David Hickie and Australian Securities & Investments Commission

[2013] AATA 853

[2013] AATA 853 

Division	GENERAL ADMINISTRATIVE DIVISION
File Number	2012/3597
Re	David Hickie
APPLICANT
And	Australian Securities & Investments Commission
RESPONDENT

DECISION

Tribunal	Egon Fice, Senior Member
Date	29 November 2013
Place	Melbourne

The Tribunal affirms the decision made by a delegate of ASIC on 8 August 2012 banning Mr Hickie from providing any financial services for a period of two years.

........................[sgd]................................................

Egon Fice, Senior Member

CORPORATIONS – banning order – Australian financial services licence – failure to comply with conditions on financial services licence – registered managed investment schemes – duties of responsible entity – duties of officer of responsible entity – failure to exercise reasonable care and diligence – failure to comply with financial services law – failure to maintain an insurance policy covering professional indemnity and fraud – failure to maintain membership of one or more external disputes resolution schemes – failure to lodge annual audited financial reports – duties of auditors – appointment and dismissal of auditors – audit of compliance plans – failure to lodge breach reports – bases for making a banning order

Legislation

Australian Securities and Investments Commission Act 2001 (Cth) s 1

Corporations Act 2001 (Cth) ss 9, 180, 286, 287, 288, 289, 292, 295, 298, 301, 307, 307A, 307C, 314, 315, 319, 324AA, 324BA, 324CA, 327A, 329, 331AAA, 331AAB, 331AC, 340, 601EA, 601ED, 601FA, 601FB, 601FC, 601FD, 601HA, 601HG, 601HH, 601NC, 761A, 910A, 912A, 912B, 912D, 915C, 920A, 920B, 989A, 989B, 989D, 1274

Regulations

Corporations Regulations 2001 (Cth) reg 7.8.14A

Cases

Australian Securities and Investments Commission v Healey (2011) 278 ALR 618

Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430

Gamble v Hoffman (1997) 24 ACSR 369

Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634

Rich v Australian Securities and Investments Commission (2004) 220 CLR 129

Secondary Materials

Regulatory Guide 98, Licencing: Administrative action against financial services providers, Australian Securities & Investments Commission (July 2012)

REASONS FOR DECISION

Egon Fice, Senior Member

29 November 2013 

1. Mr David Hickie was a Director and the Chief Executive Officer (CEO) of an unlisted public company, Lion Advantage Ltd (Lion).  Prior to 2 March 2005 the company was known as Mercator Funds Management Ltd.  It held an Australian Financial Services Licence (AFSL) from 2 July 2003 until the commencement of the new name on 2 March 2005.  With effect from 31 May 2005 Lion became the holder of the AFSL.

2. Lion's AFSL authorised it to carry on a financial services business which included:

   (a)dealing in a financial product by issuing, applying for, acquiring, varying or disposing of a financial product in respect of an interest in managed investment schemes excluding investor directed portfolio services; and

   (b)in its capacity as the responsible entity, operating four registered managed investment schemes known as:

   (i)Realestate Equity Investment Trust (REIT);

   (ii)Stirling Pooled Mortgage Fund (SPMF);

   (iii)Murray River Resort Scheme (MRRS) whose name was changed later to Clean Coal Infrastructure Trust (CCIT); and

   (iv)Premium Income Fund of Australia (PIFA).  (T docs page 160)

3. It was a condition of Lion's AFSL that Mr Hickie and a Mr Ian Houston continued to be the key persons with respect to Lion's financial services business.

4. Concerned that Mr Hickie had not complied with the financial services law (s 920A(1)(e) of the Corporations Act 2001) (the Corporations Act), on 29 March 2012 the Australian Securities & Investments Commission (ASIC) notified him that in accordance with s 920A(2) of the Corporations Act, he was being given the opportunity to make submissions to ASIC prior to it making a decision regarding whether a banning order should be made against him. Particulars of the concerns held by ASIC were set out in a lengthy attachment to that letter. In summary, they were that:

   (a)it appeared Lion had failed to comply with conditions 6, 15, 16 and 17 of its licence;

   (b)it appeared Lion had failed to comply with ss 319, 601HG(7), 989B(2) and (3), 912A(1)(b), (c) and (g) and 912D(1B) of the Corporations Act;

   (c)Mr Hickie had failed to exercise reasonable care and diligence and therefore had not complied with s 601FD(1)(b) of the Corporations Act;

   (d)Mr Hickie had failed to take all steps that a reasonable person would take in his position to ensure that Lion complied with the Corporations Act, any conditions imposed on Lion’s AFSL, the schemes’ constitutions and the schemes’ compliance plans and therefore had not complied with s 601FD(1)(f).

5. A meeting with ASIC was duly held on 27 June 2012 at which Mr Hickie and Lion were legally represented.

6. In a letter dated 8 August 2012 ASIC notified Mr Hickie that it had decided to make a banning order against him prohibiting him from providing any financial services for a period of two years. Essentially, ASIC found that Mr Hickie had failed to exercise the degree of care and diligence required by s 601FD(1)(b) in that:

   (a)he failed to monitor the conduct of Lion to ensure it was complying with its obligations as the responsible entity of the schemes and the conditions on its AFSL;

   (b)he decided to postpone Lion obtaining the professional indemnity insurance required by condition 15 on the AFSL;

   (c)he failed to ascertain when Lion's membership of Financial Ombudsman Service Ltd (FOS) expired; and

   (d)he failed to ensure that Lion paid all required fees to maintain its FOS membership so that the company did not breach its obligation under condition 16 on the AFSL and s 912A(1)(g) of the Corporations Act.

7. ASIC also found that Mr Hickey failed to comply with s 601FD(1)(f) in that he:

   (a)failed to develop and implement a compliance calendar by, at the latest, October 2007;

   (b)failed to implement additional compliance measures, such as engaging an external compliance consultant, well before 2012;

   (c)failed to closely monitor the preparation of financial reports and audits of the schemes’ compliance plans;

   (d)failed to maintain its membership of an external dispute resolution scheme (EDRS);

   (e)failed to maintain professional indemnity insurance; and

   (f)failed to notify ASIC of breaches and likely breaches of its obligations under s 912A of the Corporations Act.

8. The issues which I am required to address are:

   (a)whether Lion breached any of the conditions on its AFSL and the Corporations Act;

   (b)if the answer to (a) is in the affirmative, whether the conduct of Mr Hickie constituted a breach of s 601FD(1)(b) and/or s 601FD(1)(f);

   (c)if I find that Mr Hickey breached s 601FD(1)(b) or (f), whether that enlivened the exercise of the discretionary power to impose a banning order against Mr Hickie pursuant to s 920A of the Corporations Act;

   (d)whether ASIC erred in treating breaches of its AFS licence by Lion as breaches by Mr Hickie of s 601FD(1)(b) and (f); and

   (e)whether the allegations made against Mr Hickie by ASIC justified the exercise of the discretion under s 920A(1) and s 920B(2) of the Corporations Act to ban Mr Hickie from providing any financial services for a period of two years.

   OPERATION OF THE FINANCIAL SERVICES LAW IN RESPECT OF REGISTERED MANAGED INVESTMENT SCHEMES

9. The legislation dealing with managed investment schemes is set out in Chapter 5C of the Corporations Act. The expression financial services law is relevantly defined in s 761A of the Corporations Act in the following way:

   financial services law means:

   (a)a provision of this Chapter [Chapter 7] or of Chapter 5C, 5D, 6, 6A, 6B, 6C or 6D; or

   (b)…

10. Relevantly, the expression managed investment scheme is defined in Part 1.2 (s 9) of the Corporations Act in the following way:

    managed investment scheme means:

    (a)a scheme that has the following features:

    (i)      people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

    (ii)     any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

    (iii)    the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or…

11. Not all managed investment schemes need be registered. Section 601ED(1) sets out the circumstances under which a managed investment scheme must be registered. Relevantly, it provides:

    (1)[Where scheme must be registered] Subject to subsection (2), a managed investment scheme must be registered under section 601EB if:

    (a)it has more than 20 members; or

    (b)it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or

    (c)a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20.

    …

12. To register a managed investment scheme, a person is required to lodge an application with ASIC which must, amongst other things, state the name and the address of the registered office of the proposed responsible entity (s 601EA(2)).

13. Part 5C.2 of the Corporations Act deals with the responsible entity of a managed investment scheme. Section 601FA provides:

    601FA Responsible entity to be public company and hold Australian financial services licence

    The responsible entity of a registered scheme must be a public company that holds an Australian financial services licence authorising it to operate a managed investment scheme.

14. Section 601FB provides that the responsible entity of a registered scheme is to operate the scheme and perform the functions conferred on it by the scheme’s constitution and the Corporations Act.

15. The duties of the responsible entity are set out in s 601FC of the Corporations Act. Relevantly, it provides:

    (1)[Duties of responsible entity] In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:

    (a)act honestly; and

    (b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position; and

    (c)act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests; and

    (d)treat the members who hold interests of the same class equally and members who hold interests of different classes fairly; and

    (e)not make use of information acquired through being the responsible entity in order to:

    (i)      gain any improper advantage for itself or another person; or

    (ii)     cause detriment to the members of the scheme; and

    (f)ensure that the scheme’s constitution meets the requirements of sections 601GA and 601GB; and

    (g)ensure that the scheme’s compliance plan meets the requirements of section 601 HA; and

    (h)comply with the scheme’s compliance plan;

    (i)ensure that scheme property is:

    (i)      clearly identified as scheme property; and

    (ii)     held separately from property of the responsible entity and property of any other scheme; and

    (j)ensure that the scheme property is valued at regular intervals appropriate to the nature of the property; and

    (k)ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and this Act; and

    (l)report to ASIC any breach of this Act that:

    (i)      relates to the scheme; and

    (ii)     has had, or is likely to have, a materially adverse effect on the interests of members;

    as soon as practicable after it becomes aware of the breach; and

    (m)carry out or comply with any other duty, not inconsistent with this Act, that is conferred on the responsible entity by the scheme’s constitution.

