AxiCorp Financial Services Pty Ltd and Australian Securities and Investments Commission
[2020] AATA 92
•20 January 2020
AxiCorp Financial Services Pty Ltd and Australian Securities and Investments Commission [2020] AATA 92 (20 January 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2020/0012
Re:AxiCorp Financial Services Pty Ltd
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal:Deputy President Bernard J McCabe
Date:20 January 2020
Place:Sydney
The Tribunal orders that:
1.the interim stay orders will be discharged on 23 January 2020,
2.from that date, the suspension decision is stayed until further order,
3.for the avoidance of doubt, ASIC will not be restrained from making an entry on the statutory register or otherwise publicising the reviewable decision after 23 January 2020,
4.the application for directions under section 35 of the AAT Act is refused.
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Deputy President Bernard J McCabe
CATCHWORDS
PRACTICE AND PROCEDURE – STAY APPLICATION – where review would otherwise be rendered nugatory – impact on business – impact on clients – whether suspension was the correct disciplinary action – stay granted
CONFIDENTIALITY APPLICATION – importance of hearings to be held in public – consideration where a stay has been granted – whether clients have right to know about regulatory action – confidentiality refused
LEGISLATION
Administrative Appeals Tribunal Act 1975 ss 2A, 35, 41
Australian Securities and Investments Commission Act 2001 s 1
Corporations Act 2001 ss 760A, 912A, 915C
CASES
Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185
Scott and Australian Securities Investments Commission [2009] AATA 798
REASONS FOR DECISION
Deputy President Bernard J McCabe
20 January 2020
The applicant is in the business of providing a trading platform in which members of the public trade in derivatives, which are financial products. The applicant requires an Australian Financial Services Licence (an AFSL) to conduct the business. The AFSL is issued under Chapter 7 of the Corporations Act 2001 which deals with financial services laws. The Australian Securities and Investments Commission (ASIC) administers the financial services laws. ASIC informed the applicant of concerns about potential breaches of those laws in early 2019. Some of the concerns related to matters that had occurred over a period of years and suggested problems with the applicant’s compliance processes and culture. After a regulatory review, ASIC made a reviewable decision to suspend the applicant’s AFSL for a period of four months until 2 May 2020. The suspension decision was due to come into effect on 2 January 2020.
The applicant has asked the Tribunal to review ASIC’s decision. While the review proceeds, the applicant wants the Tribunal to make orders under s 41(2) of the Administrative Appeals Tribunal Act 1975 (the AAT Act) staying the operation and implementation of the reviewable decision so the applicant can continue trading while we sort this out. The applicant also wants the Tribunal to order that ASIC not publish news of the reviewable decision or enter that decision onto the statutory register, steps which ordinarily follow upon a suspension. For good measure, the applicant has also asked for confidentiality orders under s 35 of the AAT Act. Those orders would allow the review to proceed in private while the applicant continues to operate its licenced business.
I am satisfied it is desirable to make an order staying the suspension of the applicant’s AFSL. I am not satisfied it is desirable that the stay extend to restraining ASIC from commenting on the reviewable decision or making entries in the statutory register. I explain my reasons below.
I will also explain why I am not satisfied it is appropriate to make confidentiality orders in relation to the matter under s 35 of the AAT Act.
The interim stay and the confidentiality orders should be discharged after the elapse of three business days from the date on which these reasons for decision are published to the parties. These reasons for decision will not be published until after the interim stay and the confidentiality orders cease.
THE REVIEWABLE DECISION AND ITS BACKGROUND
The applicant conducts business in a number of countries including Australia. Its chief executive officer, Mr Rajesh Yohannan, explained (in his statement dated 7 January 2020) the applicant provided a trading platform for clients wishing to trade in ‘over the counter’ derivatives, which are a kind of financial product: at [50(a)]. There was some discussion at the interlocutory hearing on 14 January 2020 about the characteristics of these clients. Mr Beaumont SC, for the applicant, acknowledged on instructions that some of the clients were institutions or large commercial concerns but insisted many of the clients were individuals – ‘mums and dads’, as it were. Mr Brady QC, who appeared for ASIC, referred to the text of the product disclosure statement that was provided by the applicant to clients in connection with its services. That statement made clear the traders using the platform were expected to be relatively sophisticated individuals. While undoubtedly some of them were also ‘mums and dads’, that homely description probably does not do them justice. I will have more to say about the characteristics of the client base below.
