Civic Capital Limited and Australian Securities and Investments Commission

[2007] AATA 2042

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 2042

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/2735

GENERAL ADMINISTRATIVE DIVISION		)
Re		CIVIC CAPITAL LIMITED

Applicant

And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal Deputy President P E Hack SC

Date12 December 2007

PlaceBrisbane

Decision

The Tribunal sets aside the decision under review and remits the matter to the Commission with a direction that an Australian financial services licence be issued to Civic Capital Limited subject to:

(a)       a condition that so long as Civic Capital Limited has only one person who satisfies the Commission’s criteria for responsible manager it be limited to raising funds not to exceed $30 million in aggregate;

(b)       a key person condition in respect of Mr Whitchurch;

(c)       such other conditions as are ordinarily imposed by the Commission upon licences of this type.

...............Signed................

Deputy President

CATCHWORDS

BANKING AND FINANCE – application for Australian financial services licence – managed investment scheme – organisational competence and past admitted breaches – decision set aside – remitted to respondent to issue financial services licences subject to conditions

Corporations Act 2001 (Cth.) – ss 601ED, 708, 761A, 911A, 912A, 913B, 1021C

Skoljarev v Australian Fisheries Management Authority (1995) 22 AAR 331

George v Rockett (1990) 170 CLR 104

REASONS FOR DECISION

12 December 2007 Deputy President P E Hack SC    

Introduction

1.This is an application by Civic Capital Limited (Civic Capital) for a review of a decision by the respondent, the Australian Securities and Investments Commission, made on 7 June 2007. By that decision the Commission, by its delegate, refused the application by Civic Capital for an Australian financial services licence.

Background

2.Civic Capital seeks to operate a managed investment scheme. It wants to raise funds from investors and to lend those funds to borrowers secured by mortgages. Its application, lodged with the Commission on 2 June 2006, anticipated that within 12 months of operation it would have approximately $15 million of investor funds under management.

3.The application was supported by a body of material setting out the manner in which Civic Capital proposed to undertake its business. It is unnecessary for present purposes to consider much of that material having regard to the limited basis on which the application was refused.

4.The Commission relied upon two matters to refuse the application. First, the delegate said that she was:

“not satisfied that Civic Capital will have the organisational competence needed to adequately manage all tasks involved with operating a registered mortgage scheme.”

Additionally, the delegate was concerned with an admitted failure by Civic Capital to comply with statutory requirements. She concluded that she was:

“not satisfied that they [sic] will comply with the obligations they have under section 912A(1)(b) and (c) and Chapter 5C of the Act.”

5.Mr Connor, the solicitor who appeared for the Commission, relied upon the same matters as the basis for submitting that the Commission’s decision ought be affirmed.

Legislative Framework

6.A person who carries on a financial services business within Australia must hold an appropriate Australian financial services licence[1]. What Civic Capital proposes to do comes within the definition of “financial services business”, hence its application for a financial services licence.

[1] See s 911A, Corporations Act 2001.

7.Section 913B of the Corporations Act sets out the circumstances under which the Commission must, and must not, grant an application for an Australian financial services licence. The only matter in issue in that section is in s 913B(1)(b) which requires the Commission to grant a licence if (and not to grant unless) it has no reason to believe that the applicant, if granted a licence, will not comply with the obligations imposed by s 912A of the Corporations Act.

8.The obligation in s 912A that is in issue here is that in paragraph (c), the obligation to “comply with the financial services laws”. That term is defined by s 761A of the Corporations Act in a way that includes the requirement of Chapter 5C of the Act dealing with managed investment schemes.

9.The basis of the Commission’s refusal decision, and the basis on which it contends that the decision ought be affirmed, is that the Commission had, and submits that I ought have, reason to believe that Civic Capital will not comply with the requirements of Chapter 5C of the Corporations Act. Two matters are put in issue – organisational competence and past admitted breaches by Civic Capital of the requirements of Chapter 5C.

Organisational Competence

10.Understandably, the Commission has adopted published policy statements that deal with its expectations of applicants in relation to, inter alia, the qualifications and expertise of those who would operate the proposed licence. At the time when Civic Capital made its application, and at the time of its refusal, that aspect of the matter was dealt with by Policy Statement 130: “Managed Investments: Licensing”. Paragraph 51 of that policy statement set out what the Commission considered were:

“the necessary qualifications and lengths of experience required to operate a scheme or schemes efficiently, honestly and fairly.”

11.There is no question here, and the Commission has always accepted, that Mr Russell Whitchurch, the controlling mind of Civic Capital, had the required qualifications and experience. The difficulty that the Commission had, and which it puts forward as a basis of refusing the application, is that there was only one person within the organisation who had the qualifications and experience that Policy Statement 130 suggested were required. The application was refused, and the case for the Commission is advanced, because the Commission contends that Civic Capital must have two people with the required qualifications and experience.