16. The duties of officers of the responsible entity are set out in s 601FD. Relevantly, it provides:

    (1)   [Duties of officers] An officer of the responsible entity of a registered scheme must:

    (a)act honestly; and

    (b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; and

    (c)act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; and

    (d)not make use of information acquired through being an officer of the responsible entity in order to:

    (i)      gain an improper advantage for the officer or another person; or

    (ii)     cause detriment to the members of the scheme; and

    (e)not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and

    (f)take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the responsible entity complies with:

    (i)      this Act; and

    (ii)     any conditions imposed on the responsible entity’s Australian financial services licence; and

    (iii)    the scheme’s constitution; and

    (iv)     the scheme’s compliance plan.

17. An officer of a corporation is defined in Part 1.2 (s 9) of the Corporations Act. It includes a director or secretary of the corporation.

18. The responsible entity, because it is required to hold an AFSL, has further obligations under Chapter 7 of the Corporations Act. Its general obligations are set out in s 912A which includes the following:

    912A General obligations

    (1)   [Duties] A financial services licensee must:

    (a)do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and

    (aa) have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and

    (b)comply with the conditions on the licence; and

    (c)comply with the financial services laws; and

    (ca) take reasonable steps to ensure that its representatives comply with the financial services laws; and

    (d)unless the licensee is a body regulated by APRA – have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and

    (e)maintain the competence to provide those financial services; and

    (f)ensure that its representatives are adequately trained, and are competent, to provide those financial services; and

    (g)if those financial services are provided to persons as retail clients – have a dispute resolution system complying with subsection (2); and

    (h)unless the licensee is a body regulated by APRA – have adequate risk management systems; and

    (j)comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.

    …

19. For the purposes of Part 7.6 of the Corporations Act, which deals with the licensing of providers of financial services, the expression representative is defined in the following way:

    910A Definitions

    In this Part, unless a contrary intention appears:

    representative of a person means:

    (a)if the person is a financial services licensee:

    (i)      an authorised representative of the licensee; or

    (ii)     an employee or director of the licensee; or

    (iii)    an employee or director of a related body corporate of the licensee; or

    (iv)     any other person acting on behalf the licensee; or

    …

20. The above legislative provisions make it clear that Mr Hickie, as the director/secretary and representative of an AFSL licence holder, Lion, had a number of duties which were personal as well as duties to ensure that Lion complied with its duties as the responsible entity of a registered managed investment scheme and its duties as an AFSL licence holder.  All of these duties arise from the financial services law.

21. In addition to the duties found in the Corporations Act, Mr Hickie, in his capacity as director/secretary of Lion had a duty to ensure that Lion complied with the conditions imposed on its AFSL and also the schemes’ constitutions and compliance plans.

22. The first issue which I need to determine is whether Lion breached any conditions on its AFSL or the Corporations Act.

    CONDITIONS ON LION’S AFSL

23. Although ASIC was initially concerned that Lion had breached conditions 6, 15, 16 and 17 of its AFSL, it was subsequently satisfied that there was no breach of condition 6.  Nevertheless, in the course of hearing this matter, Mr R Knowles of counsel, who appeared on behalf of ASIC, also referred to condition 3 which he claimed had been breached. 

    Condition 3

24. Condition 3 provides:

    3.     The licensee must establish and maintain compliance measures that ensure, as far as is reasonably practicable, that the licensee complies with the provisions of the financial services laws.

25. An AFSL holder is required to report to ASIC if it breaches or is likely to breach one of its obligations under the Corporations Act. Section 912D provides:

    (1)[Notice of breach] A financial services licensee must comply with subsection (1B) if:

    (a)the licensee breaches, or is likely to breach:

    (i)      any of the obligations under section 912A or 912B, other than the obligation under paragraph 912A(1)(c); or

    (ii) the obligation under paragraph 912A(1)(c), so far as it relates to provisions of this Act or the ASIC Act referred to in paragraphs (a), (b) and (c) of the definition of financial services law in section 761A; or…

    (iv)    ...; and

    (b)the breach, or likely breach, is significant, having regard to the following:…

    (1B)[When licensee must report breach] The financial services licensee must, as soon as practicable and in any case within 10 business days after becoming aware of the breach or likely breach mentioned in subsection (1), lodge a written report on the matter with ASIC.

26. As will become apparent presently, it appears Lion struggled over a number of years to comply with the conditions of its AFSL and relevant obligations under the Corporations Act. The question raised by this condition is whether the measures put in place by Lion to comply with the financial services law could be said to have been such as to ensure, as far as reasonably practicable, that compliance was assured. As became apparent in the course of Mr Hickie’s cross-examination, the most practical way of ensuring compliance was for Lion to have a compliance calendar which clearly set out steps or measures which had to be taken by or on particular dates. When first asked whether Lion had such a calendar, Mr Hickie said that it did and he referred to a table attached to its Replacement Compliance Plan which was apparently received by ASIC on 15 March 2005. However, even a cursory glance at that table makes clear that it is not a compliance calendar. It contains no dates on which certain actions must be taken. For example, although the table records audit of financial records under s 286 – 289 of the Corporations Act, it does not record the date by which the audit must be completed but rather states: As required by the Act but at least annually.  As a compliance measure, it is ineffective.

1. Furthermore, in the course of his cross-examination Mr Hickie was referred to a letter dated 9 December 2011 which he sent to ASIC in response to issues raised about failure to lodge various documents.  After setting out a number of reasons for Lion’s failure to comply with legislative requirements, Mr Hickie said: To ensure this does not recur, we will develop a compliance calendar listing all the mandatory matters relating to the maintenance of our licence so that this type of matter is followed up and completed in a timely manner.  As Mr Knowles put to Mr Hickie, this clearly illustrated that as at 9 December 2011, despite persistent failures to comply with legislative requirements, Lion did not have a compliance calendar. 

2. Mr Knowles also referred Mr Hickie to a letter he wrote to ASIC on 8 September 2011 regarding an application for variation of Lion’s AFSL.  Attached to that letter was a document headed A5.  Business Description Proof.  In a section dealing with compliance arrangements, Mr Hickie said that Lion expected to engage a suitably qualified and experienced compliance officer when its funds under management warranted the additional expense.  He then said: The Compliance Officer is currently David Hickie, who is also the Chief Executive Officer.  Mr Hickie also said that Lion may seek advice from time to time from compliance consultants such as Know Compliance which had experienced and qualified compliance consultants who had previously worked in ASIC.

3. In fact, Know Compliance provided Lion with a compliance calendar in July 2012.  Plainly, despite what Mr Hickie said, Lion did not have a compliance calendar prior to that date.  However, in the course of the hearing, Mr Hickie insisted that he believed Lion had a compliance calendar on its computer but that he was unable to locate it.  I should also point out that in the course of the meeting held by ASIC on 27 June 2012, Ms Mei Ling Perry, from Know Compliance, was asked what compliance measures Lion had in place at that time.  She said Know Compliance had prepared a risk management table outlining the risks.  She also said that Know Compliance intended to look at the compliance plan and to review it.  She then referred to the compliance calendar which she said was something that Know Compliance would monitor and work together with the company.  When asked who the compliance manager at Lion was at that time, she said: Christine Hicks will be.

4. In the course of those discussions on 27 June 2012 regarding responsibilities for compliance with the Corporations Act, Mr Hickie said: I was responsible for the funds, like the mortgage funds, and Diane Burns was the responsible manager for compliance, when she first got appointed, always has been.  This statement of course stands in stark contrast to what Mr Hickie said in his letter to ASIC on 8 September 2011.  In fact the statement was supported by Mr Hickie’s solicitor, Mr Wantrup, who said: Firstly, he [Mr Hickie] was operations oriented.  Secondly, he was effectively excluded from most of the compliance activities with the company. However, as will become apparent, Mr Hickie appeared to give reasons for failures to comply with the Corporations Act without any thought to reasons previously given. A common theme running through his evidence was the numerous inconsistent alternative explanations for failures to comply with legislative requirements.

5. The evidence regarding condition 3 on Lion’s AFSL leads me to find that Lion was in breach of that condition for many years, at least up until the appointment of Know Compliance in June or July 2012, to manage its compliance issues.  It had not established and maintained reasonable compliance measures to ensure compliance with the financial services law.

   Condition 15

6. Condition 15 on Lion’s AFSL was in respect of professional indemnity insurance.  It provided:

   15.   The licensee must maintain an insurance policy covering professional indemnity and fraud by officers that:

   (a)is adequate having regard to the nature of the activities carried out by the licensee under the licence; and

   (b)covers claims amounting in aggregate to whichever is the lesser of:

   (i)      $5 million; or

   (ii)     the sum of the value of all IDPS property of all IDPS’s for which it is the operator and all scheme property of all registered schemes for which it is the responsible entity.

7. In his evidence-in-chief Mr Hickie admitted that Lion did not maintain its professional indemnity insurance at all times.  In fact, in cross-examination, he agreed Lion did not hold professional indemnity insurance between 5 August 2011 and 24 January 2012.  Mr Hickie also agreed that this was not the first occasion on which Lion found itself without professional indemnity insurance.  In an email sent to ASIC on 9 July 2010, Mr Hickie explained that Lion needed to gain renewal of its professional indemnity insurance.  He said that no underwriter was willing to insure a mortgage or property fund manager at that time, Lion having had some seven rejections.  This statement was made by Mr Hickie in response to an earlier email from ASIC on 8 June 2010 seeking a copy of Lion’s current insurance policy for professional indemnity cover.  Mr Hickie explained that Lion had no funds and no exposure to the market at that time.  In response, ASIC asked for details of the expiry of the recent professional insurance policy and steps Lion was taking to obtain that cover, including any retrospective cover.

8. In the letter attached to an email sent to Mr Hickie on 6 August 2010, ASIC noted it had not received a response from Mr Hickie regarding its query as to whether Lion had maintained an appropriate professional indemnity policy to meet the requirements of condition 15 of its AFSL.  ASIC also said:

   Please note that even in circumstances where a Responsible Entity does not have any scheme property or has no funds under management in relation to any managed investment schemes, it is still required to maintain an adequate level of PI insurance to protect investors against negligence or fraud by officers that may occur during the stages leading up to the time when the interests in the scheme begin to be issued. 

9. ASIC also cautioned Lion that contravention of a condition on its AFSL could result in ASIC suspending or cancelling its licence pursuant to s 915C(1)(a) of the Corporations Act.

