Hutchison and Australian Securities and Investments Commission
[2018] AATA 3520
•18 September 2018
Hutchison and Australian Securities and Investments Commission [2018] AATA 3520 (18 September 2018)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2017/3652
Re:Robert Hutchison
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal:Deputy President Boyle
Date:18 September 2018
Place:Perth
The Tribunal sets aside the decision of ASIC dated 2 June 2017 to make a banning order under ss 920A and 920B of the Corporations Act 2001 (Cth).
.....[sgd]...................................................................
Deputy President Boyle
CATCHWORDS
FINANCIAL SERVICES AND FINANCIAL MARKETS – permanent banning order – whether power to make a banning order – financial services business – whether the Applicant engaged in dishonest conduct in relation to a particular financial product or financial service – whether the Applicant is of good fame or character – whether the Applicant is likely to contravene a financial services law – dishonesty was not in relation to a financial product or a financial service – decision under review is set aside
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) – ss 25, 43
Australian Securities and Investments Commission Act 2001 (Cth) – s 1(2)Corporations Act 2001 (Cth) – ss 760A, 761A, 766A(1), 766B(1), 911A(1), 913B, 914A, 915A to 915J, 920A, 920A(1)(d), 920A(1)(e), 920A(1)(f), 920B, 1041G, 1041H, 1317B, Chapter 7 Part 7.6
CASES
Drake v Minister for Immigration and Ethnic affairs (1979) 46 FLR 409
Fraser and Australian Securities and Investments Commission [2011] AATA 944
Hutchison and Australian Securities and Investments Commission [2018] AATA 760
Hutchison v Australian Securities and Investments Commission [2018] FCA 1002
Irving v Minister for Immigration, Local Government and Ethnic Affairs (1996) 139 ALR 84
Joye v Beach Petroleum NL & Cortaus Ltd (in liq) (1996) 67 FCR 275
Liu and Australian Securities and Investments Commission [2014] AATA 817
McBride v Walton [1994] NSWCA 199
Shi v Migration Agents Registration Authority (2008) 235 CLR 286; [2008] HCA 31
Tweed and Australian Securities and Investments Commission [2018] AATA 514
Williams and Australian Securities Investments Commission [2018] AATA 2312Yao v Minister for Immigration and Border Protection (2014) 140 ALD 21; [2014] FCAFC 17
SECONDARY MATERIALS
Australian Securities Investments Commission, ASIC Regulatory Guide 98 – Licensing: Administrative actions against financial services providers (July 2013) – reg 98.6
REASONS FOR DECISION
Deputy President Boyle
18 September 2018
THE APPLICATION
The particulars of the substantive application in this matter and the hearing of that application are set out in [4] to [27] of the decision in Hutchison and Australian Securities and Investments Commission [2018] AATA 760 (the previous decision). Rather than repeating those paragraphs in this decision, I refer to and incorporate them by reference.
The Applicant purported to appeal the interlocutory decision referred to in [1]. That purported appeal was dismissed as incompetent by Justice Banks-Smith on 3 July 2018 (Hutchison v Australian Securities and Investments Commission [2018] FCA 1002).
The Applicant filed his responsive closing submissions with the Tribunal on 9 July 2018.
The Applicant in his application (T1) seeks the review of the Respondent’s (ASIC) decision dated 2 June 2017 under ss 920A and 920B of the Corporations Act 2001 (Cth) (the Act) to permanently prohibit the Applicant from providing any financial services (the Banning Order)(T2).
On the application of the Applicant to the Tribunal, on 7 September 2017 Deputy President Rayment granted a stay of the Banning Order enabling the Applicant to continue to provide financial services on conditions.
The application for review is made pursuant to s 1317B of the Act. I am satisfied that the Tribunal has jurisdiction to review the Banning Order.
THE LEGISLATIVE FRAMEWORK
One of the responsibilities of ASIC is the administration of laws relating to corporations, financial services, financial markets and those who participate in the financial system. Under s 1(2) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), ASIC is required, amongst other things, to promote the confident and informed participation of investors and consumers in the financial system (s 1(2)(b) of the ASIC Act).
Chapter 7 of the Act deals with the regulation of financial markets and financial services. Part 7.6 of the Act establishes a licensing regime for those carrying on a financial services business. It is unlawful for an individual or entity to carry on a financial business unless they hold an Australian Financial Services Licence (AFSL) (s 911A(1) of the Act).
“Financial services business” is defined as “a business of providing financial services” and “financial service” is defined as having the meaning in Division 4 of the Act: see definitions in s 761A of the Act. Section 766A(1) of the Act, which is in Division 4, defines a person as providing a financial service if they, amongst other things, provide financial product advice (s 766A(1)(a)) or deal in a financial product (s 766A(1)(b)). In the present case the applicable financial service is providing financial product advice.
Section 766B(1) of the Act defines financial product advice as meaning a recommendation or statement of opinion that is intended, or could be reasonably regarded as intended to influence a person in making a decision in relation to a particular financial product or class of financial products or an interest therein.
ASIC is empowered to grant AFSLs (s 913B), impose conditions on AFSLs (s 914A), vary, suspend or cancel AFSLs (ss 915A to 915J) and to make an order banning a person from providing financial services (s 920A). The banning order may prohibit a person from providing financial services permanently or for a period (s 920B(2)). The prohibition for a specified period is not available where ASIC has reason to believe that the person is not of good fame or character (s 920B(2)(b)).
