ASIC Enforcement Wrap: October 2024

Key October Takeaways:

• ASIC continues to focus the insurance industry, commencing proceedings against QBE alleging that they misled customers on the value of discounts provided.  This follows its successful action against of HCF Life for misleading the public with its contract terms regarding pre-existing conditions.
• ANZ lost its appeal against a judgment that it breached continuous disclosure laws when undertaking a $2.5 billion institutional share placement, which imposed a penalty of $900,000. The maximum penalty for the same breach occurring today would have been somewhere between $15 million and $780 million.
• ASIC banned John Hazell from financial services for two years on the basis he misled the Tax Practitioners Board in order to retain his tax agent registration.

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Spotlight– SMSF Auditors suspended for having single source of work referral

ASIC has suspended the registration of three self-managed superannuation fund auditors, Wuzhao Fang, Huiting Li, and Xuan Wu, for one year due to concerns about their independence.

Fang, Li and Wu received more than 99% of their overall audit fees from a single referral source. The source was an SMSF administration provider which provides assistance to SMSF trustees in setting up and administering SMSF’s online. Because the auditors’ income depended on a single source, ASIC found that this created self-interest and threats to the auditors’ independence, which they were unable to safeguard against.

It is a condition of registration of all SMSF auditors that they must comply with auditor independence requirements as set out in APES 110 Code of Ethics for Professional Accountants (APES110 Code).

There are three things to note about this enforcement action.

Firstly, this shows cooperation between regulators to achieve enforcement outcomes. This matter was referred to ASIC by the ATO. Evidently, the ATO has better visibility on the patterns of engagement by the auditors.

Secondly, it appears that ASIC is willing to take a more proactive approach and target contraventions in an enforcement priority are before there appears to have been substantive harm to consumers.

Finally, SMSF auditors must ensure they diversify their referral sources. The APES110 Code is of the view that an auditor’s independence is threatened if its fees from a single referral source is more than 30% of the total fees, and that if this is the case, appropriate safeguards should be implemented to reduce the threats of independence.[1] In this context, it is easy to understand why ASIC was so readily to act against auditors who received 99% of their fees from a single referral source, and it may be likely that we see similar enforcement actions in the future.

October in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC commenced two civil penalty proceedings in the Federal Court:

• ASIC commenced proceedings against QBE Insurance Australia Limited (QBE) alleging that QBE misled customers about the value of discounts offered on specific general insurance products. QBE made statements and sent renewal notices promising discounts on insurance products including home, contents, and car insurance, but customers did not receive these discounts.
• ASIC commenced proceedings against Oak Capital Mortgage Fund Ltd and Oak Capital Wholesale Fund Pty Ltd (Oak Capital) for allegedly engaging in unconscionable conduct. Oak Capital allegedly made up to 47 loans totalling $37 million which were designed to avoid the application of the National Credit Code and National Consumer Credit Protection Act 2009. Oak Capital allegedly provided loans to companies instead of the individuals requiring the loan where Oak Capital knew, or ought to have known, that the loan was for a domestic, personal or household purpose and would be captured by the Code.

Civil Penalties

The Federal Court ordered civil penalties in one case:

• Campbell Nicholas, former Chief Financial Officer and Company Secretary of Noumi Limited, was ordered by the Federal Court to pay a $100,000 penalty and be disqualified from managing corporations for four years. Mr Nicholas was found to have been involved in Noumi’s continuous disclosure breaches, breached his duties as an officer, and gave false or misleading information to Noumi’s directors and auditors.