10. In a letter dated 9 August 2010 Mr Hickie, on behalf of Lion, notified ASIC that it had been able to renew its professional indemnity insurance on 5 August 2010, including retroactive cover.  The funds covered under that policy were: SPMF; Lion Mining and Resources Investment Trust; and REIT.  The policies were retroactive and the respective retroactive dates were: 21 August 2008 (this date having been entered by hand at some subsequent time); 26 May 2010; and 8 September 2009.

11. ASIC responded to Mr Hickie by noting the retrospective date of 8 September 2009 and concluding from that entry that Lion had been in breach of its AFSL from 8 September 2009 until 5 August 2010. It also noted that Lion did not lodge written notification with ASIC about the breach of its AFSL as it was required to do under s 912D of the Corporations Act. It pointed out the seriousness of failure to do so, although indicating that it did not intend to make further enquiries at that time. However, ASIC noted that it expected the breach to be recorded in Lion’s breach register. It also noted that where a breach of statutory obligations occurred, it expected licensees to review the adequacy of their compliance processes to prevent similar future breaches.

12. The professional indemnity insurance cover obtained by Lion on 5 August 2010 expired on 5 August 2011.  However, and notwithstanding the warnings issued by ASIC in August 2010, Lion did not renew its professional indemnity insurance in 2011.  Nor did it advise ASIC of its failure to do so.  In cross-examination Mr Hickie agreed that was so.  On 26 June 2012 Mr Hickie provided ASIC with a copy of Lion’s breach report dated June 2012.  That report simply stated Lion’s professional indemnity cover expired on 5 August 2011 and professional indemnity cover was obtained effective 24 January 2012 with unlimited retroactive cover.  The explanation provided in the breach report first described that Lion had been in discussions to merge with another licensee, and that it also considered extending its professional indemnity insurance to cover other mortgage schemes which it intended to take over.  The report then stated:

    There was no intention not to have any PI cover as required as the Company and Mr Hickie fully appreciate and understand the compensation requirements as explained in RG 126 and as required in the Corporations Act. Rather than a decision to postpone PI cover renewal, the Board wanted to obtain optimal PI cover in its endeavour to operate efficiently, honestly and fairly.

13. The breach report went on to provide a number of other reasons why the professional indemnity insurance was not renewed to cover the SPMF, CCIT and REIT funds.  They can be summarised as follows:

    (a)it was difficult to obtain insurance cover and there were no investors in CCIT;

    (b)an AFSL holder is required to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. It was not efficient to make further efforts to obtain professional indemnity insurance cover where there was no benefit to investors and several professional indemnity insurance companies and the insurance broker had declined to provide cover for non-active funds;

    (c)the risk of compensation claims from the investors of the inactive funds was nil;

    (d)PIFA had no assets except a worthless mortgage guarantee;

    (e)SPMF had no assets except a second mortgage and two guarantors, one of which was bankrupt; and

    (f)the insurance broker who arranged Lion’s professional indemnity cover contacted several insurers regarding the three funds in question but all underwriters refused to provide cover for funds which were in wind-up mode (presumably PIFA and SPMF).

14. In a letter dated 1 December 2011, ASIC requested that Lion provide a copy of the certificate of currency of any insurance policy covering professional indemnity and fraud held by its officers. ASIC also asked that if Lion had not maintained continuous PI cover, it set out the period of the lapsed PI cover; the reason for the lapse; why Lion did not notify ASIC of the lapsed PI cover under s 9012 D of the Corporations Act; and details of any arrangements Lion had made or proposed to make to ensure that it maintained PI cover in the future. It required that information by the close of business on 12 December 2011. Mr Hickie agreed that ASIC’s letter was directed to him.

15. In cross-examination Mr Hickie was asked whether it was ASIC’s letter of 1 December 2011 which prompted Lion to inform ASIC about the lapse in holding professional indemnity insurance.  Mr Hickie answered that he couldn’t say.

16. Mr Hickie was then referred to a letter he wrote to ASIC on 9 December 2011.  In that letter, Mr Hickie said:

    Our PI cover expired in August 2011, at time when two different paths were open to Lion Advantage: a merger with a licensee or a takeover of another mortgage fund by Lion Advantage.  The various alternative business strategies have affected the board’s decision in postponing the PI cover renewal until it could determine whether one or both paths would be taken.  A third possible path has surfaced more recently which also affects Lion Advantage’s PI cover requirements.  This involves a merger with another RE [responsible entity] which will result in Lion advantage taking over the winding up of this RE’s funds.…

    The breach report to ASIC will cover this lapse in PI cover.  To ensure this does not recur, Lion Advantage will include the need to consider the renewal of the PI cover three months prior to the cessation in its compliance calendar which will list all the mandatory matters relating to the maintenance of our licence.  This will enable Lion Advantage to seek PI cover at the best possible cost and prevent this significant breach recurring.

17. When it was put to Mr Hickie that the explanation he had given in his oral evidence, that it was not possible to get professional indemnity insurance at the time, was inconsistent with what was set out in his explanations to ASIC in December 2011, Mr Hickie simply responded that he did not refer to it.  When asked again by Mr Knowles to explain why he did not mention it to ASIC at an earlier date given the serious nature of the breach of a condition on Lion’s AFSL, Mr Hickie said that he would need to check his responses to ASIC.  Mr Knowles then referred to the words Mr Hickie used in his letter of 9 December 2011 where he mentioned a breach report to ASIC which will cover this lapse in PI cover.  Given the future tense used in this expression, Mr Knowles suggested that Lion had not provided a breach report by that date.  Mr Hickie then suggested that the letter was the breach report.  In fact, in a letter Mr Hickie wrote to ASIC dated 22 December 2011, he referred to an enclosed breach report as requested by ASIC.  The breach report essentially covered what Mr Hickie said in his letter of 9 December 2011 and also that he was expecting retroactive professional indemnity insurance cover by 31 December 2011 or sooner.  However, as Mr Knowles pointed out to Mr Hickie in the course of his cross-examination, the breach report referred to matters which were given as an explanation for Lion’s failure to hold professional indemnity insurance between 8 September 2009 and 5 August 2010 even though the date of breach in this report was said to be August 2011.  Mr Hickie simply responded by saying it was incorrect.  He also agreed that the report made no mention of the difficulties Mr Hickie said he had in obtaining professional indemnity insurance.

18. At the close of the first hearing day, Mr Hickie was asked to search his records at home in order to see if there were documents indicating he had reported to ASIC breaches by Lion of its obligation to at all times maintain professional indemnity insurance.  He had previously suggested that might be the case.  However, on resuming hearing the following day, when Mr Hickie was asked if he could find any documents indicating he had notified ASIC in 2010 of Lion’s breach of its obligations to maintain professional indemnity insurance, Mr Hickie said he could not find any.  Mr Knowles then suggested to him that if he could not find those, he had not made those reports.  Mr Hickie agreed.  Mr Hickie was also asked if he could find letters reporting the lapses in holding professional indemnity insurance to ASIC prior to ASIC asking the question.  He said he could not.  When Mr Knowles suggested to him that he did not notify ASIC, he maintained that he may have, but he could not find any letters.  Although not able to find any such letters, Mr Hickie maintained in cross-examination that he may have had discussions with ASIC about the breaches.  I had no evidence of any such discussions.

19. Mr Knowles referred Mr Hickie to the 8 September 2011 letter he wrote to ASIC which was an application for variation of Lion’s AFSL.  In particular, he referred to the attachment to that letter which I have described above as A 5.  Business Description Proof.  Mr Hickie agreed that at the time he wrote that letter he knew that Lion did not have professional indemnity insurance.  Despite that, Mr Hickie said:

    It should be noted that Lion’s Directors have been working in the financial services industry for about 40 years specialising in banking, stock broking, funds management and marketing and up well equipped to monitor and ensure that Lion operates in accordance with the Corporations Act and Regulations and its licensing requirements.

20. In concluding this part of the cross-examination, Mr Knowles put to Mr Hickie whether he remained of the view that Lion was not in breach of Condition 3 and Mr Hickie answered he was, because a compliance regime was in place.

21. With respect to Mr Hickie, his own evidence disclosed that Lion was in breach of Condition 15 as well as Condition 3 on more than one occasion. Furthermore, Lion had failed to comply with its obligations under s 912D of the Corporations Act because it had failed to notify ASIC of the breach of s 912A on more than one occasion. It failed to do so until prompted by ASIC. The breaches were significant and, in my opinion, should have been reported within the 10 days permitted by the Corporations Act.

22. Furthermore, although in the course of the hearing Mr Hickie explained the principal reason for not obtaining professional indemnity insurance during the two periods where it had lapsed was because of the difficulty brokers experienced in sourcing such insurance, the documents in evidence offer a different explanation.  The first point to make about his explanation is that Mr Hickie did not seek to adduce evidence from the insurance broker or brokers concerned.  There was no correspondence between Lion and any insurance broker in evidence.  The statements made by Mr Hickie are necessarily, by their nature, self-serving.  Ordinarily, one would expect to see some objective evidence to support those statements.  There was none.  The second point is that the explanation Mr Hickie gave in subsequent documents and letters provided to ASIC did not support his oral evidence.  They clearly indicated that the board was seeking optimal professional indemnity insurance and hence the delay.  He was unable to explain the reason for that discrepancy.  In my opinion, Mr Hickie’s explanation for Lion’s failure to maintain professional indemnity insurance at all times was unsatisfactory.

    Condition 16

23. Condition 16 on Lion’s AFSL provides:

    16.Where the licensee provides financial services to retail clients, the licensee must be a member of one or more External Disputes Resolution Scheme(s) (“EDRS”) which covers, or together cover, complaints made by retail clients in relation to the provision of all of the financial services authorised by this license.

24. In addition to condition 16, s. 912A(2) sets out what must be contained in a dispute resolution system, involving internal disputes and external disputes. Regarding external dispute resolution, the section provides:

    (2)[Contents of dispute resolution system] To comply with this subsection, a dispute resolution system must consist of:

    (c)…

    (d)membership of one or more external dispute resolution schemes that:

    (i)      is, or are, approved by ASIC in accordance with regulations made for the purposes of this subparagraph; and

    (ii) covers, or together cover, complaints (other than complaints that may be dealt with by the Superannuation Complaints Tribunal established by section 6 of the Superannuation (Resolution of Complaints) Act 1993) against the licensee made by retail clients in connection with the provision of all financial services covered by the licence.