ASIC’s power to make banning orders is set out in s 920A(1) of the Act which, relevantly, is as follows:
920A ASIC’s power to make a banning order
(1) ASIC may make a banning order against a person, by giving written notice to the person, if:
(a)ASIC suspends or cancels an Australian financial services licence held by the person; or
(b)the person has not complied with their obligations under section 912A; or
(ba) ASIC has reason to believe that the person is likely to contravene their obligations under section 912A; or
(bb) the person becomes an insolvent under administration; or
(c)the person is convicted of fraud; or
(d)ASIC has reason to believe that the person is not of good fame or character; or
(da) ASIC has reason to believe that the person is not adequately trained, or is not competent, to provide a financial service or financial services; or
(db) the person has not complied with any one or more of his or her obligations under section 921F (requirements relating to provisional relevant providers); or
(dc) both of the following apply:
(i)a supervisor referred to in section 921F has not complied with any one or more of his or her obligations under that section in relation to a provisional relevant provider;
(ii)both the supervisor and the provisional relevant provider are authorised to provide personal advice to retail clients, on behalf of the person, in relation to relevant financial products; or
(dd) both of the following apply:
(i)a provisional relevant provider has not complied with his or her obligations under subsection 921F(7);
(ii)the provisional relevant provider is authorised to provide personal advice to retail clients, on behalf of the person, in relation to relevant financial products; or
(de) ASIC has reason to believe that the person was authorised, in contravention of subsection 921C(2), (3) or (4), to provide personal advice to retail clients in relation to relevant financial products; or
(e)the person has not complied with a financial services law (other than section 921E (relevant providers to comply with the Code of Ethics)); or
(f)ASIC has reason to believe that the person is likely to contravene a financial services law; or
(g)the person has been involved in the contravention of a financial services law by another person; or
(h)ASIC has reason to believe that the person is likely to become involved in the contravention of a financial services law by another person.
Section 920B of the Act is as follows:
920B What is a banning order?
(1) A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2) The order may prohibit the person against whom it is made from providing a financial service:
(a) permanently; or
(b) for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
(3) A banning order may include a provision allowing the person against whom it was made, subject to any specified conditions:
(a) to do specified acts; or
(b) to do specified acts in specified circumstances;
that the order would otherwise prohibit them from doing.
Section 1041G of the Act is as follows:
1041G Dishonest conduct
(1) A person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service.
Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)).
Note 2: Failure to comply with this subsection may also lead to civil liability under section 1041I.
(2) In this section:
dishonest means:
(a) dishonest according to the standards of ordinary people; and
(b) known by the person to be dishonest according to the standards of ordinary people.
Section 1041H of the Act is as follows:
1041H Misleading or deceptive conduct (civil liability only)
(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
Note 1: Failure to comply with this subsection is not an offence.
Note 2: Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.
(2) The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(a) dealing in a financial product;
(b) without limiting paragraph (a):
(i)issuing a financial product;
(ii)publishing a notice in relation to a financial product;
(iii)making, or making an evaluation of, an offer under a takeover bid or a recommendation relating to such an offer;
(iv)applying to become a standard employer-sponsor (within the meaning of the Superannuation Industry (Supervision) Act 1993) of a superannuation entity (within the meaning of that Act);
(v)permitting a person to become a standard employer-sponsor (within the meaning of the Superannuation Industry (Supervision) Act 1993) of a superannuation entity (within the meaning of that Act);
(vi)a trustee of a superannuation entity (within the meaning of the Superannuation Industry (Supervision) Act 1993) dealing with a beneficiary of that entity as such a beneficiary;
(vii)a trustee of a superannuation entity (within the meaning of the Superannuation Industry (Supervision) Act 1993) dealing with an employer-sponsor (within the meaning of that Act), or an associate (within the meaning of that Act) of an employer-sponsor, of that entity as such an employer-sponsor or associate;
(viii)applying, on behalf of an employee (within the meaning of the Retirement Savings Accounts Act 1997), for the employee to become the holder of an RSA product;
(ix)an RSA provider (within the meaning of the Retirement Savings Accounts Act 1997) dealing with an employer (within the meaning of that Act), or an associate (within the meaning of that Act) of an employer, who makes an application, on behalf of an employee (within the meaning of that Act) of the employer, for the employee to become the holder of an RSA product, as such an employer;
(x)carrying on negotiations, or making arrangements, or doing any other act, preparatory to, or in any way related to, an activity covered by any of subparagraphs (i) to (ix).
THE ISSUES
The Applicant’s Statement of Facts and Contentions dated 6 November 2017 (Applicant’s SFC) identifies the issues as being:
Whether the Respondent ought to have made a determination that as a result of conduct between 1 January 2011 and 30 November 2012:
i.the Applicant did not comply with a financial services law (s 920A(1)(e));
ii.ASIC has reason to believe that the Applicant is likely to contravene a financial services law (s 920A(1)(f));
iii.ASIC has reason to believe that the Applicant is not of good fame or character (s 920A(1)(d)).
(Footnotes omitted)
ASIC’s Statement of Facts, Issues and Contentions dated 27 November 2017 (ASIC’s SFIC) at paragraph 6 agrees that the issues as identified by the Applicant’s SFC are the issues for determination.
While ASIC might agree with the issues being those as identified by the Applicant, the issue is not whether the “Respondent ought to have made” the determinations identified, the issue for determination by this Tribunal is whether the correct and preferable decision in the circumstances is for a banning order under s 920A(1) of the Act to be made prohibiting the Applicant from providing financial services and, if that is the case, for what period should that prohibition apply and on what, if any, conditions (see Shi v Migration Agents Registration Authority(2008) 235 CLR 286; [2008] HCA 31 (the Shi decision)). In making that determination the Tribunal will have to consider the issues identified in [16] but will also have to consider whether a banning order is available, appropriate and justified in the circumstances.
Further, ASIC summarises the basis of its claims against the Applicant at paragraphs 2 and 3 of its closing submissions as follows:
2. …the banning order made with respect to the Applicant, Mr Hutchison, should be upheld on the basis that the Applicant:
a. has not complied with a financial services law: s 920A(1)(e); and
b. is not of good fame and character: s 920A(1)(d).
and
3. The Respondent’s case is that the Applicant has not complied with a financial services law because:
a. in the course of carrying on a financial services business engaged in dishonest conduct in relation to a financial product or a financial service contrary to s1041G of the Corporations Act 2001 (Cth) (the Act); and
b. engaged in conduct in relation to a financial product or a financial service, that was misleading and deceptive or likely to mislead or deceive contrary to s 1041H of the Act.
