Chapel Road Pty Limited and Australian Securities and Investments Commission
[2003] AATA 660
•14 July 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 660
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2001/539
GENERAL ADMINISTRATIVE DIVISION ) Re Chapel Road Pty Limited Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Mr RP Handley, Deputy President Date14 July 2003
PlaceSydney
Decision The Tribunal sets aside the decision under review and remits the matter to the Respondent with the direction that the Applicant’s securities dealers licence be reinstated subject to appropriate conditions, pursuant to s 786(1) of the Corporations Act 2001, with a view to ensuring effective compliance with condition 1 of its licence and with regulation 7.3.02 of the Corporations Regulations. ..............................................
RP Handley
Deputy President
CATCHWORDS
Corporations Law – Securities Law – revocation of dealers license - breach of the conditions of a dealers licence – whether there were adequate compliance procedures –- whether there was adequate supervision and training of representatives and an adequate complaints handling system – whether the dealer acted efficiently, honestly and fairly - examination of the enforcement action available under the Corporations Act – held that the dealer did not act efficiently, honestly and fairly in August/September 1999 but there was no evidence to suggest it would not do so in the future – held decision under review set aside with a direction to the Respondent that the Applicant’s securities dealers licence be reinstated subject to conditions.
Corporations Act 2001 ss 786(1), 787, 788(1), 826, 826(1), 827, 829, 837, 849, 851
Australian Securities and Investments Commission Act 2001 ss 93AA(1)
Corporations Regulations 7.3.02
Australian Securities and Investment Commission v Donald [2002] FCA 1174
Associated Provincial Picture Houses Limited v Wednesbury Corporation 1 KB 223
Australian Securities Commission v Kippe (1996) 67 FCR 499
Australian Securities and Investments Commission v Whitlam (No 2) (2002) 42 ACSR 515
Nisic v Corporate Affairs Commission (1998) 8 ACLC 514
Re Campbell and ASIC [2001] 37 ACSR 238
Re Donald and ASIC (2001) 38 ACSR 661
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Kippe and ASIC (1997) 16 ACLC 190
Re HIH; ASIC v Adler (2002) 42 ACSR 80
Story v National Companies and Securities Commission (1988) 13 NSWLR 661
REASONS FOR DECISION
14 July 2003 Mr RP Handley, Deputy President
TABLE OF CONTENTS
Paragraph No
A. Introduction 1
B. Background 3
C. Applicable Legislation 7
D. Summary of the Respondent’s Contentions 14
E. Evidence
(a) Anthony Bennett 16
(b) William Davies 41
(c) David Hollonds 47
(d) Brian Burgess 61
(e) Annette Donselaar 70
(f) Brett Walker 91
(g) Paul Brady 105
F. Consideration of the Law and Findings
(a) Compliance Obligations 111
(i) Licence Condition 112
(ii) Regulation 7.3.02 114
(b) Discussion and Findings 120
(i) General Findings 121
(ii) Training 127
(iii) Supervision 132
(iv) Complaints Handling 143
(v) The Compliance Regime 148
(c) Performance of Duties – Efficiently, Honestly and Fairly
(i) Relevant Law 169
(ii) Contentions 172
(iii) Findings 175
(d) Enforcement Action
(i) Relevant Law and Practice 180
(ii) Conclusion 192
A. Introduction
1. This matter involves an application lodged on 27 April 2001 by Chapel Road Pty Limited (“the Applicant” – “Chapel Road”) for a review of the decision of a delegate of the Australian Securities and Investments Commission (“the Respondent” – “ASIC”) made on 26 April 2001 revoking the Applicant’s securities dealers licence from the date of service of the Order. On 13 August 2001, a conditional stay of the delegate’s Order was granted pending the substantive hearing of this application.
2. The hearing in this matter took place in Sydney on 9 December 2002, 11 December 2002, 16 to 20 June and 24 June 2003. At the hearing, the Applicant was represented by Michael Galvin, of Counsel, and the Respondent was represented by Terrence Lynch, of Counsel. The evidence before the Tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (“the T Documents”) together with documents tendered by the parties. Evidence was given for the Applicant by Brett Walker, Anthony Bennett, David Hollonds and William Davies, and for the Respondent by Paul Brady, Brian Burgess and Annette Donselaar.
B. Background
3. On 14 October 1996, Chapel Road was issued with a securities dealers licence, subject to nine conditions. Relevantly, the first condition stated:
The licensee shall establish and maintain adequate training, supervision and compliance procedures designed to ensure, as far as is reasonably possible, that the licensee’s representatives do not contravene, in their conduct on behalf of the licensee, or in connection with the securities business carried out by the licensee:
(a) any provisions of a Securities Law; or
(b) another condition of this licence.
4. On 29 September 1999, a delegate of ASIC wrote to Chapel Road about Chapel Road’s non-compliance with its security dealers licence identified in a surveillance of Chapel Road by ASIC in September 1999 (T11). ASIC invited Nicholas Bahles, the then Managing Director of Chapel Road, to respond by 30 October 1999, such response being made on 14 October 1999. Between October 1999 and November 2000, ASIC and Chapel Road communicated about ASIC’s “serious concerns”.. There were also further surveillance visits in May, June and July 2000 (T22).
5. On 27 November 2000, a delegate of ASIC issued Chapel Road with a “Notice of Concerns” (T43) in respect of its securities dealers licence and invited Chapel Road to appear at a hearing on 21 December 2000. This date was subsequently vacated and the matter was heard by an ASIC delegate on 19 January 2001 (T45).
6. On 26 April 2001, the delegate made a decision revoking Chapel Road’s securities dealers licence. On 27 April 2001, Chapel Road lodged an application with the Tribunal for a review of this decision.
C. Applicable Legislation
7. Division 1 of Part 7.3 of the Corporations Act 2001 (“the Act”) sets out the requirements for the licensing of those carrying on a securities business or an investment advice business.. Division 3 requires representatives of a dealer or investment adviser to either themselves hold a dealers licence or investment advisers licence or hold “a proper authority” from the dealer or investment adviser. Relevantly, regulation 7.3.02 of the Corporation Regulations states:
(1)For the purposes of section 786 of the Corporations Law, a licence is subject to the conditions that the holder of the licence must ensure that each representative of the holder:
(a)is adequately supervised in the performance of the duties that he or she is required by the holder to perform; and
(b)is sufficiently trained in relation to those duties before acting as a representative; and
(c)keeps up to date in relation to those duties by means of continuing training programs.
B(5)The licensee must have in place at all times, to deal with complaints from retail investors, internal complaints-handling procedures that are in accordance with Australian Standard AS 4269 1995, Complaints Handling, as in force on 1 October 1998.
8. Division 5 of the Act contains provisions enabling ASIC to exclude persons from the securities industry. Section 826 sets out ASIC’s powers to revoke a licence after holding a hearing. Section (1) states relevantly that ASIC may by written notice revoke a licence if:
(c) the licensee contravenes a securities law; or
(d) the licensee contravenes a condition of the licence; or …
(j) the Commission has reason to believe that the licensee has not performed efficiently, honestly and fairly the duties of a holder of a dealers licence or an investment advisers licence, as the case requires; or
(k) the Commission has reason to believe that the licensee will not perform those duties efficiently, honestly and fairly.
9. Section 827 enables ASIC to suspend a licence rather than revoke it if ASIC considers it desirable to do so.
10. Division 3 of Part 7.4 regulates the making of recommendations about securities. Section 849 states:
(1) This section applies where a securities adviser makes a securities recommendation to a person (in this section called the client) who may reasonably be expected to rely on it.
(2) The securities adviser shall:
(a) if the recommendation is made orally—when making the recommendation, disclose to the client orally; or
(b)if the recommendation is made in writing—set out in that writing, in such a way as to be no less legible than the other material in that writing;
particulars of:
(c)any commission or fee, or any other benefit or advantage, whether pecuniary or not and whether direct or indirect, that the securities adviser or an associate has received, or will or may receive, in connection with the making of the recommendation or a dealing by the client in securities as a result of the recommendation; and
(d)any other pecuniary or other interest, whether direct or indirect, of the securities adviser or an associate, that may reasonably be expected to be capable of influencing the securities adviser in making the recommendation.
(3) Subsection (2) does not apply in relation to a commission or fee that the securities adviser has received, or will or may receive, from the client.
(4) If by making the recommendation the securities adviser does an act as a representative of another person, then:
(a)without limiting the generality of Division 2 of Part 1.2, the other person is an associate for the purposes of subsection (2); and
(b)subsection (2) does not apply in relation to a commission or fee that the other person has received, or will or may receive, from the client.
(5)For the purposes of Division 2 of Part 1.2, the making of securities recommendations is the matter to which a reference to an associate in subsection (2) relates.
(6) Despite Division 2 of Part 1.2 and subsection (5), a person (in this subsection called the alleged associate) is not an associate for the purposes of subsection (2) merely because of being:
(a) a partner of the securities adviser otherwise than because of carrying on a securities business in partnership with the securities adviser; or
(b) a director of a body corporate of which the securities adviser is also a director, whether or not the body carries on a securities business;
unless the securities adviser and the alleged associate act jointly, or otherwise act together, or under an arrangement between them, in relation to making securities recommendations.
11. Section 851 states:
(1) A securities adviser who:
(a) makes a securities recommendation to a person who may reasonably be expected to rely on it; and
(b) does not have a reasonable basis for making the recommendation to the person;
contravenes this section.
(2) For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:
(a) in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person's investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b) the recommendation is based on that consideration and investigation.
(3) A person who contravenes subsection (1) is not guilty of an offence.
12. Licensees are required to notify ASIC of breach of licence conditions pursuant to s 787 of the Act:
(1) Within 1 day after the happening of an event constituting a contravention of a condition of a licence, the licensee must lodge a written notice setting out particulars of the event.
(2) It is a defence to a charge arising under subsection (1) if it is proved that:
(a) when the licensee was required to lodge the notice, the licensee was unaware of a fact or occurrence that gave rise to the requirement; and
(b) in a case where the licensee has since become aware of that fact or occurrence—the licensee lodged the notice as soon as practicable after becoming so aware.
13. The parties referred to a number of policy statements in the course of the hearing and in submissions. The Tribunal notes that in the case of relevant policy of a government agency, in the absence of a statutory obligation to do so, the Tribunal will ordinarily apply that policy unless it is unlawful to do so or its application would cause injustice, or there are other cogent reasons for not applying it in the circumstances of the particular case: Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 645. Those policies relevant in this matter will be referred to below in discussing more fully the relevant provisions of the law.
D. Summary of the Respondent’s Contentions
14. In its Statement of Facts and Contentions, ASIC contends that the issues for the Tribunal are first, whether Chapel Road failed to systematically address its compliance responsibilities and, second, whether that failure was so persistent and extensive that it was not appropriate that Chapel Road continued to be licensed.
