FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353
ORDERS
VID 379 of 2022 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff
AND: LANTERNE FUND SERVICES PTY LIMITED
Defendant
ORDER MADE BY:
MCEVOY J
DATE OF ORDER:
10 APRIL 2024
THE COURT DECLARES THAT:
1.Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and s 1317E of the Corporations Act 2001 (Cth), during the period 13 March 2019 to 5 October 2021 (the Relevant Period), Lanterne Fund Services Pty Limited breached its obligation to have adequate risk management systems, and thereby contravened ss 912A(1)(h) and 912A(5A) of the Corporations Act by:
(a)failing to identify and assess the risks faced by its business, including the risks relating to its corporate authorised representatives (CARs) and authorised representatives (ARs);
(b)failing to document any identification or assessment of the risks faced by its business, including failing to have a risk management framework and basic risk management tools;
(c)relying on initial due diligence of directors of potential CARs and pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and identify risks associated with their conduct;
(d)failing to have an adequate compliance management system having regard to the nature, scale and complexity of its business and instead relying on a compliance manual which was out of date, inapplicable to its business, and omitted regulatory and compliance obligations of CARs, ARs and Lanterne;
(e)failing to have sufficient employees or officers with appropriate risk management expertise and failing to engage external consultants with risk management expertise for the purpose of risk management;
(f)failing to have any independent oversight or monitoring of its risk management systems; and
(g)otherwise failing to have systems, processes or controls to manage or mitigate risks, including failing to have an incident management process.
2.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to do all things necessary to maintain competence to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(e) and 912A(5A) of the Corporations Act, by:
(a)failing to have responsible managers with sufficient time effectively to conduct their roles;
(b)failing to have a sufficient number of responsible managers with appropriate knowledge and skills across the financial services offered by Lanterne's CARs and in the industries and businesses operated by Lanterne's CARs; and
(c)failing to have any processes for ensuring it had appropriately qualified managers.
3.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to ensure that its representatives were adequately trained and competent to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(f) and 912A(5A) of the Corporations Act by:
(a)failing to assess the skill and competency requirements of its ARs, and failing to take any or adequate steps to address those requirements;
(b)failing to provide or arrange any or adequate training, professional development or other instructional programs for its CARs and ARs; and
(c)relying only on monthly self-assessment compliance reports completed by the CARs and ARs to satisfy itself that they had undertaken training, and not requesting, obtaining and inspecting CARs’ or ARs' training records or other evidence of relevant training.
4.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to take reasonable steps to ensure that its representatives complied with the financial services laws, and thereby contravened ss 912A(1)(ca) and 912A(5A) of the Corporations Act by:
(a)failing to have a documented and rigorous due diligence and background check process for prospective CARs and ARs, and failing to conduct ongoing checks to ensure ARs remained appropriate;
(b)failing to provide clear and practical guidance to CARs and ARs about the nature, extent and discharge of their obligations under the financial services laws;
(c)failing to have a systematic and documented audit process, and failing to conduct regular audits of the CARs and ARs;
(d)failing to document the matters the subject of its informal discussions with the ARs;
(e)relying on pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and identify risks associated with their conduct;
(f)failing to record or follow up any exceptions noted in the compliance self-assessments; and
(g)failing to conduct regular performance reviews of its employees, management or responsible manager.
5.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to have available adequate resources (including technological and human resources) to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(d) and 912A(5A) of the Corporations Act, by:
(a)failing to have adequately trained and skilled compliance and risk management personnel (particularly to undertake audits and reviews of CARs and ARs);
(b)failing to have an adequate information technology capability and any human resources capability having regard to the nature and scale of Lanterne's business;
(c)failing to have a human resources plan or process to establish and maintain the adequacy of Lanterne's human resources;
(d)failing to have staff training, development plans or reviews;
(e)failing to have plans for the temporary or permanent absence of its only operational responsible manager who also held the position of managing director;
(f)failing to have a technology resourcing plan or an up-to-date disaster recovery plan, and relying on outdated back up processes;
(g)failing to update its software to meet the needs of a business of its nature, scale and risk profile; and
(h)until September 2020, relying on paper files and records and failing to use a suitable software system in its monitoring and supervision of CARs and ARs.
6.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, by the conduct alleged in:
(a)paragraphs 1(a) to (g);
(b)paragraphs 2(a) to (c);
(c)paragraphs 3(a) to (c);
(d)paragraphs 4(a) to (g); and/or
(e)paragraphs 5(a) to (h),
together, or in any combination, Lanterne breached its obligation to do all things necessary to ensure the financial services covered by its financial services licence were provided efficiently, honestly and fairly, and thereby contravened ss 912A(1)(a) and 912A(5A) of the Corporations Act.
THE COURT ORDERS THAT:
7.Pursuant to s 1317G(1) of the Corporations Act, in respect of the contraventions the subject of the declarations in paragraphs 1 to 5 above, Lanterne pay to the Commonwealth of Australia a pecuniary penalty in the amount of $1.25 million within 30 days of the making of this order.
8.Pursuant to s 1101B(1)(a)(i) of the Corporations Act, Lanterne is required to:
(a)engage an independent expert within 30 days of this order, the identity of whom is to be agreed between the parties, and in the absence of agreement, to be determined by the court (Independent Expert), who will be required to, within 4 months of the order:
(i)review Lanterne's systems, processes and controls so as to report on the adequacy of those systems, processes and controls for the purpose of ensuring compliance with ss 912A(1)(a), (ca), (d), (e), (f) and (h) of the Corporations Act;
(ii)where any aspect of Lanterne's systems, processes and controls is considered to be inadequate, make recommendations as to the steps which should be taken to make the relevant systems, processes and controls adequate; and
(iii)prepare a written report setting out the results of the review and recommendations referred to above, and deliver a copy of the report to the plaintiff and Lanterne (compliance report);
(b)within two months of receipt of the compliance report, establish a risk management and compliance program and take any other necessary steps, including implementation of any recommendations in the compliance report, to ensure Lanterne's systems, processes and controls are adequate to secure compliance with ss 912A(1)(a), (ca), (d), (e), (f) and (h) of the Corporations Act;
(c)engage the Independent Expert to, within three months of the receipt by the plaintiff and Lanterne of the compliance report, prepare a short written report opining on the adequacy of Lanterne's implementation of the recommendations in the compliance report (implementation report) and deliver a copy of the implementation report to the plaintiff and Lanterne; and
(d)pay the costs of the Independent Expert.
9.Costs be reserved.
10.On or before 4:00pm on 24 April 2024 the plaintiff and the defendant file and serve written submissions not exceeding one page to be prepared with 1.5 line spacing and 12-point font, on the question of costs.
11.Costs will be determined on the papers pursuant to s 20A of the FCA Act.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MCEVOY J:
The plaintiff in this proceeding, the Australian Securities and Investments Commission (ASIC), alleges that Lanterne Fund Services Pty Ltd has contravened ss 912A(1)(a), (ca), (d), (e), (f) and (h) and 912A(5A) of the Corporations Act 2001 (Cth) in the conduct of its business. Lanterne’s business involves authorising companies and individuals to operate as corporate authorised representatives (CARs) and authorised representatives (ARs) under Lanterne’s Australian Financial Services Licence (AFSL). Lanterne received fees in return for the provision of these services and does not directly provide any financial services to clients. ASIC has described Lanterne as a “licensee for hire”.
ASIC alleges that from 13 March 2019 to 5 October 2021 (Relevant Period) between 62 and 69 CARs operated under Lanterne’s AFSL and between approximately 134 and 205 ARs operated under those CARs. During the Relevant Period the total funds under management of all CARS fluctuated between $1.2 billion in March 2021 and approximately $1.658 billion by the end of the Relevant Period.
Lanterne has admitted to the contraventions of ss 912A(1)(a), (ca), (d), (e), (f) and (h) and 912A(5A) of the Act and on 16 December 2022 the parties jointly prepared and filed a statement of agreed facts and admissions (SAFA) in support of liability pursuant to s 191 of the Evidence Act 1995 (Cth). The parties jointly seek declarations as to the admitted contraventions, and compliance orders. The parties disagree, however, on the pecuniary penalty that ought to be imposed on Lanterne for the contraventions. The quantum of the penalty is the primary issue to be determined.
In addition to declarations of the contravention and the compliance orders, ASIC seeks a total pecuniary penalty of $1.5 million. This represents a penalty of $300,000 for the contraventions of each of s 912A(1)(ca), (d), (e), (f) and (h) of the Act, each of which is a contravention of s 912A(5A) of the Act. ASIC does not seek a penalty for the contravention of s 912A(1)(a), by reason of the overlap between the factual matters relied on as the basis for the contravention of s 912A(1)(a) and the other contraventions. Lanterne submits that a total pecuniary penalty in this amount would be excessive and that an aggregate pecuniary penalty in the order of $150,000 (in effect $30,000 per contravention) would be more appropriate.
In support of its submissions on penalty, ASIC relies upon the following documents:
(a)the expert report of compliance and risk management expert Sarah Birkensleigh dated 28 October 2022 (Birkensleigh report);
(b)the SAFA dated 16 December 2022; and
(c)written submissions on liability, relief and penalties dated 28 April 2023.
Lanterne relies upon:
(a)affidavits of Mr Peter Cozens dated 5 April 2023 and 8 May 2023; and
(b)written submissions dated 8 May 2023.
For the reasons that follow there will be declarations and compliance orders substantially in the form sought by ASIC and agreed to by Lanterne. Insofar as the pecuniary penalty is concerned, I have formed the view that $150,000 would be an entirely insufficient penalty to impose. The contraventions in this case have been serious and they have been systemic. I have given careful consideration to whether the penalty of $1.5 million proposed by ASIC would, in all the circumstances, be appropriate. Although the matter is evenly balanced, ultimately I have formed the view that there are some factors which support a slightly lower penalty amount. Weighing matters carefully I have determined that Lanterne should be ordered to pay a total pecuniary penalty of $1.25 million; that is to say, $250,000 per relevant contravention. In these reasons I have drawn from the SAFA and, where appropriate, the written submissions of the parties.
THE PRINCIPAL STATUTORY PROVISIONS
Part 7.6 of Ch 7 of the Act concerns licensing of providers of financial services.