25. Condition 17 on Lion’s AFSL relevantly provides:

    17.Where the licensee ceases to be a member of any EDRS, the licensee must notify ASIC in writing within 3 business days:

    (e)the date the licensee ceases membership of the EDRS(s);

    (f)the reasons the licensee’s membership of the EDRS(s) has ceased (including circumstances where the EDRS is no longer operating, failure by the licensee to renew their membership of the EDRS or where the EDRS has terminated the licensee’s membership of the EDRS);…

26. In his evidence-in-chief Mr Hickie said that up until 31 October 2011 Lion had been a member of an EDRS.  He said that after October 2011, Lion was not a member of an EDRS for a period of time because it did not receive the renewal notice and hence did not renew its membership.  He said that was because it went to the wrong postal address, number 120 rather than 160.

1. In its 1 December 2011 letter ASIC said that it had come to its attention that Lion may no longer be a member of an EDRS because its membership of the Financial Ombudsman Service (FOS) ceased on 31 October 2011 due to non-payment of outstanding fees. The letter reminded Lion of its obligation under the Corporations Act and also its obligation to notify ASIC where it was aware of a breach of the Act or its Conditions. This evidence discloses that some two months after the expiry of its membership of FOS, Lion had taken no steps to renew its membership.

2. In cross-examination Mr Knowles referred Mr Hickie to Lion’s prior membership with another EDRS referred to as Financial Industry Complaints Service (FICS).  Mr Knowles asked Mr Hickie whether in 2007 Lion’s membership of FICS lapsed due to the non-payment of fees.  Mr Hickie agreed it had.  An ASIC internal memorandum dated 10 October 2007 records a meeting between officers of ASIC and Mr Hickie on that day.  That memorandum states:

   DH [Mr Hickie] advised that he only became aware that the FICS membership for Lion Advantage had expired after I left a phone message for him earlier today.  He advised that he contacted Lorainne Russell from FICS regarding the issue and will be paying the outstanding membership fees of $825 today (10/10/07) by Bpay.  (Membership expired due to non-payment in May 07).  Asked DH how they came to fall so far behind in fees and he advised that he did not receive any reminder notices, although FICS maintain they sent the notices and the address FICS have on file for Lion Advantage is correct.

3. Although Mr Hickie said in cross-examination that he could not recall that meeting, he agreed that he could not dispute what was in the memorandum.  When it was put to Mr Hickie that FICS claimed to have sent the notice and maintained it went to the correct address, he simply said that Lion had not received it.  He agreed that he told ASIC that the membership fee would be paid on that day and he was aware that Lion’s AFSL could be cancelled.  He said he was aware that ASIC viewed this breach as serious.

4. Despite the prior failure to maintain membership of FICS, the same issue arose again in October 2011 when Lion failed to renew its membership of FOS. When asked whether that failure constituted a significant breach of the conditions of Lion’s AFSL, Mr Hickie agreed. He also agreed that in contravention of Condition 17 of its AFSL and s. 912D of the Corporations Act, he did not report that breach to ASIC. Lion’s membership of FOS ceased on 31 October 2011.

5. By way of explanation for allowing membership of FOS to lapse, Mr Hickie wrote to ASIC on 9 December 2011 stating:

   We have now renewed our membership of FOS; this organisation had sent an email to the wrong address and consequently, we did not receive our renewal notice and fees.  We have paid the outstanding fee of $220 and will send you a copy of our receipt when received from FOS.

6. The explanation for failure to maintain membership of FOS was repeated by Mr Hickie in a breach report he compiled on 22 December 2011, except that the explanation had now changed.  The breach report stated:

   December 2011 FOS renewal invoice not received due to change of email address and therefore not paid, which caused an inadvertent lapse in membership.

7. In addition to the three different explanations offered by Mr Hickie for failure to maintain membership of an EDRS, in his correspondence with ASIC, he clearly indicated that by 9 December 2011, the membership arrears had been paid and membership renewed.  However, the objective documentary evidence tells a different story.  I had in evidence a document entitled Membership Requests for Reinstatement on FOS letterhead paper, dated 7 March 2012.  It states:

   I recommend that the following entities are reinstated as members of the Financial Ombudsman Scheme Limited, effective immediately, as all outstanding invoices have now been settled as at the date indicated.

8. The date indicated recorded on the FOS document is 7 March 2012.  Quite plainly, what Mr Hickie told ASIC about its EDRS membership in December 2011 was untrue.  Furthermore, the three alternative explanations given by Mr Hickie for failure to maintain its membership of FOS not only resemble the explanation he gave in 2007 for a similar breach, but plainly cannot all be correct.    Furthermore, I had evidence in the form of a file note made by ASIC of a meeting held on 25 January 2012 at which Mr Hickie was present.  That file note indicates ASIC had information from FOS that membership for Lion remained outstanding because there were outstanding invoices yet to be paid.  It recorded that Mr Hickie said there was a disputed amount for $7700 for one complaint regarding redemptions when a scheme was being wound up and he said he intended meeting with FOS to discuss that disputed amount. 

9. The objective evidence on this issue is unequivocal. I find that Lion was in breach of Conditions 16 and 17 on its AFSL and it was also in breach of s. 912D of the Corporations Act, probably on a number of occasions.

   ANNUAL FINANCIAL REPORTING OBLIGATIONS

10. Section 292 of the Corporations Act provides that all public companies and all registered schemes must prepare an annual report and a directors’ report for each financial year. Therefore, Lion as a public company, and REIT, SPMF, CCIT and PIFA being registered schemes, were required to prepare annual financial reports and directors’ reports. The required content of each of these reports is set out in ss 295 and 298 respectively.

11. The financial reports of the above entities must be audited. Relevantly, s. 301 the Corporations Act provides:

    (1)[Audit of report] A company, registered scheme or disclosing entity must have the financial report for a financial year audited in accordance with Division 3 and obtain an auditor’s report.…

12. Division 3 of the Corporations Act deals with audit and an auditor’s report. It provides that an auditor of a financial report for a financial year must form an opinion about whether the financial report is in accordance with the Corporations Act, including compliance with accounting standards; and whether it discloses a true and fair view of the finances of the entity being audited (s. 307). It also requires the audit to be conducted in accordance with auditing standards (s. 307A).

13. The financial year in respect of a financial services licensee, where the licensee is a body corporate, is the financial year of the body corporate (s. 989A).  Lion’s financial year ended on 30 June.

14. Lion and the registered schemes were required to report to their respective members for a financial year providing, amongst other things, the financial report for that year, as well as the directors’ report and the auditor’s report on the financial reports (s. 314).  Lion was required to report to its members by the earlier of 21 days before the next Annual General Meeting after the end of the financial year, or 4 months after the end of the financial year.  The registered schemes are required to report to members within 3 months after the end of the financial year (s. 315).

15. Section 319 of the Corporations Act deals with lodging reports with ASIC. Relevantly, it provides:

    (1)   [Obligation to lodge] A company, registered scheme or disclosing entity that has to prepare or obtain a report for a financial year under Division 1 must lodge the report with ASIC. This obligation extends to a concise report provided to members under section 314.

    (1A) [Strict liability for s 319(1) offence] An offence based on subsection (1) is an offence of strict liability.

    (2)…

    (3)[Lodgment deadlines] The time for lodgement is:

    (g)within 3 months after the end of the financial year for a disclosing entity or registered scheme; and

    (h)within 4 months after the end of the financial year for anyone else.

16. In addition to the above, the holder of an AFSL is required to prepare and lodge with ASIC an annual profit and loss statement and balance sheet. Along with those documents, the licensee must lodge an auditor’s report. Section 989B of the Corporations Act provides:

    (1)[Lodgement of annual statement] A financial services licensee must, in respect of each financial year, prepare a true and fair profit and loss statement and balance sheet in accordance with this Subdivision.

    (2)[Lodgement of statement and balance sheet] The licensee must lodge the statement and balance sheet with ASIC in accordance with this Subdivision.

    (3)[Auditor’s report] The licensee must, with the statement and balance sheet, lodge an auditor’s report with ASIC containing the information and matters required by the regulations.

17. The time for lodgement of the above documents with ASIC by an AFSL holder, where the licensee is a body corporate which is not a disclosing entity or a registered scheme, is 4 months after the end of that financial year (s. 989D modified by Regulation 7.8.14A of the Corporations Regulations 2001).

18. To satisfy the provisions of s. 319 of the Corporations Act, Lion and each of the registered schemes were required to lodge annual financial reports, the annual directors’ reports and annual auditor’s report with ASIC within the time stated. Therefore, each of the registered schemes was required to lodge its annual reports with ASIC by 30 September and Lion was required to lodge its annual reports with ASIC by 31 October each year. Lion was also required to lodge its annual profit and loss statement, balance sheet and auditor’s report by 31 October each year.

19. ASIC prepared a table of statutory lodgment history for the registered schemes and for Lion.  Mr Hickie was given the opportunity to check the lodgment dates set out on that table to ensure that each was correct.  He subsequently agreed that all lodgment dates listed on the table were correct.  The tables below in respect of each scheme and Lion record all of the late lodgment dates or failure to lodge at all.   

    REIT

20. The only financial statements lodged on time for this registered scheme occurred in the 2008 financial year.  The remainder were as follows:

Financial Year	Required Lodgment Date	Date Lodged
2005	30 September 2005	17 July 2007
2006	30 September 2006	17 July 2007
2007	30 September 2007	25 September 2008
2009	30 September 2009	5 May 2010
2010	30 September 2010	21 December 2011
2011	30 September 2011	13 June 2012
2012	30 September 2012	24 December 2012

SPMF

1. No financial statements were lodged on time.  Lion notified ASIC that on 30 June 2009 the scheme commenced to be wound up.  The lodgment history is as follows:

Financial Year	Required Lodgment Date	Date Lodged
2005	30 September 2005	3 September 2007
2006	30 September 2006	7 November 2007
2007	30 September 2007	29 November 2007
2008	30 September 2008	not lodged
2009	30 September 2009	not lodged
2010	30 September 2010	not lodged
2011	30 September 2011	not lodged
2012	30 September 2012	13 May 2013

CCIT

1. The 2007, 2008 and 2012 financial statements were lodged within the required three month period.  The remainder were not.  They were lodged as follows:

Financial Year	Required Lodgment Date	Date Lodged
2005	30 September 2005	17 July 2007
2006	30 September 2006	17 July 2007
2009	30 September 2009	17 March 2010
2010	30 September 2010	9 September 2011
2011	30 September 2011	21 December 2011

PIFA

1. No financial statements were lodged for this registered scheme between 2005 and 2012.  Lion notified ASIC on 19 July 2005 that winding up of the scheme had commenced.