Civil Judgments

Four judgments were delivered in ASIC civil proceedings:

• The Federal Court made orders for Global Capital Property Fund Limited to be wound up on just and equitable grounds. The Court appointed Ross Blakeley and Kelly-Anne Trenfield of FTI Consulting as liquidators. ASIC applied for Global Capital to be wound up following concerns over the management of its business.
• The Federal Court held that Latitude Finance Australia and Harvey Norman Holdings Ltd engaged in misleading conduct and made false or misleading representations for its advertisements. Its ‘60-month interest free and no deposit payment method required’ advertising campaign did not mention that consumers were required to take out a credit card to purchase goods.
• The Federal Court appointed Helen Newman and Andrew Fielding of BDO as receivers and managers of the property of David McWilliams and wife Laura Fullarton. The receivers are tasked with investigating the amount of investor funds received by Mr McWilliams and Ms Fullarton. The appointment follows asset preservation orders and travel restraint orders made in September over Mr McWilliams, Ms Fullarton, and several of Mr McWilliams’ companies.
• The Federal Court held that certain HCF Life Insurance Company Pty Ltd policies were liable to mislead consumers under section 12DF of the ASIC Act. The term ‘pre-existing condition’ in three of HFC’s contracts purported to allow HCF to deny coverage for non-disclosure of a pre-existing condition even if a medical practitioner decided that the condition existed before entering into the insurance contract, or for customers who were not aware of a pre-existing condition before entering into an insurance contract (Pre-Existing Condition Term). The Pre-Existing Condition Term is held to be misleading because nothing in the product’s PDS highlights that the Pre-Existing Condition Term may not be relied upon by HCF in particular circumstances pursuant to section 47 of the Insurance Contracts Act 1984 (Cth), and an ordinary and reasonable reader would be ignorant of the potential effect of that provision.

Appeals

• The Full Federal Court in Victoria dismissed an appeal from Australia and New Zealand Banking Group Limited (ANZ).The Court upheld its original decision that ANZ breached continuous disclosure laws when undertaking a $2.5 billion institutional share placement in 2015, when it failed to notify the Australian Securities Exchange that between $754to $791 million of the shares offered in the placement were to be acquired by underwriters rather than investors.

Interventions

• ASIC intervened in a proceeding where the Supreme Court of Queensland ordered A.C.N. 114 733 569 Limited (formerly ISG Financial Services Limited) to wind up its Schemes, the ISG Private Access Fund and the ISG Real Estate Equity Fund. The Court appointed Neil Cussen, Anthony Wright, and Katherine Barnet of Olvera Advisors as receivers of each Scheme, which were proposed by some investors in the Scheme and agreed to by ASIC. They were preferred over receivers proposed by ISG and its director. Since July 2023, ASIC has been undertaking an investigation into suspected contraventions of the Corporation Act 2001 (Cth) in relation to the affairs of ISG.

Criminal Action:

Charges– two individuals were charged:

• Wayne Thomas Fraser was charged with 16 counts of making or authorising the filing of false or misleading documents with ASIC, contravenings 1308(2) of the Corporations Act 2001 (Cth). These relevant documents relate to three companies - Embrace Australia Pty Ltd (five forms), Situbusit Pty Ltd (five forms), and Maiorana Marketing Pty Ltd (six forms).
• Grant Colthup, the ex-CEO of ACCE Australia Pty Ltd, appeared in the Magistrates Court in Ipswich, Queensland, charged with one count of fraud. ACCE offered cryptocurrency trading services to customers between May 2019 and September 2022. A customer allegedly paid $2.2 million to ACCE for Bitcoin however they never received any cryptocurrency. ASIC alleges that Mr Colthup used the monies to pay the liabilities of ACCE and/or purchase cryptocurrency for other customers.

Charges Dismissed – charges laid against one individual have been dismissed:

• Former financial adviser Warren Scott had charges against him dismissed in the Brisbane Magistrates Court after the CDPP offered no evidence. Mr Scott had been charged with 27 offences, including 16 counts of making false or misleading statements, 6 counts of making a false statement contrary to s 64 of the ASIC Act, and 5 counts of fraud.