12.Mr Whitchurch, who appeared on behalf of Civic Capital, proposes that Mr Peter Dunn, an accountant and registered tax agent, should fill the role of this second responsible officer. He points out, correctly as it seems to me, the difficulty that a start-up organisation will have in attracting two people with the qualifications and experience that the Commission says are required.

13.The policy requirement for two responsible officers has been refined during the history of this application. Policy Statement 130, which was in force at the time of refusal of the application, makes no mention of such a requirement. The Commission’s decision of 7 June 2007 set out the effect of paragraph 51 of Policy Statement 130 and continued:

“For the purposes of considering these criteria, ASIC generally considers that the operator of a managed investment scheme will require two responsible officers for the significant day to day business decisions to ensure that it is operated efficiently and effectively and complies with the obligations under Chapter 5C of the Act.”

14.Policy Statement 164, “Licensing: organisational capacities”, which was in force at that time, detailed the organisational expertise that the Commission expected of an Australian financial services licensee. It said this:

“77 … We would generally expect an AFS licence applicant to nominate two or more responsible officers. However, in some cases a single responsible officer may be adequate. An example is where the applicant’s main business is not the provision of financial services, but this will depend of the nature, scale and complexity of the business.”

15.The requirements of those policy statements have been superseded by the publication in October 2007 of a new policy document, now called a “Regulatory Guide”. Regulatory Guide 105, “Licensing: Organisational Competence” describes what the Commission looks for when it assess compliance with the organisational competence requirements of s 912A(1) of the Corporations Act. Under the heading “How many responsible managers do you need?”, the following appears:

“38 The number of people you need to nominate as responsible managers will depend on the nature, scale and complexity of your business … However, we expect that you will nominate two or more responsible managers.

…

40 In some cases we may accept you having only one responsible manager e.g. where you operate a one-person advisory business or where your main business is not the provision of financial services.

…

42 Factors that can affect who you nominate as your responsible managers and how many you need include:

(a) the financial services and products you provide;

(b) the number of representatives who provide financial services on your behalf;

(c) the size, structure and diversity of your operations;

(d) the number of clients you have; and

(e) whether your main business is the provision of financial services.”        

16.The role that properly formulated policy plays in the decision-making continuum is well-known[2] and the Tribunal will ordinarily apply such a policy. But policy does not create a binding rule unless the statute expressly provides. No such provision is made here. Mr Connor informed me that the policy is concerned with the capacity to manage, not the fidelity of the manager.

[2]        See e.g. Skoljarev v Australian Fisheries Management Authority (1995) 22 AAR 331, 335-9.

17.Whilst I can appreciate why the Commission had adopted the policy of ordinarily requiring at least two responsible managers, the circumstances of the present case are such that with appropriate conditions, the matter may be seen as coming within the exception referred to in Paragraph 40.

18.The present case is one where Mr Whitchurch intends to start the business of Civic Capital in a quite modest way. He is prepared to limit the extent of the business by the imposition of a condition limiting the funds received for investment to $30 million in aggregate. Mr Connor accepts that such a condition may be imposed. Moreover Mr Dunn, whilst not satisfying all of the Commission’s criteria for qualifications and experience, goes a substantial way to doing so. He has tertiary qualifications in accounting from a respected Australian university. He has practised as a public accountant for a number of years. He has himself invested in managed investment schemes for a number of years. Whilst he lacks the day-to-day experience of managed investment schemes that the Commission ordinarily seeks, Mr Whitchurch possesses those skills, as is accepted by the Commission and Mr Dunn’s skills will be of great assistance in the business of Civic Capital.

19.In my view it is proper to depart from the ordinary requirement of the Commission’s policy in these circumstances. However, given that there will be only one responsible manager with the level of knowledge and skill that the Commission seeks, it is proper to impose the “key person” licence conditions referred to in paragraphs 183 and 184 of Regulatory Guide 105.

20.The imposition of conditions of this nature enables me to be satisfied that Civic Capital will have sufficient expertise and experience to fulfil the obligations of a licence subject to such conditions. I have in mind that at some time in the future when Civic Capital seeks to expand its business it will make application for an unconditional licence and at that time the Commission can determine whether the demonstrated managerial competence warrants the grant of an unconditional licence.

21.I would propose, as well, to make the licence subject to the types of conditions ordinarily imposed by the Commission of this type.

22.I do not accept the Commission’s submissions, made after the conclusion of the hearing, that Civic Capital has not demonstrated that the proposed limit of $30 million is an appropriate amount and that no material is provided upon which I could make a determination as to what would be an appropriate limitation to place upon the value of funds under management. Those submissions, when put in these terms and made after the conclusion of the hearing, are unhelpful. But the simple answer is that I am persuaded of these matters by the accepted experience and expertise of Mr Whitchurch and by the complementary skills of Mr Dunn. Mr Whitchurch, in his response to the Commission’s post-hearing submission, referred to the average mortgage being in the order of $5 million. With a limitation of $30 million there would be in the order of six loans to manage, a number, according to Mr Whitchurch, “far less than [he] has managed in the past”.