Pursuant to s 911A(1) of the Act, a person who carries on a financial services business in this jurisdiction must hold an AFSL covering the provision of the financial services. The “general obligations” of AFSL holders are set out in s 912A(1) relevantly as follows:
(1) A financial services licensee must:
(a)do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
…
(ca)take reasonable steps to ensure that its representatives comply with the financial services laws, except to the extent that:
(i)those representatives are insurance fulfilment providers; and
(ii)the financial services laws relate to the provision of claims handling and settling services by those representatives; and
…
(d)subject to subsection (4) – have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and
(e) maintain the competence to provide those financial services; and
(f)ensure that its representatives are adequately trained (including by complying with the CPD provisions), and are competent, to provide those financial services; and
…
(h)subject to subsection (5)—have adequate risk management systems;
…
A person contravenes s 912A(5A), which is a civil penalty provision, if the person contravenes, as here, s 912A(1)(a), (ca), (d), (e), (f), or (h) of the Act.
An AFSL holder may authorise a person to provide a specified financial service or financial services on behalf of the licensee: s 916A(1) of the Act. This authorisation may cover some or all of the financial services covered by the licensee’s AFSL: s 916A(2) of the Act. Where an AFSL holder authorises representatives under s 916A, it is the AFSL holder who remains responsible for complying with the “general obligations” in s 912A(1) of the Act.
AGREED FACTUAL BACKGROUND
Lanterne’s business
As has been mentioned, Lanterne operated a business in which it authorised others to operate as CARs and ARs under its own AFSL in exchange for fees. The CARs operating under Lanterne’s AFSL operated across a number of industries including renewable energy, infrastructure, transport and logistics, cyber and technology, healthcare, real estate and property, biotechnology and agriculture. The businesses operating as CARs under Lanterne’s AFSL included venture capital funds, managed investment schemes, agricultural advisory services, wholesale funds management services, corporate advisory services, wholesale property funds, energy trading funds, digital asset funds, and climate change advisory services. The fees typically charged by Lanterne during the Relevant Period to CARs were as follows:
(a)an initial upfront fee of $5,000 to become authorised under its AFSL, although this fee was reduced or waived in some instances;
(b)approximately 45% of CARs were charged ongoing fees of $3,000 per month; and
(c)the remaining CARs were charged ongoing fees of up to $2,500 per month.
Lanterne’s responsible manager
During the relevant period Mr Cozens was the only full time employee of Lanterne as well as its only active responsible manager. Mr Cozens was also the sole director and chief executive officer. Lanterne had three part time employees for various periods throughout the Relevant Period (and only two at any given time) whose roles were limited to administrative functions such as bookkeeping and administrative support. It would seem that for all effective purposes Mr Cozens was Lanterne.
Mr Cozens became Lanterne’s responsible manager in 2004 when Lanterne obtained its AFSL. Mr George Lucas was listed as a second responsible manager of Lanterne during the Relevant Period until 8 July 2021. However, Mr Lucas had no direct involvement in Lanterne’s business and did not carry out any duties or responsibilities during the Relevant Period. It is agreed that only Mr Cozens acted as Lanterne’s responsible manager in the Relevant Period.
Mr Cozens had not completed any formal qualifications. He applied for and obtained responsible manager status through a written submissions to ASIC as to his knowledge and skills for the role. ASIC considered and accepted Mr Cozens’ application and written submissions to be a responsible manager.
Lanterne had previously been a funds management business and at that time Mr Cozens worked as its chief operating officer. Mr Cozens had experience working as a stockbroker and was also the chief operating officer of LHC Capital Pty Ltd, a Wholesale Equities Funds Manager, from June 2012 to June 2013. LHC Capital was a CAR of Lanterne at that time.
It is an agreed fact that Mr Cozens did not have experience in all the businesses and industries in which Lanterne’s CARs and ARs operated.
Mr Cozens also acted and was registered with ASIC as a responsible manager for three other entities at times during the Relevant Period.
Lanterne’s processes, systems and resources
The SAFA outlines Lanterne’s processes, systems and resources, a summary of which is set out below.
Arrangements with new CARs
In respect of new CARs, Lanterne relied largely on referrals of prospective CARs from law firms and other persons. Lanterne conducted no discernible due diligence on the prospective CAR and only limited background checks on the entity’s directors. The SAFA notes that in some cases the CAR entity was incorporated at the same time, or only slightly before, it was appointed a representative of Lanterne and so no meaningful due diligence could be conducted. Background checks of the directors typically involved Mr Cozens interviewing a representative of the prospective CAR and Lanterne obtaining copies of identification documents, two references, an Insolvency Trustee Service Australia bankruptcy check, and police checks. It is agreed that Lanterne did not otherwise verify the information provided by prospective CARs about their directors’ or prospective ARs’ education, experience, or membership of professional bodies. The due diligence process was not documented.
When an entity became a CAR under Lanterne’s AFSL, the CAR was required to execute an agreement with Lanterne which set out the terms of the appointment and attached a copy of Lanterne’s AFSL. The agreement provided that CARs could nominate ARs with the written consent of Lanterne. It contained limited guidance about the legal obligations of CARs and ARs, was not tailored to the CAR’s particular industry, and was largely identical for each CAR.
Supervisory arrangements
Under the agreement, CARs were required to provide written confirmation each month to Lanterne about certain matters relating to risk and compliance and to attest that they had met their obligations under the agreement. As part of this reporting, CARs were required to report any “exceptions” to compliance. Mr Cozens sometimes conducted informal meetings with representatives of CARs and ARs, and in some of those meetings compliance was discussed. However, no minutes or notes were ever taken of those meetings. Lanterne was reliant on self-reporting by CARs and ARs, and did not have a documented process for recording or following up on any of the exceptions reported. There was also no formal or documented review or audit process to assess ARs compliance with financial services laws and nor did Lanterne have any structured or formal processes for monitoring or supervising its staff.
Risk management and compliance systems
Lanterne did not have a formal or documented risk management system. It did not have any systems or processes in place to enable it to identify and assess the various risks it faced, nor controls or other measures to manage and mitigate those risks.
Lanterne had two manuals in the Relevant Period: the AR Procedures Manual and a compliance procedures manual (Compliance Manual). The Procedures Manual contained inadequate guidance for ARs in relation to their financial services obligations and some measures Lanterne considered necessary to comply with those obligations. The Compliance Manual was out of date and did not reflect Lanterne’s business of authorising CARs and ARs to operate under its AFSL.
Lanterne did not have a documented or functional incident management process pursuant to which it could investigate any breaches notified to it by its CARs and ARs. Lanterne otherwise did not have any systems, processes or controls to identify, manage or mitigate compliance and regulatory risks faced by CARs and ARs. There was no independent governing body which could oversee and challenge decisions taken and practices adopted by Mr Cozens as the sole director and CEO of Lanterne.
Training
There was no training provided or offered to CARs and ARs by Lanterne, nor was there any training and competency program in place. Lanterne did not require any verification of, information about, or record of training undertaken by, its CARs and ARs. Nor did Lanterne have any internal resources capable of developing or implementing a training program, and it did not seek any third-party assistance prior to April 2021 to support it in doing so on any ongoing basis. Lanterne did, however, arrange for a third-party compliance consultant, Haystack Consulting, to prepare a marketing document offering training to ARs. This was circulated to CARs on 20 April 2021. Lanterne did not maintain a record of training undertaken by its CARs and ARs.
Human resources
Other than Mr Cozens, Lanterne did not have any employees with qualifications or experience in risk management or compliance. Lanterne did not outsource its risk management or compliance function to any third-party specialists, other than for the preparation of the Compliance Manual. Mr Cozens did have limited risk management experience in his previous role as chief operating officer of LHC Capital for around 12 months. Lanterne had insufficient human resources to monitor and supervise its CARs and ARs.
Mr Cozens, and Lanterne’s other employees, were not subject to any performance reviews to assess whether they understood their roles and compliance obligations, and to assess and remedy any skills gap. Mr Cozens performed all management roles, and so there was a lack of segregation of duties. There were no processes to identify human resourcing capabilities and requirements, nor for ensuring that there were an adequate number of suitably qualified responsible managers to oversee the financial services businesses operated by Lanterne or its CARs and ARs, or to ensure that responsible managers remained appropriately qualified.
Technological resources
Lanterne did not have:
(a)adequate information technology (IT) infrastructure to keep abreast of issues such as IT security or cyber security;
(b)an IT resources plan;
(c)a security management plan;
(d)an IT back-up protocol;
(e)a disaster recovery plan (for hard or soft copy records);
(f)any compliance software for its supervision and monitoring of CARs and ARs or general compliance purposes; or
(g)any internal dedicated IT capability (and nor did it outsource its IT function).
Until September 2020 Lanterne maintained its records using a paper filing system. Since September 2019 it has engaged a third-party IT provider to review the adequacy of its digital security and carry out improvements.
LANTERNE’S OBLIGATIONS AS HOLDER OF AN AFSL
Lanterne accepts that as the holder of an AFSL it had the following obligations.
Risk management systems
To comply with the obligation under s 912A(1)(h) of the Act to have adequate risk management systems, a financial services licensee in Lanterne’s position should have a risk management system which identifies and evaluates risks faced by its business, including the risks of non-compliance with financial services laws and the risks relating to its ARs and CARs.
The risk management system should include a documented risk management framework describing how the licensee manages risk (including regulatory, authorised representatives, operational and financial risk), together with risk management tools such as a risk matrix of key risks, and an incident management process.
The licensee’s risk management system should integrate a compliance management system to identify, evaluate and respond to regulatory risks, which is regularly reviewed.
A licensee in Lanterne’s position should implement and monitor controls designed to manage and mitigate the identified risks. A licensee should regularly review and, if necessary, update its analysis of risks. It should have regular independent oversight of its risk management systems.
A licensee needs to understand its own processes and controls for managing risk but also the processes and controls that its CARs and ARs have in place to manage their businesses, including that the financial services offered are within the scope of their authority and that their technology is sufficient, including cyber security arrangements.
