensed, making misleading and deceptive statements about the said Crypto Fund, and providing false evidence during an ASIC examination.

Licence Cancellation/Suspension

Three companies had their AFSL cancelled or suspended, including:

• Suetonius Wealth Management Pty Limited’s license was suspended for failure to lodge its financial statements and audit reports.
• Endeavour Securities (Australia) Ltd’s license was cancelled because it was insolvent, under administration and is being wound up.
• Crown Wealth Group Pty Ltd’s license was cancelled because it was placed into voluntary administration.

Infringement Notices

ASIC issued one infringement notice:

• ASX Limited has paid a penalty of $1,050,000 following an ASIC investigation into its compliance with the Market Integrity Rules. This is the first time ASIC issued an infringement notice to a market operator. ASIC believed that ASX breached the rule requiring pre-trade transparency on 8,417 occasions between April 2019 and December 2022. Pre-trade information assists with price formation, aids liquidity, enables investors to assess investment opportunities and values listed companies. ASIC considered ASX’s conduct to be serious, but also that it was indicative of carelessness rather than recklessness or intentional misconduct.

Director Disqualifications

Two individuals were disqualified by ASIC from managing corporations:

• Alaa El Hassan was disqualified for 5 years due to his involvement in the failure of seven companies which owed a combined total of $3,723,402.16 to unsecured creditors. This included $2,879,671.46 owed to the ATO, $547,346 owed to Revenue NSW and $23,246 owed to former employees.
• Joseph Gutnick was disqualified for 4 years due to his involvement in the failure of 3 companies which owed a combined total of $43,209,965 to unsecured creditors, including to a number of councils and government entities.

SMSF Auditors

ASIC has taken action against 15 SMSF auditors over independence concerns, where the firm preparing financial statements for SMSF Clients also conducted the SMSF audit, in breach of SMSF auditor’s independence requirements.

ASIC:

• imposed conditions on the registration of 13 SMSF auditors; and
• accepted voluntary cancellations of two SMSF auditors.

Surveillance

Financial reporting and audit surveillance program

One listed company restated its financial statements in response to ASIC’s financial reporting and audit surveillance program:

• Data#3 Limited restated its full year 2023 and half year 2022 financial reports following ASIC’s new financial reporting and audit surveillance program. With regards to revenue from contracts where Data#3 was an agent rather than a principal, Data#3 changed its accounting policy to only recognise net earnings from such sales as revenue. This resulted in a $1.67 billion decrease to revenue for the full year 2023, but there was no impact to profit before tax. ASIC was concerned that the previous policy would create a misleading impression about the size of the business.

 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.

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[1]Paragraph 268