Muscular enforcement: ASIC deploys new weapons in broader bannings

ASIC’s more muscular approach to enforcement extends into administrative actions with the use of new powers post the Hayne Royal Commission.  The following article explains the scope of the new powers, how ASIC has recently wielded them and what you need to do if faced with a banning action involving the new powers.

The banning

ASIC recently banned former Theta Asset Management Ltd director Robert Patrick Marie from:

• providing financial services for four years; and
• from controlling any entity carrying on financial services, and performing any function involved in carrying on a financial services business.

The banning arose from the issue by Theta of five defective Product Disclosure Statements for the Sterling Income Trust, under which over $16million was raised from investors. As a result, ASIC was of the view that financial services had not been provided to clients efficiently, honestly and fairly.

The new powers

In making the banning order, ASIC applied its new, broader powers obtained following the Hayne Royal Commission, via the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures) Act 2020.

Commencing in February 2020, the legislation strengthened ASIC’s banning powers by expanding two broad areas:

• the grounds on which ASIC can make banning orders; and
• the scope of such banning orders.

New grounds

The grounds for a banning by ASIC under section 920A of the Corporations Act 2001 have been expanded as follows:

• the previous “not of good fame or character” ground has been replaced with a clearer ground that the person is not “fit and proper” to provide financial services, perform functions as an officer of an entity that carries on a financial services business, or to control such an entity;
• the addition of a ground for persons who have, at least twice within the last seven years, been an officer of a corporation involved in financial services or credit activity that is unable to pay its debts;
• the previous “not adequately trained or competent” ground has been expanded to include where the person is not adequately trained or competent to perform any function as an officer of an entity that carries on a financial services business, or control such an entity; and
• an entirely new ground for where the person has at least twice been linked to a refusal or failure to give effect to an Australian Financial Complaints Authority (AFCA) determination.

New scope

The new scope of banning orders has been expanded beyond providing a financial service or engaging in credit activities.  

ASIC can now ban the person from controlling an entity that carries on a financial services business or credit activities, or performing any function involved in such businesses or activities.

ASIC actively wielding its new powers  

Another case in which ASIC used them was in March 2021 against Mr Nizi Bhandari, former authorised representative of The Australian Dealer Group Pty Ltd.  ASIC found that Mr Bhandari acted dishonestly while assisting customers to find and consolidate their superannuation and obtain early access to their super, including telling them to lie regarding hardship they faced, and that he provided unauthorised personal advice.

These instances show that ASIC will not hesitate to use its “beefed up” powers obtained post-Hayne, where it has reason to believe a person lacks the requisite fitness and propriety and poses a serious risk to consumers.  We expect these powers and scope of orders to be used/sought more and more frequently by ASIC to effectively remove people from the industry for a period.

Conclusion

The use of this power by ASIC is an example of the increased willingness by ASIC to take action generally and, what it considers, effective action making use of increased available powers.  You should assume that these types of orders will be sought frequently, and owners of financial services and credit businesses should consider their ‘key person’ risk and the ability of the business to continue and retain value without key people in the event of a comprehensive banning.

It emphasises the need to take banning actions seriously, and immediately get expert advice.  Our recent experience shows there are opportunities to defend these actions successfully, but no guarantees.  This means any defensive strategy should consider the risks to business value of a banning, and structural changes that can be made alongside a traditional defence to bolster that defence and manage the downside risk of key person banning.  

If you or your business are subject to an ASIC investigation or exercise of its powers, as financial services regulatory experts, Mackay Chapman are here to help.

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