The above closing submissions refer to two subsections of s 920A(1) of the Act, namely subsections 920A(1)(d) and 920A(1)(e). As noted at [16] and [17], ASIC’s SFIC at paragraph 89(b) also refers to a basis of the Banning Order being that ASIC has reason to believe that the Applicant “is likely to contravene a financial services law” and therefore comes within subsection 920A(1)(f) of the Act. Those are the only references to that subsection in ASIC’s SFIC and that subsection is not referred to in ASIC’s closing submissions. The statement of reasons that was issued by the delegate with the Banning Order (T2, 16-23) at paragraph 3(b) refers to s 920A(1)(f) of the Act and that subsection is discussed in those reasons at paragraphs 32 to 36 (T2, 21 and 22). At paragraph 36 of her reasons (T2, 22) the delegate purports to make a finding in relation to s 920A(1)(f) of the Act. While she finds that the Applicant had not “developed a full understanding of the high degree of honesty, adherence to duties and the level of trust expected of providers of Australian financial services…”, she makes no express finding that the Applicant “is likely to contravene a financial services law”, which is the relevant consideration for the purposes of s 920A(1)(f) of the Act.
It is not clear whether ASIC still seeks to rely on s 920A(1)(f) of the Act or, if it does on what basis it does so, however, insofar as it does do so, for reasons set out later in this decision I find that that ground is not made out. However, for the purposes of summarising and considering the Applicant’s relevant conduct I have assumed that ASIC does seek to rely on s 920A(1)(f) of the Act.
THE APPLICANT’S RELEVANT CONDUCT
ASIC’s closing submissions summarise the relevant conduct as follows;
47. There are 23 payments set out in the Aide Memoire. Those payments were received by the Applicant over an almost 2 year period between 9 December 2010 and 26 November 2012. The Applicant was not entitled to receive those payments and he knew that to be the case. He also knew that he was not entitled to receive payments in cash or to take cheques payable to RI Advice.
(Footnotes omitted)
The details of the alleged payments, as set out in paragraph 48 of ASIC’s closing submissions, are:
·payment by a client of cash on 8 February 2011 directly to the Applicant and potentially one cash payment by another client directly to the Applicant on 9 December 2010;
·deposit of cash by clients directly to the Applicant’s bank account on 9 February 2011;
·payments by 10 bank transfers/direct deposits to the Applicant’s bank account by a number of clients in the period between 9 February 2011 and 26 November 2012;
·deposit of two cheques on 4 March 2011 and 20 April 2011 made payable to the Applicant; and
·the deposit of eight cheques payable to RI Advice or RetireInvest on dates between 27 June 2011 and 29 May 2012.
ASIC claims that in addition to the above payments there were five separate payments made by clients for which there is no separate documentary evidence. While there is no documentary evidence to support these payments, ASIC submits that the Tribunal should be satisfied that they were made and received by the Applicant on the basis of admissions made by the Applicant. These admissions are discussed below.
The Applicant disputes some of the payments claimed to have been made to him and also disputes that in all of the cases where he did take payment directly from the client there was a double-charging.
Clients double-charged/payments received directly from clients
While there was repeated reference throughout these proceedings to certain clients being double-charged and evidence led, in particular by the Applicant, in relation to the issue of double-charging and reimbursement of those clients, ASIC’s case as disclosed by ASIC’s SFIC, ASIC’s closing submissions and the affidavit of Mr Nhan Kien Chau, does not rely on the claimed double-charging, of itself at least, as a ground for the Banning Order. Its case, as disclosed by the above documents, relies on the conduct of the Applicant in taking payments directly from the clients, whether in cash, cheque or electronic transfer. The fact that in some cases the clients that had made payment to the Applicant by one of those means were also charged the same fee by deduction from their investment accounts by RI, appears not to be an element of ASIC’s case, except potentially insofar as ASIC submits that the Applicant did not make refund payments to those clients until after RI instigated an investigation into the double-charging or misled the clients in relation to the double-charging.
The Applicant admits that certain clients were double-charged fees for the provision of financial advice. The Applicant also admits that he took payments directly from clients in the ways alleged by ASIC, although again there is dispute as to the number of clients involved and, in some cases, the detail of how the payment was made. The Applicant asserts that insofar as clients were double-charged, that arose out of inadvertence on his part or on the part of his staff responsible for processing the paperwork submitted to RI which, based on that paperwork, deducted the fee again from the client’s account.
Paragraph 13 of the Applicant’s SFC sets out the Applicant’s position in relation to 16 clients identified as having made payments directly to the Applicant. Unfortunately, as with a lot of the documentation produced by the Applicant for this application, it is not clear which direct payments the Applicant is conceding, however, of the 16 identified clients it appears that the Applicant concedes that direct payment was made and/or there was a refund of fees paid by clients in nine of the cases. In relation to some clients the Applicant appears to concede a refund while (apparently) denying that a direct payment had been received. In addition to those direct payments admitted (apparently) by the Applicant, I am satisfied on the basis of the evidence, in particular the answers provided by the Applicant in cross-examination and the documentation put to him in cross-examination (Transcript, pp 283-350) that there were at least seven other clients, some included in the identified 16 clients, who made payments directly to the Applicant. In relation to a number of those additional clients it appears that there was no receipt or other record of payment issued by the Applicant.
The total value of these payments appears to be, as asserted by ASIC, in the vicinity of $17,000 (R7, witness statement of Mr Nhan Kien Chau, paragraph 5).
ASIC’s SFIC argues that the receipt by the Applicant of direct payments and, in the cases where it occurred, the double charging and other conduct on the part of the Applicant, should support the Banning Order as follows:
104. The Delegate’s decision should be upheld on the basis that fees received from 15 clients, 10 of whom were also double charged were received in cash or were paid by the Applicant into his own personal bank account. In doing so the Applicant:
(a)converted to his own use cheques made payable to RI Advice;
(b)provided a fraudulent tax invoice to Mr and Mrs [B];
(c)wrote his banking details on a with compliments slip and provided it to Mr and Mrs [P];
(d)received cash from Mrs [O] and potentially others;
(e)did not provide a receipt for any of those fees to any payer;
(f)did not record the receipt of those fees into the system; and
(g)did not report the receipt of those fees to RI Advice.