   LION

2. Lion lodged its audited financial reports in compliance with s. 319 and its profit and loss statement, balance sheet and auditor’s report in compliance with ss 989B and 989D within the time required by the Corporations Act in 2008 and 2012. In the remaining years, it lodged those documents in accordance with the following:

Financial Year	Required Lodgment Date	Date Lodged
2005	31 October 2005	27 April 2007
2006	31 October 2006	15 October 2007
2007	31 October 2007	28 April 2008
2009	31 October 2009	5 May 2010
2010	31 October 2010	9 September 2011
2011	31 October 2011	22 December 2011

1. In his oral evidence regarding why many of the financial reports and statements were lodged outside the time limits established by the Corporations Act, Mr Hickie simply repeated what was in his supplementary witness statement. He explained that in October 2005 Lion sought to remove its current auditor, Mr Sheridan, who was from the firm Hanrick Curran. Mr Hickie said that ASIC did not approve the appointment of a new auditor, Mr Sincock, until 24 March 2007. However, there is a problem with this explanation.

2. ASIC does not approve the appointment of auditors. Section 324AA of the Corporations Act provides:

   Subject to this Part, the following may be appointed as auditor for a company or a registered scheme for the purposes of this Act:

   (i)an individual;

   (j)a firm;

   (k)a company.

   The company or registered scheme may have more than one auditor.

3. Section 324BA of the Corporations Act provides that an individual contravenes that section if that person consents to be appointed as auditor of a company or registered scheme and the person is not a registered company auditor. The directors of a public company must appoint an auditor of the company within 1 month after the day on which the company is registered as a company unless the company at a general meeting has appointed an auditor (s. 327A).

4. An auditor of a company may be removed from office by resolution of the company at a general meeting providing proper notice has been given (s. 329).  ASIC’s approval for removal of an auditor of a company is not required.  An auditor of a company may also resign as auditor of the company but in those circumstances, the consent of ASIC must be obtained (s. 329(5)).

5. Subdivision A of Division 7 deals specifically with the appointment and removal of registered scheme auditors.  The responsible entity of a registered scheme must appoint an auditor of the registered scheme within 1 month after the date on which the scheme is registered (s. 331AAA).  ASIC is not required to approve the appointment.  A registered scheme auditor holds office until he dies; is removed or resigns from office; ceases to be capable of acting as auditor because he or she fails to maintain registration; or ceases to be auditor due to conflict of interest (s. 331AAA(2)).

6. If a vacancy occurs in the office of auditor of a registered scheme and there is no surviving or continuing auditor of the scheme, the responsible entity is required to appoint an auditor to fill the vacancy within 1 month after the vacancy occurs (s. 331AAB(1)) and a director of the responsible entity of a registered scheme must take all reasonable steps to secure compliance with s. 331AAB(1) (s. 331AAB(2)).

7. The responsible entity of a registered scheme may, with ASIC’s consent, remove the auditor of the scheme from office (s. 331AC(1)).

8. The responsible entity may remove an auditor of the compliance plan if it obtains ASIC’s consent (s. 601HH(1)) (I deal with the audit of compliance plans below).  If the auditor of the compliance plan wishes to resign, he or she must also obtain ASIC’s consent.  ASIC must notify an auditor as soon as practicable after receiving an application to resign whether it consents.

9. In summary, ASIC does not approve the appointment of an auditor to a public company, a registered scheme or a compliance plan.  A public company may remove an auditor from office without seeking consent from ASIC.  However, if the responsible entity of a registered scheme wishes to remove an auditor from office, it must obtain ASIC’s consent. 

10. Although Mr Hickie’s evidence was that ASIC was advised on 3 October 2005 of Lion’s intention to remove Mr Sheridan as auditor, Lion did not appoint a new auditor until 24 March 2007.  Although Mr Hickie said ASIC approved the appointment of Mr Sincock on that date, for the reasons I have set out above, he cannot be correct.  Mr Hickie did not suggest that Lion was waiting for ASIC’s approval to remove Mr Sheridan.  I had no evidence that ASIC objected to the removal of Mr Sheridan.  Furthermore, as will become apparent presently, the correspondence between Mr Hickie and ASIC regarding the lodgement of financial statements and reports makes no mention of waiting for approval for the appointment of Mr Sincock.

11. On 21 February 2006 ASIC sent to Lion a letter indicating it had failed to lodge its financial statements and reports for the 2005 financial year.  ASIC reminded Lion that those reports were due within four months after the end of the financial year.  It also noted that Lion was obliged to pay a $270 late lodgement fee.  Lion did not respond directly following that letter.

12. However, in a letter dated 29 September 2006 sent to ASIC, Mr Hickie requested an extension of time to enable lodgement of financial reports for Lion and for three of the registered schemes in the 2005 financial year.  At that time, those reports were already some 12 months overdue.  The letter explained the request in this way:

    The reason for the extension is due to the time constraints on the company after relocation from Queensland to Melbourne and the changing of auditors as a result of the move.  New auditors have been appointed and are finalising the reports outstanding as a result of the change of auditors.  We expect these to be lodged imminently and the current reports to follow in due course.  The audits are under way and to date have not identified any significant issues.  

13. Once again, the explanation given by Mr Hickie under oath in the course of the hearing bears no resemblance to what he said in his letter of 29 September 2006.  In that letter he said nothing about waiting for ASIC approval for the appointment of new auditors but rather, that a new auditor had been appointed.  I have no idea what Mr Hickie meant when he said: due to the time constraints on the company. ASIC responded to Mr Hickie’s letter on 1 November 2006 by stating there was no provision in the Corporations Act allowing it to grant an extension of time. However, ASIC did point out that Lion could make an application under s. 340 of the Corporations Act for relief from financial reporting requirements. There was no evidence before me that Lion made such an application. Despite ASIC’s letter stating that an extension of time to lodge documents could not be given under the Corporations Act, in a document prepared by Mr Hickie in June 2012, apparently for the purposes of the hearing conducted by ASIC on 27 June 2012, Mr Hickie said: ASIC, too, has been made aware of some of the reasons for the delays and had agreed to grant an extension of time to complete some of the audit reports and hence had not taken regulatory action against the Company previously (T docs page 1071).  This statement is also plainly incorrect.

14. In any event, Lion did not lodge the required documents following that exchange of correspondence. On 14 March 2007 ASIC caused a Complaint to issue from the Magistrates’ Court in Melbourne seeking an order under s. 1274(11) of the Corporations Act directing Lion to comply with its obligations under s. 319(1). That Complaint stated Lion had contravened s. 319(1) by failing to lodge with ASIC the required annual reports for the 2005 financial year. The Complaint also stated that ASIC had served a notice on Lion dated 22 June 2006 addressed to the company’s registered office together with the letter explaining the notice. In cross-examination Mr Hickie agreed that he had received that notice. ASIC made it clear that Mr Hickie, as a director of Lion, was liable for a civil penalty up to a maximum of $200,000 for failure to comply.

15. In a letter dated 27 April 2007 ASIC agreed to withdraw its Magistrates’ Court action with a right to have it reinstated.  The basis upon which ASIC agreed to do this is not clear from the evidence.  However, a letter dated 7 June 2007 from ASIC noted that the CCIT registered scheme had failed to lodge its financial reports for the 2005 financial year.  ASIC requested that this matter be dealt with urgently.  Mr Hickie responded to that letter on 15 June 2007.  Despite having previously been told that ASIC could not grant an extension of time for the lodgement of documents, he nevertheless sought an extension of three weeks.  The reason for the request was: due to delays caused by the previous auditor and the previous time constraints of the current auditor.

1. In his letter of 15 June 2007 Mr Hickie also informed ASIC that the Lion financial reports for the 2005 income year had been lodged and that the auditors were in the process of completing the 2006 income year accounts.  He then recorded delays as having been caused by: insufficient accounting information provided by Hanrick Curran in the provision of the rollover figures from the previous financial accounts which needed to [be] reconciled again.  Mr Hickie also said that a new auditor, CW Stirling & Co, was to be appointed due to a perceived conflict.  He then said that Mr Sincock was appointed as financial auditor and CW Stirling & Co remained the auditor for the schemes’ compliance plans.  This statement is confusing as Mr Sincock remains the financial auditor and CW Stirling & Co is the auditor of the compliance plans of the registered schemes.  Be that as it may, the 2005 and 2006 financial reports for REIT and the 2005, 2006 and 2007 financial reports for CCIT were lodged on 17 July 2007. 

2. ASIC arranged a meeting with Mr Hickie which took place on 10 October 2007.  A memorandum prepared following that meeting was in evidence.  The memorandum recorded Mr Hickie as stating that the late financials for the 2006 year would be lodged by 12 October 2007 and the following year on 19 October 2007. 

3. On 14 January 2008 ASIC wrote to Lion explaining that it needed to lodge its financial services licensee financial and audit reports urgently.  In particular, it identified Lion’s failure to lodge its financial statements and auditor’s report for the 2007 year.  In that letter, ASIC noted it was too late to apply for an extension of time to lodge those documents as ASIC could only approve an extension where an application was made before the due date for lodgement.  ASIC also requested that if Lion was unable to lodge its documents by 11 February 2008, it should notify ASIC in writing setting out the reasons why it could not do so and provide a likely timeframe for compliance.

4. Subsequently, on 18 April 2008, ASIC again wrote to Mr Hickie confirming his advice that Lion would lodge its financial statements and auditor’s report by Friday 2 May 2008.  It also noted that Lion had not lodged the 2004 and 2005 financial statements and auditor’s reports. 

5. Lion’s financial statements and audit reports were lodged on time for the 2008 financial year.  So too were the financial statements for REIT and CCIT.  No financial statements or audit reports for the 2008 financial year were lodged with ASIC regarding SPMF or PIFA.  In fact, no financial statements or audit reports were lodged for these two funds in any subsequent years.  The reason given by Mr Hickie was that these funds were in run-off in those years.  PIFA lodged a notice with ASIC indicating commencement of winding up of the scheme on 31 May 2005.  SPMF lodged a notice indicating winding up of that scheme had commenced on 29 June 2009.