The applicant has held an AFSL since 2007. It has been operating under its current AFSL since 2016. ASIC monitored the applicant’s operations in mid-2018 and asked for documents and other information. In February 2019, ASIC alerted the applicant to ASIC’s concerns over aspects of the applicant’s compliance with its obligations under the AFSL. In due course, ASIC notified the applicant of a hearing before a delegate under s 915C of the Corporations Act. In anticipation of that hearing, the applicant began to make a number of changes to its operations (many of them embodied in a ‘Compliance Continuing Improvement Plan’ which introduced new policies, procedures and personnel to improve compliance) after obtaining an independent expert report.
The hearing before the delegate occurred on 22 October 2019. The applicant acknowledged it had contravened the financial services laws (although there was some dispute about whether it had contravened one particular provision with the frequency alleged by ASIC). The applicant argued it had moved to address, or was in the process of addressing, most of the issues. It said its new personnel and arrangements should be taken into account when exercising the powers under s 915C.
After deliberating, the delegate exercised the power in s 915C of the Corporations Act to suspend the applicant’s AFSL. The decision was made on 2 January 2020. The suspension was for a period of four months, i.e. until 2 May 2020. The decision specified the licence remained temporarily in effect until 30 January 2020 for the limited purpose of permitting the applicant and its clients to close out positions in preparation for the suspension. The applicant promptly approached the Tribunal on the day it received the decision and asked for a stay and confidentiality orders. ASIC agreed to an interim stay of the decision and agreed the decision would not be entered into the register or publicised while the stay application was before the Tribunal.
The delegate’s reasons for decision found ASIC’s concerns were substantially made out. There was no suggestion of dishonesty or want of integrity identified in those reasons. The delegate concluded there was also reason to believe the applicant was likely to contravene its obligations under s 912A in the future. That conclusion was reached in light of concerns about the applicant’s culture and because of entrenched shortcomings in the compliance regime and long-standing problems in training and record-keeping that were unlikely to be addressed overnight. The delegate acknowledged the applicant had made welcome improvements to its compliance arrangements by the time of the reviewable decision but said there was still a way to go – and in those circumstances, the risk of further contraventions remained real.
When it came to exercising the discretion, the delegate acknowledged some of the contraventions it had identified were individually less serious, but she concluded the conduct taken as a whole warranted regulatory action. She reasoned the investing public, the applicant and other providers would benefit from the knowledge that ASIC was vigorously enforcing the law. She also reasoned a suspension would provide specific deterrence to the applicant that would prompt a more diligent approach to compliance. She said a period of suspension would also assist the applicant to effect organisational change.
I have devoted some attention to the delegate’s reasoning because it may help shed light on the limited nature of the risk posed by the applicant remaining in business while the review proceeds. The applicant says, in effect, that the delegate imposed the suspension to impress upon the applicant the need to change its ways. Mr Beaumont says the applicant has already absorbed that lesson but in any event the force of the lesson will not be diminished if, following the review, the decision was affirmed.
THE RELATIONSHIP BETWEEN CONFIDENTIALITY ORDERS UNDER S 35 OF THE AAT ACT AND THE STAY POWER IN S 41(2)
The power to make confidentiality orders is found in s 35 of the AAT Act. The power to order a stay of the operation or implementation of the decision is found in s 41(2). The two powers are separate but there may be overlap on occasions like this. The overlap arises because ASIC is under a statutory obligation to record a suspension decision in the relevant register. It also, as a matter of routine practice, publicises the fact of a suspension decision by issuing a press release. The issue of a press release is a legitimate exercise of ASIC’s statutory function having regard to ASIC’s objectives set out in s 1(2) of the Australian Securities and Investments Commission Act 2001.