Lanterne accepts that during the Relevant Period, it:
(a)failed to identify and assess the risks faced by its business, including the risks relating to its ARs and CARs;
(b)failed to document any identification or assessment of the risks faced by its business, including by failing to have a risk management framework and basic risk management tools;
(c)relied on initial background checks of directors of potential CARs, and monthly compliance self-assessments by the CARs, to monitor the CARs and ARs and identify risks associated with their conduct;
(d)failed to have an adequate compliance management system having regard to the nature, scale and complexity of its business and instead relied on a Compliance Manual which was out of date, inapplicable to Lanterne’s business, and omitted regulatory and compliance obligations of ARs and Lanterne as the licensee;
(e)failed to have any employees or officers with appropriate risk management expertise and failed to engage external consultants with risk management expertise for the purpose of risk management;
(f)failed to have any independent oversight or monitoring of its risk management systems; and
(g)otherwise failed to have adequate systems, processes or controls to manage or mitigate risks, including failing to have an incident management process.
Maintain competence to provide financial services
To comply with the obligation under s 912A(1)(e) of the Act to maintain competence to provide financial services, a financial services licensee in Lanterne’s position should have sufficient responsible managers with the skills and experience in the financial services offered by its CARs and ARs and across the industries and businesses in which they operate, with sufficient time to conduct their role effectively.
A licensee should have documented and implemented processes for assessing its responsible managers and for ensuring they remain appropriately qualified, including taking account of changes to the business over time.
Lanterne accepts that during the Relevant Period it:
(a)failed to have a sufficient number of responsible managers with appropriate expertise for the businesses operated by Lanterne and its CARs, for the financial services offered by its CARs, and for the number of CARs and ARs operating under Lanterne’s AFSL;
(b)failed to have responsible managers with sufficient time to conduct their roles effectively; and
(c)failed to have any processes for ensuring it had a sufficient number of responsible managers with appropriate expertise for the businesses operated by Lanterne and its CARs, for the financial services offered by its CARs, and for the number of CARs and ARs operating under Lanterne’s AFSL.
Adequate training
To comply with the obligation under s 912A(1)(f) of the Act to ensure its representatives are adequately trained and are competent to provide the financial services, a financial services licensee in Lanterne’s position should establish a training and competency program and process which documents the skills and competencies required by its ARs to provide the authorised financial services, and includes a needs analysis which assesses each AR against the documented required skills and competencies.
The licensee should develop and implement training programs, whether in-house or externally, which address the identified skills and competency needs, and which ensure those skills and competencies are maintained and kept up to date.
A licensee should maintain a record of training and assess the effectiveness of the training at least annually.
Lanterne accepts that during the Relevant Period it:
(a)failed to assess the skill and competency requirements of representatives of its CARs or ARs, and failed to take any or adequate steps to address those requirements;
(b)failed to provide or arrange any or adequate training, professional development or other instructional programs for its CARs and ARs; and
(c)relied only on the monthly reports completed by the CARs and ARs to satisfy itself that they had undertaken training, and did not request, obtain or inspect CARs’ or ARs’ training records or other evidence of relevant training.
Reasonable steps to ensure representatives comply with financial services laws
To comply with the obligation under s 912A(1)(ca) of the Act to take reasonable steps to ensure that its representatives comply with the financial services laws, a financial services licensee in Lanterne’s position should have an effective and documented process for background checks and due diligence of representatives of prospective CARs and ARs. The process should include recording all documentation, verifying all claims made (including education, qualifications and memberships of relevant bodies), obtaining police checks and conducting reference checks.
The licensee should conduct ongoing checks of its appointed ARs, to ensure they remain appropriate while acting as ARs.
The licensee should provide clear guidance and instructions to its CARs and ARs about their obligations regarding compliance with the financial services laws.
The licensee should design and implement an effective system for monitoring and supervising its CARs and ARs through a program of reviews and audits following a prescribed methodology. The frequency of audits should depend upon the risk assessment of each CAR and AR, with higher risk CARs and ARs reviewed and audited more frequently.
A licensee should also have a system for responding to negative audit findings, events and breaches, which should include preparing a rectification plan where necessary. Performance against any rectification plan should be monitored by an independent specialist.
A licensee in Lanterne’s position should also have processes in place to ensure its employees are complying with the financial services laws, including regular reviews, performance reviews and reports to management and the board identifying deficiencies and recommendations for remediation. There should also be an appropriate form of oversight over management and the responsible managers, ideally by the board of directors or an independent party.
Lanterne accepts that during the Relevant Period it:
(a)failed to have a documented and rigorous due diligence and background information check process for prospective CARs and ARs (such as verifying education, qualifications and memberships of relevant bodies);
(b)failed to conduct ongoing checks to ensure ARs remained appropriate;
(c)failed to provide adequate practical guidance to CARs and ARs about the nature, extent and discharge of their obligations under the financial services laws;
(d)failed to have a systematic and documented audit process, and failed to conduct regular audits of the CARs and ARs;
(e)failed to document the matters the subject of Mr Cozens’ informal discussions with the CARs and ARs;
(f)relied on pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and to identify risks associated with their conduct;
(g)failed to record or follow up any exceptions noted in the compliance self-assessments; and
(h)failed to conduct regular, or any, performance reviews of its employees, including Mr Cozens, to determine whether they understood their compliance obligations, and to remedy any gaps in their understanding and skills.
Resources
To comply with the obligation under s 912A(1)(d) of the Act to have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements, a financial services licensee in Lanterne’s position should, in relation to human resources, have systems and processes to ensure it understands its human resource needs, and implement a plan to fulfill those needs, which is regularly reviewed.
A licensee in Lanterne’s position requires human resources covering its basic functions of risk and compliance (particularly to supervise and monitor ARs); IT functions; financial management; and human resources. Absent internal capability, a licensee should obtain third-party specialist support. A licensee should have a documented performance management system, a staff training and development program, and a plan to deal with the loss of key persons.
Lanterne accepts that during the Relevant Period, in relation to human resources, it did not have:
(a)adequately trained and skilled compliance and risk management personnel (particularly to undertake audits and reviews of ARs and CARs);
(b)any human resources capability;
(c)adequate information technology capability, or adequate financial management capability, having regard to the nature and scale of its business;
(d)a human resources plan or process to establish and maintain the adequacy of its human resources;
(e)staff training, development plans or reviews, or contingency plans for the temporary or permanent absence of Mr Cozens.
In relation to technological resources, a licensee in Lanterne’s position should:
(a)document a technology resourcing plan based on an assessment of its hardware and software needs;
(b)undertake a security assessment, including cyber security;
(c)develop and implement a response to that assessment;
(d)develop and implement a disaster recovery plan;
(e)acquire and install necessary hardware and software relevant to its business operations and its number of employees; and
(f)regularly review its IT requirements to ensure the resources remain adequate and up to date and that systems are appropriately upgraded.
Lanterne accepts that during the Relevant Period, in relation to technological resources, it:
(a)failed to have a technology resourcing plan or up to date disaster recovery plan;
(b)relied on outdated back-up processes;
(c)failed to update its software to meet the needs of a business of its nature, scale and risk profile;
(d)until September 2020, relied on paper files and failed to use a suitable software system in its monitoring and supervision of ARs and CARs; and
(e)failed to have internal information technology capabilities, and had limited third-party support.
Other relevant matters
As a result of the matters which are the subject of the SAFA, Lanterne accepts that it put the ultimate clients of its ARs and CARs at risk of harm in relation to the financial services provided to them by the ARs and CARs under Lanterne’s AFSL. Significantly, Lanterne also accepts that it benefited by receipt of fees from its CARs, without applying those fees to ensure that the financial services provided under its licence were provided in accordance with the financial services laws.
THE CONTRAVENTIONS OF THE ACT
As has been mentioned, Lanterne has admitted that it breached the following obligations of an AFSL holder contained in s 912A(1) of the Act:
(a)to take reasonable steps to ensure that its representatives comply with the financial services laws: s 912A(1)(ca);
(b)to have available adequate resources (including technical and human resources) to provide the financial services covered by its financial service licence: s 912A(1)(d);
(c)to maintain the competence to provide the financial services covered by its financial services licence: s 912A(1)(e);
(d)to ensure that its representatives are adequately trained and competent to provide the financial services covered by its financial service licence: s 912A(1)(f); and
(e)to have adequate risk management systems: s 912A(1)(h).
ASIC does not press the allegation included in the Originating Process and Concise Statement dated 6 July 2022 that Lanterne breached its obligations under s 912A(1)(d) in respect of financial resources (the obligation to have available adequate financial resources). However, ASIC does press the allegation of a breach of s 912A(1)(d) in relation to technological and human resources of Lanterne.
Lanterne has also admitted that by the conduct which constituted the contraventions referred to above, Lanterne breached its obligation to do all things necessary to ensure the financial services covered by its AFSL were provided efficiently, honestly and fairly: s 912A(1)(a).
Lanterne admits that by each contravention of ss 912A(1)(a), (ca), (d), (e), (f) and (h), it contravened s 912A(5A) of the Act. This is the basis upon which ASIC and Lanterne have agreed to seek declarations of these contraventions from the court.
ASIC submits, and I accept, that only limited guidance may be obtained from other cases in which the general obligations under s 912A(1) of the Act have been considered. Obviously enough, the content of the general obligations, and the way a licensee may comply with the obligations, will depend upon the nature, scale and complexity of their business and the financial services they offer, as well as the particular circumstances of each case.
The parties are agreed as to the steps required to comply with the relevant obligations under s 912A(1) by a financial services licensee in Lanterne’s position, and about the way in which Lanterne contravened each provision.
Having regard to ASIC’s submissions, I turn then to the legal principles relevant to the various contraventions. Consistently with the approach adopted in ASIC’s submissions, I deal with the relevant contraventions of s 912A(1) of the Act in an order more conducive to an understanding of the conduct of Lanterne’s business which has resulted in the contraventions described above.
Section 912A(1)(h) – adequate risk management systems
Section 912A(1)(h) of the Act requires a licensee to have adequate risk management systems. In Australian Securities and Investments Commission v RI Advice Group Pty Ltd (2022) 160 ACSR 204, Rofe J approved orders agreed by the parties, and made the following observations about the scope of the obligation (at 215-216 [54]-[55]):
[54] Although s 912A(1)(h) does not appear to have been the subject of any relevant prior judicial consideration, the notion of “adequacy” again imports a normative standard of conduct against which the licensee’s performance can be judged. The particular focus of this provision is on “risk management systems”, and in the context of RI Advice, whose business is conducted on its behalf through its Authorised Representatives, this necessarily places the focus on the risks to Authorised Representatives, and the necessity for RI Advice to have “adequate” systems to manage those risks.