15. More particularly, ASIC contends that:
(a)Chapel Road failed to provide adequate initial and ongoing training to its proper authority holders;
(b) Chapel Road failed to adequately supervise its proper authority holders;
(c)A sample of 12 client files indicates that Chapel Road failed to ensure the level of disclosure by proper authority holders was adequate and thus Chapel Road may have contravened s 849 of the Act;
(d)the sample of 12 client files indicates that Chapel Road failed to ensure the appropriateness of the advice given to certain clients and thus may have contravened s 851;
(e)Chapel Road failed to have in place an adequate internal complaints system;
(f)Chapel Road failed to have in place an adequate compliance system;
(g)having regard to the matters in paragraphs (a) to (f) above, Chapel Road does not have the technical expertise and knowledge to fulfil its responsibilities to proper authority holders, and thus may not have performed the duties of a liased securities dealer efficiently, honestly and fairly, contrary to s 826 (1)(j) of the Act; and
(h)having regard to the matters in paragraphs (a) to (g) above, Chapel Road will not perform the duties of a licensed dealer efficiently, honestly and fairly contrary to s 826(1)(j) of the Act.
E. Evidence
(a) Anthony Bennett
16. Mr Bennett provided a statement dated 11 March 2003 (A2). He is currently the Managing Director of Chapel Road. He is also the Managing Director of Benwest Investment Services Pty Ltd (“Benwest”) in which he holds a majority shareholding. Benwest holds a securities dealers licence. Mr Bennett and the companies with which he is associated are the majority shareholders in Chapel Road.
17. Mr Bennett has worked in the financial planning industry since 1984. He obtained a securities dealers licence in the name of Benwest in April 1988. In 1990, Mr Bennett graduated with a Diploma of Financial Planning from Deakin University and in 2001 he became a Certified Financial Planner.
18. Mr Bennett stated that shortly after the issuing of a securities dealers licence to Chapel Road, it acquired the financial planning business of Benwest and thereafter had about 96 proper authority holders. Through his family trust, Mr Bennett held a 25 per cent interest in Chapel Road. He “played a minor role in the company on a Consultancy basis”. Mr Nicholas Bahles was initially the Managing Director.
19. Mr Bennett said he acted as a consultant to Chapel Road, providing corporate advice on the business development of the company. He agreed that he attended regular management meetings of Chapel Road in 1999. He is not sure what Board meetings he attended. He became a director of Chapel Road on 21 January 2000 but resigned when ASIC revoked Chapel Road’s licence because he thought not to do so might pose a risk to his business, Benwest. He was reappointed a director of Chapel Road in approximately August 2001 having examined Chapel Road’s files and formed a view about its conduct. He offered to purchase a majority shareholding in Chapel Road shortly afterwards and, in September 2001, acquired approximately 90 per cent of its shares through various interests.
20. Mr Bennett said on or about 27 July 2001, as a result of a chance meeting, he was introduced to Mr Karl Suleman, the owner of the Froggy Group of companies, by Terry Griffiths, the former New South Wales Police Commissioner. Not long afterwards, Mr Bennett was invited to a meeting with Mr Griffiths and Mr Suleman at which Mr Suleman described his business interests and said he wanted to “float” the Froggy Group. Mr Bennett had previously been involved in the floating of two other companies. Mr Suleman asked Mr Bennett the value of Benwest and then offered to purchase a 50 per cent share in Benwest for $1m. Mr Suleman subsequently asked that he, Mr Griffiths and Mr Bennett should hold one third each of the shares in Benwest. Mr Bennett acknowledged that he was surprised by the speed with which the deal was concluded, but considered it a good deal.
21. Mr Bennett agreed to Mr Suleman’s purchase and, on or about 6 August 2001, the agreement having been documented, Mr Suleman provided Mr Bennett with a cheque for $500,000 payable to Benwest Investment Services as a deposit. Mr Bennett went to see Mr Suleman and knowing that Mr Suleman had undertaken no “due diligence” in relation to Benwest, offered Mr Suleman the opportunity to withdraw from the agreement and returned the cheque for $500,000. However, Mr Suleman said he wanted to continue with the deal and drew a replacement cheque for $500,000 payable to “Tony Bennett”. The drawer of the cheque was Suleman Enterprises. Mr Bennett asked in whose names the shares should be registered and was alarmed when Mr Suleman said he was buying the interest personally. However, by this stage the agreement had been concluded.
22. After these events and within a week of his first receiving the cheque for $500,000, Mr Bennett was told by Mr David Goldstein, who was the Froggy Group’s accountant, that Mr Suleman was operating a “ponzi scheme”. Mr Bennett described such a scheme as one where “you rob Peter to pay Paul”: funds obtained from one person are used to pay another. A “pyramid” selling scheme is an example of such schemes which, Mr Bennett stated, are improper and illegal. He has never been associated with such a scheme.
23. Mr Bennett said on discovering this, he did not try to rescind his agreement with Mr Suleman because by then it was binding. However, he immediately arranged a meeting with Mr Suleman, held at the Sunnybrook Hotel at Warwick Farm, on or about 20 August 2001. Mr Bennett advised Mr Suleman that the ponzi scheme was illegal, should be wound up and ASIC consulted. Mr Suleman said his lawyers “had it in hand” and engaged Mr Bennett and others as consultants to legitimise the ponzi scheme. The others involved included Mr Griffiths and Mr Goldstein. At the meeting with Mr Suleman, Mr Bennett asked him whether he had the money to repay investors in the scheme. Mr Suleman said he had. After this meeting, Mr Bennett tried unsuccessfully to contact Mr Suleman on at least a dozen occasions but he did not see Mr Suleman again until November 2001 when Mr Suleman and his legal representative Ms David, attended his offices. By this time, ASIC had closed down Mr Suleman’s business and Mr Suleman sought Mr Bennett’s advice on a Scheme of Arrangement to protect his creditors.
24. Mr Bennett said Mr Suleman had many businesses and substantial assets. There was nothing to suggest that the $500,000 deposit which he had received from Mr Suleman was part of the proceeds of the ponzi scheme. Mr Bennett took the view that it came from legitimate sources. He examined the financial reports of the Froggy Group, spreadsheets for their investment schemes and various contracts. The financial documents did not indicate a ponzi scheme although other contract documents might have done so.
25. It was also envisaged that Mr Bennett’s consultancy with the Froggy Group would extend to a float of the Froggy Group, and Mr Bennett expected that fees of more than $500,000 might be involved. The consultancy was not documented but Mr Suleman paid an initial fee of $100,000 to Benwest which Mr Bennett in turn paid to Mr Griffiths in respect of his consultancy undertaken under Benwest’s auspices. How this fee was to be split up was to be decided at a later date. Mr Bennett estimated that about 300 hours work were undertaken in respect of the consultancy over the period to December 2001 by Mr Goldstein, Mr Griffiths, himself and other Benwest staff.
26. Mr Bennett said he has retained the $500,000 notwithstanding the insolvency and liquidation of the Froggy Group of companies. Since the other $500,000 of the agreed purchase price of $1m was never paid, one sixth only of the shares in Benwest were transferred to each of Mr Suleman and Mr Griffiths. They continue to be shareholders.
27. Mr Bennett said if Chapel Road’s licence is reinstated, he anticipates the business will initially be small building up to 30 proper authority holders over time. Compliance will be outsourced to Benwest which is currently using independent compliance auditors. If necessary, additional staff will be employed. Benwest, which currently has 13 proper authority holders (down from 96 in the early 1990s), has a Compliance Manual and Plan and a Compliance Manager. It complies with legal requirements and has been audited by the Financial Planning Association (FPA). Mr Bennett acknowledged that Chapel Road does not yet have a compliance system in place although he has been planning for it. His main criticism of Chapel Road’s former compliance regime is that “they did not suck up to ASIC”. He agreed that Chapel Road did not have a Compliance Plan until 1999, but it did have a Compliance Manual and had done so since its inception in 1996.
28. Mr Bennett said he became aware of the Cochrane matter when ASIC brought this to Chapel Road’s attention. He became aware that Mrs Robyn Cochrane had given an undertaking to ASIC not to give advice in her son, Stephen Cochrane’s business, in about November 1998. Mr Bennett has not seen any evidence to establish that Mrs Cochrane gave advice in breach of this undertaking.
29. Mr Bennett said Mr Cochrane became a proper authority holder of Chapel Road in February 1998. ASIC did not notify Chapel Road as licensee that Stephen Cochrane, one of Chapel Road’s proper authority holders, was the subject of an ASIC investigation. Chapel Road sought an explanation from ASIC by letter dated 13 November 1998 (T56). Mr Cochrane was audited by Chapel Road in September 1999, Mr Bennett considers this was sufficient given that a number of other surveillance visits were made to see Mr Cochrane about his business in the interim period by the Managing Director and compliance officer which included discussion of whether Mrs Cochrane had given advice to her son’s clients. Mr Bennett agreed that an important check might have been to contact Mrs Cochrane’s clients to see whether Mrs Cochrane had given advice.
30. Mr Bennett acknowledged that Chapel Road did not take steps to totally exclude Mrs Cochrane from her son’s business. Indeed, she had a Vodafone business in the next door office. A compliance audit report by Matthew Gadd dated 16 December 1998 (T58) states that Mrs Cochrane’s involvement is limited to assisting Mr Cochrane with client files and “Clients are not allowed to speak to RC at all in respect to previous advice”. Mr Gadd randomly selected three of Mr Cochrane’s client files for audit.
31. Mr Bennett said the de Vries audit of Mr Cochrane’s client files in August/September 1999 (T85) was in response to ASIC’s involvement. Chapel Road instructed an independent accountant – Anthony de Vries – to undertake an audit in accordance with ASIC’s instructions. This was, however, a file review and did not involve actual contact with the clients. Efforts were made to obtain a list of Mr Cochrane’s clients in July 1999 after Chapel Road suspended his proper authority on 9 July 1999 (T71). Mr Bennett said he was acting as a consultant to the Board on the structure of the company and made recommendations on how to deal with the Cochrane issue. It was a Board decision to suspend Mr Cochrane’s proper authority and the Board also heard on 16 July 1999 that letters were to be sent to all Mr Cochrane’s clients (T72).
32. Mr Bennett was referred to a Memorandum to the Managing Director of Chapel Road from Trevor Myers, a proper authority holder, about his telephone conversations with 49 clients of Robyn and Stephen Cochrane (T73). Mr Myers discussed with the clients their dealings with the Cochranes and made recommendations for follow up action where appropriate.
33. Mr Bennett said in his view, prior to the ASIC surveillance, Chapel Road’s compliance system was “adequate”. He disagrees with the criticisms made by Ms Donselaar in her latest report of 11 June 2003 (R4). Mr Bennett was asked about Roger Budd, one of Chapel Road’s proper authority holders referred to by Ms Donselaar in her report. Mr Bennett noted that the comments to which Ms Donselaar refers concerning Mr Budd (R4 para 41) were made by Chapel Road’s Business Development Manager and not by the Compliance Manager.
34. While Matthew Gadd (Chapel Road’s Compliance Manager) assisted “Natalie” on 15 June 2000 in ensuring that Mr Budd’s files were of suitable quality (T136 p1585), on 27 June 2000 Mr Gadd, David Hollonds (Chapel Road’s newly appointed Compliance Manager) and Keith Redpath (Chapel Road’s Business Development Manager) visited Mr Budd at his offices. Regular surveillance of Mr Budd began around 25 October 1999 and involved Mr Gadd, Mr Gellett (the Chairman of Chapel Road, who occupied the office below Mr Gadd’s), and also Mr Bennett.
35. Mr Bennett acknowledged that Mr Budd was one of Chapel Road’s top proper authority holders in terms of business sold: in the year to 30 June 1999, he sold $5.1m worth of business earning approximately $240,000 in commission. This was not, however, the reason for Chapel Road not terminating his proper authority – it was because the matter was too trivial. Mr Budd subsequently moved to Benwest and left in about 2001. He is now a proper authority holder with Tabor Financial Solutions.