6. In his examination in chief, Mr Hickie attempted to explain the reason why PIFA and SPMF did not lodge any financial statements or audit reports in the 2008 and subsequent financial years.  He said that the auditor at that time told him that he could not lodge those documents until the winding up of the schemes was complete.  He said he acted on the advice of the auditor.

7. With respect to Mr Hickie, given the general requirement for an auditor to be independent (s. 324CA of the Corporations Act), and that an auditor must give a written declaration to that effect when completing an audit (s. 307C), it is clearly not the duty of an auditor to advise the responsible entity of its duties under the Corporations Act. In any event, I had no such evidence from the auditor concerned. While I have not disregarded Mr Hickie’s evidence about this issue, quite plainly, that evidence was self-serving. I cannot place much weight on it.

8. The winding up notices of both schemes indicate that the reason for winding up was that the scheme’s purpose was accomplished or could not be accomplished. In those circumstances, the winding up takes place under s. 601NC of the Corporations Act. Part 5C.9 of the Corporations Act deals generally with the winding up of registered managed investment schemes. There is nothing in that Part which so much as suggests that once the winding up of a registered management investment scheme has commenced, no financial reports need to be lodged with ASIC. Furthermore, there is no dispensation from providing annual financial reports to members of a registered management investment scheme in Division 4 Part 2M .3 of the Corporations Act dealing with financial reporting in general. Nor is there any dispensation under those provisions requiring lodgement of financial reports, auditor’s reports and directors reports with ASIC. However, Part 2M.6 deals with the exemptions and modifications. Section 340 of the Corporations Act provides:

   (1)[ASIC may waive requirements] On an application made in accordance with subsection (3) in relation to a company, registered scheme or disclosing entity, ASIC may make an order in writing relieving any of the following from all or specified requirements of Parts 2M .2, 2M .3 and 2M .4 (other than Division 4):

   (l)the directors;

   (m)the company, scheme or entity;

   (n)the auditor.

   (2) [ASIC order] The order may:

   (o)be expressed to be subject to conditions; and

   (p)be indefinite or limited to a specified period.

   (3)[Application for order] The application must be:

   (q)authorised by a resolution of the directors; and

   (r)in writing and signed by a director; and

   (s)lodged with ASIC.

   (4)[Notice of altering of order] ASIC must give the applicant written notice of the making, revocation or suspension of the order.

9. Plainly the Corporations Act contemplates dispensing with the obligations placed on a registered managed investment scheme to lodge with ASIC financial reports, directors’ reports and an auditor’s report in some circumstances. I had no evidence before me which might indicate such an application had been made to ASIC. Given that the exemption provisions apply to auditors, I cannot accept that a registered auditor would be unaware of those provisions. It follows that I do not accept Mr Hickie’s explanation for failing to lodge those documents in respect of SPMF for the 2008 – 2011 financial years and CCIT for the 2005 – 2012 financial years.

10. REIT’s financial reports, directors’ report and auditor’s report for the 2009 financial year were some seven months late and for the 2010 income year, lodged some 11 months late although returned by ASIC because they were incorrectly completed and subsequently re-lodged some 15 months late.  CCIT’s financial reports, directors’ report and auditors report for the 2009 income year were lodged some 5 ½ months late and for the 2010 income year 11 months late.  Lion’s audit reports for the 2009 income year were lodged 6 months late and some 11 months late for the 2010 income year.

11. Mr Hickie offered two explanations for the late lodgement of the 2009 and 2010 reports.  The first had to do with the floods experienced in Brisbane and the second involved a dispute between Lion and a Mr Haynes, which he said had been running for some time but had settled, who claimed to be owed some $65,000.

12. ASIC made enquiries of Mr Hickie in March 2011 regarding the lodgement of audited financial reports for Lion and CCIT for the 2010 financial year.  In an email response made on 17 March 2011 Mr Hickie said that he had moved to Brisbane in late October 2010 and the business moved in November 2010.  However, due to the floods in Brisbane, the premises were flooded up to the first floor and he had no access.  He also said there were electrical problems with the building at the time of sending his email.  He said that he had to come back to Melbourne and put all of the records into storage which caused delays on everything.

13. The first thing which must be said about the Brisbane floods is that the city of Brisbane was inundated by floodwater on 12 January 2011 (source – Wikipedia). By that time, Lion’s 2009 audited financial reports were at least 15 months overdue and the 2010 audited financial reports some 3 months overdue. Therefore, irrespective of the floods, neither the 2009 or 2010 audited financial reports would have been lodged with ASIC within the statutory limits. The second point which needs to be made is that in a document prepared by Mr Hickie in June 2012 for the purposes of the meeting held by ASIC on 27 June 2012, which set out in detail explanations for failure to lodge documents in accordance with Lion’s statutory obligations, Mr Hickie made no mention whatsoever of floods in Brisbane being a reason why those documents were not lodged on time. The floods issue was not raised at the meeting save to say that breach reports, which Lion was required to lodge under s 912D of the Corporations Act, were not sent to ASIC because they were not available due to the floods. A breach report prepared by Mr Hickie which is dated 4 June 2012 does mention the fact that ASIC had been advised on 8 December 2011 about the flooding the Brisbane office.

14. ASIC continued to pursue Mr Hickie in the early part of 2011 through a number of emails to which Mr Hickie responded.  In response to a 10 March 2011 email from ASIC, on 17 March 2011 Mr Hickie said that the financial accounts for both of the funds (CCIT and REIT) had been completed and that he was waiting for the auditor to sign all the accounts including Lion’s accounts which he said had been completed months ago and were awaiting sign off.  In a subsequent email Mr Hickie sent to ASIC on 3 May 2011, he again said that the accounts had been finished months ago but that the audit could not be finished until he had retrieved some records which he said were packed up from the office in Brisbane which had been flooded.  He said he expected the accounts to be signed off later that week.  In an email dated 4 July 2011 Mr Hickie claimed that his delay for responding to ASIC had been because his emails were hidden by a virus twice.  He claimed to have enclosed the accounts for REIT and CCIT which had not been audited.  He then mentioned a court action against Mr Haynes which had been running for some time but had now settled.  He again said that Lion’s accounts would be signed off later that week and lodged.  Despite that, a letter from ASIC dated 1 December 2011  makes it clear that by then, Lion had failed to lodge with ASIC its audited financial statements and reports for the 2010 and 2011 financial years and the audited financial statements and reports regarding each of the schemes for the 2010 and 2011 financial years. 

15. In the breach report dated 4 June 2012, Mr Hickie explained the delay was caused by the dispute with Mr Haynes.  Mr Hickie said that Lion wrote off $65,000 owing to Mr Haynes under the terms of a so-called Convertible Note permitting Lion to offset rental payments and consulting fees owed by Mr Haynes and his associates against his Convertible Note investment (I did not have a copy of the convertible note in evidence and confess Mr Hickie’s explanation about this makes no sense to me).  Mr Hickie said Mr Haynes issued a winding up notice although the validity of that notice was challenged and the notice dismissed some months later.  He then claimed the auditor could not complete the audit report for the 2009 financial year unless a provision was made for fees owed by Mr Haynes and his associates, presumably because they were not recoverable.  He also claimed that although the audit of the financial reports recommenced after 2 December 2009, Mr Haynes lodged a counterclaim against the judgement, although that was unexplained by Mr Hickie.  It plainly had nothing to do with the winding up application.  Nevertheless, he maintained it caused further delays as the auditor became concerned about the impact on the financial position of Lion.  However, Mr Hickie then said that after the auditor obtained legal advice distinguishing the legal action from the winding up application, the 2009 audited financial reports for Lion and the schemes were then completed and lodged between March and May 2010.

16. According to Mr Hickie, Mr Haynes’ legal action proceeded and was finally resolved in August/September 2011.  He said this affected the completion of the audits of Lion and the schemes (CCIT and REIT) for the 2010 financial year reports.  Mr Hickie claimed the audit reports and financial information could not be lodged until the period between September 2011 and June 2012 due to further delays caused by failure to correctly complete forms.

17. Mr Knowles referred Mr Hickie to a letter dated 20 July 2012 which Lion sent to ASIC.  The letter was signed by Mr Richard Green, the chairman of Lion.  Mr Hickie said he did not draft that letter although he put together a timetable set out in that letter.  The letter sets out a detailed account of the reasons for delays in lodgement of the 2009 and 2010 financial reports.  It states:

    The circumstances leading to the delays in lodgement of the financial reports arose from Lion taking steps to recover moneys from [Mr] Haynes (BH) for the use by him of its premises and assets and to enforce a right of offset against BH in respect to his claim under a convertible note issued by Lion.  In turn, BH made counter claims and issued wind up notices against Lion.

18. The letter then goes on to explain the concerns of Mr Sincock, the auditor, as follows:

    The auditor, Mr Russell Sincock, was in the process of completing the 2009 audits (which were then 90% completed) when BH first attempted to wind up Lion in [sic] 31 August 2009.  The auditor then advised that he would qualify the accounts because of the winding up notice.  In his view the notice indicated that the company might not be able to continue as a going concern.  In contrast, the directors held the view that Lion would be successful in the court action against BH and that Lion would be able to enforce its right of set-off and hence continue to be a going concern.  That view was subsequently vindicated over some 2 years of litigation.

    The directors were greatly concerned that any qualification of the nature proposed would have severe detrimental effects on the company’s activities and would detrimentally affect the company’s ability to attract new investors and raise funds for its own operations and for its managed investment schemes.…

19. Lion’s letter of 20 July 2012 also referred to a second winding up notice served by BMW attempting to repossess the company car which Mr Hickie claimed was stolen by Mr Haynes.  It said that the car had been sold by Lion and the money was to be used to pay off BMW but, because it had been stolen, the sale could not proceed and Lion did not have the money to pay BMW.  That winding up notice was dismissed on 9 December 2010 after Mr Hickie raised money to pay out BMW.  Mr Hickie claimed that the second winding up notice also caused a delay in completing the audit of the 2010 financial accounts.