Administrative Action:

Financial Services Bannings

ASIC banned one individual from providing financial services:

• ASIC has banned financial adviser John Hazell from providing financial services for two years. Mr Hazell was registered with the Tax Practitioners Board as a tax adviser from 15 June 2015 until 8 March 2023. ASIC found Mr Hazell made misleading statements to the Board in order to retain his registration and imposed a ban of two years on the basis Mr Hazell was likely contravene his obligations as a financial advisor in the future.

Licence Cancellation/Suspension

19 companies and individuals had their AFS or Credit licence suspended or cancelled:

• ASIC cancelled two AFS licenses and 11 credit licenses in connection with their failure to maintain AFCA membership.
• ASIC cancelled the AFS licence of Prospero Markets Pty Ltd (in liquidation) effective from 25 September 2024. Prospero failed to lodge its 2023 audited financial accounts which led to its AFS licence being suspended in December 2023. Following this, the Federal Court ordered that Prospero be wound up in April 2024 which led to the cancellation of its licence.
• ASIC cancelled the credit licence of Ferratum Australia Pty Ltd (in liquidation) following a payment by the Compensation Scheme of Last Resort (CLSR). Ferratum failed to make payments following an AFCA determination which led to the cancellation.
• ASIC cancelled the credit licence of Emmanuel Katsoulis, effective from 4 October 2024. Mr Katsoulis failed to lodge annual compliance certificates and failed to pay industry funding levies owed to ASIC.
• ASIC suspended the credit licence of Peter Wormington for four months from 11 October 2024. Mr Wormington had been expelled from AFCA due to the non-payment of fees and had also failed to pay industry funding levies owed to ASIC.
• ASIC cancelled the AFS licence and credit licence of Ultiqa Lifestyle Promotions Limited (in liquidation) (Ultiqa) following a payment by the CLSR. Ultiqa failed to make a payment of $19,429.60 following an AFCA determination which led to the cancellation of both licences.
• ASIC cancelled the AFS licence of Next Generation Advice Pty Ltd (in liquidation) following an order from the Queensland Supreme Court that the company be wound up.

Director Disqualifications

ASIC disqualified one individual from managing corporations:

• ASIC has disqualified Constandinos Ganatzos from managing corporations for the maximum period of five years. Between October 2016 and November 2021, Mr Ganatzos was the director of 21 failed companies which now owe a total of$71,144,235 to unsecured creditors. ASIC found that Mr Ganatzos failed to be involved in the management of five companies despite being a director, failed to ensure four companies lodged various financial statements with the ATO, allowed one company to trade whilst being insolvent, failed to ensure that three companies maintained adequate financial records, and failed to assist the liquidator following their appointment over one company.

Stop Orders

ASIC issued one stop order:

• ASIC placed a design and distribution obligation (DDO) stop order on Indy-C-Fashion Accessories Pty Ltd to prevent consumers in Katherine, Northern Territory, from entering into credit arrangements to pay for goods on credit through Centrepay deductions. ASIC is concerned that these consumers may be financially vulnerable and at increased risk of financial hardship. Entering into these credit arrangements may mean consumers’ repayments are deducted from their Centrelink income before they receive it, putting them at risk of being unable to make essential living purchases.

SMSF Auditors

• Between 1 January and 30 June 2024, ASIC acted against 13 approved self-managed superannuation fund (SMSF) auditors. This action included the disqualification of seven SMSF auditors, the suspension of one SMSF auditor, the imposition of additional conditions upon four SMSF auditors, and the cancellation of registration of one SMSF auditor. The action relates to ASIC’s concerns over auditor conduct, including breaches of auditing and assurance standards and not being a fit and proper person to remain a SMSF auditor.
• ASIC suspended a further three SMSF auditors, Wuzhao Fang, Huiting Li, and Xuan Wu, for one year for breaching independence requirements. The three auditors had audited thousands of SMSF clients from one referral source – a SMSF administration provider, and received 99% of their overall audit fees from this source. ASIC found that this created threats to these Fang, Li and Wu’s independence which they were unable to safeguard against.

‍[1]AUST R410.14.2

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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.