The reasoning of the Full Federal Court in Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185 confirms the Tribunal’s powers under s 41(2) extend beyond the power to stay the suspension. It also has the power to restrain the decision-maker from taking ancillary steps like making entries on a register. Downes and Jagot JJ explained those activities were plainly “an aspect of the operation and implementation of the banning order” under review in that case: at [81]. If a formal power to publish following a decision could be restrained, Downes and Jagot JJ reasoned it would be “an odd result” if the power did not extend to restraining less formal communications, like press releases.
The applicant in this case has asked the Tribunal to stay the suspension decision and restrain publication under s 41(2). But orders under s 41(2) alone will not achieve the confidentiality that the applicant seeks. In the absence of confidentiality orders under s 35, the name of the applicant will still appear on the press list advertising hearings, and any hearing will be open to the public. (The applicant’s name was temporarily replaced with a pseudonym when the interim orders were made. Those orders will be discharged at the conclusion of the interlocutory process; fresh orders would be required if the pseudonym is to remain.) It is therefore necessary to consider the operation of both provisions.
While the powers in ss 35 and 41 are separate, they are ultimately directed to the same end. They are intended to facilitate the review in a way that meets the needs of the case, and which best achieves the object referred to in s 2A of the AAT Act. It would be a mistake to consider the operation of each section in complete isolation from the other in a case like this.
THE STAY POWER
The stay power is a discretionary power available “for the purpose of securing the effectiveness of the hearing and determination of the application for review”. It may only be exercised “if the Tribunal is of the opinion that is desirable to do so after taking into account the interests of any person who may be affected by the review”. The stay may be absolute or conditional. The ability to impose conditions (including conditions that require undertakings from the applicant) enables the Tribunal to craft a stay order that more effectively responds to the interests of the various persons affected by the review.
Both parties acknowledged there are a number of well-known decisions which describe the Tribunal’s usual approach to the exercise of the stay power, including Scott and Australian Securities Investments Commission [2009] AATA 798. Each application must be considered on its merits, but there are a number of factors which are typically relevant – remembering, of course, that the stay power is only available for the limited purpose identified in s 41(2). I will have regard to those interests below.
The question of whether to stay the decision to suspend admits of an easy answer - at least at first glance. The period of suspension is short. The applicant would likely have served out the entire period of the suspension before the review concluded. Even if there was an expedited hearing, a substantial part of the suspension period would already have passed. The hearing would be rendered nugatory. I will have more to say about the applicant’s prospects of success and other relevant factors going to the exercise of the discretion in due course, but ASIC conceded there was a proper basis for allowing the applicant to continue trading, albeit subject to conditions. The real dispute was in relation to publication of the reviewable decision. I will focus on that aspect of the application first.
To be clear, the applicant wishes the Tribunal to restrain ASIC from entering details of the adverse decision on the statutory register, and to order that ASIC refrain from publicising the adverse decision, whether through the issue of a press release or making an announcement on its website or otherwise. That was the real nub of the dispute between the parties at the interlocutory hearing.
The applicant’s central argument is that, in the absence of a stay, the impact of the reviewable decision on the applicant’s business will be so significant that it will likely collapse. The statement of Mr Yohannan, the managing director, includes evidence suggesting the business is currently profitable. It has cash on hand. But Mr Yohannan said almost all of the applicant’s revenue was generated from clients making individual trades. It follows the applicant would not derive any income if the platform were shut down because its AFSL was suspended. That stands to reason. But he says the impact would likely be more serious than simply sustaining a loss of income. He argues the business would likely fail because of features of the client base and the market. If the applicant’s business failed, the hearing would be rendered nugatory. The damage would be done. Even if the business managed to limp through, the effectiveness of the hearing would be undermined, I was told.
Mr Yohannan gave a rational explanation in his statement for his apocalyptic view. He believes the applicant’s customers would be unlikely to return to the applicant’s trading platform if the applicant were forced to suspend its operations for any length of time. The transaction costs associated with changing platforms were high. If forced to transition to a new platform while the suspension took effect, customers would be unlikely to bear the cost of returning once the suspension was lifted. He said that loss of business and revenue would be catastrophic and difficult to reverse.
Mr Yohannan claimed the publicity around the reviewable decision would have a catastrophic effect on the applicant’s business even if the applicant were able to trade while the review continued: at [94]. He said the applicant’s reputation would be irretrievably damaged by news of the regulatory action. ASIC doubts that.