[55]The assessment of “adequate risk management systems”, in the context of cyber risk management, requires consideration of the risks faced by a business in respect of its operations and IT environment. As I have noted above in relation to s 912A(1)(a), cyber risk management is a highly technical area of expertise. While the standard of “adequacy” is ultimately one for the Court to decide, the Court’s assessment of the adequacy of any particular set of cyber risk management systems will likely be informed by evidence from relevantly qualified experts in the field.
Section 912A(1)(f) – adequate training and competence of representatives
Section 912A(1)(f) of the Act requires the licensee to ensure that its representatives are adequately trained and are competent to provide the financial services covered by the licence.
The obligations under s 912A(1)(f) have been considered and applied in several regulatory proceedings brought by ASIC, with the nature of the obligations dependent upon the particular circumstances of the entities concerned in those cases: see Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147 (ASIC v Westpac (BBSW)) (Beach J) at 317-324 [2490]-[2533]; Australian Securities and Investments Commission v Commonwealth Bank of Australia (2018) 128 ACSR 289 (Beach J) at 297 [48], 298 [57], see also orders 3 and 4; Australian Securities and Investments Commission v National Australia Bank Limited (2017) 123 ACSR 341 (Jagot J).
It has been said that subsections (1)(ca) and (f), in combination, suggest that the holder of an AFSL should undertake a continuing training program that is calculated to produce competent representatives or maintain their level of competence: see Avoca Consultants Pty Ltd v Millennium3 Financial Services Pty Ltd (2009) 179 FCR 46 at 105 [344] (Barker J); Australian Securities and Investments Commission v NSG Services Pty Ltd (2017) 122 ACSR 47 at 55 [31] (Moshinsky J); ASIC v Westpac (BBSW) at 317 [2490].
Section 912A(1)(ca) – reasonable steps to ensure representatives’ compliance
Section 912A(1)(ca) of the Act provides that a financial services licensee must take reasonable steps to ensure representatives comply with financial services laws. “Financial services laws” is broadly defined in s 761A to include a provision of Chapters 5C, 5D, 6, 6A, 6B, 6C, 6D, 7 or 8A of the Act and Division 2 of Part 2 of the Australian Securities and Investments Commission Act 2001 (Cth).
I accept ASIC’s submission that as a matter of statutory construction, there is nothing in the language of s 912A(1)(ca) that makes proven contraventions of any financial services law a precondition to a finding of contravention of s 912A(1)(ca). Accordingly, there can be a failure to take reasonable steps to procure compliance without proof that the failure led to an actual contravention of the other provisions: Australian Securities and Investments Commission v Financial Circle Pty Ltd (2018) 131 ACSR 484 at 508 [123] (O’Callaghan J) (ASIC v Financial Circle). In the present case, ASIC does not allege that any of Lanterne’s representatives contravened any financial services laws.
The obligations under s 912A(1)(ca) of the Act have been considered and applied in several regulatory proceedings brought by ASIC: see Australian Securities and Investments Commission v Westpac Banking Corporation (Omnibus) (2022) 407 ALR 1 (Beach J) (ASIC v Westpac (Omnibus)); ASIC v Westpac (BBSW); ASIC v Financial Circle; Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) (2021) 156 ACSR 371 (Moshinsky J) (RI Advice (No 2)).
In ASIC v Westpac (Omnibus), Beach J observed that what steps are reasonable will depend upon the nature of the obligation to be complied with, and the circumstances of the licensee. His Honour held that while the precise content of the obligation has not received detailed consideration (at 17 [76]):
[s 912A(1)(ca)] may be taken to impose an obligation to establish an adequate system for the supervision of representatives, as well as policies and procedures that are designed to address identified or reasonably identifiable risks of non-compliant conduct by representatives.
Justice Beach accepted that by failing to have in place adequate risk management procedures directed to detecting breaches of particular aspects of the financial services laws, and directed to monitoring internal controls, Westpac had failed to take reasonable steps to ensure that its representatives complied with the financial services laws: ASIC v Westpac (Omnibus) at 66 [514]-[516], see also orders 3 to 6 made in NSD 1241 of 2021.
ASIC submits, and I accept, that there are some similarities between the conduct in this matter and the contravening conduct in Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 3) (2020) 275 FCR 57 (Beach J) (ASIC v AGM Markets). In that case, AGM held an AFSL and it had authorised two other defendants as CARs under the AFSL, which were authorised to provide financial product advice. The CAR defendants provided the advice to clients via “account managers”, whom the CARs engaged. The court found that AGM had outsourced to the account managers certain key functions for providing financial product advice to its clients, making the observation that “the responsibility for ensuring that the advice was provided in a fair, honest and efficient manner remained with AGM. AGM could outsource the function but not its responsibility under its AFSL”: ASIC v AGM Markets at 146 [493].
In ASIC v AGM Markets, Beach J concluded that AGM failed to comply with s 912A(1)(a) and (ca) by reason of, among other matters, the following conduct (at 146-148 [487]-[504]):
(a)the training provided to the account managers was inadequate, and while there was some initial effort by AGM to ensure that account managers received adequate training, there was no evidence that the AMs in fact received the training or that AGM took any steps to follow up on its initial admonition that such training should occur.
(b)prior to the provision of any services by the CARs or the account managers on AGM’s behalf, AGM should have undertaken due diligence on all the entities that provided the account managers. The due diligence should have confirmed that the CARs and all the account managers had sufficient resources to provide the outsourced functions, had the requisite knowledge of the Australian financial services laws, and understood the obligations they were being given as a representative of an AFSL holder. AGM should have been confident that the CARs and all AMs could provide the services fairly, honestly and efficiently, in accordance with AGM’s obligations under its AFSL, prior to any services being provided.
(c)AGM should have ensured that prior to any services being provided by the account managers, adequate training had been undertaken by all account managers. AGM should have ensured the training was completed to meet the obligations of its AFSL.
(d)AGM should have had in place a system for monitoring the activities of its CARs and all account managers when providing financial product advice. This system should have included regular monitoring and review of telephone conversations, emails and any other communications between the account managers and the clients.
(e)The compliance departments of AGM and its CARs should have ensured they had a close working relationship.
In Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd (No 2) (2018) 124 ACSR 351 (ASIC v Wealth & Risk Management), Moshinsky J accepted that a financial services licensee providing financial advice should have a compliance framework which included:
(a)policies and procedures addressing and providing guidance on the statutory requirements for provision of financial advice;
(b)regular and targeted risk-based monitoring and supervision of ARs;
(c)effective ongoing training;
(d)effective record keeping; and
(e)regular reviews of the providers’ measures, processes and procedures.
Justice Moshinsky accepted that the financial services provider in that case had serious deficiencies in its compliance manual, training and supervision, and registers. His Honour found that the defendant had failed to take reasonable steps to ensure its representatives’ compliance with the financial services laws, and had failed to ensure the financial services were provided efficiently, honestly and fairly: ASIC v Wealth & Risk Management at 372-373 [111]-[113].
In ASIC v Financial Circle, O’Callaghan J approved a settlement and made proposed orders by consent, to the effect that Financial Circle had failed to take reasonable steps to ensure its representatives complied with financial services laws in contravention of s 912A(1)(ca) by the following conduct, among other matters (at 496-498 [59]-[67]):
(a)Financial Circle’s compliance manual failed to provide detailed, practical and specific guidance on how advisers could ensure they complied with the law;
(b)Financial Circle’s conflicts register did not adequately identify conflicts of interest, address the impact of conflicts or give adequate guidance on how conflicts should be managed;
(c)Financial Circle’s complaints register, and incidents register did not facilitate Financial Circle identifying, remediating or reporting on the underlying causes of the complaints or incidents; and
(d)Financial Circle did not provide formal or substantive training to advisers on their obligations to comply with the financial services laws.
Section 912A(1)(d) – adequate resources
Section 912A(1)(d) provides that a financial services licensee must have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the license and to carry out supervisory arrangements.
There do not appear to be any decisions in which the court has considered the scope and content of s 912A(1)(d), although adapting the court’s analysis in RI Advice at 215 [54]-[55] in the context of s 912A(1)(h), the notion of adequacy may be said to import a normative standard of conduct against which the licensee’s performance can be judged. The focus of this provision is on the resources (relevantly human and technological) required to provide the applicable financial services (which in this case are provided by ARs and CARs) and to carry out supervisory arrangements. The standard of adequacy is ultimately one for the court to decide, informed where appropriate by qualified experts in the field.
Section 912A(1)(e) – maintaining competence
Section 912A(1)(e) requires licensees to maintain the competence to provide the financial services covered by its licence.
ASIC Regulatory Guide 105 (RG 105) addresses what a licensee must do to comply with this provision. By way of overview, RG 105 (unexceptionally, it may be observed) provides that a licensee must have responsible managers with sufficient knowledge and skills in relation to the financial services provided by the licensee, having regard to the size of the business and the financial services and products provided.
In Australian Securities and Investments Commission v National Australia Bank Limited [2021] FCA 1013 (Davies J), the court considered s 912A(1)(e) and made declarations of contravention by consent.
The case relevantly concerned the NAB’s failure to establish and maintain documented policies, procedures and systems which were adequate to identify whether it had provided review services in accordance with ongoing service agreements and financial disclosure statements, and whether it was prohibited from charging clients ongoing fees. Davies J accepted the parties’ joint submissions that (at [46]):
[C]ompetence to provide financial services in a financial planning context does not only extend to the qualitative standard of substantive advice provided, but also to competence to comply with statutory and contractual obligations applicable to the provision of financial advice. The admitted compliance deficiencies thus bore upon NAB’s competence to provide the review services, pursuant to its ongoing fee arrangements.
Section 912A(1)(a) – provision of financial services efficiently, honestly and fairly
Section 912A(1)(a) requires a financial licensee to do all things necessary to ensure the financial services covered by its license are provided efficiently, honestly and fairly.