36. Mr Bennett was asked about comments made by the Business Development Manager about Mr Budd’s sale of Australian Plantation Timber (“APT”) lots in a managed investment scheme (T127). Mr Bennett doubted that Mr Budd had not read the APT prospectus since he would have had to complete a questionnaire, which included pertinent questions requiring a reading of the prospectus and knowledge of the product, in order to be permitted to sell the product. Mr Bennett said Chapel Road did not contact Mr Budd’s clients to see whether they wanted to rescind their APT investments. Mr Bennett acknowledged that if a proper authority holder sold a product without first reading the prospectus, he would consider this as meriting cancellation of the proper authority.
37. Mr Bennett was referred to the minutes of a Chapel Road management meeting held on 18 May 2000 (T131), at which Mr Budd was discussed. Mr Bennett said the course of action suggested in relation to Mr Budd was for him to obtain the IDT compliance software with a view to all his financial plans being produced by Chapel Road’s paraplanning department, for him to undertake additional education/training, and to rectify irregularities in his documentation. Mr Budd was the subject of discussion at a meeting between Mr Davies (Chapel Road’s General Manager) and Mr Brian Burgess (Senior Manager, ASIC) on 25 May 2000, following which Mr Davies sought additional time to implement remedial action in respect of Mr Budd’s compliance (T134). Following this, Chapel Road staff spent time going through Mr Budd’s files (see the reference to “Natalie”, above) and these matters were the subject of the meeting between Chapel Road managers and Mr Budd on 27 June 2000, also referred to above.
38. Mr Bennett was shown a summary, prepared by Mr Redpath, of a discussion with Mr Budd on the THP external audit report on Mr Budd (A3). Mr Bennett said he was not present at this meeting in December 1999. Mr Budd’s response of 6 December 1999 was that he had studied the Compliance Manual (A3 p5). Mr Bennett said he had personally interviewed Mr Budd in February 2000 about issues raised in the THP report and told him that such matters must not re-occur and that steps would be taken to ensure this.
39. Deficiencies were again identified in Mr Budd’s work in a further audit on 19 May 2000 (A3 p6) to which Mr Budd was required to respond. Mr Bennett acknowledged that the audit showed little improvement in Mr Budd’s compliance. Mr Budd responded by letter dated 12 June 2000 (A3 p8). Further surveillance of Mr Budd was the subject of Chapel Road Board discussion on 6 June 2000 (A3 p12) at which the Compliance Manager reported on the current situation. Chapel Road took steps to try and ensure Mr Budd complied with all aspects of the law, and did consider terminating his proper authority. Ultimately, he was audited in October 1999, May 2000 and July 2000.
40. Mr Bennett was asked about a letter sent by a proper authority holder of Chapel Road to clients after ASIC’s action to cancel Chapel Road’s licence and in relation to the stay on that cancellation (R5 Tab 3 p25). Mr Bennett said he was not a director of Chapel Road at the time (May 2001) and did not become aware of the letter until after it was sent.
(b) William Davies
41. Mr Davies provided a statement dated 13 March 2003 (A6). He is currently Client Services Manager of Smart Super Pty Ltd, a super fund administrator. From 1993 to 1998, he worked for the Export Finance and Insurance Corporation (“EFIC”) including as Product Manager (National) from November 1996 to June 1998. From 1998 to February 2000, Mr Davies was Chief Executive Officer of the Australian-Netherlands Chamber of Commerce and, in February 2000, he was appointed General Manager of Chapel Road, a position he held until May 2001 after the revocation of Chapel Road’s securities dealers licence. Mr Davies is a graduate in Marketing Management from the School of Management of the University of New South Wales (T50).
42. Mr Davies acknowledged that he is not qualified as a financial planner and has not studied for this. He had compliance training while working for EFIC and previously, between 1987 and 1993, had compliance experience while working for the National Australia Bank. At EFIC, he had a product management role which included developing a compliance procedure manual which continued to evolve during his employment there. His role at Chapel Road was that of oversight – to see that the legislative regime was being complied with.
43. As General Manager of Chapel Road, Mr Davies’ duties included the day to day running of Chapel Road, the financial viability of the dealer group, marketing plans for the dealer group and overseeing all managers including the Compliance Manager. Mr Davies said Chapel Road had sought the assistance of “headhunters” in appointing a Compliance Manager in 2000 but none of their candidates had relevant compliance experience. He does not recall how Chapel Road learned of Mr Hollonds. Although not a Compliance Manager, he had experience in the industry and knowledge of compliance procedures implemented by other dealers through his employment at IDT. He could be trained within Chapel Road with the assistance of the outgoing Compliance Manager, Matthew Gadd, who left about three months after, to join “Moneytax” as a proper authority holder of Chapel Road. Mr Gellett, the Chairman of Chapel Road, also worked for Moneytax and was a proper authority holder of Chapel Road. Mr Gellett had passed units 1 to 8 of the Diploma of Financial Planning. Mr Davies acknowledged that the newly appointed Mr Hollonds would therefore be responsible for compliance management by Mr Gadd and Mr Gellett.
44. Mr Davies said in February 2000, he was informed by the Board of Chapel Road that they would be receiving a report on ASIC’s 1999 surveillance. He followed this up with ASIC between about March and May 2000, and on a number of occasions in May 2000, Mr Burgess of ASIC “said, with some force, “stop asking me for a copy of the report – no report exists’” (A6 para 5). Ms Donselaar’s report of March 2000 was only provided to Chapel Road in December 2000 after Mr Davies noticed a reference to it in the hearing documents and requested a copy from the ASIC delegate. Mr Davies said he believed “ASIC failed to tell us about their concerns, and indeed I believe they deliberately kept them from us” (A6 para 7). Mr Davies could not recall whether he had seen Mr Burgess’ letter to Chapel Road dated 24 September 1999 (T11).
45. Mr Davies acknowledged that he had learned of ASIC’s concerns at a two day meeting with ASIC personnel at Chapel Road’s offices on 1 and 2 June 2000. This was a follow up audit to see whether Chapel Road had implemented compliance systems, and followed an earlier meeting he had with ASIC on 25 May 2000 (T28). The ASIC staff asked generic questions as to compliance and about the roles of different Chapel Road staff.
46. Mr Davies stated that by January 2001, Chapel Road had reduced the number of its proper authority holders from about 70 to about 36. It was his opinion that this would facilitate better control and supervision.
(c) David Hollonds
47. Mr Hollonds provided a statement dated 12 March 2003 (A5). He is the Compliance Manager for Benwest and Chapel Road. He had previously worked for four years – 1985 to 1989 – as a financial planner in Queensland during which time he completed a financial planning course run by the Australian Investment Planners Association which was then regarded as the leading course to undertake in financial planning. From 1989 to 1992, he left the financial planning industry and worked in management in Queensland.
48. In 1992, Mr Hollonds commenced employment with Investment Data Technologies (IDT), a software company founded by the principal of Bearing Financial Services, specialising in the provision of software for financial planners. Mr Hollonds moved into marketing IDT’s software and was appointed a director in 1994. His position involved liaison with financial planning organisations over their software needs in running their businesses and formulating financial plans. This included compliance issues. While IDT financial services software was not a compliance system, it facilitated compliance and provided an audit trail in relation to client information. Mr Hollonds’ IDT marketing and consultancy role necessitated meetings with clients including compliance personnel.
49. Prior to commencing his employment with Chapel Road on 27 June 2000, Mr Hollonds had had contact with Chapel Road over several years with regard to their software needs. He was aware that their objective was to have all their advisers using the IDT software. In June 2000, Matthew Gadd (outgoing Compliance Manager) and Keith Redpath (Business Development Manager) were using the IDT software to review financial plans remotely and would visit the offices of proper authority holders as required. The Chapel Road proper authority holder Roger Budd was not using the IDT software at that time.
50. Mr Hollonds said although he had not worked in a specific compliance role, his previous work gave him the necessary background, particularly in relation to the preparation of financial plans, the facilitation of which was a primary objective of the IDT software. However, he acknowledged that he had not at that time undertaken a compliance audit. He commenced study for the first two units of the Diploma of Financial Planning offered by Deakin University in June 2000.
51. Mr Hollonds said he was not provided with a copy of ASIC’s letter to Chapel Road dated 24 September 1999 when he was appointed. He did not receive a copy of Ms Donselaar’s report of August 2000 (T40) until notified of the ASIC hearing in December 2000. At the time of his appointment, there were about 70 proper authority holders of Chapel Road (Transcript 17 June 2003 p70) and it was Chapel Road’s intention to have 10 per cent of them internally audited annually in accordance with general industry practice. In addition to ASIC audits, prior to his appointment, Chapel Road had commissioned THP Services Pty Ltd (“THP”), an external compliance auditor, to undertake external audits and further THP audits were undertaken after his commencement (T116 and T126). During his time at Chapel Road, there was no shortfall in the number of audits. The schedule of visits was followed (T22).
52. Mr Hollonds said in his opinion Chapel Road’s compliance procedures and policy excelled in comparison to other financial planning organisations. Chapel Road complied with generally accepted industry standards whereas many others did not. Chapel Road had stringent requirements in relation to continuing education and training, held an annual conference, conducted regular audits, were using IDT software (although this was not mandatory) and had a Compliance Manual. He acknowledged that the formulation of a Compliance Plan and the setting up of a Compliance Committee were reactions to ASIC involvement. However, in 2000 there was no legal requirement for a Compliance Manual or Plan unless an Australian Financial Services licence was held. Mr Hollonds said about one third of Chapel Road’s proper authority holders were using the IDT software but Head Office was using the software to develop financial plans for wider use. With proper authority holders using the software, it was necessary to visit them from time to time to assist with its use.
53. Mr Hollonds said when he worked for IDT, he had visited many other large financial planning organisations – for example that of Westpac and AMP – who, in his opinion, had less commitment to a culture of compliance. After his appointment by Chapel Road, he had telephone conversations about compliance issues with compliance officers at other financial planning organisations but also with Chapel Road’s Board. He was given a copy of Bridge’s compliance plan in strict confidence. He acknowledged that about two thirds of Bridge’s business was in stockbroking as opposed to about one third in financial planning. Nevertheless, he considered Chapel Road’s Compliance Manual was better structured and had fuller and more comprehensive content.
54. Mr Hollonds said although he was aware of and had seen AS 3806 - 1998 Compliance programs, he did not read it thoroughly in its entirety and digest its content until after notification of the ASIC hearing. Until December 2000, he relied on Chapel Road’s compliance expert, Kerrie Giles of Mosaic Solutions Pty Ltd, who was engaged to assist in the development of both Compliance Plans and Compliance Manuals. Mr Hollonds said in late July 2000, after liaising with Ms Giles, an amended Compliance Plan was produced and, between July 2000 and January 2001, further work was undertaken on the Plan and Manual. With the Compliance Manual, he was continually updating this. Shortly after July 2000, Mr Burgess told him that there were mistakes in the Compliance Manual but declined to tell him what these were, instead telling him to take this up “with your consultant”. Mr Hollonds said “at no stage, did ASIC reveal the precise concern with the manuals” (A5 para 13).