105. In the cases of double charging, even if the Applicant did not intend that those clients would be double charged (a matter not conceded by ASIC), the Applicant did not take any or sufficient steps to ensure that did not occur. The double charging occurred because the documentation that the Applicant or his staff submitted authorised the deduction of fees from the clients’ investment accounts.
106. The Applicant did not alter the documentation to ensure that the deduction would not occur. He did not tell the clients that their payment would not be recorded or that the documentation would operate to authorise a further deduction regardless of their payment of upfront fees. The failure of the Applicant in this regard was misleading and deceptive.
107. Concealing from the clients that he intended to take fees payable to RI Advice was dishonest and by any objective standard misleading to and deceptive of the clients.
108. There is additional evidence of a course of conduct by the Applicant in paying fees due to RI Advice to himself.
109. Further, the concealing of his course of conduct from RI Advice was dishonest and was, by any objective standard, misleading and deceptive.
110. The Applicant has demonstrated significant dishonesty within the meaning of section 1041G of the Corporations Act. As the Applicant submits, the test of dishonesty is that it be dishonest according to the standards of ordinary people.
By that definition, the:
(a)The conversion of cash and cheques payable to RI Advice or RI Advice;
(b)The failure to advise the clients that he would be taking those fees for his own personal use and not for the use of either RI Advice or for WAWM was dishonest;
(c)The failure to advise RI Advice that he had taken fees properly payable to RI Advice;
(d)His evidence in support of the stay application; and
(e)His continued refusal to accept that he had received those fees forcing ASIC to obtain documentary proof,
was dishonest.
The basis upon which ASIC makes the claim that receipt of fees directly by the Applicant was dishonest is that it was contrary to the RI Advice Process (T3.6), in particular the prohibition on receiving cash payments (T3.6, 486) and the RI Advice Procedures and Policies (T3.7), in particular the requirement that all cheques are to be made payable to “RI Advice Group Pty Limited” (T3.7, 537). The Applicant had agreed to comply with “procedures and guidelines established by” RI in paragraph 2.1(a) of the Individual Representative Deed (T3.8) between RetireInvest Pty Ltd, WAWM Investment Holdings Pty Ltd and the Applicant. The Applicant conceded that he was bound by those terms (Transcript, pp 263-264).
CONSIDERATION
The application for review is made pursuant to s 1317B of the Act (see also s 25 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act)). Under s 43 of the AAT Act, the Tribunal may exercise all of the powers of the original decision-maker so it can affirm, vary or set aside the decision.
As noted at [18] above, the role of the Tribunal in such a review is to determine for itself what is the correct or preferable decision: see the Shi decision. The Tribunal conducts its own de novo assessment and determination of the matter. Its role is “‘to do over again’ what the original decision maker did”: Yao v Minister for Immigration and Border Protection (2014) 140 ALD 21; [2014] FCAFC 17 at [41] per Perry J (White and Wigney JJ agreeing), referring to the Shi decision at 315 [100] (Hayne and Heydon JJ) and 299 [37] (Kirby J); see also Drake v Minister for Immigrationand Ethnic Affairs (1979) 46 FLR 409.
In undertaking that task, the Tribunal is entitled to consider all the material before it, and is not limited to consideration of only the material that was before the original decision-maker. Thus the Tribunal decides what is the correct or preferable decision at the time it makes its decision, rather than at the time of the original decision: the Shi decision at [41]-[51] per Kirby J; at [99]-[101] per Hayne and Heydon JJ.
Did the Applicant fail to comply with a financial services law ? - (s 920A(1)(e) of the Act)
ASIC identifies two financial service laws as being relevant to this consideration, namely, ss 1041G and 1041H of the Act (ASIC’s SFIC at paragraph 91).
Section 1041G of the Act
Section 1041G of the Act has two distinct elements in addition to the requirement for dishonest conduct. The first is that the conduct must be “in the course of carrying on a financial services business”. The second is that the dishonest conduct must be “in relation to a financial product or financial service”. It is not disputed that the Applicant, at the relevant times, carried on a financial services business for the purposes of s 1041G of the Act. The first element of s 1041G of the Act is therefore satisfied. What is disputed is that the conduct relied on by ASIC was conduct “in relation to a financial product or financial service”.
ASIC at paragraph 22 of its closing submissions points to the Applicant’s argument at paragraph 69 of his closing submissions that the provisions of Chapter 7 of the Act are “consumer protection” provisions and that therefore conduct relating only to the licensee does not come within the scope of the section.
ASIC refers (at paragraph 21 of its closing submissions) to the case of Fraser and Australian Securities and Investments Commission [2011] AATA 944 (Fraser and ASIC) as being a case in which the dishonest conduct relied on was the authorised representative (the applicant in that case) keeping payments for advice provided instead of paying them to the AFSL holder and creating documents which concealed that position. Fraser and ASIC is, however, distinguishable from the present case. Under the agreement between Mr Fraser and his principal, fees had to be split between Mr Fraser, those referring clients to Mr Fraser and Mr Fraser’s principal, the AFSL holder. Mr Fraser, however, had the discretion to waive fees for the provision of financial advice. What Mr Fraser did was to receive payments directly from the clients but to falsely record in the relevant documents that fees had been waived. In particular the client invoice produced by him to be retained on the company’s files falsely stated that the fee had been waived whereas it had actually been paid, or was payable, by the client to him. He then retained the full fee received from the client.
Mr Fraser was subsequently charged with and pleaded guilty to 37 counts of fraud causing loss to his employer. Mr Fraser was banned permanently from providing financial services because it was found that he was not of good fame or character under s 920A(1)(d) of the Act.
Importantly for present considerations, however, Mr Fraser accepted that his underlying conduct of receiving payments and falsifying records was such that ASIC could be satisfied that he had breached a financial law (op. cit. at [4] and [5]). The Tribunal in Fraser and ASIC therefore did not have to consider whether retaining the money paid by way of commission was a breach of s 1041G of the Act. That concession is not made in the present case.
The legal argument comes down to how the phrase “in relation to” is to be interpreted in s 1041G of the Act. At paragraph 93 of its SFIC ASIC states its case to be that:
The prohibition is directed to conduct in the course of carrying on a financial services business ‘in relation to’ a financial service.