The provision has been interpreted as follows:
(a)the words “efficiently, honestly and fairly” connote a requirement of competence in providing advice and in complying with relevant statutory obligations;
(b)the word “efficient” refers to a person who performs his duties efficiently, meaning the person produces the desired effect, and is capable and competent. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect;
(c)it is not necessary to establish dishonesty in the criminal sense. The word “honestly” may comprehend prevention of conduct which is not criminal, but which is morally wrong in the commercial sense; and
(d)the word “honestly” when used in conjunction with the word “fairly” tends to give the flavour of a person who not only is not dishonest, but also is ethically sound.
See generally Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206 at 225 [69], [70] (Foster J) (ASIC v Camelot); Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209 at 337-338 [673]-[674] (Edelman J) (ASIC v Cassimatis); ASIC v Financial Circle at 510 [137]; Australian Securities and Investments Commission v Westpac Securities Administration Limited, in the matter of Westpac Securities Administration Limited (2019) 133 ACSR 1 at 87-90 [413]-[426] (Gleeson J); ASIC v AGM Markets at 148-149 [505]-[512].
In ASIC v Westpac (BBSW) at 294 [2350], Beach J confirmed that:
… a contravention of the “efficiently, honestly and fairly” standard does not require a contravention or breach of a separately existing legal duty or obligation, whether statutory, fiduciary, common law or otherwise. The statutory standard itself is the source of the obligation.
Consistently with this, the other authorities on s 912A(1)(a) emphasise that the section does not require dishonesty in the traditional or criminal sense: ASIC v Camelot at 225 [69(d)], 226 [72]; ASIC v Cassimatis at 337 [673]. In Australian Securities and Investments Commission v Westpac Securities Administration Limited (2019) 272 FCR 170 at 210 [173] (ASIC v Westpac Securities), Allsop CJ observed that the section reflects a legislative policy of promoting adherence to social or commercial norms or standards of behaviour; but see ASIC v AGM Markets at [518]-[519] (Beach J). Contravention does not rely on any proof or finding of intent, rather it is determined by reference to objective circumstances. Accordingly, a finding of contravention of s 912A(1)(a) can be made even though it is not shown that the contravener engaged in an intentional wrong: Australian Securities and Investments Commission v MLC Nominees Pty Ltd (2020) 147 ACSR 266 at 276 [51] (Yates J).
In the first decision considering a contravention of s 912A(1)(a) after it became a civil penalty provision, although it was a decision in which contraventions were admitted and orders were sought by consent, Beach J held that there was no good reason not to apply the existing authorities about the scope of the provision; including his Honour’s own observations about the provision in ASIC v AGM Markets: ASIC v Westpac (Omnibus) at 13-15 [60]-[61].
As ASIC submits, the authorities have predominantly emphasised that the words “efficiently, honestly and fairly” must be read as a compendium describing a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672 (Young J); ASIC v AGM Markets at 148 [506], 149 [516]. However, contrary views have more recently been expressed. In ASIC v Westpac Securities the Full Court considered s 912A(1)(a). O’Bryan J expressed “considerable reservations” about the view that the phrase should be construed compendiously in that manner: ASIC v Westpac Securities at 267 [424], [426]; but cf Allsop CJ at 209 [170].
In subsequent consideration of s 912A(1)(a), single judges of this court have found it unnecessary to resolve this question, and have observed that it is best left for an appropriate circumstance for resolution: see Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 3) [2020] FCA 1421 at [48] (Allsop CJ); RI Advice (No 2) at 473-474 [377] (Moshinsky J); Australian Securities and Investments Commission v MobiSuper Pty Ltd [2021] FCA 855 at [39] (Jackson J); Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [2023] FCA 1150 at [52]-[57] (Beach J). In ASIC v Westpac (Omnibus), Beach J stated that, given the section has civil penalties attached, if there was any ambiguity as to whether the expression is to be interpreted compendiously (which his Honour considered there was not), that ambiguity should be resolved in favour of a compendious approach: ASIC v Westpac (Omnibus) at 16 [66].
It is not necessary to resolve this issue for the purposes of the present case given that Lanterne’s conduct by which it contravened the various subsections of s 912A(1) addressed above are the basis for its contravention of s 912A(1)(a). No additional conduct is relied upon.
ASIC submits and I accept that whether the statutory phrase in s 912A(1)(a) is to be construed compendiously does not affect whether Lanterne contravened s 912A(1)(a). Regardless of the construction adopted, the authorities on s 912A(1)(a) emphasise that the section does not require dishonesty in the criminal sense. The aggregated contravening conduct of Lanterne outlined above satisfies the requirement that the financial services were not being provided “honestly” in this sense of this provision.
It may be accepted that Lanterne’s conduct fell well short of the reasonable standard of performance of an AFSL holder, which the public is entitled to expect. It failed to demonstrate competence in performing its obligations as an AFSL holder and competence in complying with its applicable statutory obligations. It thereby failed to provide financial services “efficiently, honestly and fairly” within the meaning of that term in s 912A(1)(a) of the Act.
DECLARATIONS
The court’s power
The court has a wide discretionary power to make declarations pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act): Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790 at [152] (Beach J) (ASIC v CBA). See also s 1101B(1) of the Act and Wellington Capital Limited v Australian Securities and Investments Commission (2014) 254 CLR 288 at 298-299 [10] (French CJ, Crennan, Kiefel and Bell JJ); Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 at [478] (Sackville AJA); ASIC v Financial Circle at 513 [155].
Section 1317E(1) of the Act requires the Court to make a declaration of contravention if it is satisfied that a person has contravened a civil penalty provision of that Act. Subsection 1317E(2) prescribes the matters which must be specified in the declaration.
Relevant principles
In Australian Securities and Investments Commission v Mercer Financial Advice (Australia) Pty Ltd [2023] FCA 1453 at [52]-[54] I outlined the principles relevant to the making of declarations in the present circumstances. What follows is drawn in substantial part from my reasons in Mercer.
The utility of declarations which set out the particular liability found and the basis for the penalties ordered is well established: see Australian Securities and Investments Commission v Axis International Management Pty Ltd (2009) 178 FCR 485 at 491-496 [26]-[43] (Gilmour J) and, more generally, Rural Press Limited v ACCC (2003) 216 CLR 53 at 92 [95] (Gummow, Hayne and Heydon JJ); Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex relatione Corporate Affairs Commission (1981) 148 CLR 121 at 125 (Mason J), 144-5 (Wilson J); Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89 at 97-9 (Sheppard J), 106 (Foster J), 107 (Hill J); Stuart v Construction, Forestry, Mining and Energy Union (2010) 185 FCR 308 at 322 [35] (Moore J), 334 [94] (Besanko and Gordon JJ); Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 at 388 [35] (Greenwood, Logan and Yates JJ); and Australian Securities and Investments Commission v Allianz Australia Insurance Limited [2021] FCA 1062 at [120]-[121] (Allsop CJ).
In Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68 (ABCC v CFMEU), the Full Court stated (at 87 [90]):
The fact that the parties have agreed that a declaration of contravention should be made does not relieve the Court of the obligation to satisfy itself that the making of the declaration is appropriate. … It is not the role of the Court to merely rubber stamp orders that are agreed as between a regulator and a person who has admitted contravening a public statute...
(Citations omitted.)
The Full Court continued (at 87 [93]):
Declarations relating to contraventions of legislative provisions are likely to be appropriate where they serve to record the Court’s disapproval of the contravening conduct, vindicate the regulator’s claim that the respondent contravened the provisions, assist the regulator to carry out its duties, and deter other persons from contravening the provisions…
(Citations omitted.)
In Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437-438, Gibbs J, referring to Lord Dunedin’s summary of the Scottish rules in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448, accepted that there are three requirements that should be satisfied before the discretion is exercised in favour of making a declaration:
(a)the question must be a real and not a hypothetical or theoretical one;
(b)the applicant must have a real interest in raising it; and
(c)there must be a proper contradictor.
See also Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 at [70]-[76] (Gordon J); MLCNominees at 284 [110]; Rural Press at 92 [95]; Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2007] ATPR 42-140, [2006] FCA 1730 at [6] (Nicholson J) and the cases there cited, applied in ABCC v CFMEU at 87 [93].
The High Court considered the principles applicable to the making of civil regulatory orders by consent in Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 (the Agreed Penalties Case) (French CJ, Kiefel, Bell, Nettle and Gordon JJ). The High Court there emphasised (at 503-504 [46]) the important public policy involved in promoting predictability in the outcome of civil penalty proceedings.
The principles are not confined to agreed submissions on pecuniary penalties, but apply equally to agreement on other forms of relief. It may be accepted that the High Court’s conclusions in the Agreed Penalties Case as to the desirability of acting upon agreed penalty submissions were made in the context of broader recognition that civil penalties were one of several forms of relief which regulators could choose and pursue as a civil litigant in civil proceedings: at 495 [24], 507-508 [57]-[59], 509 [63], 521 [103], 522-523 [107]. ASIC submits, and I accept, that this approach is consistent with the long-standing judicial support for agreed positions on declarations, injunctions and other relief in civil penalty proceedings: see for example NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (Burchett, Carr and Kiefel JJ).
The proposed declarations
ASIC proposes declarations in the following terms:
1.Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and s 1317E of the Corporations Act 2001 (Cth), during the period 13 March 2019 to 5 October 2021 (the Relevant Period), Lanterne Fund Services Pty Limited breached its obligation to have adequate risk management systems, and thereby contravened ss 912A(1)(h) and 912A(5A) of the Corporations Act by:
(a)failing to identify and assess the risks faced by its business, including the risks relating to its corporate authorised representatives (CARs) and authorised representatives (ARs);
(b)failing to document any identification or assessment of the risks faced by its business, including failing to have a risk management framework and basic risk management tools;
(c)relying on initial due diligence of directors of potential CARs and pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and identify risks associated with their conduct;
(d)failing to have an adequate compliance management system having regard to the nature, scale and complexity of its business and instead relying on a compliance manual which was out of date, inapplicable to its business, and omitted regulatory and compliance obligations of CARs, ARs and Lanterne;
(e)failing to have sufficient employees or officers with appropriate risk management expertise and failing to engage external consultants with risk management expertise for the purpose of risk management;
(f)failing to have any independent oversight or monitoring of its risk management systems; and
(g)otherwise failing to have systems, processes or controls to manage or mitigate risks, including failing to have an incident management process.