ASIC points out the applicant’s customers are, generally speaking, sophisticated individuals. They are presumably capable of absorbing the news about the regulatory action and should appreciate the effect of the stay when it was explained to them. They are less likely to flee the applicant’s platform at the first sign of trouble for precisely the reasons the applicant has identified: moving to a different platform is costly and inconvenient. ASIC also points out the Australian market is presumably aware of press reports of regulatory action taken against the applicant in an overseas jurisdiction. I accept those reports may not have received much attention in this country, but the lack of any obvious reaction amongst local customers is relevant. Even if I accept Mr Yohannan’s claim that the applicant’s reputation is important and that competitors will try to make something of any bad news, it is unclear whether publicity would have a catastrophic effect on the applicant’s fortunes as he predicts. That is not to say there is no risk of loss in the short term; one would expect some sort of reaction from startled traders who would need reassurance, and some of them would leave – perhaps permanently. But the risk of some loss consequent upon regulatory action is the price one must pay for the privilege of participating in a regulated occupation. The potential for loss does not inevitably render the hearing nugatory. In the circumstances of this case, it is more difficult to be satisfied that orders staying publication are appropriate for the purpose of securing the effectiveness of the hearing.
I have already indicated I accept an order staying the suspension decision is at least potentially appropriate for the purpose of securing the effectiveness of the hearing. It follows the discretion in s 41(2) is engaged, notwithstanding my reservations about the applicant’s claim that publicity on its own will likely drive it from business and render the whole process moot. The question, then, is whether it is desirable to make an order having regard to the interests of persons affected by the decision.
The applicant presented a confident picture of its prospects for success at the eventual hearing. While it has admitted much if not all of the conduct identified by the delegate – indeed, the applicant wants credit for disclosing examples of problematic conduct in a spirit of cooperation – it says a suspension is plainly excessive.
Where a case is obviously strong, that will weigh in favour of making the stay order. An obviously weak case might count for less in the balancing process. In most cases, it is difficult to predict the outcome at an early stage with any degree of confidence. The evidence is often in a rudimentary state, and it has not been tested. For those reasons, the Tribunal will not conduct a mini-trial at an interlocutory hearing to make a detailed assessment of an applicant’s prospects. It is usually enough that the Tribunal is satisfied there is an arguable case. That is the case here, if only because the question of whether to impose a short-term suspension – or some more stringent action - in the face of largely admitted conduct involves delicate questions of judgment.
I turn next to the interests of persons affected by the review. A number of persons have interests at stake, including, most obviously, the applicant. I have mentioned the applicant’s evidence about the impact on the business if the decision were implemented. I have no reason to doubt the claim that requiring it to cease trading in the short term will have a significant and potentially catastrophic impact on the fortunes of that business and its investors, employees and creditors. I also accept the evidence of Mr Yohannan that clients are likely to experience considerable cost and inconvenience if they are forced to move to another platform and deal with a new provider. He explained why that was so in his statement, and I have no reason to reject his evidence on this point. These risks to the applicant all weigh in favour of ordering a stay of the suspension decision. It is less clear how and to what extent the interests of these individuals will be affected if the suspension decision is stayed but ASIC remains free to publicise the reviewable decision. I have already explained Mr Yohannan’s evidence on this point did not extend much beyond an assertion of likely effect. While his opinion as an experienced executive in the field counts for something, I have also mentioned there are reasons for scepticism.
The applicant’s employees will presumably be badly affected if the business shuts down, even temporarily. Their interests line up with the interests of their employer. They will be affected if the applicant experiences financial loss, and the reputational effects of publicity might reflect on them as well.
The interests of clients require particular attention. The applicant mentioned the cost and expense associated with a suspension. If the suspension is not imposed in the short term, it is not clear how clients will be affected: they can continue trading like before if they are minded to do so. But if clients are not told of the reviewable decision and the applicant continues to trade, the clients are denied an opportunity to make an informed decision about whether they wish to deal with the applicant in light of the questions that have arisen over its operations. As Downes and Jagot JJ observed in ASIC v AAT, those clients would understandably complain if information that might have been relevant to their decision to trade were withheld from them: at [54]. I acknowledge those remarks were made in the context of an application for confidentiality orders, but it seems to me the same reasoning applies in relation to an application for a stay on publication.