While it may be a matter of semantics, the above re-phrasing of s 1041G of the Act misstates what the section says or, at least, places the “dishonest conduct” in the wrong part of the sentence. The critical part of the section, for current purposes in any event, is that the placement of the words “dishonest conduct” denotes an intention that the conduct must be in relation to a financial service or financial product, not in relation to the carrying on of a financial services business.
The parties’ opposing views on the proper construction of s 1041G of the Act as it applies to the present case can be summarised as follows:
(a)Applicant: The dishonest conduct on which ASIC relies related to the Applicant’s conduct towards RI, not conduct in relation to the financial service or product provided to the clients; and
(b)ASIC: The dishonest conduct was in relation to fees charged for the provision of a financial service and was therefore dishonest conduct in relation to a financial service.
ASIC argues at paragraph 95 of its SFIC that the interpretation argued for by the Applicant, namely that the dishonest conduct must relate directly to the financial service or product, would lead to anomalous outcomes. The example given is basically the facts of the present case. That is not particularly helpful. It is not clear, at least to me, why the section not applying to that conduct, conduct that does not impact the client, would give rise to an anomalous result. The party engaging in that conduct does not get off scot-free if the section does not apply. If the conduct is contrary to some contractual obligation to the principal, as is the case here, the person will still be liable to the principal in contract. Similarly, if the conduct vis-à-vis the principal constitutes criminal behaviour, as was the case in Fraser and ASIC, then the person engaging in the conduct will be liable for criminal penalty. That is not an anomalous result.
ASIC urges that a wide interpretation be given to the words “in relation to” and argues at paragraph 23 of its closing submissions that the authorities cited by the Applicant do not support the Applicant’s interpretation of s 1041G of the Act. ASIC submits:
The authorities cited by the Applicant, Joye v Beach Petroleum NL & Cortaus Ltd (in liq) [1996] (1996) 67 FCR 275 at 285… [Joye v Beach]… and Australian Competition & Consumer Commission v Maritime Union of Australia [2001] FCA 1547 say the opposite: see Hill J at [68]:
“The words “in relation to” are wide words which do no more, at least without reference to context, than signify the need for there to be some relationship or connection between two subject matters: see Smith v Federal Commissioner of Taxation (1987) 164 CLR 513 at 533 per Toohey J and PMT Partners Pty Ltd (In liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 at 328 per Toohey and Gummow JJ. But the phrase is both “vague and indefinite”: see per Taylor J in Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1961) 105 CLR 602 at 620. Like the phrase “in respect of”, the phrase “in relation to” will not, at least normally, apply to any connection or relationship no matter how remote: see Technical Products Pty Ltd v State Government Insurance Office (Qld) (1989) 167 CLR 45 at 51 per Dawson J. The extent of the relationship required will depend upon the context in which the words are used”.
ASIC argues that because the payments retained by the Applicant were payments made for the provision of financial advice, the dishonest conduct in retaining those fees was “conduct in relation to a financial product or financial service” for the purposes of s 1041G of the Act. In that context ASIC argues that those words should be given a wide meaning. Whether the words should be given a “wide” meaning or a “narrow” meaning must, as the above cited extract indicates, be considered with regard to the context in which the words are used. In that regard I think that the opinion expressed by the Court in Joye v Beach at 285 is informative:
Of the phrase “relating to”, Taylor J said, in Tooheys Ltd v Commissioner of Stamp Duties (1961) 105 CLR 602 at 620:
“ … the expression … is extremely wide but it is also vague and indefinite. Clearly enough it predicates the existence of some kind of relationship but it leaves unspecified the plane upon which the relationship is to be sought and identified. That being so, all that a court can do is to endeavour to seek some precision in the context in which the expression is used.”
Taylor J went on to say (at 620) that “relating to” in the context there considered was not the “equivalent of ‘referring to’; the ‘relationship’ must be based upon some more substantial ground”.
Other decisions of the High Court have acknowledged that, ordinarily, “relates to” is a wide term, and that it will depend upon context whether it is necessary that the relationship be direct or substantial, or whether an indirect or less than substantial connection will suffice (see Re Dingjan; Ex parte Wagner (1995) 183 CLR 323 at 338 per Brennan J, at 347 per Dawson J, at 354 per Toohey J and at 370 per McHugh J; PMT Partners Pty Ltd (In liq) v Australian National Parks & Wildlife Service (1995) 69 ALJR 829 at 835-836 per Brennan CJ, Gaudron and McHugh JJ and at 845-846 per Toohey and Gummow JJ; Re Jarman; Ex parte Cook (1996) 70 ALJR 550 at 553 per Brennan CJ and Gaudron J and at 556 per Kirby J. Tooheys’ case has been followed in this Court (see, eg, Secretary, Department of Foreign Affairs and Trade v Boswell (1992) 36 FCR 367 at 374 per Hill J and at 383 per Cooper J).
While the term in question in the present case is “in relation to”, the comments by the courts concerning the phrase “relating to” are applicable. What then is the context in which the term is used in s 1041G of the Act? Section 1041G appears in Chapter 7 of the Act. Section 760A, the first section in Chapter 7, is as follows:
760A Object of Chapter
The main object of this Chapter is to promote:
(a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b)fairness, honesty and professionalism by those who provide financial services; and
(c)fair, orderly and transparent markets for financial products; and
(d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
The focus of the legislation being on the protection of consumers of financial services indicated by the statement of the objects in s 760A of the Act is given further support by ASIC’s Regulatory Guide 98 Licensing: Administrative actions against financial service providers (July 2013) (ASIC Regulatory Guide 98) (T6) which, at reg 98.6 (T6, 94) states that:
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.
Part B of ASIC Regulatory Guide 98, under the heading “ASIC’s administrative powers”, states (T6, 96):
ASIC’s powers to protect investors include the power to apply a variety of administrative remedies…
The administrative remedies that may be available to us are:
·…
·making a temporary or permanent banning order…
The context in which the words in s 1041G of the Act should be read is the context of consumer or investor protection, the context of consumers or investors having confidence in the financial services and financial products. In that light the reference to dishonest conduct in s 1041G of the Act must be read as dishonest conduct which relates directly to the nature, qualities or characteristics of the financial service or financial product, not to the broader context of dishonesty in the carrying on of a financial services business which does not impact the consumer or investor. In that regard “it is necessary that the relationship be direct or substantial” as envisaged by the Court in Joye v Beach in the passage cited at [46] above.