55. Mr Hollonds said he had a number of telephone conversations with Mr Burgess at ASIC during which he asked for copies of reports prepared by ASIC on Chapel Road. These were not provided until Chapel Road received notice of the ASIC hearing in November 2000, and Ms Donselaar’s March 2000 Report was not provided until early December 2000. On a number of occasions Mr Burgess told him either that no report on the ASIC surveillance was yet available, or that it was with the Commissioner or the lawyers and Mr Burgess would let him know when it was available. In the meanwhile, Mr Burgess told him not worry and to press on regardless.
56. Mr Hollonds said consideration has been given to re-establishing the business if Chapel Road’s licence is reinstated. Strategies have been considered and the budgets of other financial planning organisations examined but no actual documents or budgets have been prepared. However, they can draw on Benwest’s experience.
57. Mr Hollonds was asked then about surveillance of Roger Budd. Mr Hollonds said he examined the audits of Mr Budd conducted in October 1999 and May 2000, which indicated some improvement. Mr Hollonds went to visit Mr Budd on the first day of his employment at Chapel Road on 27 June 2000, with Matthew Gadd and Keith Redpath. The monthly report for May 2000 in the T Documents (T127) was probably prepared by Mr Redpath and indicates the need for Chapel Road assistance for Mr Budd’s new personal assistant, Natalie. With regard to Mr Redpath’s comment about Mr Budd under the heading in that report “Other matters” in connection with Australian Plantation Timber (APT) timber lots, Mr Hollands said Mr Redpath was prone to make flippant remarks and his comment about Mr Budd not “reading” the prospectus may have been such a remark. Mr Hollonds assumes Mr Budd must have read the prospectus in order to undertake the questionnaire prepared by the promoter which he had to complete before being permitted to sell the product.
58. Mr Hollonds was asked about a Chapel Road Schedule of Compliance visits for May to December 2000 (T126). He said he prepared this document and undertook the visits from 10 July 2000 onwards. THP undertook four audits over this period. Mr Hollonds said other financial planning organisations such as MLC/Lend Lease did not complete field audits on their proper authority holders annually. In his opinion, Chapel Road’s audits were beyond those undertaken in other organisations. Similarly with training, a lot of representatives in other organisations attend mainly externally provided training much of which is product focussed. Unlike many other organisations, Chapel Road held compulsory Continuing Professional Development days and annual conferences.
59. Mr Hollonds was referred to a document outlining the Procedure for Dispatch of Compliance Audit Reports (T60) and to a Compliance Policy document on Key Business Documents (T63) both of which were used in compliance audits. He was also referred to a Compliance Audit Questionnaire (T104) which he said proper authority holders were asked to complete as part of an audit.
60. Mr Hollonds stated that Chapel Road does not concede that it breached its licence conditions in relation to the training of proper authority holders. All proper authority holders appointed after the commencement of the ASIC surveillance had, as a minimum, passed units 1 and 2 of the Diploma of Financial Planning. They were also required to attend professional development days.
(d) Brian Burgess
61. Mr Burgess is a Senior Analyst with the Australian Prudential Regulation Authority (“APRA”). During the relevant period in 1999/2000, he was a senior manager with ASIC and involved in surveillance of Chapel Road both in August and November 1999 and in early to mid 2000. He commenced his employment with ASIC in August 1999. He is a Certified Practising Accountant but has not studied for the Diploma of Financial Planning.
62. Mr Burgess said he probably saw Ms Donselaar’s report of March 2000 (T19) at about that time and gave consideration to the issues raised. He did not forward a copy to Chapel Road. Senior ASIC management had already made a decision to conduct further surveillance on Chapel Road. He spoke with Mr Davies on the phone about the surveillance and was present at the meeting with Chapel Road on 1 and 2 June 2000. He does not recall whether the March 2000 report was mentioned at the meeting but he did not reveal its existence or relay its contents to Chapel Road. He also could not recall whether Mr Davies asked him for copies of the surveillance reports but acknowledged that he might have done so.
63. Mr Burgess was asked about notes of that meeting (T28). He confirmed that he would have coordinated the preparation of those notes. One of the questions contained in the notes (para 3.8) states:
3.8Have the compliance manual problems outlined in the NCU [National Compliance Unit] report of March 2000 been rectified?
Mr Burgess said these questions were roughly formulated beforehand but the notes were prepared after the meeting.
64. Mr Burgess disagreed with Mr Davies’ recollection of a telephone call in August 2000 when Mr Davies claims Mr Burgess told him that Chapel Road had still “not fixed our areas of concern identified in the original report” (A6 para 7). Mr Davies claims that when he responded that if Mr Burgess could “tell me what those areas of concern are, I will fix them immediately”, Mr Burgess replied “no I am not going to tell you” (A6 para 7). Mr Burgess denied having said this.
65. Mr Burgess recalled having telephone conversations with Mr Hollonds. He could not, however, recall telling Mr Hollonds, as Mr Hollonds’ alleges, that there were mistakes in Chapel Road’s Compliance Manuals and, when Mr Hollonds asked what they were, Mr Burgess replying “it’s not our position to tell you, take it up with your Consultant” (A5 para 11). Mr Burgess also denied Mr Hollonds’ evidence that in a telephone conversation on 30 August 2000, he said his report on ASIC’s June surveillance, which had gone to the Regional Commissioner and the lawyers, would require “some remedial action” by Chapel Road “but there is nothing to worry about, just soldier on regardless” (A5 para 18). He agreed, however, that he might have been waiting for the Commissioner’s response.
66. Mr Burgess was also asked about Ms Donselaar’s report of August 2000 (T40). He said he would have received her report at about that time but did not forward it to Chapel Road.
67. Mr Burgess was asked about the correspondence between himself and Chapel Road between September 1999 and February 2000. He said the letter dated 24 September 1999 (T11) was drafted by Sue Williams, a Senior Lawyer with ASIC, and other colleagues. In a letter dated 17 December 1999 (T14), Mr Burgess acknowledged receipt of Chapel Road’s draft Compliance Plan and asked for additional information. Chapel Road responded by letter dated 13 January 2000 (T15). Mr Burgess then wrote on 27 January 2000 (T16) raising concerns, to which Chapel Road responded on 2 February 2000 (T17) and again, following a telephone conversation with Mr Burgess, on 10 February 2000 (T18). This correspondence all related to the first ASIC surveillance in 1999.
68. On 27 April 2000, Mr Burgess signed a section 31 Notice addressed to Chapel Road requiring the production of documents (T20). He acknowledged that between his receiving the March 2000 Donselaar report and the June 2000 meeting with Chapel Road, he did not notify Chapel Road of any concerns raised in the March 2000 report.
69. Mr Burgess was asked about ASIC’s Surveillance Report on Chapel Road dated August 2000 (T39). He said he was responsible for coordinating that report. He recalled telephone conversations with Mr Hollonds and Mr Davies when they asked for copies of ASIC’s reports. His response was that he would not be providing them. He was reporting to senior management and, in particular, the Regional Commissioner.
(e) Annette Donselaar
70. Ms Donselaar prepared a report “Compliance Review – Chapel Road Pty Ltd” dated 11 June 2003 (R4). She is a Compliance Consultant based in Melbourne. Between 1994 and 1997, Ms Donselaar was National Professional Standards Manager for the Financial Planning Association (FPA). She left the FPA in late 1997 to take up a position as Group Compliance Manager for the IOOF of Victoria Friendly Society and commenced her employment with ASIC as National Compliance Officer in September 1999. She ceased that employment on 21 December 2001 to take up the role of Head of Compliance, Australian Business Banking at Westpac. Since 19 May 2003, Ms Donselaar has been employed as a Compliance Consultant to Corrs Chambers Westgarth.
71. Ms Donselaar holds the following degrees: Bachelor of Arts, Bachelor of Commerce (Accounting and Finance), Master of Commercial Law, Master of Laws. She also holds a Diploma in Financial Planning and is a certified trainer.
72. Ms Donselaar said her responsibilities at the FPA included running the FPA disputes resolution scheme and overseeing disciplinary procedures. She co-authored (with Brett Walker) the FPA’s Compliance Handbook published in late 1994. This Handbook remained current until at least late 1997 when she left the FPA. She is not aware of any other industry publications of that sort during that period. The FPA has not since updated the Handbook but a new on-line version will be published in July 2003. Ms Donselaar said the Handbook was to be used to assist members with standards thought by the FPA to be appropriate at that time. Members might use the Handbook in preparing their own Compliance Manuals.
73. Ms Donselaar said in her position at ASIC she reported to senior managers of ASIC. She prepared her March 2000 Report (T19) in response to a request from senior management. In preparing her report, she did not consider Chapel Road’s handling of complaints in respect of Robyn Cochrane. This material was not provided to her. She acknowledged that with such a large matter, her report may not reflect how day to day complaints are handled.
74. Ms Donselaar said the briefing of an independent expert to audit client files was one of a number of steps she would expect to take place. She would expect the procedure for an independent audit to be set out clearly in writing.
75. Ms Donselaar acknowledged that at the time of her report in March 2000 there was no legal requirement for securities dealers to have a compliance plan. However, a significant number of financial planning organisations had plans or were in the process of adopting a plan. AS 3806 – 1998, the Australian Standard on Compliance programs, spoke of the need for a Compliance Plan and of the procedures required to implement such a plan. There was also no legal requirement to have a Compliance Manual but this had been industry practice since 1992 when the FPA “Compliance Resource Kit” was published.
76. Ms Donselaar said while she assisted ASIC in preparing for its surveillance of Chapel Road, the National Compliance Unit which she headed was mostly involved in preparing campaigns on particular issues. It was rare for her to be involved in surveillance although she had some experience in reviewing the documents of financial planning organisations.
77. Ms Donselaar said the majority of financial planning organisations had Compliance Manuals although smaller organisations with less than ten proper authority holders relied on the FPA Compliance Handbook as a source. Large organisations or those with more than one office generally developed their own Manuals. Chapel Road retained an external consultant, Mosaic Solutions Pty Ltd, to assist in compiling their Compliance Manuals, something which was not uncommon in small to medium sized organisations. Ms Donselaar acknowledged that by doing so, Chapel Road indicated its willingness to comply. However, she said in her opinion the Manual produced by Mosaic Solutions Pty Ltd was flawed because it contained an adviser classification system based on a system of points.
78. Ms Donselaar agreed that in the period 1998 to 2001, there was also no express legal requirement for a dedicated Compliance Manager. With smaller organisations, someone would usually assume that role along with other responsibilities.
79. With regard to her March 2000 report (T19), Ms Donselaar acknowledged her stated opinion that Chapel Road’s “compliance manual is generally adequate” (T7) but said she had identified a number of issues it failed to address. She agreed that these could have been rectified fairly easily but said more work was required to link the Plan and the Manual and to address AS 3806 – 1998.
80. Ms Donselaar said her second report on Chapel Road (T40) was prepared after 8 August 2000. She acknowledged that it was normal practice for ASIC reports to be provided to the relevant financial planning organisation with a proposed timetable for follow up.