Quite apart from the interest of individual clients in the free flow of information, there is a public interest in transparency in a case like this. That interest is summarised in the objectives of the regulatory regime set out in Chapter 7 of the Corporations Act. Section 760A explains those objectives include promoting “confident and informed decision-making by consumers of financial products” and “fair, orderly and transparent markets…”. ASIC suggested in its written submissions that:
[t]his is precisely the sort of case that demonstrates why the free flow of information in the marketplace is so fundamental to the processes set out in the Corporations Act.
The applicant points out the problems it experienced are mostly in the past, and that lessons have been learned from that experience. I was told none of the adverse findings raised questions about honesty. The suspension was mainly intended to deter and educate, and to underline the need for good practice in the future. It is difficult to see how information about the past factors into current decision-making by traders in the marketplace.
At first glance, that submission sits uncomfortably with the evidence that the applicant expects an adverse reaction from rational traders in the market if and when the news of regulatory action was disclosed – although I understand the applicant argues that busy (and to some extent, risk averse) traders may react in the short term as soon as they hear about a suspension without waiting for a proper evaluation of the applicant’s case. But evidence about the ‘stickiness’ of the applicant’s services (i.e. suggesting traders are reluctant to shift or split their activities between trading platforms), the relative sophistication of the customer base and questions over the extent to which traders in derivatives are risk averse suggest the reaction to adverse publicity may not be as great as the applicant fears. In any event, the Tribunal should think carefully before deciding for itself what the market needs to know, or presuming what individual traders will regard as relevant. Having said that: if the temporary stay on publication is to be lifted, there is a good argument for allowing the applicant at least a brief pause so it can prepare messaging that will put its case in a digestible form. That measure would appear to be consistent with the goal of ensuring the market is properly informed.
The absence of imminent risk to traders and the investing public if the applicant continues to trade weighs in favour of staying the suspension decision. But the publication dimension to the reviewable decision raises more difficult issues because the regulatory regime in Chapter 7 is not solely concerned with consumer protection. It is also concerned with promoting free and informed markets. It follows the public interest weighs against extending the stay to the publication of the decision.
The implications for ASIC if a stay is granted are also important. I should note at once that I do not accept a stay order of itself communicates some disapproval or want of confidence in a regulator’s decision-making processes. The whole point of a stay is that it permits the status quo to be maintained until a proper review can be concluded. A stay precludes the need for a rush to judgment. ASIC is not embarrassed or discredited in its function as a regulator simply because somebody has engaged the review process Parliament established as part of a decision-making continuum.
The lesson which ASIC seeks to bring home to the applicant and to other service providers is unlikely to be lost if the decision is affirmed on review. One would have thought that, in the short term, if a stay were granted, the applicant would have every incentive to behave well given the review proceedings.
In all the circumstances, I do not think there are significant implications for the regulator if the suspension decision were stayed. The calculation may be different if ASIC were also restrained from publicising the reviewable decision. The Tribunal should be cautious about putting ASIC in an embarrassing position. The public may be entitled to expect the regulator would disclose issues it had identified. While there are good reasons why that public expectation of disclosure might give way to other considerations in particular cases, the market needs ASIC to be and to be seen to be a vigorous ‘cop on the beat’. Indeed, there is a good argument that permitting the regulator to disclose the existence of the reviewable decision together with news of the Tribunal’s involvement might actually enhance public confidence in a vigorous and fair regulatory process.
CONCLUSION IN RELATION TO THE APPLICATION FOR ORDERS UNDER S 41(2)
I am satisfied the stay is sought for the purpose of preserving the efficacy of the hearing and review. After having regard to the interests of those affected by the decision and review – especially the potential consequences for the applicant and the fact the public is not at risk – I am satisfied there is good reason for staying the suspension decision until the hearing has concluded. I am not satisfied ASIC should, as a consequence of that order, be restrained from entering the reviewable decision on the register (subject to it including a note in an appropriate form of these proceedings and the stay) or issuing a press release or making other announcements. The public and the markets have an interest in being informed. While that right or interest is not absolute, I am not satisfied the interests of others are such that publication ought to be restrained.