In the present case, even if the Applicant’s conduct of not passing on the monies received from clients is considered to be dishonest, rather than merely a breach of the agreement between the Applicant and RI, it is not dishonesty directly in relation to the financial services that the Applicant provided to the clients. The payment of the fees may have been for the provision of financial services, however, that does not make conduct relating to how that money is dealt with thereafter conduct “in relation to a financial product or financial service”. It simply makes it conduct in relation to money received.
The last element of s 1041G of the Act is that the conduct must be dishonest. Is the conduct identified in paragraph 104 of ASIC’s SFIC quoted at [30] above dishonest for the purposes of s 1041G? The Applicant admits that he received money directly from clients and even admits that that “was the wrong thing to do” (Transcript, p 254). Was that, of itself, dishonest? Receiving money directly from clients and failing to pass that money on to RI as he was supposed to do under his agreement with RI was certainly in breach of his contractual obligations and it was, in my view, probably dishonest if one were to apply a broad meaning to the word “dishonest”. However, such dishonesty as there was related to the agreement between the Applicant and RI, not the financial service provided to the clients by the Applicant.
Of the conduct identified in paragraph 104 of ASIC’s SFIC the conduct that could, of itself alone, properly be considered to be dishonest is the conversion of the cheque made payable to RI and the issuing of a “fraudulent tax invoice” to Mr and Mrs [B]. In relation to the claimed fraudulent tax invoice to Mr and Mrs [B], I am not sure to what ASIC is referring as being the “fraudulent tax invoice” but nothing presented before, or at the hearing, could be said to have established fraud on the part of the Applicant in relation to the clients Mr and Mrs [B]. As with a number of the clients who were double-charged, I am not satisfied that the double-charging was part of a deliberate fraud. For reasons that I canvass later in this decision, I am satisfied that the double-charging was the result of a lack of care and incompetence on the part of the Applicant and not a fraud or deliberate scheme.
I am not satisfied that, on the evidence presented and on the interpretation of s 1041G of the Act as set out in [50] and [51] above, the Applicant failed to comply with a financial services law for the purposes of s 920A(1)(e) of the Act by failing to comply with s 1041G of the Act. Even if there was conduct which could be considered to be dishonest, such dishonesty was not “in relation to a financial product or a financial service” for the purposes of s 1041G of the Act.
Section 1041H of the Act
While ASIC also refers to a breach of s 1041H of the Act (paragraph 3(b) of its closing submissions), it does not expand on that submission or explain what conduct of the Applicant was misleading or deceptive or likely to mislead or deceive. ASIC’s SFIC refers to s 1041H of the Act (paragraphs 77(b) and 91(b)), and identifies the conduct which it says was misleading and deceptive at paragraphs 106 to 109 as follows:
106. The Applicant did not alter the documentation to ensure that the deduction would not occur. He did not tell the clients that their payment would not be recorded or that the documentation would operate to authorise a further deduction regardless of their payment of upfront fees. The failure of the Applicant in this regard was misleading and deceptive.
107. Concealing from the clients that he intended to take fees payable to RI Advice was dishonest and by any objective standard misleading to and deceptive of the clients.
108. There is additional evidence of a course of conduct by the Applicant in paying fees due to RI Advice to himself.
109. Further, the concealing of his course of conduct from RI Advice was dishonest and was, by any objective standard, misleading and deceptive.
I do not accept the above argument. It has at its core two propositions: firstly that the failure to properly amend or fill in the relevant forms “to ensure that the deduction would not occur” is misleading and: secondly, that failing to advise the clients that he was, in breach of his contractual obligations to RI, going to keep fees paid by the clients to him, was misleading. The first proposition fails because there was no conduct which misled. The mere failure to amend a form or filling out of the form incorrectly which may result in a fee being deducted is not deceptive conduct. What part of that conduct deceives? It may result in a double-charging, but of itself there is nothing on the face of the documentation which is misleading. There is no suggestion that, at the time of the pro-forma document being completed (and it is not clear who completed these documents), the Applicant made any representation to the client that they would not be charged a further fee.
Further, as ASIC itself concedes at paragraph 105 of its SFIC:
105. In the cases of double charging, even if the Applicant did not intend that those clients would be double charged (a matter not conceded by ASIC), the Applicant did not take any or sufficient steps to ensure that did not occur. The double charging occurred because the documentation that the Applicant or his staff submitted authorised the deduction of fees from the clients’ investment accounts.
I am not satisfied that the evidence establishes that there was any deliberate conduct on the part of the Applicant to “falsify” the documentation that was submitted to RI so that clients were double charged or that the completed documentation was “misleading”. Such conduct would, if intentional, be exceptionally short-sighted as the clients would, and did, become aware of the double-charging resulting from the failure to properly complete the pro-forma documentation submitted to RI very quickly after it occurred. I accept that the more likely explanation, the one alluded to by ASIC in paragraph 105 of its SFIC, is a failure by the Applicant to take sufficient steps to ensure that it did not occur. That conduct may fall short of competence or the standard of management expected of someone carrying on a financial services business, but it is not conduct which is misleading or deceptive.
The second proposition underlying ASIC’s argument is that the Applicant engaged in misleading or deceptive conduct by “concealing” from clients that he intended to withhold fees that were meant to be passed on to the RI. ASIC does not identify the conduct which it says constitutes the Applicant “concealing” that intention. There was no evidence presented which would sustain an argument of positive action being taken by the Applicant to conceal the fact. Presumably what ASIC is contending is that rather than “concealing” the fact, the Applicant failed to disclose that that was his intention. For silence or a failure to disclose something to constitute a misrepresentation, the silence or failure has to occur in circumstances in which the person was under an obligation to disclose or in which silence could reasonably be taken to be a representation (see Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 per French CJ and Kiefel J). If, for instance, at a meeting it became clear that the clients were proceeding on the assumption that fees were being passed on to RI and the Applicant did not disabuse the clients of that assumption, then arguably there may be a misrepresentation by silence. As far as the evidence indicates, however, that situation did not arise. Further, it is unlikely that such a situation would ever have arisen as it is inherently unlikely that the clients would have had any interest in how the fees that they paid were dealt with as between the Applicant and RI after payment was made.