81. With regard to the initial training of proper authority holders, Ms Donselaar referred to para 3.4.2 of the FPA Compliance Handbook (A7) which states that a dealer must ensure that each holder of a proper authority “is sufficiently trained in relation to those duties before acting as a representative”.. Ms Donselaar said a proper authority should not be issued before a person receives induction training. She acknowledged that, in 1998/1999, units 1 and 2 of the Diploma of Financial Planning were considered minimum requirements for a person to engage in financial planning practice. Unit 1 is an introduction to financial planning which provides a summary of units 2 through to 8. Unit 2 deals with risk management and insurance. Both are studied remotely, off campus. However, it is not necessarily prudent to accept that a person who has been a proper authority holder previously is necessarily qualified to be a proper authority holder for a different financial planning organisation because prior experience is not always relevant.
82. Ms Donselaar said the evidence suggests that Chapel Road did recognise the need for continuing professional development, although without seeing the content of such training she could not comment on its quality. The FPA required 30 hours of continuing professional development annually for its members.
83. Ms Donselaar described paraplanners as those in the “back office” who are presented with the relevant client information and construct the financial plan for the financial planner. She agreed that the IDT software would be a valuable tool for a paraplanner. The IDT software was one of a number of competing products available. She is not aware of whether it has particular advantages over other products.
84. Ms Donselaar acknowledged that following the ASIC surveillance, Chapel Road reduced the number of its proper authority holders and appointed a full-time Compliance Manager. She said it is appropriate for a dealer to conduct audits of its proper authority holders to ensure effective compliance as part of the supervision required by regulation 7.3.02. She noted that the THP audit reports prepared for Chapel Road were more detailed than those prepared by Chapel Road on its own internal audits.
85. Ms Donselaar said the particular reference to Roger Budd in her report of August 2000 (T40) is because she had the relevant material to track what had occurred. However, she acknowledged that she was not aware that Mr Budd was visited by Chapel Road staff fortnightly from late 1999. Although in her most recent report (R4 at para 44) she expressed concern that one of the Chapel Road visits was not with Mr Budd but with his personal assistant Natalie, she acknowledged that dealer support for a proper authority holder’s staff may be appropriate. Ms Donselaar was asked about additional Chapel Road documents with evidence of a meeting with Mr Budd in December 1999, of which she was not aware, and a letter dated 8 June 2000 (A3). Ms Donselaar noted that the meeting in December 1999 was still about two months after the THP audit report in October 1999. She agreed that the letter of 8 June 2000 indicated that there was direct communication between Chapel Road and Mr Budd and not just with his assistant Natalie. Thus, there appears to have been more follow up action by Chapel Road than she was aware of.
86. Ms Donselaar said that over the period March to August 2000, she could see changes to Chapel Road’s Compliance Manual and that they were conducting audits. She was, however, concerned that proper authority holders should be audited annually with proper follow up action. She agreed that it was appropriate for most audits to be conducted internally with a proportion of external audits.
87. The third report on Chapel Road’s compliance prepared by Ms Donselaar is dated 17 November 2000 (T41). Her instructions to prepare this report were verbal and from Mr Burgess. Once again, she stated that Chapel Road’s Compliance Manual was “generally adequate” but identified a number of issues it failed to address. She was only aware of one THP audit from the material before her. Similarly, her concerns about Mr Budd were based on the material before her. Counselling and close supervision were obviously relevant. Ms Donselaar was referred to Chapel Road’s letter of advice to Mr Burgess dated 26 May 2000 (T135) advising of potential breaches of licence conditions in relation to Mr Budd and of action taken to correct the breach. In Ms Donselaar’s view, this was appropriate. She did not recall being provided with this letter in preparing her report.
88. With regard to complaint handling, Ms Donselaar said she had seen no evidence of systemic consideration as required by AS 4269 – 1995 Complaints handling. Nevertheless, she agreed, once again, that there is no express legal requirement for a dealer to have a Compliance Manual.
89. Ms Donselaar’s fourth report on Chapel Road’s compliance, dated March 2001 (T48), was prepared in response to a request from the ASIC delegate to comment on documents provided at the hearing. She stated (p4) that “the compliance plan of January 2001 is significantly better than the previous drafts submitted by Chapel Road”.. However, she questioned Chapel Road’s ability to be responsive given the time that had elapsed since the first ASIC surveillance. Nevertheless she agreed that if her reports were made available to Chapel Road in December 2000 and the issues raised were addressed in January 2001, then this was a timely response. In any event, she would expect Chapel Road to modify its compliance procedures independently of an ASIC audit.
90. Ms Donselaar noted that the Compliance Manual had also been updated in January 2001 to address the issues which she had raised previously, although there were still flaws. She has not seen any material about a Compliance Committee. She said if senior management are committed to a culture of compliance, this is important in encouraging compliance in the organisation as a whole.
(f) Brett Walker
91. Mr Walker was engaged by Chapel Road as an expert witness and provided a statement dated 4 June 2002 (A1). Since 1998, he has been a director of FSI Consulting Pty Ltd, engaged in the provision of compliance and related consulting services to the financial services industry. He holds a Bachelor of Laws degree from the University of Queensland and is an affiliated member of the Financial Planning Association of Australia (FPA). From about 1990 to 1994, Mr Walker worked for ASIC as an investigator and market analyst and, from late 1994 until 1998, he was employed by the FPA providing compliance advisory services to FPA members.
92. Mr Walker described compliance as the management of a business in such a way as to ensure the meeting of its statutory responsibilities. He agreed that whereas regulation 7.3.02 is concerned with actual performance and is a substantive obligation, the first condition attached to Chapel Road’s securities dealers licence (T9) is concerned with the procedures required to achieve that performance and is, therefore, a procedural obligation. Mr Walker said he did not examine Chapel Road’s performance or procedures in the period before August 1999.
93. Mr Walker agreed that procedures require a system. Thus, compliance with the first condition of Chapel Road’s licence requires a system, and a system requires appropriate documentation. He agreed that if there was no documentation, Chapel Road would be in breach of the first condition.
94. Mr Walker said he is not a certified financial planner and does not hold a Diploma in Financial Planning. While at the FPA, he held the positions of Senior Compliance Officer, Compliance and Technical Services Manager and Professional Standards Manager. He reported to Annette Donselaar. He was the principal author of the FPA Compliance Handbook. Ms Donselaar wrote the section on complaints handling and undertook the overall editing of the Handbook.
95. Mr Walker is a shareholder but not a director of an advisory services benchmarking business, Adviser Ratings Pty Ltd, for which he does some work. As a result, he has become familiar with compliance management systems. Adviser Ratings Pty Ltd use a questionnaire with over 400 detailed questions to make an assessment. These questions seek information about the educational qualifications of an adviser, whether the adviser attends ongoing training, how the adviser is remunerated, the number of support staff the person has, the quality controls put in place by the licensee etc. No assessment is made of the quality of the advice given.
96. Mr Walker acknowledged that an assessment of a licensee’s quality control system in a business involving between 35 and 70 proper authority holders would, inevitably, involve an inspection of relevant documentation. But the existence or not of such documentation would not affect an adviser rating score. Similarly, whether or not there is a complaints handling system in place is not something which would affect an adviser rating.
97. Mr Walker agreed that from 1998 there was a requirement for securities dealers to have a complaints handling system in accordance with the Australian Standard on Complaints handling (AS 4269 – 1995 (T4)). Mr Walker acknowledged that he had not seen any evidence of Chapel Road having a complaints handling system in the period from August 1999. However, it was not part of his instructions to see whether Chapel Road had a system compliant with AS 4269 - 1995.
98. Mr Walker acknowledged that “a minuted commitment from the directors of an organisation” agreeing to abide by AS 4269 – 1995 (A1 para 41) would not necessarily give rise to a complaints system. There would have to be other documents requiring, at the very least, the recording of complaints and their outcomes (T4 – AS 4269 – 1995 – para 2.11). In the period prior to the hearing conducted by the ASIC delegate in November 2000 (Transcript 9 December 2002 p24), Mr Walker did not see any document recording complaints made nor their outcomes.
99. With regard to compliance with regulation 7.3.02, Mr Walker said, at the relevant time, he was not aware of any industry-wide accepted interpretation or guidance on the way in which licensees were expected to comply. He agreed that ASIC Policy Statement 117 – “Investment advisory services: acting as a representative”, issued 3 March 1997 (T6), and ASIC Policy Statement 122 – “Investment advisory services: the conduct of business rules (s 849 and s 851)”, issued 3 March 1997 (T7), were industry-wide accepted guidance, and AS 4269 – 1995 on Complaints handling (T4), was industry-wide imposed guidance. However, he said that the Australian Standard on Compliance programs (AS 3806 – 1998 (T5)), while accepted by a large number of participants in the industry, was not universally accepted, and was not mandatory. AS 3806 – 1998 requires documentation, training programs and a compliance plan. Mr Walker said he was not asked to check whether Chapel Road complied with AS 3806 – 1998.
100. Mr Walker acknowledged that he advises clients to document their compliance risks and procedures and said other consultants would do the same. While he advises clients that authorised representatives should be audited once a year, this is not his advice universally – it depends on the circumstances. He agreed that the supervision of advisers is a critical business risk and should include periodic audits. Annual auditing of advisers would be a reasonable requirement. Mr Walker noted that regulation 7.3.02 requires that representatives be adequately supervised in the performance of their duties. He acknowledged that in a paper given at the FPA Convention in Melbourne in December 2000 (R1), he recommended an annual compliance audit and suggested that problems be documented. Mr Walker said there are other ways of supervising representatives other than conducting an audit. These include training, mentoring – for example, assisting a person to prepare a plan for a client - and the use of software which permits external supervision of a representative’s work.
101. With regard to his statement that he was not advised of any Chapel Road representative contravening a licence condition or a provision of the securities law (A1 para 48), Mr Walker acknowledged that he is now aware of a banning order made in respect of Stephen Cochrane, a proper authority holder of Chapel Road, on 11 January 2000 (R3). He is also aware that a professional indemnity claim has been made in respect of that matter (A1 para 49).
102. Mr Walker acknowledged that it would be reasonable for a licensee to advise authorised representatives of the licensee’s obligations under s 787 of the Act to notify ASIC of a breach of a licence condition within one day after the happening of the event, even though there is no legal requirement to put such a system in place (A1 para 45).
103. With regard to Chapel Road’s appointment of authorised representatives, Mr Walker said he is not aware whether Chapel Road appointed any proper authority holders in 2000. He assumes there would be some documentation about this but he was never shown any. He agreed that to ensure compliance with regulation 7.3.02(1)(b) – that representatives are sufficiently trained before acting as a representative – a licensee would need to know about the representative’s skills, qualifications and history, and that a probity check of the person would need to be undertaken.
104. Mr Walker was referred to paragraph 5 of the FPA Code of Ethics (R2) which requires that members comply with the FPA’s regulations and professional standards. Rule 133 requires that a Principal Member “shall establish and maintain written policies and procedures for the effective control and conduct of its business”.. Rule 135 requires that a Principal Member “must maintain an effective system of supervision of all representatives’ activities, performance, training and recommendations made to clients”.. Mr Walker confirmed that Chapel Road is a Principal Member of the FPA.
(g) Paul Brady
105. Mr Brady has been a Certified Financial Planner (“CFP”) since about 1997 and is a licensed securities dealer. He said he has been a financial adviser for about 14 or 15 years. He has a Master of Commerce (Financial Planning). Mr Brady has served as a director of the FPA for the past four years. He chairs the FPA’s audit committee and the national practitioners advisory committee. He has been involved in developing educational standards for the FPA and in the assessment and recognition of educational programs. In his business, Brady and Associates Pty Ltd, he now has six proper authority holders. In 1999, he had three or four proper authority holders (Transcript 9 December 2002 p77) but, except for him, none gave advice to clients. Mr Brady has a wide range of clients, primarily individuals and not all wealthy.