2.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to do all things necessary to maintain competence to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(e) and 912A(5A) of the Corporations Act, by:
(a)failing to have responsible managers with sufficient time to effectively conduct their roles;
(b)failing to have a sufficient number of responsible managers with appropriate knowledge and skills across the financial services offered by Lanterne's CARs and in the industries and businesses operated by Lanterne's CARs; and
(c)failing to have any processes for ensuring it had appropriately qualified managers.
3.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to ensure that its representatives were adequately trained and competent to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(f) and 912A(5A) of the Corporations Act by:
(a)failing to assess the skill and competency requirements of its ARs, and failing to take any or adequate steps to address those requirements;
(b)failing to provide or arrange any or adequate training, professional development or other instructional programs for its CARs and ARs; and
(c)relying only on monthly self-assessment compliance reports completed by the CARs and ARs to satisfy itself that they had undertaken training, and not requesting, obtaining and inspecting CARs or ARs' training records or other evidence of relevant training.
4.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to take reasonable steps to ensure that its representatives complied with the financial services laws, and thereby contravened ss 912A(1)(ca) and 912A(5A) of the Corporations Act by:
(a)failing to have a documented and rigorous due diligence and background check process for prospective CARs and ARs, and failing to conduct ongoing checks to ensure ARs remained appropriate;
(b)failing to provide clear and practical guidance to CARs and ARs about the nature, extent and discharge of their obligations under the financial services laws;
(c)failing to have a systematic and documented audit process, and failing to conduct regular audits of the CARs and ARs;
(d)failing to document the matters the subject of its informal discussions with the ARs;
(e)relying on pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and identify risks associated with their conduct; and
(f)failing to record or follow up any exceptions noted in the compliance self-assessments; and
(g)failing to conduct regular performance reviews of its employees, management or responsible manager.
5.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, Lanterne breached its obligation to have available adequate resources (including technological and human resources) to provide the financial services covered by its financial services licence, and thereby contravened ss 912A(1)(d) and 912A(5A) of the Corporations Act, by:
(a)failing to have adequately trained and skilled compliance and risk management personnel, (particularly to undertake audits and reviews of CARs and ARs);
(b)failing to have an adequate information technology capability and any human resources capability having regard to the nature and scale of Lanterne's business;
(c)failing to have a human resources plan or process to establish and maintain the adequacy of Lanterne's human resources;
(d) failing to have staff training, development plans or reviews;
(e)failing to have plans for the temporary or permanent absence of its only operational responsible manager who also held the position of managing director;
(f)failing to have a technology resourcing plan or an up-to-date disaster recovery plan, and relying on outdated back up processes;
(g)failing to update its software to meet the needs of a business of its nature, scale and risk profile; and
(h)until September 2020, relying on paper files and records and failing to use a suitable software system in its monitoring and supervision of CARs and ARs.
6.Pursuant to s 21 of the FCA Act and s 1317E of the Corporations Act, during the Relevant Period, by the conduct alleged in:
(a) paragraphs 1(a) to (g);
(b) paragraphs 2(a) to (c);
(c) paragraphs 3(a) to (c);
(d) paragraphs 4(a) to (g); and/or
(e) paragraphs 5(a) to (h),
together, or in any combination, Lanterne breached its obligation to do all things necessary to ensure the financial services covered by its financial services licence were provided efficiently, honestly and fairly, and thereby contravened ss 912A(1)(a) and 912A(5A) of the Corporations Act.
Regarding the ongoing failure to remedy the contraventions, Lanterne submits that it has taken steps towards compliance and that ASIC acknowledges this, although the exercise is not yet complete. Lanterne contends that the significance of this consideration in assessing penalty is low in circumstances where it has been aware of and accepted ASIC’s proposed regime (that is, the appointment of an independent expert review and the requirement to implement recommendations.)
In relation to contrition, Lanterne’s counsel referred to Mr Cozens’ affidavit of 8 May 2023 in which he deposed that:
(a)he is uncertain how ASIC formed the impression that he failed to demonstrate contrition and does not consider that to be an accurate impression for ASIC to have formed;
(b)when the proceedings were commenced by ASIC Lanterne moved quickly to seek to agree relevant facts and make admissions of contraventions where appropriate;
(c)Lanterne’s approach to agreeing facts and making admissions was motivated by a recognition that many of its systems and processes for managing risk were inadequate and required improvement;
(d)the contraventions the subject of the SAFA were unintentional and Lanterne at all times was seeking to manage the risk associated with CARs;
(e)Lanterne had failed to implement and document appropriate systems and controls;
(f)he regrets the contraventions that have occurred; and
(g)Lanterne is committed to rectifying its risk and compliance frameworks and ensuring its business is “unquestionably compliant”.
In relation to the suggestion that Lanterne may have delayed in making changes and not yet fully grasped the importance of ensuring its compliance with the general obligations of an AFSL holder, Mr Cozens deposed in his affidavit of 8 May 2023 that:
(a)Lanterne has sought to address many areas of concern to ASIC including updating its systems and processes for recording information provided by CARs and ARs, updating the training program, appointing a second responsible manager and engaging Xenia;
(b)Lanterne is aware of the compliance orders sought in this proceeding, has agreed to those orders, and has been operating on the assumption that through that process it would identify all matters which it was necessary to address and then be in a position to implement the necessary program of work.
Lanterne’s position is that general deterrence does not justify a penalty of $1.5 million where there is no evidence that it saved $1.5 million during the Relevant Period by reason of its contraventions. Lanterne submits that when weighing up whether to contravene rather than incur the costs of implementing proper systems, a person would consider the proportionate size of the penalty compared to revenue and profits as well as the other costs of the contraventions, such as the cost of the mandatory compliance regime and the adverse effect of declarations of contravention.
Lanterne rejects ASIC’s submission that the present case is important to establish the standards required of licensees in the future in the context of general deterrence and submits that the declarations made in this case in light of the admissions in the SAFA will serve to establish those standards. Lanterne submits that the size of the penalty does not inform this consideration.
In relation to specific deterrence, Lanterne has indicated that it intends to continue to operate its business, however it submits that it will do so subject to the proposed compliance regime. Lanterne submits that the penalty will not be an acceptable cost of doing business because it will not be doing business on the same basis going forward. Mr Cozens deposed in his affidavit of 8 May 2023 that ASIC’s proposed penalty would represent a very significant adverse financial impact on the business and would be what he expects to be between two and three years of anticipated future profit, which would be a significant imposition and threat to the future viability of the business.
In response to ASIC’s submissions regarding Lanterne’s financial position, Lanterne contends that the purpose of civil penalties is not to punish, nor to ensure disgorgement of profits. Lanterne submits that in any event ASIC accepts that it is not possible to identify the precise benefit it gained from the contravening conduct and in these circumstances it is difficult to see how a $1.5 million penalty could be appropriate. Further it is said that whether Lanterne would see the penalty as an acceptable cost of doing business must take into account the cost to Lanterne of the declaratory and mandatory compliance orders, and that the proceedings have had and will continue to have a substantial detrimental effect on Lanterne.
Lanterne submits that the fact that it has not been found to have engaged in contraventions previously supports a lower penalty, and it is not clear where and how these matters have been recognised and taken into account in the proposed $1.5 million figure. These matters are said to support a much lower figure.
Lanterne also submits that ASIC’s submission regarding the risk of harm to consumers posed by the contravening conduct downplays the relevance of the fact that there is a lack of evidence of actual harm. Lanterne contends that the significance of an absence of evidence of loss depends on the circumstances, and that ASIC v MobiSuper can be distinguished from the present case. Lanterne submits that there is no evidence and no suggestion in this case that its clients were not adequately trained, not competent, or did not comply with their financial services obligations in dealing with investors. Lanterne also contends that it did not entirely disregard training, competence and compliance of its clients; rather it addressed those matters informally such that the lack of harm cannot be said to be happenstance. Lanterne submits that the absence of evidence that investors suffered harm is relevant to the determination of penalty, and that an absence of such evidence cannot be used to justify ASIC’s proposed penalty of $1.5 million. Rather, so Lanterne submits, the absence of evidence is a factor supporting the appropriateness of a lower penalty.
Insofar as the assessment of penalty is concerned, Lanterne contends that ASIC’s submissions take an unduly narrow view of the course of conduct principle. Lanterne submits that different provisions will by their nature focus on different aspects of conduct, but that this is where the principle operates. It is Lanterne’s position that there is substantial overlap or interrelationship between the various contraventions. Lanterne submits that the contraventions overlap with each other such that a separate penalty for each of the contraventions would penalise Lanterne more than once for substantially the same wrongdoing. Lanterne also emphasises that it is appropriate and necessary to ensure that the total penalty imposed reflects and is proportionate to the seriousness of the conduct and is no more than what is necessary to achieve the objective of deterrence. Consequently, Lanterne submits that there is substantially one course of conduct which is at the lower end of any scale of seriousness such that a penalty of $1.5 million is substantially disproportionate to the conduct as a whole and relative to the significance of that amount for Lanterne.
While acknowledging that other cases are of limited assistance, Lanterne emphasises that the penalty imposed in ASIC v Mobisuper was at the bottom end of the appropriate range at $125,000. Lanterne submits that that case involved a situation where consumers were misled and subjected to an identified specific risk of causing significant harm and that the contraventions in that case were more serious than those in the present case such that it is hard to see how the range in this case could extend to ASIC’s proposed amount of $1.5 million.
The appropriate pecuniary penalty
The process of intuitive synthesis involved in deriving a penalty figure having regard to the relevant factors requires a weighing together of all relevant factors rather than an arithmetical algorithmic process that starts from some pre-determined figure then makes incremental additions or subtractions for each factor according to a set of predetermined rules: Murray Goulburn at [36]-[37] (Beach J). As has been mentioned, the process requires a consideration of all factors taken together by reference to the civil penalty provisions contravened, in their statutory context.
As I have indicated, in all the circumstances I accept ASIC’s submission, informed by Ms Birkensleigh’s report, that Lanterne’s comprehensive failures to comply with its fundamental obligations as a licensee merit a significant pecuniary penalty in order to satisfy the requirements of general and specific deterrence. Lanterne, and other licensees, must be deterred from disregarding their statutory obligations and putting the ultimate consumers of the relevant financial services at real risk of harm.