20. In cross-examination Mr Knowles asked Mr Hickie whether he agreed that the director’s report and the financial reports could have contained notes in relation to the litigation which would have explained the directors’ view about it.  With some reluctance, eventually Mr Hickie agreed.  When it was put to Mr Hickie that the winding up application issue only lasted for eight months at the most, he very reluctantly agreed.  He also agreed that Lion lodged financial statements for the 2009 financial year on 5 May 2010.  Despite this, Mr Hickie appeared to maintain the position that until all of the legal disputation had been resolved, the auditor could not finalise the audit.

21. With respect to Mr Hickie, the reason why the 2009 and 2010 financial reports were not completed, audited and lodged with ASIC on time was simply because Lion did not want a qualified report from the auditor.  That is plainly stated in the extract from the 20 July 2012 letter I have quoted above.  In fact, that letter puts the question beyond doubt because it was said:

    In consideration of the legal requirement to act in the best interests of investors under s.601FD(1)(c), and taking into account the interests of Lion’s investors and creditors, the directors made the decision not to accept the qualified report.  Consequently the order was delayed until December 2009 when the court dismissed the application for the windup by BH.…

    The 30 June 2010 accounts were then prepared and in the process of being audited when further legal action took place, again caused by vexatious disputes by [Mr] Haynes and his theft of a BMW company car owned by Lion.…

    This second winding up notice impacted on the audit of the 30 June 2010 financial accounts for the same reasons explained earlier in relation to the company as a going concern.

    It was determined in May 2011 to settle out of court with BH.  The counterclaim by BH was finally resolved by August 2011, resulting in significant delays to the 30 June 2010 financial audit report.  This audit report was completed and lodged on 9 September 2011.

22. Plainly, the delays in lodging the 2009 and 2010 financial reports, directors’ report and audit reports for Lion and the two schemes were due to the fact that Lion would not accept a qualified audit report on any of those financial reports.  It had nothing to do with not being able to complete the audit.  The fact that the directors disagreed with the auditor is irrelevant.  The auditor is bound by statute to act independently and, where he or she is of the opinion that a qualified report should be made, it is not up to the directors to withhold completing and lodging the required reports simply because they disagree.  Furthermore, as Mr Knowles suggested to Mr Hickie in the course his cross-examination, there was nothing to prevent the directors from putting their views in their statement required to be completed and lodged with ASIC.  What Mr Hickie failed to appreciate was that the investors in the schemes had a statutory right to be informed of all significant matters impacting on their investments.  By withholding the reports, the investors were deprived of that right.

    AUDIT OF COMPLIANCE PLANS

23. Part 5C.4 of the Corporations Act sets out the requirements for a registered managed investment scheme to have a compliance plan. A registered managed investment scheme is required to lodge with ASIC a compliance plan which complies with s. 601HA of the Corporations Act. Section 601HG relevantly provides for the audit requirements in the following way:

    (1)[Audit of compliance plan] The responsible entity of a registered scheme must ensure that at all times a registered company auditor, an audit firm or an unauthorised audit company is engaged to audit compliance with the scheme’s compliance plan in accordance with this section.  This auditor, firm or company is referred to as the auditor of the compliance plan.

    …

    (3) [Role of auditor] With the 3 months after the end of a financial year of the scheme, the auditor of the compliance plan must:

    (t)examine the scheme’s compliance plan; and

    (u)carry out:

    (i)      if the scheme has only had one responsible entity during the financial year – an audit of the responsible entity’s compliance with the compliance plan during the financial year; or…

    (v)Give to the scheme’s current responsible entity a report that states whether, in the auditor’s opinion:

    (i)      the responsible entity, or each responsible entity, complied with the scheme’s compliance plan during the financial year or that part of the financial year when it was the scheme’s responsible entity; and

    (ii)     the plan continues to meet the requirements of this Part.…

    (7)[Lodgement of auditor’s report] The responsible entity must lodge the auditor’s report under subsection (3) with ASIC at the same time as the financial statements and reports in respect of the scheme are to be lodged with ASIC (see sections 292 and 321).

1. In his closing submissions Mr Knowles referred to ASIC’s Regulatory Guide 98 (RG 98) entitled Licensing: Administrative action against financial service providers (July 2012).  He explained that RG 98 provided guidance to financial services industry participants regarding the administrative powers available to decision-makers to enforce financial services laws and how those powers should be exercised.

2. There are good reasons for this Tribunal to adopt a guiding policy providing that policy is consistent with the statute.  In Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634, Brennan J, as President of the Tribunal, said this about a ministerial policy dealing with deportation powers under the Migration Act, at 640:

   There are powerful considerations in favour of a Minister adopting a guiding policy.  It can serve to focus attention on the purpose which the exercise of the discretion is calculated to achieve, and thereby to assist the Minister and others to see more clearly, in each case, the desirability of exercising the power in one way or another.  Decision-making is facilitated by the guidance given by an adopted policy, and the integrity of decision-making in particular cases is the better assured if decisions can be tested against such a policy.  By diminishing the importance of individual predeliction, an adopted policy can diminish the inconsistencies which might otherwise appear in a series of decisions, and enhance the sense of satisfaction with the fairness and continuity of the administrative process.

3. RG 98.5, RG 98.6 and RG 98.7 set out ASIC’s responsibilities in the following way (T docs page 1351):

   RG 98.5 We are responsible for regulating persons who carry on a financial services business in Australia, as well as those who provide financial services on behalf of persons who carry on a financial services business.

   RG 98.6 The financial services regime is intended to ensure that investors can feel confident when dealing with persons (or those acting on their behalf) who are licensed to provide those services or products or engage in those activities.  This is because licensees and other financial services providers are subject to the legal obligations that attach to their licensee or provider status.  ASIC’s powers to protect the public include the power to apply a variety of administrative remedies against financial services providers that breach or are likely to breach those obligations, where this is appropriate.

   RG 98.7 To promote public confidence in the financial services industry, we endeavour to ensure that providers of financial services comply with their obligations and meet community expectations.  We educate investors so that they will be in a better position to make informed decisions.  We also educate industry participants to raise compliance standards generally.  Where necessary, we will take action to protect the public as well as deter industry participants from engaging in misconduct.

4. ASIC makes it clear that its approach to administrative action is guided by a number of principles and that it is likely to ban a person where it has serious concerns about the licensee or the way their business is being or has been conducted (RG 98.44).  This is particularly so in the case with there is a need to protect the public and where conduct may result in investor detriment.  To assist ASIC’s determination in each case, it has set out factors that may be taken into account (Table 1), and examples of conduct and potential consequences which may follow from that conduct (Table 2).  Table 2 sets out the following:

Outcome	Factors	Examples of conduct (indicative only)
Banning for less than 3 years	Conduct is the result of carelessness or inadvertence Attempt to remedy the contravention and person has fully cooperated with ASIC No loss (or minimal loss) to client	Giving a complying disclosure document, but not within the required time failing to lodge documents with ASIC as required failing to notify ASIC about a representative’s breach of the licensee’s obligations

1. In examining the principles which inform ASIC when exercising its discretion to make a banning order, Mr Knowles referred to s. 1(2) of the Australian Securities and Investments Commission Act 2001. Essentially, it provides that ASIC must strive to promote the confident and informed participation of investors and consumers in the financial system.  Although the Federal Court of Australia and the High Court of Australia have, on a number of occasions, had reason to consider the principles underlying the exercise of the discretion to ban a person from providing financial services, and some general propositions may be stated, the circumstances and facts in each case generally dictate the outcome (see Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430 at 451).

2. Middleton J, in Healey (No 2), said this about disqualification, at 445:

   Although there has been a considerable number of cases which have set out the principles, propositions and circumstances which should be taken into account in determining whether, and for what period, an order should be made disqualifying a person from managing a corporation, in Rich v ASIC at [48] McHugh J stated that Santow J’s judgement in Re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ASCR 80 was the leading authority on the reasons for a court exercising its power under s 206C or s 206E of the Act.  It has been referred to and followed in most cases dealing with subject.

3. From the long list made by Santow J in the HIH Insurance Ltd case, these appear to be the relevant considerations for the purposes of the facts and circumstances of this case:

   ·A banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and the suitability of directors to hold office.

   ·Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.

   ·The order has a motive of personal deterrence, though it is not punitive.

   ·The objects of general deterrence are also sought to be achieved.

   ·In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.

   ·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.

   ·It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.

   ·A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.

4. McHugh J in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, at 155, summed up the position as follows:

   Both Santow J’s list of propositions and the comments of the Victorian Court of Appeal indicate that the factors taken into account in the criminal jurisdiction – retribution, deterrence, reformation, contrition and protection of the public – are also central to determining whether an order of disqualification should be made under the Corporations Act and, if so, the appropriate period of disqualification. Those factors also support the conclusion that the jurisdiction exercised under this part of the Corporations Act cannot properly be characterised as purely protective.

5. In closing submissions, Mr Foster, who appeared on behalf Mr Hickie, accepted that the explanations given by Mr Hickie for late lodgement of documents did not justify the lateness so that he could claim he had exercised the degree of care and diligence that a reasonable person in his position would exercise; or that he had taken all steps that a reasonable person in his position would take to ensure Lion complied with the Corporations Act, its licence and the compliance plans of the registered schemes. However, while apparently accepting that Mr Hickie had breached s. 601FD(1)(b) and (f), Mr Foster submitted that those breaches were not so serious as to prevent ASIC allowing Mr Hickie to assume the role of Responsible Manager for another AFSL holder in mid-2011, namely, Sovereign MF Ltd (Sovereign). According to Mr Foster, this is a matter of critical significance.

6. In fact, in a supplementary witness statement made by Mr Hickie on 27 June 2013, he said that he had been asked to become the Responsible Manager of Sovereign.  He said that he attended a meeting at ASIC on 25 February 2011 in the course of which Ms Corinne McKenzie, a senior analyst with ASIC, suggested that Sovereign should have a responsible manager like him with the experience he had funds management.

7. Ms McKenzie provided to the Tribunal a witness statement made on 25 July 2013 which was taken into evidence.  Ms McKenzie said she arranged for a meeting with the directors of Sovereign on 25 February 2011 and that Mr Hickie also attended that meeting.  She said ASIC had some concerns about two key persons named on Sovereign’s AFSL and whether they met its organisational competency requirements.  In response to ASIC’s concerns regarding organisational competency, Sovereign undertook an independent recruitment process searching for a responsible manager.  ASIC was not involved in that recruitment process.  Ms McKenzie denied making any statements of the kind referred to by Mr Hickie in his supplementary witness statement made on 27 June 2013; or that she suggested or recommended any specific individual to be appointed to Sovereign as a potential responsible manager.