106. Mr Brady received instructions (T42 p859) from ASIC to review 12 files relating to seven proper authority holders of Chapel Road and prepare a report. The files were selected by ASIC. Mr Brady was instructed to assess the files according to the assessment module used in the Australian Consumers Association (ACA)/ASIC Survey and the marking guide used to assess unit 5 of the Diploma of Financial Planning. He said he considered these an appropriate guide. He provided his report to the ASIC in November 2000 (T42 p844). He has undertaken one other report for the ASIC.
107. Mr Brady agreed that since he became a CFP, the requirements for certificates have been tightened up progressively. Those who do not comply with the requirements are not likely to stay long in the industry. He also agreed that a person’s abilities as a financial planner usually improve with experience.
108. Mr Brady said in conducting his review of the Chapel Road files, he formed the view that in many instances the process of gathering relevant client information had not been thorough. He identified a range of problems. The level of disclosure was of particular concern. In some cases, there was an absence of disclosure, while in others it was inaccurate or there was contradictory information in different parts of the written advice. He did not detect examples of a client losing money as a result of the advice received but in a limited number of cases the particular investment recommended seemed inappropriate: for example illiquid, long term geared investments where the clients were contemplating retirement in the relatively short term (T42 p857).
109. Mr Brady said he has recently prepared a number of financial plans. His business has a Compliance Plan but, at the time of his report, while there was a Compliance Manual, which he drafted, there was no Plan. He acknowledged that because of the small size of his business - he supervises himself, he does not have an external auditor for his practice.
110. During 1999/2000, when a securities dealer had a number of proper authority holders in different locations, it was usual to have a compliance officer and for there to be a level of formality in the supervision of the proper authority holders. Generally, Mr Brady’s impression is that in larger organisations there is greater formality, including as to standards, and more resources are committed to compliance. He said where problems with proper authority holders are identified, the proper authority holder should be informed of those problems so that preventive steps can be taken.
F. Consideration of the Law and Findings
(a) Compliance Obligations
111. The principal issue for the Tribunal to determine is whether Chapel Road fulfilled its compliance obligations as required by the first condition of its securities dealers licence and the relevant provisions of the law.
(i) Licence Condition
112. The first condition of Chapel Road securities dealers licence dated 14 October 1996 (T9) states:
1.The licensee shall establish and maintain adequate training, supervision and compliance procedures designed to ensure, as far as is reasonably possible, that the licensee’s representatives do not contravene, in their conduct on behalf of the licensee, or in connection with the securities business carried out by the licensee:
(a) any provision of a Securities Law; or
(b) another condition of this license.
The obligation is to establish and maintain adequate training, supervision and compliance procedures. In the Tribunal’s view, as a matter of practicality and good management, this would ordinarily require that those procedures should be set out in writing. Those procedures must be “designed to ensure, as far as is reasonably possible” that the licensee’s representatives do not contravene the relevant Securities Law or another condition of the licence.
113. In the present matter, the focus is on contraventions of the relevant law and whether Chapel Road’s procedures were designed to ensure, as far as is reasonably possible, that its representatives did not contravene the relevant law. ASIC contend that Chapel Road failed to have in place an adequate compliance system.
(ii) Regulation 7.3.02
114. Regulation 7.3.02(1) of the Corporations Regulations stated that a dealers licence is subject to the condition that each holder of the licence must ensure that each representative of the holder:
(a)is adequately supervised in the performance of duties that he or she is required by the holder to perform; and
(b)is sufficiently trained in relation to those duties before acting as a representative; and
(c)keeps up to date in relation to those duties by means of continuing training programs.
115. ASIC contend that Chapel Road breached these licence conditions by
(a)failing to provide adequate initial and ongoing training to its proper authority holders, and
(b) failing to adequately supervise it proper authority holders.
116. It seems to be accepted (see, for example the Respondent’s Statement of Facts and Contentions) that the supervision and training required by regulation 7.3.02 was for the purpose of ensuring compliance with s 849 and s 851. Further elucidation of the required standard can be found in AS 3806 – 1998 Compliance programs, published on 5 February 1998 (R13), which provides “Guidance in developing a program for compliance with laws and regulations”. Clause 1.2 states that
The purpose of this Standard is to provide a framework for an effective compliance program, the performance of which can be monitored and assessed.
Part of this involves promoting “a culture of compliance within the organisation”.
117. At the hearing, there was no reference to specific breaches of the s 849 disclosure requirements, nor to specific breaches of the s 851 requirement that an adviser has a reasonable basis for making a securities recommendation to a person. In answer to a question from the Tribunal at the commencement of the hearing, Mr Lynch confirmed that the Respondent was not directly pursuing breaches of these sections (Transcript 9 December 2002 pp3 - 4), although the Respondent contends, based on a sample of 12 files reviewed by Mr Brady, that Chapel Road failed to ensure that the level of disclosure by proper authority holders was adequate and failed to ensure the appropriateness of the advice given to clients. The Tribunal notes Mr Brady’s evidence that in his November 2000 report (T42), on the review he conducted for ASIC of 12 files relating to seven proper authority holders, he identified problems in relation to the gathering of client information and in some cases as to the suitability of advice and level of disclosure. There was insufficient evidence before the Tribunal to form any view as to breaches of s 849 and s 851 and, as noted, this was not the focus of the Respondent’s contentions.
118. Regulation 7.3.02B(5) requires that the licensee must have in place at all times internal complaints handling procedures for dealing with complaints from retail investors that are in accordance with AS 4269 – 1995 Complaints handling, as in force on 1 October 1998. AS 4269 – 1995 “sets out the essential elements for the management of complaints … [and] guidelines for the implementation of a complaints handling process” (T4 p59).
119. ASIC contend that “Chapel Road failed to have in place an adequate internal complaints handling system”.
(b) Discussion and Findings
120. The Tribunal sets out its findings below: first, general findings; second, on the adequacy of the initial and ongoing training provided by Chapel Road to its authorised representatives; third, on the adequacy of the supervision of their representatives in the performance of their duties; fourth, on the adequacy of their internal complaints handling system; and, fifth, on the adequacy of their compliance system.
(i) General Findings
121. One of the allegations made by Chapel Road is this matter was that ASIC failed to provide copies of Ms Donselaar’s reports to Chapel Road with the implicit consequence that it was unable to respond as fully as it might otherwise have done to the concerns raised by ASIC. It is appropriate therefore to set out the sequence of events which led to the revocation of Chapel Road’s licence. In doing so, the Tribunal notes that it drew on the chronology provided by Chapel Road in its written submissions.
· August/September 1999 – ASIC surveillance of Chapel Road following complaints relating to Stephen and Robyn Cochrane.
· 24 September 1999 (T11) – ASIC letter (from Brian Burgess) to Chapel Road raising concerns about the adequacy of Chapel Road’s compliance and training regime, requiring a response by 30 October 1999.
· 14 October 1999 (T12) – Chapel Road response (from Nicholas Bahles, Managing Director) expressing gratitude for ASIC’s surveillance, addressing ASIC’s concerns and setting out steps to be taken to alleviate those concerns: specifically, Chapel Road will reduce the number of proper authority holders (they were reduced to 34), out-sourcing of compliance visits (to THP), appointment of a business manager, implementation of an induction style course, publishing a newsletter with input from the Compliance Manager, establishing a Training and Professional Development Team Committee, constructing a new and comprehensive Compliance Plan with guidance from an external expert (Mosaic Solutions Pty Ltd) who assisted in developing the Compliance Manual.
·November 1999 (T13) - Chapel Road draft Compliance Plan.
·9 November 1999 (T99) - Email from Chapel Road (Matthew Gadd, Compliance Manager) to Mr Burgess attaching first draft of Chapel Road’s Compliance Plan and setting out other action being taken, including an inaugural competency exam for all proper authority holders in January 2000, and plans for a classification ranking system for advisers.
·17 November 1999 (T100) - Email from Mr Gadd to Mr Burgess about the Compliance Plan and inviting further suggestions. The Applicant contends this is indicative of the co-operative approach adopted by Chapel Road.
·29 November 1999 (T101) - Email from Mr Gadd to Mr Burgess enclosing the final draft of the Compliance Plan.
·17 December 1999 (T14) - Letter from Mr Burgess to Mr Bahles requesting additional information.
·13 January 2000 (T15) – Mr Bahles responds to Mr Burgess’ letter. Enclosed are Chapel Road’s “Knowledge Assessment”, and a statement that representatives will be appraised on an annual basis. The timetable for implementation of the Induction Training Course for new appointees is stated to be 1 April 2000 but with respect to the Training Assessment in operation, the letter refers to the assessment carried out by the Compliance Manager on new appointees who are requested to meet with the Compliance Manager to discuss their responsibilities and Chapel Road’s requirements. The prescribed format for the interview is disclosed (T15 p327), covering financial plan construction, training and development, client file composition and other general matters. Enclosed with Chapel Road’s letter were minutes of the inaugural Compliance and Training Committee meeting on 7 December 1999 (T15 p320), which include reference to topics to be presented at training days including systemic issues identified from the THP audit results. There is also reference (at p309) to the proposed system for appraising proper authority holders involving a classification system which Mosaic Solutions Pty Ltd helped develop for Chapel Road.
·27 January 2000 (T16) – Mr Burgess’ letter to Mr Bahles, raising concerns about the THP audits and mandatory educational requirements with regard to the financial planning diploma. The timetable in respect to the classification of advisors is considered as a key remedial initiative that should have been implemented as a matter of urgency. The Applicant notes that ASIC raised concerns about the timetable for implementing the classification system but not about the system itself.
147. On the basis of the chapter on Complaints Resolution in the Compliance and Procedures Manual (T10), which makes reference to the need to satisfy the requirement for a complaints handling system conforming with AS 4269 – 1995 as from 1 October 1998, the Tribunal finds that such a system was in place from July 1999. However, the Tribunal notes, once again, that no evidence has been provided for example as to a complaints register or how particular complaints have been resolved.
(v) The Compliance Regime
148. For Chapel Road to comply with regulation 7.3.02 and condition 1 of its licence required that it have in place a regime involving training, supervision and compliance procedures. Condition 1 requires that such a regime should be “designed to ensure, as far as is reasonably possible, that the licensee’s representatives do not contravene” relevant provisions of the Securities Law.
149. The Respondent contends that “Chapel Road failed to have in place an adequate compliance system”.. Mr Lynch submitted that condition 1 imposes a high standard and requires self-regulation by the licensee. The licensee was obliged to identify its obligations and the requirements of the law and put in place appropriate procedures and structures to ensure compliance. He contended that the Applicant had not provided evidence as to its situation before November 1999. As a matter of law, it is not enough to show that Chapel Road was responsive to the concerns raised by ASIC. Chapel Road came to ASIC’s attention as a result of the Cochrane matter and the ensuing ASIC surveillance in August/September 1999. The issue is whether Chapel Road was in breach of condition 1 of their licence (T9) granted on 14 October 1996.