Taking all relevant matters into account, including a limited number of mitigating factors, I have concluded that a pecuniary penalty of $1.5 million is probably somewhat more than would be required to achieve the necessary deterrent effect and may thus be said to be inappropriate. Yet a pecuniary penalty of $150,000 would be little more than derisory and for that reason would be wholly inappropriate. As I explain below, I consider that an aggregate pecuniary penalty of $1.25 million is appropriate in all the circumstances.
Maximum penalty
In considering the quantum of the pecuniary penalty to be imposed on Lanterne for its admitted contraventions I have had regard to the maximum penalty prescribed by s 1317G for contraventions in the Relevant Period. I have also had regard to statements of the plurality in Pattinson, including those to the effect that:
(a)there is no place for a “notion of proportionality” in a civil penalty regime (at 457 [10] and 468 [41]-[42]);
(b)insistence upon the deterrent quality of a penalty should be balanced by insistence that it “not be so high as to be oppressive” (at 467-468 [40], citing NW Frozen Foods at 293);
(c)it is necessary to have regard to the circumstances of the contravenor and the contravention (at 474 [60]);
(d)contrition and substantial changes in an organisation’s personnel may mean that a more modest penalty is appropriate (at 470 [47]); and
(e)what is required is “some reasonable relationship between the theoretical maximum and the final penalty imposed” (citing Reckitt at 63 [156]), which will be established where the penalty does not exceed what is reasonably necessary to achieve the purpose of the provision, being the deterrence of future contraventions of a like kind by the contravener and others (citing NW Frozen Foods at 293) (at 457 [10]).
What follows should be understood in this context.
The nature, extent and circumstances of the contravening conduct
Considered as a whole, the conduct which is the subject of the proceeding and which has been described above was extensive and serious. The fact that ASIC has not revoked Lanterne’s AFSL is beside the point. I accept ASIC’s submission that the failures leading to each contravention were striking in circumstances where they were so comprehensive and consisted of failures to comply with fundamental obligations of a licensee, being the very thing that formed the basis of the business. The failures have occurred over an extended period and involved Lanterne’s senior officer. There has also been an ongoing failure on the part of Lanterne to remedy the contravening conduct. These factors weigh in favour of a significant pecuniary penalty.
I do not accept Lanterne’s submission that the contraventions are on the “less serious” end of the spectrum. Putting to one side whether or not this submission was an attempt to downplay the seriousness of the conduct (as ASIC submits it was), the failures were clearly comprehensive and at the more serious end. Lanterne had no risk management system, scant processes for compliance, informal and largely undocumented processes for vetting new ARs and supervising and monitoring CARs, as well as minimal staff and technological resources. It is no answer for Lanterne to say that potential clients were only accepted if Mr Cozens was satisfied that they would comply with their obligations if this was never effectively monitored. Lanterne was content to take the benefit of the fees, but it was not prepared to invest some of them in appropriate compliance systems. Lanterne’s admitted contraventions of s 912A(1) of the Act constituted substantial failures and they are unacceptable.
As has been mentioned, ASIC contends that Mr Cozens has been at least reckless as to Lanterne’s obligations as an AFSL holder. Lanterne rejects this characterisation, submitting that the contraventions were careless, but not deliberate. In my assessment it is unnecessary to determine whether it is appropriate to describe Lanterne’s failure to comply with its statutory obligations as reckless, and I have not proceeded on the basis that it was reckless. The real point which must be reflected in the penalty imposed is that these obligations were effectively ignored by Lanterne and in consequence the ultimate consumers of financial services were exposed to risks which could have been mitigated had there been compliance with the requirements of s 912A(1) of the Act. This requires a substantial penalty.
Although Lanterne’s contraventions were serious, I accept that Lanterne has taken some steps to remediate the deficiencies in its processes and procedures and has agreed to a compliance regime to be ordered by the court. Importantly, Lanterne has cooperated with ASIC in these proceedings, has not been found to have contravened the Act before, has agreed the relevant background facts and has admitted the relevant contraventions. These are, in my assessment, matters of significance. I regard these aspects of Lanterne’s conduct as supporting a slightly lower penalty than ASIC proposes, even if Lanterne has not yet implemented its new regime of compliance.
Course of conduct and totality principle
Lanterne submits that there are aspects of the contravening conduct that overlap such that the course of conduct principle should apply. In particular, Lanterne contends that the principle operates where there is an interrelationship between the factual and legal elements of two or more contraventions, and that there is a substantial overlap or interrelationship in this case between the subject matter of the contraventions. In all the circumstances, however, I do not consider that the course of conduct principle is of assistance in assessing the appropriate penalty and I do not accept Lanterne’s submissions on this point. As Moshinsky J observed in ASIC v AMP at 91 [122]:
[T]he “course of conduct” principle does not have paramountcy in the process of assessing an appropriate penalty. It cannot operate as a de facto limit on the penalty to be imposed for contraventions of civil penalty provisions of (in this case) the ASIC Act. The present case is one where, even if the conduct can be described as a single “course of conduct”, the contravening conduct affected a large number of members and involved the wrongful deduction of (in total) a substantial sum of money. In my view, in the circumstances of this case, the preferable approach is to have regard to the nature and extent, and the circumstances, of the contravening conduct, including its common features, rather than determining whether the conduct constitutes a single “course of conduct”.
Justice Moshinsky’s observations in ASIC v AMP resonate in the present circumstances. While the nature and extent of the conduct in this instance is similar, its similarity is by virtue of the fact that Lanterne had completely inadequate systems and processes in relation to multiple facets of its business and its obligations as an AFSL holder. The similarity of the conduct stems from its extent and the comprehensiveness of the relevant failures. Doing little (if anything) to comply with the obligations of an AFSL holder does not make the course of conduct principle applicable so that it operates as a de facto limit on what would otherwise be a suitable pecuniary penalty, nor does it mean that the contravening party should receive the benefit of some sort of course of conduct penalty reduction. Each of the contraventions of s 912A(1) of the Act which ASIC relies on as the basis for a penalty are separate and they reflect separate failures on the part of Lanterne.
As to the totality principle, it may be accepted that the various contraventions of s 912A of the Act overlap in the sense that Lanterne’s conduct has had the effect of contravening several statutory provisions. The total penalty for the various contraventions should thus be assessed in aggregate and the court should be satisfied that the total penalty is not unjust or disproportionate. I have adopted this approach in coming to the penalty amount and I am satisfied that, in the circumstances, the total penalty is not unjust or disproportionate to the conduct.
Harm / loss caused to clients
Lanterne admits that it put the ultimate clients of its ARs and CARs at risk of harm in relation to the financial services provided to them by the ARs and CARs under Lanterne’s AFSL. In these circumstances, I accept ASIC’s submission that Lanterne’s conduct led to a serious risk or potential for harm to consumers which was significant in circumstances where Lanterne had CARs and ARs operating under its licence with an aggregate of up to $1.685 billion under management. Although there is no evidence of actual harm in the present proceeding, this does not somehow serve to negate the risk of harm that was created by Lanterne’s contraventions. I accept that there was the potential for significant loss and harm. The penalty to be imposed must demonstrate to the market that allowing such a risk to develop will not be tolerated.
Insofar as Lanterne submits that ASIC v Mobisuper provides a comparison to the present case in relation to the total penalty, I do not accept that this is so. It is well established that the parity principle is generally of limited assistance in cases concerning pecuniary penalties. As Beach J observed in ASIC v Westpac (Omnibus) (at 27 [140]), it can be conceptually problematic to look at penalties in other cases to calibrate a figure for the instant case when all that one has from the other cases are single point determinations produced by “opaque intuitive synthesis”. In the present circumstances the comparisons drawn by Lanterne in relation to the penalty range in ASIC v Mobisuper are not especially helpful and significant difficulties attend doing so. Lanterne’s submissions in this regard pay insufficient attention to the extent and serious systemic nature of the contraventions in this case.
Deterrence
The following factors are significant in considering the importance of deterrence and achieving a balance between specific and general deterrence and oppressive severity.
Specific deterrence
Lanterne has indicated that it intends to continue to operate its business subject to compliance orders to be made by the court. Thus it says that the payment of a pecuniary penalty will not be seen as an acceptable cost of doing business because it will not be doing business on the same basis going forward. Accepting this to be the case, I do not accept that Lanterne’s proposed penalty of $150,000 would achieve an appropriate level of specific deterrence. There has been no relevant change in personnel at Lanterne, and the compliance regime envisaged by the orders proposed by the parties has not yet been implemented. In these circumstances Lanterne has apparently only taken limited steps to reform its processes and systems, and there is more to be done. In light of what has occurred, it is important that Lanterne ensure that it has robust systems in place going forward across the spectrum of the financial services that it provides.
Lanterne’s capacity to pay and its resources are relevant considerations in determining the size of the penalty, but only in the sense that while the size of a corporation does not of itself justify a higher penalty than might otherwise be imposed, it may be relevant in determining the size of the pecuniary penalty that would operate as an effective specific deterrent: ASIC v Westpac (No 3) at 594 [49(d)]. As has been mentioned, Lanterne submits that ASIC’s proposed penalty of $1.5 million is almost equal to its net asset position and exceeds revenue and profit for FY2023, while its proposed penalty of $150,000 (effectively $30,000 per contravention) is about a third of a year’s profit. Mr Cozens deposed in his affidavit of 8 May 2023 that ASIC’s proposed penalty would be a significant imposition and a future threat to the viability of the business. In response ASIC submits, and I accept, that there is no evidence that Lanterne does not have the capacity to pay a significant penalty. Mr Cozens does not say that Lanterne will be unable to continue, only that a penalty in the dimension sought by ASIC would make it difficult for Lanterne. In all the circumstances I consider that the penalty needs to be sufficiently substantial to demonstrate to Lanterne that its business should not have been conducted on the basis that it has been conducted. A penalty of $150,000 would, in my assessment, be entirely insufficient to achieve effective specific deterrence. A much higher penalty is required, and the fact that Lanterne will be met with increased compliance costs going forward is not the point.