8. On 1 March 2011 Sovereign lodged an application to notify ASIC of a change in the details of its AFSL.  Mr Hickie was put forward on that application form as a new added responsible manager.  Ms McKenzie said that that application along with an application to vary the authorisation conditions on its AFSL was allocated to other ASIC offices in the Registry and Licensing team for assessment.  She said that one of those officers came to her to discuss Sovereign’s applications and the appointment of Mr Hickie as a responsible manager.  She then said:

   During that conversation I stated that while Mr Hickie had appropriate knowledge, I did not consider him to be competent operationally, and that he also may not be in a position to ensure that the appropriate procedures were followed.

9. Ms McKenzie made a file note recording what was said at the meeting with other ASIC officers and the above quote is consistent with what is contained in her file note.  On 22 June 2011 Ms McKenzie received an email from the ASIC officer from Registry and Licensing with whom she had spoken.  Relevantly, the officer stated:

   3.  Whilst ASIC is not fully satisfied as to the capacity and competence of Hickie and Giorgio, on the information provided, they are the only parties with sufficient knowledge in the authorisations granted.  Therefore Hickie to be made key person with respect to all authorisations and Giorgio to be made key person with respect to asset type – property.

   4.  Recommend surveillance for possible cancellation or suspension of the licence due to competence and capacity concerns.

10. In her witness statement Ms McKenzie noted that ASIC continued to have concerns about Mr Hickie’s appointment as responsible manager and that while Sovereign was unable to appoint another external responsible manager, it would continue its efforts to obtain a suitable person.  Concern was also expressed about the fact that Mr Hickie was the subject of bankruptcy proceedings.  In fact, on 11 April 2012 ASIC had determined to notify Mr Hickie that his appointment as a responsible manager for Sovereign had ceased.

11. In the course of his cross-examination, when Mr Knowles put to Mr Hickie that this was simply a case of Sovereign nominating him as responsible manager, he agreed.  Also, when asked whether he accepted that ASIC had not endorsed him as a responsible manager, he again agreed.

12. Mr Foster submitted that the fact that Mr Hickie had been approved by ASIC as the responsible manager of Sovereign, which had serious compliance issues, was reflective of the fact that the non-compliance events involving Lion and Mr Hickie between 2007 and June 2011, which were well known to ASIC, were not sufficient to prevent Mr Hickie from being appointed to Sovereign.  With respect to Mr Foster, I do not think that the evidence takes the matter as far as he suggested.  The evidence discloses that Sovereign had difficulty in finding a suitable person to act as a key person under its AFSL and Mr Hickie’s name was put forward.  While ASIC clearly had serious reservations about that appointment, it allowed it to proceed only on the basis that careful monitoring was to continue to ensure compliance and that search for a suitable responsible manager continued.  It does not alter the fact that even at that time, ASIC regarded Mr Hickie’s performance as a key person under Lion’s AFSL to be well below standard.

13. As Mr Knowles submitted, Mr Hickie’s breaches of the Corporations Act are serious. All of the registered management investment schemes, except for CCIT, held assets as a result of investments made by investors. SPMF had about 98 investors, PIFA about 54 and REIT about 70. SPMF and PIFA both made losses on their investments resulting in investors failing to receive their investment money let alone any profit from those investments.

14. While I have not aggregated the number of contraventions, I have no reason to doubt Mr Knowles’ submission that Lion contravened s. 319 on 36 occasions between 2005 and 2012. In fact, it is far simpler to add up the number of times which Lion did comply with its statutory obligations. Between 2005 and 2012, Lion complied with its statutory lodgment obligations on two occasions. As far as the registered schemes are concerned, Lion, as the responsible entity, complied with its statutory obligations on only four occasions out of some 64 deadlines which it was required to meet. Mr Knowles calculated there were more than 70 contraventions of the Corporations Act. It is fair to say, that over that eight year period, compliance was a rare event. Furthermore, the delays themselves were often lengthy, some exceeding two years and many exceeding 12 months. A number of documents were not lodged at all. Furthermore, I have found the explanations given by Mr Hickie for the delays to be unsatisfactory. On some occasions he contradicted himself and on others the explanation was simply illogical. On number of occasions his oral evidence was at odds with the objective documentary evidence.

15. It was clear to me that Mr Hickie had no insight whatsoever into his failure to comply with the Corporations Act. He appeared to have a genuine belief that he had not caused Lion to breach conditions of its AFSL when that was plainly the case even on his own evidence. There was also an attempt to play down the seriousness of his failure to comply with the Corporations Act by simply stating that none of the investors was hurt or lost money. Even that statement was incorrect. Not only did he deprive investors of the right to be fully informed about the financial status of their investments in the registered schemes, he was reluctant to admit that investors had in fact suffered losses in two of the schemes.

16. There was no evidence before me that Mr Hickie had accepted his past failures and that he would perform at a much higher standard if allowed to continue as a key person of an AFSL holder. In fact his lack of insight and acceptance of his own failings give me no confidence that his behaviour would alter if allowed to continue to be involved in the financial services industry without suspension. Although Mr Hickie claimed that with the appointment of Know Compliance to assist in compliance with statutory obligations he would do so, I am not satisfied that this would assist Mr Hickie. Mr Hickie’s failure to meet the required standard of diligence and care did not arise simply out of oversight or forgetfulness. There was no reason why Mr Hickie could not simply have diarised all of the relevant dates and regularly referred to his diary. The problem with Mr Hickie goes much deeper than that. The impression I gained from his evidence was that he was not prepared to diligently comply with the Corporations Act. He would only comply if forced by ASIC, on occasion by legal action, to do so.

17. In a supplementary witness statement which was received by the Tribunal on 20 February 2013, Mr Hickie set out the effect a banning order would have on his livelihood.  He said the banning order and associated publicity in the media and on the Internet had effectively wiped out my livelihood.  He claimed that all activity, negotiations or deals were affected resulting in no income generating activities since August 2012.  Mr Hickie also referred to the fact that people were reluctant to deal with him and the companies with which he was involved as they perceived a reputational and business risk in any association with him.  In addition, in a statement provided by Mr Hickie which was received by the Tribunal on 14 February 2013, he said that he made his livelihood in dealing in the financial services industry and that he had no other business ability.

18. However, in the course of his cross-examination, Mr Hickie was asked about the work he had been conducting since the banning order was made by ASIC.  Mr Hickie discussed a business prospect in Indonesia and Malaysia regarding a banking system.  He said he had not been remunerated because the entity involved was licensing its technology.  Mr Hickie also mentioned that he was a director and shareholder of a number of other companies, including a listed public company.

19. When Mr Hickie was asked whether he had expertise in business outside of financial services, he responded by saying: Well, it’s structuring and writing business plans, and developing structures for these people.  At that point Mr Knowles referred Mr Hickie to paragraph 2 of his witness statement lodged with the Tribunal on 14 February 2013 where he said: David has made his livelihood in dealing in the financial services industry.  He has no other business ability.  Mr Hickie then agreed with Mr Knowles that he had been involved in vocational or business activities over the past year which did not involve the provision of financial services.  However when it was pointed out to Mr Hickie that that evidence was inconsistent with what he said in his witness statement, he seemed to have considerable difficulty in recognising that was the case.  In fact, his response was consistent with many other answers he gave in the course of his cross-examination, that is, completely inconsistent with prior statements but seemingly unable to recognise or accept that to be the case.  It was not until Mr Foster, in the course of re-examination, drew his attention to the inconsistency and invited him to withdraw the statement indicating he had no other business ability, that Mr Hickie agreed to withdraw it.

20. In my opinion, a banning order is appropriate in this case. It will serve to protect intending investors in registered managed investment schemes. Furthermore, I believe it will act as a specific and general deterrent to Mr Hickie should he once again become involved in financial services following expiry of the banning order. I find that a ban for a period of two years is appropriate having regard to the guidelines (RG 98) established by ASIC. Although I am not convinced that the conduct resulted from carelessness or inadvertence, it appears the losses to investors were minimal and not necessarily due to Mr Hickie’s failure to comply with the Corporations Act. Nevertheless, the indicative conduct satisfies the making of a banning order for less than three years. Such a ban satisfies the requirement to treat similar conduct with similar sanctions. It diminishes the importance of individual predeliction.

    CONCLUSION

1. The findings of fact which I have made in this matter disclose that Mr Hickie had almost completely disregarded his and Lion’s statutory duties despite being a director, secretary and CEO of Lion.  His repeated failures to comply with his statutory duties were met with explanations which were not only inconsistent, but in some instances wholly implausible.  Perhaps the most concerning aspect of Mr Hickie’s evidence was the apparent lack of understanding that he had in fact failed to comply with his statutory duties.  He certainly did not exercise the degree of care and diligence that a reasonable person would have exercised in his position.

2. There can be no question on the evidence before me that ASIC’s power to make a banning order under s. 920A was enlivened. Mr Hickie had not complied with the financial services law. Furthermore, given Mr Hickie’s response to his failures to comply, and particularly his lack of insight, I have reason to believe that he is likely to contravene the financial services law in the future if a banning order were not made. Although Mr Hickie suggested that the appointment of Know Compliance would ensure future compliance with his statutory obligations, given that he frequently disregarded ASIC’s demands to comply over the years in question, I have no reason to believe that anything Know Compliance would say would have effect on him.

3. In my opinion, Mr Hickie has displayed a serious disregard for the financial services law.  In his case, a banning order is appropriate.  I accept Mr Knowles’s submission that such an order would promote specific and general deterrence as well as investor confidence and the effective regulation of the financial services industry.  I find that the banning order made by a delegate of ASIC on 8 August 2012, which prohibited Mr Hickie from providing any financial services for a period of two years, was the preferable decision.  I affirm that decision.

I certify that the preceding 173 (one hundred and seventy three) paragraphs are a true copy of the reasons for the decision herein of Egon Fice, Senior Member

.........................[sgd]...............................................

Associate

Dated  29 November 2013

Dates of hearing	22 and 23 October 2013
Solicitors for the Applicant	Mr A Foster, Foster Nicholson Jones Lawyers
Counsel for the Respondent	Mr R Knowles
Solicitors for the Respondent	Mr M Povey, ASIC