150. Mr Lynch said Chapel Road seemed to resent ASIC’s interfering in its business. He noted “rancorousness”, evident for example in Mr Bennett’s allegation of a conspiracy in the withholding of documents. By contrast, Mr Lynch contended that a licence should be regarded as a privilege imposing responsibilities on a dealer including, pursuant to condition 1 of the licence, self-regulation.
151. Mr Lynch submitted that the Applicant’s contention that there was no express requirement for a Compliance Plan or Manual was, therefore, not relevant. ASIC does not require every dealer to have a Compliance Manual or Plan. He acknowledged that Mr Brady, the Respondent’s expert witness, did not have a plan. It is a matter of self-regulation and self-analysis as to need and Mr Brady’s circumstances are very different from those of Chapel Road.
152. Mr Lynch said the fact that Chapel Road responded to ASIC’s concerns does not establish that it met the obligations implicit in condition 1 of its licence. While Chapel Road reduced the number of its proper authority holders from 71 in September 1999 to 36 by late June 2000, it is clear that the position in September 1999, about which ASIC voiced its concerns, was as a result of deliberate business planning.
153. Mr Lynch referred to ASIC’s letter to Chapel Road of 24 September 1999 (T11) which stated ASIC’s view that the resources allocated by Chapel Road to the supervision and training of its authorised representatives was inadequate. The letter cites an internal Chapel Road memorandum from the Compliance Manager, Mr Gadd dated 31 May 1999. In this memorandum, Mr Gadd refers to “chronic understaffing in this organisation – particularly in the research and compliance areas” (T11 p280).
154. Mr Lynch referred to Chapel Road’s letter to ASIC dated 2 February 2000 (T17) which refers to Chapel Road having “detected a global lack of understanding regarding full disclosure”. Mr Lynch asked why this was not detected until February 2000. He noted that Mr Brady, in his report dated November 2000 (T42), also expressed concern over the level of disclosure.
155. Mr Galvin noted that the requirement for compliance in condition 1 of Chapel Road’s licence is “as far as is reasonably possible”.. The Applicant contends that Chapel Road did all that was reasonably possible. The issuing of the Compliance and Procedures Manual in July 1999 (T10) indicates that Chapel Road had turned its mind to its compliance obligations before the ASIC surveillance.
156. Mr Galvin said there is no express legal requirement for the Applicant to have either a Compliance Plan or a Compliance Manual. Mr Walker (A1) gave evidence that plans and manuals are useful tools but not mandatory indicators of compliance. He suggested that Ms Donselaar proposed standards and benchmarks were not universally applied to the industry. Mr Brady, the Respondent’s expert witness, did not himself have a Compliance Plan at the relevant time. Nevertheless, the evidence for the Applicant with regard to Compliance Plans and Compliance Manuals suggests a culture of compliance. Even though in her report of March 2000 (T19), Ms Donselaar found Chapel Road’s Compliance Manual failed to address a number of issues, she found it “generally adequate”.
157. Mr Gadd’s internal memorandum of 31 May 1999 (T11 p280) does not indicate that compliance obligations were not being addressed. It does, however, indicate an attempt to inculcate a culture of compliance, evidenced by the new edition of the Manual, the draft Plan, staffing changes and the appointment of a full-time Compliance Manager. Mr Galvin noted that Mr Hollonds was recruited after an unsuccessful search for an experienced Compliance Manager. Nevertheless, he had relevant experience and the background to take on such a position.
158. With regard to Mr Lynch’s allegation of a lack of commitment by Chapel Road and to its stated initiatives not being followed through, Mr Galvin noted that in the year 2000, Chapel Road went through major changes including the recruitment of a new full-time Compliance Manager in June 2000 and dealing with the Cochrane matter. Despite this, both internal and external audits were undertaken, including audits of all proper authority holders within the 12 month period before their leaving Chapel Road. Another indication of Chapel Road’s recognition of the importance of compliance is that the Compliance Manager reported directly to the Board. Mr Galvin contended that the evidence supports a finding that there was a culture of compliance and that Chapel Road had not breached its licence conditions nor any relevant law.
159. The Tribunal has already made separate findings in relation to training, supervision and complaints handling. These matters are also relevant to whether Chapel Road had in place a regime designed to ensure as far as is reasonably possible compliance with the relevant provisions of the law.
160. The Tribunal accepts that to establish a compliance regime requires that the financial planning organisation licensee have a system in place with appropriate documentation to record the objectives or goals to be achieved and the procedures to be followed. Without appropriate documentation there will be no procedural certainty and likelihood of consistency is significantly reduced. Thus, while as Mr Galvin pointed out, there is no express requirement in law for the licensee to have a Procedures Manual and a Plan, it is administratively necessary to do so in order to meet the required standard. This is implicit in AS 3806 – 1998 Compliance programs.
161. The evidence shows that Chapel Road had a Compliance and Procedures Manual at least from July 1999 (T10). It also had a draft Compliance Plan from November 1999 (T13). Prior to July 1999, it appears that Chapel Road had some sort of Compliance Manual although when it was first granted a licence on 14 October 1996, it may have relied on the FPA Compliance Handbook published in 1994. In 1999, it engaged an external consultant, Ms Kerrie Giles of Mosaic Solutions Pty Ltd to assist in drafting the Procedures Manual and Plan.
162. In her report of March 2000 (T19), Ms Donselaar described Chapel Road’s Compliance Procedures Manual as “generally adequate” but identified a number of issues that it failed to address. There is no evidence that those issues were specifically made known to Chapel Road until December 2000 when a copy of the report was finally provided. In Ms Donselaar’s report of 17 November 2000 (T41), she once again found the Manual to be “generally adequate” but found it failed to address certain issues. That report was provided to Chapel Road in late November or early December 2000. In her report of March 2001 (T48), she commented on an updated version of the Manuals she reviewed previously. Some of the issues identified in the earlier reports had been addressed but she was critical of the training and assessment provisions.
163. In her report of March 2000 (T19), Ms Donselaar comments on the draft Compliance Plan of November 1999, comparing it with the standards set out in AS 3806 – 1998. In her opinion, the Plan failed to meet the necessary standards. As stated above, a copy of that report was not provided to Chapel Road until late November/early December 2000 and so it is not surprising that the changes made during 2000 were minimal. In her report of March 2001 (T48), by which time Chapel Road had received copies of all her previous reports, Ms Donselaar found the Compliance Plan to be significantly better than previous drafts, although she identified specific issues which required addressing.
164. Other responses by Chapel Road to the ASIC surveillance included a significant reduction in the number of proper authority holders from about 76 in late 1999 to about 35 in June 2000, an improved training regime, classification rankings for representatives, the establishment of a Compliance and Training Committee, an improved audit regime including a proportion of externally conducted audits, and the appointment of a full-time Compliance Manager.
165. Chapel Road was already using IDT software, one of a number of competing products available which Ms Donselaar described as a valuable tool for the paraplanner. The Tribunal finds that the use of such a system tends to facilitate compliance by promoting higher standards for recording client information and preparing financial plans but also permits external review by the organisation’s head office of certain aspects of a representative’s business. Unfortunately, as Mr Hollonds acknowledged, the IDT software was only being used by about one third of Chapel Road’s representatives.
166. With regard to the Compliance and Training Committee, as Mr Lynch pointed out, this only seems to have met once on 7 December 1999 (T108). Mr Lynch pointed to this and the small number of Bulletins published as an indication of Chapel Road’s lack of commitment to compliance. However, the Tribunal notes, as Mr Galvin pointed out, that Chapel Road underwent major changes in the year 2000 which was a very busy one in terms of dealing with compliance issues.
167. One of those changes was the recruitment of a full-time Compliance Manager to replace Mr Gadd who was only part-time in his role as Compliance Manager. Mr Davies’ evidence is that Chapel Road was unable to identify a suitable candidate with experience as a Compliance Manager. None of the candidates presented by the “headhunters” whom Chapel Road approached had relevant compliance experience. Mr Hollonds, whilst not previously a Compliance Manager, had worked as a financial planner up until 1989 and since 1992 had had relevant experience with IDT in advising clients on compliance related issues. Chapel Road arranged for the outgoing Compliance Manager, Mr Gadd, to work with Mr Hollonds for three months after his commencement. Mr Hollonds also embarked on study for units 1 and 2 of the Diploma of Financial Planning, although he had completed a financial planning course run by the Australian Investment Planners Association in the 1980s. The Tribunal finds that Mr Hollonds’ appointment was appropriate in the circumstances and is not persuaded that his conduct has been other than entirely competent.
168. In general terms, the Tribunal finds that while Chapel Road may have been in breach of its compliance obligations in August/September 1999, over the course of the next 16 months to the time of the hearing before the ASIC delegate in January 2001, significant steps were taken by Chapel Road towards improving their compliance regime and their culture of compliance. This was notwithstanding some communication difficulties with ASIC over the specific issues identified by Ms Donselaar in her earlier reports, which were not made known to Chapel Road specifically until late November/early December 2000, about a month before the hearing before the ASIC delegate.. The Tribunal notes Ms Donselaar’s evidence that it was ASIC’s normal practice for ASIC’s reports to be provided to the relevant financial planning organisation (Transcript 20 June 2003 p24).
(b) Performance of Duties – Efficiently, Honestly and Fairly
(i) Relevant Law
169. Section 826(1) empowers ASIC to revoke a licence if ASIC has reason to believe that the licensee has not performed or will not perform their duties “efficiently, honestly and fairly”.. The leading authority on the interpretation of those words is Justice Young’s decision in Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672:
Thus I turn to the phrase “efficiently, honestly and fairly”. In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words “efficiently, honestly and fairly” must be read as a compendious indication meaning 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…
So far as “efficient” is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate: see, eg, Spotts v Baltimore & Ohio Railroad Co 102 F(2d) 160 at 162 (1939). Although that definition comes from a case dealing with handbrakes on railways cars, it seems to me that it can be applied to the word used in the current statute.
Later in Story (supra), Young J explains the test of efficiency (at 679), as follows:
does the relevant conduct show that the performance by the plaintiff of his functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect: cf Boyd v Carah Coaches Pty Ltd (at 99)?
170. His Honour’s interpretation has been followed in a number of court and tribunal decisions, including Re Kippe and ASIC (1997) 16 ACLC 190 at paragraph 209 where Deputy President Forgie said:
A person cannot be said to operate efficiently if he or she has no knowledge, or only a very limited knowledge of the laws which must be followed and which may circumscribe his or her actions.
And at paragraph 213:
Whether or not a dealers representative had a dishonest intent would be relevant but so too is an objective assessment of whether or not his or her conduct satisfies the standard of propriety which may be expected of a dealers representative.
171. In Re Campbell and ASIC [2001] 37 ACSR 238 at para 117, the Tribunal found that “notwithstanding the absence of any finding of dishonesty”, the applicant’s inefficiency – “demonstrably inadequate securities advice practices” – and contravention of the law were sufficiently serious to warrant the making of a banning order.
(ii)Contentions
172. The Respondent contends, first, that having regard to the matters previously raised, “Chapel Road does not have the technical expertise and knowledge to fulfil its responsibilities to proper authority holders, and thus may not have performed the duties of a licensed securities dealers efficiently, honestly and fairly” and, second, that having regard to the matters previously raised “Chapel Road will not perform the duties of a licensed dealer efficiently, honestly and fairly”.