In any event, as with s 1041G of the Act, the relevant misleading conduct for the purposes of s 1041H must be “in relation to a financial product…”. Even if there was the claimed misrepresentation in relation to how fees were to be distributed as claimed by ASIC, that does not have the “direct or substantial” connection to the financial product envisaged by the Court in Joye v Beach in the passage cited at [46] above to cause the conduct to come within the operation of s 1041H of the Act. The need for the conduct, in this case the misrepresentation, to be directly and substantially related to the financial product or service is even clearer in s 1041H than in s 1041G of the Act because of the provisions of s 1041H(2) of the Act. The subsections of s 1041H(2) of the Act make it clear that the misrepresentation must relate to the quality, characteristics and nature of the financial product. A misrepresentation relating to the arrangement between the Applicant and RI does not have those characteristics and is therefore not a misrepresentation “in relation to a financial product or financial service” for the purposes of s 1041H of the Act.
Accordingly, I am not satisfied that the evidence establishes any breach of s 1041H for the purposes of s 920A(1)(e) of the Act.
Section 920A(1)(f) of the Act
As noted at [20] and [21] above, it is not clear whether ASIC still relies on s 920A(1)(f) of the Act, namely that it has reason to believe that the Applicant is likely to contravene a financial services law. Presumably, insofar as ASIC does assert that to be the case, it is saying that there is reason to believe that the Applicant is likely to contravene those financial services laws which ASIC asserts the Applicant has contravened in the past, namely ss 1041G and 1041H of the Act. I do not accept that there is a reasonable basis for such a belief.
Even on ASIC’s own case, the contraventions asserted occurred only over a relatively short period of less than two years from December 2010 to November 2012. There is no evidence, or even any suggestion, that in the four to five year period prior, in which the Applicant ran WAWM, or in the ten years before then when the Applicant worked for ANZ in financial services, he contravened any financial services laws.
Further, as ASIC observed, some, at least, of the conduct in relation to which ASIC raises concerns was as a result of the Applicant failing to ensure that there was adherence to internal systems and procedures by him and/or his staff (see [57] above). The Applicant now operates under a representative arrangement with AFSL holder Infocus Securities Australia (Infocus) which he joined in July 2015 (evidence of Ms Dickson, Transcript p 426). Ms Dickson’s evidence was that prior to entering into representative arrangements Infocus undertook an audit of the Applicant’s business and systems (Transcript, p 426) and that that process did not disclose any improper conduct on the part of the Applicant. Her evidence was also that since the Applicant had started operating under Infocus’s AFSL there had not been any instances of double-charging or other financial irregularity disclosed by Infocus’s monitoring. In that regard Ms Dickson’s evidence was that in addition to the extra monitoring required by the terms of the stay order issued by the Tribunal in September 2017, Infocus had asked the Applicant to provide his business bank statements and his personal bank statements so that Infocus could “have an oversight” to identify any irregularities. None had been identified.
It does seem that many of the Applicant’s issues were the result of him failing to properly oversee his business and to ensure that procedures were followed over the relatively short two year period ending in November 2012. There is no evidence that that conduct has been repeated since that time and there is no reason to believe that the conduct which was at the heart of ASIC’s case is likely to be repeated in the future. I am therefore not satisfied, on the evidence before me, that there is any reason to believe that the Applicant is likely to contravene any financial services law.
Does ASIC have reason to believe that the Applicant is not of good fame or character?
If there are reasons for ASIC to believe that the Applicant is not of good fame or character, any banning order must, by operation of s 920B of the Act, be permanent: Liu and Australian Securities and Investments Commission [2014] AATA 817 at [122]; Fraser and Australian Securities and Investments Commission [2011] AATA 944; BC20111-329; Williams and Australian Securities and Investments Commission [2018] AATA 2312 (Williams and ASIC) at [41].
A helpful explanation of the meaning of the relevant terms is set out in Deputy President McCabe’s decision in Williams and ASIC.
43. …It is clear the sub-section requires that there be reason to believe the person was of good fame and good character. It is not enough that an individual has one and not the other. Moreover, it is clear the assessment of one’s fame and character must be made at the time of the hearing: see, for example, Prothonotary of the Supreme Court of New South Wales v Alcorn [2007] NSWCA 288 at [57] per Hoeben J; see also Shi v Migration Agents’ Registration Authority [2008] HCA 31; (2008) 248 ALR 390. The sub-section requires that I be satisfied there is reason to believe he is – as opposed to was – of good fame and character, after all. That means there is a possibility a compromised reputation might be repaired and defects in one’s character might be remedied in the interregnum between the hearing and earlier instances of bad behaviour that reflect on character or invite infamy: see, for example, Re Davis [1947] HCA 53; (1947) 75 CLR 409 at 416 per Latham CJ.
44.I was referred to a number of cases in which the dual concept of good fame and character was discussed. The cases regard ‘fame’ as a reference to one’s reputation, while ‘character’ requires an examination of one’s moral qualities and nature: see, for example, Prothonotary of the Supreme Court of New South Wales v P [2003] NSWCA 320 at [17]. For my own part, I am not sure there is much profit in generating synonyms for plain English words. Words like ‘fame’ may be old-fashioned but their meaning is clear enough and attempts to further define them are apt to mislead…
Deputy President McCabe goes on (at [45]-[47]) to identify the elements of the test that emerge from the cases to which he had referred. They are:
(a)the test of fame and character is to be applied with an eye to the purpose for which the test was created. The test is as to the applicant’s fame and character insofar as it is relevant to the role of a person providing financial services;
(b)the statutory language focuses on whether there is reason to believe the applicant is not of good fame or character. That is not the same thing as asking whether the applicant is of good character, or – even less accurately – whether he is a paragon of virtue since the public does not expect perfection in financial advisers. It is not enough that one be satisfied the applicant engaged in bad behaviour. That bad behaviour must point logically to relevant defects in character. Even very bad behaviour might not go that far in the circumstances of a particular case. While actions speak louder than words when it comes to assessments of character, those actions might still suggest a serious lapse of judgment rather than a character defect; and
(c)evidence of dishonesty occurring in most contexts is problematic since a commitment (and reputation for commitment) to honest dealing is essential to this role. The centrality of honesty and trust is underlined by s 760A(b) of the Act which confirms one objective of the financial services law is to promote fairness, honesty and professionalism amongst providers of financial services.