Past Admitted Breaches

23.In mid 2004 Mr Whitchurch was informed, incorrectly as it transpired, that using “special purpose vehicles” was a mechanism which, by virtue of s 708 of the Corporations Act, would enable Civic Capital to operate a managed investment scheme without the need to comply with other requirements of the Corporations Act. He sought legal advice. His solicitors advised, in writing, in these terms:

“As discussed yesterday, it should be possible for you to raise funds by way of either issuing equity in a Special Purpose Vehicle (SPV) company, or by having the money lent to an SPV by way of a loan (or debenture etc). This is assuming that each SPV does not have more than 20 members, and does not raise more than $2 million.”

Mr Whitchurch wrote back to his solicitors. His letter dated 15 October 2004 referred to “a way of using the 708 provisions in a manner satisfactory to all and be within the guidelines”. The letter posed a series of questions on specific issues. Importantly, it concluded in this way:

“I guess … I am looking for reassurance that section 708 is not being contravened if we operate in the anticipated manner as I don’t want ASIC having reason to investigate and close down the operation because we weren’t following correct guidelines.”

24.Mr Whitchurch says, and I accept, that the advice he received was that Civic Capital would not need to be registered or licensed if it operated in this way. He says, as well, that he operated in accordance with the advice.

25.Seemingly, the advice was fundamentally flawed with the result that Civic Capital and Mr Whitchurch:

·contravened s 601ED of the Corporations Act by operating, unregistered, a managed investment scheme that was required to be registered;

·contravened s 911A of the Corporations Act by carrying on a financial services business without holding a licence to do so; and

·contravened s 1021C of the Corporations Act by failing to provide a disclosure document in relation to the interests offered.

26.Mr Whitchurch cooperated with the Commission when it drew his attention to the fact that Civic Capital was operating unlawfully. He consented to the making of declarations and injunctions in the Supreme Court of Queensland and orders for the winding up of the unregistered scheme.

27.The case for the Commission accepts that Mr Whitchurch had a mistaken view of the operation of the Corporations Act but, it says, that view was negligently formed. The advice sought, it was said, was too narrowly focussed upon s 708 having regard to the background and experience of Mr Whitchurch in this industry. It was said, as well, that it was not apparent that Civic Capital had ever sought advice about the fundraising or licensing provisions of the Corporations Act. On this basis, it is argued, I ought have reason to believe that Civic Capital would not comply with the conditions of a financial services licence and with the requirements of Chapter 5C of the Corporations Act.

28.Suspicion and belief are different states of mind and the facts that might reasonably ground a suspicion may be quite insufficient to reasonably ground a belief[3].

[3]George v Rockett (1990) 170 CLR 104, 115.

29.I do not accept the Commission’s argument. I am satisfied that Mr Whitchurch’s erroneous belief was formed honestly and reasonably. His request was to ensure that the Commission did not have any reason to either investigate or close down the proposed business. I consider it inaccurate to suggest that he sought “narrow” advice. It is true to say that the letter seeking advice did not make mention of the fundraising or licensing provisions of the Corporations Act. But it did express the concern to avoid giving the Commission reason to “investigate and close down the operation”. I would have thought that in ordinary circumstances a lawyer whose advice was sought in the terms of the letter of 15 October 2004 would not limit the advice given to s 708 but would consider the wider questions of the lawfulness of the conduct proposed.

30.Mr Whitchurch and Civic Capital accept that they each contravened the provisions of the Corporations Act, however the circumstances of the contraventions are not such as lead me to conclude that there is reason to believe, or indeed to suspect, that Civic Capital will not in the future, comply with the obligation under the Corporations Act.

Conclusion

31.It follows that I am satisfied of the matters in s 913B of the Corporations Act, that is, having considered the matters relied upon by the Commission I have no reason to believe that Civic Capital, if granted a licence, would not comply with its obligations under s 912A of the Corporations Act. I would set aside the decision under review and remit the matter to the Commission with a direction that an Australian financial services licence be issued to Civic Capital subject to the following conditions:

(a)that so long as Civic Capital has only one person who satisfies the Commission’s criteria for responsible manager it be limited to raising funds not to exceed $30 million in aggregate;

(b)a key person condition in respect of Mr Whitchurch;

(c)such other conditions as are ordinarily imposed by the Commission upon licensees of this type.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

Signed:         ........................Signed.............................................
  Eleanor O’Gorman, Associate

Date of Hearing  15 November 2007
Final submissions received      3 December 2007         
Date of Decision  12 December 2007
The Applicant appeared in person  

Solicitor for the Respondent     Australian Securities & Investments    Commission