173. Mr Lynch referred to Mr Bennett’s evidence and in particular to his statement (A2 para 6) that in the early part of Chapel Road’s history, he played “a minor role in the company on a Consultancy basis”.. However, in cross-examination, Mr Bennett accepted that he was a regular participant at Management Committee meetings. Mr Lynch suggested that the Management Committee was the de facto Board.
174. Mr Galvin pointed to Mr Bennett’s statement (A2) that in the “early part” of Chapel Road’s history he played a minor role on a consultancy basis. Mr Galvin said it is understandable that there should be some resentment at ASIC’s actions given that Chapel Road was cooperative and sought ASIC’s assistance throughout the relevant period, and because of the dire consequences of the revocation of Chapel Road’s licence. Chapel Road never indicated resentment during that period and, indeed, thanked ASIC for their surveillance (T12) while still seeking copies of ASIC’s reports.
(iii) Findings
175. There have been no allegations of dishonesty made about Chapel Road. The Respondent’s contentions go to the efficiency of Chapel Road, the implication being that if Chapel Road is inefficient, this will also have an adverse effect in terms of fairness, in particular, on its clients.
176. As noted above, there is some evidence to suggest that Chapel Road may have been in breach of its compliance obligations in August/September 1999 and, therefore, not “efficient” in terms of a compliance regime of the required standard. However, the evidence is not very clear except in relation to the Cochrane matter and the lack of a Compliance Manual or Plan until around that time, although the Compliance Manual of July 1999 appears to predate ASIC intervention.
177. Despite some evidence of compliance breaches in August/September 1999, following ASIC intervention, Chapel Road took substantial steps to improve their compliance regime and bring it into line with the required standard. By the time of the hearing before the ASIC delegate in January 2001, a significant improvement had been achieved. The fact that the changes came about as a response to ASIC intervention does not devalue the changes in themselves. In terms of the capacity of Chapel Road to maintain a compliant regime, it also does not necessarily mean that Chapel Road will not be capable of being proactive rather than reactive to compliance issues in the future. It seems abundantly clear that Chapel Road has received the message about the need for proactivity and, given what has occurred over the past two years and the cooperative attitude taken by Chapel Road towards ASIC in the period September 1999 to January 2001, the Tribunal is optimistic that Chapel Road would act appropriately in the future.
178. As to resources if Chapel Road’s licence is restored, Mr Bennett’s and Mr Hollonds’ evidence suggests that although some consideration has been given to how to restart Chapel Road’s business if its license is restored, no detailed planning has been undertaken and, for example, no budget has been prepared. However, both Mr Bennett and Mr Hollonds said the resources of Benwest would be available to Chapel Road in re-establishing its compliance regime including, if necessary, taking on additional staff for this purpose. Mr Bennett said Chapel Road’s business would initially be small, building up to about 30 proper authority holders over time.
179. The Tribunal therefore finds that Chapel Road may not have performed efficiently, honestly and fairly the duties of a holder of a dealers licence in August/September 1999 but has reason to believe that it will perform those duties efficiently, honestly and fairly in the future.
(c)Enforcement Action
(i) Relevant Law and Practice
180. The Tribunal’s role in conducting a review is to stand in the shoes of the decision-maker and make its own decision. In doing so, if the Tribunal finds that the Applicant has failed to comply with the provisions of the Act, the Tribunal must decide whether the correct and/or preferable decision should involve enforcement action being taken against the Applicant, especially if it makes adverse findings as to the Applicant performing its duties efficiently, honestly and fairly.
181. A range of enforcement action is open to ASIC once it has given the licensee an opportunity to appear at a private hearing before the ASIC delegate and to make submissions and give evidence in relation to the matter (s 837(2)). Relevantly in the current matter, s 786(1)(b) permits ASIC to impose conditions or restrictions on a licence which is in force. Pursuant to s 786(2), “without limiting the generality of subsection (1)”, such conditions and restrictions may include:
(e)conditions about what the holder of a licence is to do, by way of supervision or otherwise, in order to prevent the holder’s representative from contravening:
(i) a securities law; or
(ii) another condition of the licence; or
(f)conditions about what the holder of a licence is to do to ensure that each representative of the holder has adequate qualifications and experience having regard to what the representative will do on the holder’s behalf in connection with a securities business or investment advice business carried on by the holder.
Section 786(7) permits ASIC, at any time, to revoke or vary such conditions or restrictions.
182. Secondly, pursuant to s 826(1), ASIC may revoke, or, pursuant to s 827, suspend a licence.
183. An additional power open to ASIC, not subject to the requirement for a private hearing, is that authorised by s 93AA(1) of the Australian Securities and Investments Commission Act 2001 which states that “ASIC may accept a written undertaking by a person in connection with a matter in relation to which ASIC has a function or power under the Act”.. The Federal Court decision in Australian Securities and Investment Commission v Donald [2002] FCA 1174 confirms that the AAT, standing in the shoes of the ASIC, has power to utilise this power.
184. Finally, s 788(1) of the Corporations Act states that ASIC can require the holder of a dealers licence “to lodge such written information or statements in relation to the securities business carried on … as the ASIC from time to time directs”.
185. It is clear that the exercise of the ASIC’s powers should be protective of the public interest and preventative in nature. They are not intended to be punitive: Story (supra) at 685. In Australian Securities Commission v Kippe (1996) 67 FCR 499 at 508, the Full Federal Court emphasised that the purpose of a proceeding which may result in a banning order is not penal in nature and designed to punish:
Rather, the grounds set out in s829 clearly point to the conclusion that it is properly described as protective …
The immediate and direct legal effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein.
It seems clear that similar principles apply in respect of the exercise of the ASIC’s other powers: for example, Nisicv Corporate Affairs Commission (1998) 8 ACLC 514 at 525; Re Donald and ASIC (2001) 38 ACSR 661 at 675.
186. However, Mr Lynch submitted that the Tribunal should have regard to the recent New South Wales Supreme Court decision of Gzell J in ASIC v Whitlam (No 2) (2002) 42 ACSR 515 at paragraph 627. Gzell J said:
In general terms, the purpose of an order prohibiting a person from managing a corporation is to protect the public whereas the purpose of a pecuniary penalty is to act as a personal and general deterrent against repetition of like conduct.
While it may be said in a broad sense that deterrence is the motive for ordering a penalty and protection of the public is the motive for prohibiting a person from management of a corporation, there is no logical reason why deterrence should not also be taken into account when the question of prohibition from management of a corporation is in question.
187. Mr Lynch submitted that the Tribunal should also, therefore, consider deterrence in the context of a revocation order. By contrast, Mr Galvin sought to distinguish the decision in Whitlam (supra) on the ground that it is concerned with different sections of the Act dealing with directors. He noted that no reference was made to the decision in Story (supra) which is the relevant authority on enforcement action with regard to securities dealers.
188. The decision in Whitlam (supra) included a finding that Mr Whitlam had failed to act honestly in the exercise of his powers and the discharge of his duties as chairman of the board of directors and had made improper use of his position to gain an advantage for himself and for other directors. It was open to the Court to order that Mr Whitlam be prohibited from managing a corporation for a particular period and/or to pay a pecuniary penalty to the Commonwealth. Justice Gzell referred to the New South Wales Supreme Court decision in Re HIH Insurance; ASIC v Adler (2002) 42 ACSR 80 at 97-98, where Santow J analyses the cases on disqualification and banning orders in respect of directors.
189. Santow J sets out the propositions that may be derived from the cases. These include that the order is designed to protect the public by seeking to both safeguard the public interest and protect individuals that deal with the company. In addition, however, “The order has a motive of personal deterrence, though it is not punitive” and “The objects of general deterrence are also sought to be achieved”. In relation to the period of disqualification, “Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty” and “In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public”.
190. The cases referred to by Santow J involve an order made in respect of an individual director akin to the banning order which ASIC may make in respect of a natural person pursuant to s 828 and s 829 in relation to securities matters. They do not involve the revocation of a licence of the kind in issue in the present proceedings. Nevertheless, in the Tribunal’s view, similar considerations apply and reference to Santow J’s propositions provides useful guidance.
191. The Tribunal accepts that while ASIC’s powers are not intended to be punitive in character, an aspect of protecting the public interest is deterring similar conduct in the future. To that extent, the Tribunal accepts Mr Lynch’s submission that deterrence may also be a relevant consideration in the context of whether to revoke a securities dealers licence. In particular, the Tribunal notes his point that the responsibilities imposed on securities dealers are fiduciary in so far as they may be dealing with large sums of money on trust for their clients.
(ii)Conclusion
192. Mr Lynch submitted that it is a matter of whether Chapel Road’s licence should be revoked for breach of its licence conditions. Revocation of a licence is viewed not as a penalty but as a measure of protection against failure. Mr Galvin said that even if breaches did occur, the circumstances do not warrant revocation of Chapel Road’s licence, which is a serious matter. In such a situation, it would be more appropriate to impose conditions on the licence, for example, as to training or supervision. Mr Galvin noted that if Chapel Road’s licence is reinstated, the resources of Benwest are available to ensure compliance.
193. The Tribunal has found that Chapel Road may have breached its licence condition in relation to compliance as at August/September 1999 and may not at that time have performed efficiently, honestly and fairly the duties of a holder of a dealers licence. However, the Tribunal has also found that there is reason to believe that Chapel Road will perform those duties efficiently, honestly and fairly in the future.
194. ASIC’s power to revoke a dealers licence under s 826(1) is discretionary. As stated above, other enforcement action is open to ASIC. It is clear that the exercise of ASIC’s powers should be protective of the public interest and preventative in nature although the Tribunal recognises that deterrence may also be a relevant consideration.
195. In the case of Chapel Road, there is evidence that by the time of the ASIC delegate’s decision in April 2001, it had made significant improvements in its compliance regime such that there is reason to believe that it would satisfy the required compliance standards and perform its duties as a dealer efficiently, honestly and fairly.
196. Bearing in mind the protective/preventative nature of ASIC’s power, in the Tribunal’s opinion the appropriate course was not to revoke Chapel Road’s licence but to impose appropriate conditions pursuant to s 786(1). Such conditions might have required regular reviews, perhaps six monthly, of Chapel Road’s compliance regime by an external consultant approved by ASIC, over a period of perhaps two years, on the basis of Chapel Road undertaking to implement reasonable recommendations for change made by the consultant and approved by ASIC considered necessary to achieve the required standard of compliance.
197. As stated above, while the Tribunal recognises that deterrence may also be a relevant consideration in the exercise of ASIC’s powers, in the case of Chapel Road there has been a sufficient deterrent effect arising from the revocation and present proceedings – and, more particularly, from the effective cessation of Chapel Road’s business in the intervening period.
198. In conclusion, the Tribunal sets aside the decision under review and remits the matter to the Respondent with the direction that Chapel Road’s securities dealers licence be reinstated subject to appropriate conditions, pursuant to s 786(1), with a view to ensuring effective compliance with condition 1 of its licence and with regulation 7.3.02 of the Corporations Regulations.
I certify that the preceding paragraphs are a true copy of the reasons for the decision herein of Mr RP Handley, Deputy President.
Signed: .......................................................................................
AssociateDate/s of Hearing 9 December 2002, 11 December 2002,
16 to 20 June and 24 June 2003
Date of Decision 14 July 2003
Counsel for the Applicant Mr M Galvin
Counsel for the Respondent Mr T Lynch
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