Fame, in the context in which it is used in this part of the Act, is a reference to the person’s public standing, his reputation amongst the broader community. There is no evidence that the Applicant is not of good fame and I do not understand that to be ASIC’s case. I find, in any event, that there is no reason to believe that the Applicant is not of good fame. The only evidence presented which might be considered to be going to the issue of the Applicant’s public standing or reputation was the evidence of Ms Dickson. The effect of Ms Dickson’s evidence was that the Applicant’s standing, with Infocus at least, was good and that he was considered to be “one of the better advisers” (Transcript, p 428). What little evidence there was from the Applicant’s clients or former clients did not indicate that the Applicant was not of good fame.
The meaning of the expression “good character” was considered in Irving v Minister for Immigration, Local Government and Ethnic Affairs (1996) 139 ALR 84. Referring to the requirements in the Migration Act 1958 (Cth), Lee J said (at [94]):
Unless the terms of the Act and the Regulations require some other meaning be applied, the words ‘good character’ should be taken to be used in their ordinary sense, namely, a reference to the enduring moral qualities of a person, and not to the good standing, fame or repute of that person in the community. The former is an objective assessment apt to be proved as a fact, whilst the latter is a review of subjective public opinion... A person who has been convicted of a serious crime and thereafter held in contempt in the community, nevertheless may show that he or she has reformed and is of good character... Conversely, a person of good repute may be shown by objective assessment to be a person of bad character.
(Case citations omitted)
ASIC in its closing submissions refers to McBride v Walton [1994] NSWCA 199 (McBride v Walton) which, ASIC submits, identified a number of matters which should be considered when assessing whether a person is not of good character. At paragraph 43 of its closing submissions ASIC identifies those matters as follows:
a.whether the misconduct can be satisfactorily explained as an error of judgment rather than a defect of character;
b.the intrinsic seriousness of the misconduct qua fitness to practice;
c.whether the misconduct should be viewed as an isolated episode and hence atypical or uncharacteristic of the practitioner’s normal qualities of character;
d.the motivation which may have given rise to the proven episode of misconduct;
e.the underlying qualities of character shown by previous and other misconduct; and
f.whether the practitioner’s conduct post the proven episode of misconduct demonstrates that public and professional confidence may be reposed in him to uphold and observe the high standards of moral rectitude required of a medical practitioner.
As ASIC notes, the court in McBride v Walton was considering the issue of good character in the context of a medical practitioner, however, the matters identified are appropriate factors in considering whether a person is, or is not, of good character for the purposes of Chapter 7 of the Act. Assessing the Applicant’s conduct against those identified factors, the cashing of cheques payable to RI was obviously serious and clearly not the sort of conduct that someone in the Applicant’s position should engage in, however, I am satisfied that conduct was an aberration arising out of a serious error or errors of judgment and not indicative of a deeper character flaw. The conduct in question appears to have been a blip in an otherwise fault-free career over some 20 years.
Deputy President McCabe described the task of the Tribunal in Williams and ASIC (at [46]) as follows:
ASIC (and the Tribunal, when standing in ASIC’s shoes) must identify reasons that tend logically to the conclusion that the applicant is not of the good fame or character expected of a person licensed to provide financial services. It is not enough that I be satisfied the applicant engaged in bad behaviour. That bad behaviour must point logically to relevant defects in character. Even very bad behaviour might not go that far in the circumstances of a particular case. While actions speak louder than words when it comes to assessments of character, those actions might still suggest a serious lapse of judgment rather than a character defect.
I find that while the Applicant’s conduct was “bad behaviour” and well below the standard which could reasonably be expected of someone engaged in the provision of financial services, and in some cases was dishonest, that conduct is not sufficient to establish that the Applicant is not of good fame or character.
CONCLUSION
I find that:
(a)the Applicant’s conduct did not contravene a financial services law for the purposes of s 920A(1)(e) of the Act;
(b)there is no reason for ASIC to believe that the Applicant is likely to contravene a financial services law for the purposes of s 920A(1)(f) of the Act; and
(c)there is no reason for ASIC to believe that the Applicant is not of good fame or character for the purposes of s 920A(1)(d) of the Act.
ASIC’s case relied on establishing the contravention of a financial services law, specifically under ss 1041G and/or 1041H of the Act, and that the Applicant was not of good fame or character. In making the reviewable decision, the delegate did not rely on any other subsections of s 920A(1) of the Act, such as subsection (da) that there is reason to believe that the Applicant is not adequately trained or is not competent to provide financial services and that argument was not raised by ASIC. The evidence did not seek to address that issue. Given my findings that the claims based on subsections 920A(1)(d), (e) and (f) of the Act have not been made out and that there is no reason to believe that the Applicant is not of good fame or character, I have no alternative but to set aside the Banning Order and, because no other ground for a banning order under any of the other subsections of s 920A(1) of the Act is established, I am unable to impose any banning order including one for a specified period.
Accordingly, I set aside the reviewable decision. The effect of setting aside the reviewable decision is that no banning order has been made and it is therefore not necessary to substitute another decision for the purposes of s 43(1)(c) of the AAT Act (see Tweed and Australian Securities and Investments Commission [2018] AATA 514 at [189]).
I certify that the preceding 77 (seventy-seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President Boyle
......[sgd]..................................................................
Associate
Dated: 18 September 2018
Dates of hearing: 4 – 8 December 2017 Counsel for the Applicant: Ms Helen Prince and Mr James Xenidis Solicitors for the Applicant: LFS Lawyers Counsel for the Respondent: Ms Wendy Gillan Solicitors for the Respondent: Self-represented
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