THE APPLICATION FOR CONFIDENTIALITY ORDERS
The applicant has also asked for directions under s 35 that would restrain ASIC from discussing the case, allow the review process to proceed under a pseudonym, and have a private hearing which excludes members of the public and prevents the disclosure of evidence. Mr Beaumont acknowledged the principles referred to in s 35 set a high bar.
Section 35(1) establishes a default rule that Tribunal proceedings be held in public in the absence of confidentiality orders. When considering an application for a confidentiality order (i.e. more accurately, for a direction under s 35(2), (3), or (4)), s 35(5) provides:
the Tribunal is to take as the basis of its consideration the principle that it is desirable:
(a)that hearings of proceedings before the Tribunal should be held in public; and
(b)that evidence given before the Tribunal and the contents of documents received in evidence by the Tribunal should be made available to the public and to all the parties; and
(c)that the contents of documents lodged with the Tribunal should be made available to all the parties.
However (and without being required to seek the views of the parties), the Tribunal is to pay due regard to any reasons in favour of giving such a direction, including, for the purposes of subsection (3) or (4), the confidential nature (if applicable) of the information.
The importance of that principle to the Tribunal’s work cannot be overstated. Individuals who are used to dealing with bureaucracy behind closed doors during the primary decision-making process might be startled by the prospect of conducting a review in the open. While the Tribunal understands the loss of privacy is confronting, the review process is not only concerned with the comfort of individuals. The Tribunal has a larger function under the Australian system of administrative law that transcends the preferences of the individual applicant engaged in a dispute with a particular decision-maker. The Tribunal is responsible for modelling good decision-making behaviour. It can only do that if its processes are transparent. Transparency also promotes accountability and public confidence. While there may be good reasons for imposing confidentiality orders in particular cases, each application for an order must be scrutinised with these concerns in mind.
I have already explained I am not convinced there is a strong case for suppressing news of the reviewable decision. There is a strong public interest in transparency that can be divined from s 760A of the Corporations Act. That interest – which is motivated by a concern for consumer protection and for properly informed markets – reinforces the general interest in transparent decision-making processes by regulators. It might be argued, of course, that one can suppress the identity of the applicant without suppressing news of the decision. The regulator’s decision can be scrutinised and discussed without referring to the applicant by name. But that misses the point that hearing processes are supposed to be open. Members of the public are entitled to come along to an open hearing and see justice being done. They can report what they have seen to others in the absence of a confidentiality order. The ability to report is particularly important to representatives of the media who might be interested in a high-profile case like this which has important commercial implications.
Section 35(5) requires that I consider any reasons that might favour making a direction under s 35. I have already discussed how the business of the applicant might be harmed if the review proceeds in the open, although I noted the extent and likelihood of that harm is less clear than the applicant suggests if it is permitted to continue trading. The potential disruption might also be contained if the applicant has a chance to develop a messaging strategy that allows it to put the reviewable decision in context.
I am not satisfied the matters raised by the applicant provide a good reason for making an exception to the general rule that the review proceed in public. I am not inclined to make the confidentiality orders requested.
CONCLUSION
The interim orders – including the temporary confidentiality orders – will remain in place until noon on Thursday 23 January 2020 to permit the applicant to prepare appropriate communications with its clients so each can be properly informed. The interim stay order will thereafter be varied so the suspension decision will not take effect until further order. ASIC will not thereafter be prevented from making entries on the statutory register or otherwise publicising the reviewable decision provided, of course, that any publication includes reference to the Tribunal proceedings and the fact of the stay. In the absence of any fresh application for confidentiality orders, the hearing will be in public.
I certify that the preceding 45 (forty -five) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe
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Associate
Dated: 20 January 2020
Date(s) of hearing: 14 January 2020 Date final submissions received: 13 January 2020 Counsel for the Applicant: Mr N Beaumont SC and Mr T Hollo Solicitors for the Applicant: Mr I Bolster and Mr M Youssef, Ashurst Counsel for the Respondent: Mr M Brady QC Solicitors for the Respondent: Ms G Wong, ASIC
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