General deterrence
There is plainly a need to impose a penalty to deter other businesses in a similar position from engaging in such conduct. This is a consideration of the highest importance. Having regard to the comprehensive failings of systems, processes and procedures which have occurred with respect to Lanterne, it is necessary that the penalty ordered be significant (without being disproportionate or oppressive), and signal the court’s disapproval of the contraventions. It must also be sufficient to convey to market participants the standard of corporate behaviour which is expected, and the importance of ensuring that systems and processes are adequate to ensure compliance with regulatory requirements. ASIC notes that this is one of the first litigated cases relating to a “licensee for hire” business and the contraventions here go to the core of that business model. Contrary to Lanterne’s submission that the declarations will establish the standards required by licensees in the future and that the size of the penalty does not inform the matter, I consider that the declarations and the penalty together are critically important in setting the standards required of licensees in the future and the standards of behaviour expected of AFSL holders. The overriding purpose of s 912A(1), and Ch 7 of the Act, supports a substantial penalty to ensure financial services licensees comply with their statutory obligations.
Conclusion on pecuniary penalty
I have accepted that the contraventions in the present case were serious. They were comprehensive, they covered various areas of the business, and they continued over a sustained period of time. They were identified by ASIC through its own investigations rather than by Lanterne reporting the deficiencies to ASIC. It is noteworthy that the contraventions occurred in the context of the increased public and regulatory focus on the obligations of AFSL holders brought about by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Lanterne, through Mr Cozens, should have known better.
As Allsop CJ observed in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 3) [2020] FCA 1421 at [74], market efficiency, upon which consumer confidence rests, relies on reliability, good faith, fairness and honesty of conduct. These obligations are of fundamental importance, and they underpin the efficient functioning of the Australian economy. It is important never to lose sight of them. It must be made clear to Lanterne, and to all businesses, that consumers are to be dealt with in the way for which Parliament has legislated. The community is entitled to expect that robust systems and processes will be put in place and maintained in the market for financial services, in accordance with statutory obligations, to ensure that the risks posed by the conduct of the kind which has occurred in this case does not occur.
Whatever may be said about Lanterne’s failure to comply with legislated norms of corporate behaviour and whether there was an element of recklessness in the behaviour, the fact is that there was such a failure. Lanterne’s contraventions of the Act are deserving of a significant penalty to achieve the objectives of specific and general deterrence in light of what has occurred.
Although I have given serious consideration to acceding to ASIC’s submissions that the total penalty should be $1.5 million, there are mitigating factors which I have taken into account in determining that a slightly lesser penalty would be appropriate. These include that Lanterne has worked with ASIC in agreeing to and admitting the facts and contraventions outlined in the SAFA, and that Lanterne has not been found to have engaged in similar conduct in the past. Lanterne has agreed to a compliance regime to be put in place by the orders that will be made. Whatever the actual position, Mr Cozens at least says that he is contrite about what has occurred.
In weighing all these matters, and endeavouring to balance the need for specific and general deterrence with the importance of ensuring that the amount of the pecuniary penalty is not so high as to punish and be oppressive, I consider a pecuniary penalty of $1.25 million to be appropriate in the circumstances of this case. This equates to $250,000 for each relevant contravention of the Act. Anything less, in my assessment, would be insufficient to achieve the relevant objectives.
COMPLIANCE ORDERS
Section 1101B(1) of the Act provides the court with a broad discretionary power to make such orders it sees fit where a contravention of Ch 7 of the Act has been established. Section 912A is to be found within Ch 7.
In this instance ASIC seeks and Lanterne consents to certain compliance orders. ASIC submits that the making of compliance orders by consent in this instance would achieve the overall purpose of upholding or restoring public confidence in Lanterne as an AFSL holder, and that the orders are directly connected to Lanterne’s contravening conduct. ASIC also submits that in circumstances where Lanterne has not addressed all of the admitted deficiencies, it is appropriate for the court to make compliance orders directed towards rectification of those deficiencies.
Given that the compliance program orders sought by ASIC are consented to by Lanterne, and they appear to be suitable, it is appropriate that they be made. The regime to be put in place will ensure that Lanterne is brought into a state of compliance through the appointment of an independent expert review and the requirement to implement recommendations arising from that review.
There will be compliance regime orders in the terms proposed.
COSTS
At the hearing, counsel for Lanterne submitted that Lanterne may wish to make further submissions regarding any order as to costs having regard to the Birkensleigh report. There was agreement between counsel that such submissions could be confined to a page, or less. Accordingly, there will be an order that the parties may make submissions of no more than one page as to costs within the next 14 days. The question of costs will then be determined on the papers.
I certify that the preceding two hundred and five (205) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McEvoy. Associate:
Dated: 10 April 2024
- AGLC
- Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353
- Case
- [2024] FCA 353
- Decision Date
CaseChat Overview and Summary
The court considered the gravity of Lanterne’s contraventions, which were comprehensive, sustained, and identified through ASIC's investigations. The contraventions were found to be serious and went to the core of Lanterne’s business model as a "licensee for hire." The court determined that the proposed declarations and the penalty together were crucial in setting future standards for AFSL holders. The penalty of $1.25 million was deemed appropriate to achieve specific and general deterrence. The court also considered the need for compliance orders to ensure that Lanterne’s systems, processes, and controls were adequate to prevent future breaches. The court made compliance orders as agreed by the parties, including engaging an independent expert to review and report on Lanterne’s systems, processes, and controls.
The court ordered that Lanterne pay a pecuniary penalty of $1.25 million within 30 days and implement a risk management and compliance program. Additionally, Lanterne was required to engage an independent expert to review and report on its systems, processes, and controls, and to establish a risk management and compliance program. Costs were reserved, with parties required to file and serve written submissions on the question of costs.
Orders
Orders of the court
7. Pursuant to s 1317G(1) of the Corporations Act, in respect of the contraventions the subject of the declarations in paragraphs 1 to 5 above, Lanterne pay to the Commonwealth of Australia a pecuniary penalty in the amount of $1.25 million within 30 days of the making of this order.
8. Pursuant to s 1101B(1)(a)(i) of the Corporations Act, Lanterne is required to:
(a) engage an independent expert within 30 days of this order, the identity of whom is to be agreed between the parties, and in the absence of agreement, to be determined by the court (Independent Expert), who will be required to, within 4 months of the order:
(i) review Lanterne's systems, processes and controls so as to report on the adequacy of those systems, processes and controls for the purpose of ensuring compliance with ss 912A(1)(a), (ca), (d), (e), (f) and (h) of the Corporations Act;
(ii) where any aspect of Lanterne's systems, processes and controls is considered to be inadequate, make recommendations as to the steps which should be taken to make the relevant systems, processes and controls adequate; and
(iii) prepare a written report setting out the results of the review and recommendations referred to above, and deliver a copy of the report to the plaintiff and Lanterne (compliance report);
(b) within two months of receipt of the compliance report, establish a risk management and compliance program and take any other necessary steps, including implementation of any recommendations in the compliance report, to ensure Lanterne's systems, processes and controls are adequate to secure compliance with ss 912A(1)(a), (ca), (d), (e), (f) and (h) of the Corporations Act;
(c) engage the Independent Expert to, within three months of the receipt by the plaintiff and Lanterne of the compliance report, prepare a short written report opining on the adequacy of Lanterne's implementation of the recommendations in the compliance report (implementation report) and deliver a copy of the implementation report to the plaintiff and Lanterne; and
(d) pay the costs of the Independent Expert.
9. Costs be reserved.
10. On or before 4:00pm on 24 April 2024 the plaintiff and the defendant file and serve written submissions not exceeding one page to be prepared with 1.5 line spacing and 12-point font, on the question of costs.
11. Costs will be determined on the papers pursuant to s 20A of the FCA Act.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
It may be accepted that Lanterne’s conduct fell well short of the reasonable standard of performance of an AFSL holder, which the public is entitled to expect. It failed to demonstrate competence in performing its obligations as an AFSL holder and competence in complying with its applicable statutory obligations. It thereby failed to provide financial services “efficiently, honestly and fairly” within the meaning of that term in s 912A(1)(a) of the Act.DECLARATIONSThe court’s power The court has a wide discretionary power to make declarations pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act): Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790 at [152] (Beach J) (ASIC v CBA). See also s 1101B(1) of the Act and Wellington Capital Limited v Australian Securities and Investments Commission (2014) 254 CLR 288 at 298-299 [10] (French CJ, Crennan, Kiefel and Bell JJ); Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 at [478] (Sackville AJA); ASIC v Financial Circle at 513 [155]. Section 1317E(1) of the Act requires the Court to make a declaration of contravention if it is satisfied that a person has contravened a civil penalty provision of that Act. Subsection 1317E(2) prescribes the matters which must be specified in the declaration. Relevant principles In Australian Securities and Investments Commission v Mercer Financial Advice (Australia) Pty Ltd [2023] FCA 1453 at [52]-[54] I outlined the principles relevant to the making of declarations in the present circumstances. What follows is drawn in substantial part from my reasons in Mercer. The utility of declarations which set out the particular liability found and the basis for the penalties ordered is well established: see Australian Securities and Investments Commission v Axis International Management Pty Ltd (2009) 178 FCR 485 at 491-496 [26]-[43] (Gilmour J) and, more generally, Rural Press Limited v ACCC (2003) 216 CLR 53 at 92 [95] (Gummow, Hayne and Heydon JJ); Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex relatione Corporate Affairs Commission (1981) 148 CLR 121 at 125 (Mason J), 144-5 (Wilson J); Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89 at 97-9 (Sheppard J), 106 (Foster J), 107 (Hill J); Stuart v Construction, Forestry, Mining and Energy Union (2010) 185 FCR 308 at 322 [35] (Moore J), 334 [94] (Besanko and Gordon JJ); Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 at 388 [35] (Greenwood, Logan and Yates JJ); and Australian Securities and Investments Commission v Allianz Australia Insurance Limited [2021] FCA 1062 at [120]-[121] (Allsop CJ). In Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2017) 254 FCR 68 (ABCC v CFMEU), the Full Court stated (at 87 [90]):The fact that the parties have agreed that a declaration of contravention should be made does not relieve the Court of the obligation to satisfy itself that the making of the declaration is appropriate. … It is not the role of the Court to merely rubber stamp orders that are agreed as between a regulator and a person who has admitted contravening a public statute...(Citations omitted.)