ONE RE SERVICES LIMITED and AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
[2012] AATA 294
•15 May 2012
[2012] AATA 294
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2011/2918
Re
ONE RE SERVICES LIMITED
APPLICANT
And
AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
RESPONDENT
DECISION
Tribunal Senior Member J L Redfern
Date 15 May 2012 Place Sydney The Tribunal affirms the decision under review.
.............[sgd]...........................................................
Senior Member J L Redfern
CATCHWORDS
FINANCIAL SERVICES – Licensing – Australian Financial Service Licence – authorisation sought to operate investment schemes ‘of a particular kind’ – authorisation refused – decision incidental to grant of licence – whether ‘no reason to believe’ applicant will not comply with legislative obligations – distinguished from banning and licence cancellation – nature and extent of the authorisation sought relevant – Decision affirmed
LEGISLATION
Australian Securities and Investments Commission Act 2001 ss 1(2), 11(4),
Corporations Act 2001 ss 601ED, 601FB, 911A, 912A, 913A, 913B, 914A, Parts 5C, 7.6 and 7.9
CASES
Power v Hamond [2006] VSCA 25
Re De Souza and Australian Securities and Investment Commission [2009] AATA 725
Re Drake and Minister for Immigration and Ethnic Affairs (1979) 2 ALD 634Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602
SECONDARY MATERIALS
ASIC Regulatory Guide 104 Licensing: Meeting the general obligations
ASIC Regulatory Guide 105 Licensing: Organisational competence
ASIC Regulatory Guide 1, 2 and 3: AFS Licensing Kit (Parts 1-3)ASIC Regulatory Guide 166 Licensing: Financial Requirements
REASONS FOR DECISION
Senior Member J L Redfern
15 May 2012
One RE Services Limited (One RE) is a wholly-owned subsidiary of One Investment Group Pty Limited (OIG), which is described as ‘an independent funds management business’ specialising in providing a range of financial services. OIG owns several entities which operate financial services businesses and hold Australian Financial Service Licences (AFSLs).
On 13 April 2011, One RE made an application to the Australian Securities & Investments Commission (ASIC) for an AFSL to operate a financial services business, including authority to operate multiple managed investment schemes of a particular kind, being schemes holding interests in direct real property and financial assets. Such authorisation would have permitted One RE to register any number of managed investment schemes of that kind without first having to obtain approval or a licence variation from ASIC.
ASIC granted an AFSL to One RE on 9 August 2011 which did not include an authorisation to operate managed investment schemes. Prior to the grant, ASIC advised One RE it would include authorisation to operate a named managed investment scheme but would not provide the broader authorisation to operate registered managed investment schemes ‘of a particular kind’. One RE rejected this proposed form of authorisation and ASIC therefore issued an AFSL without any authorisation in respect of the operation of managed investment schemes. ASIC notified One RE of this decision by email and letter dated 11 July 2011.
One RE sought review of the decision of ASIC not to grant an AFSL which included authorisation to operate managed investment schemes ‘of a particular kind’. In submissions filed by One RE after the hearing, One RE contended the decision being reviewed was the decision not to grant a ‘kind’ authorisation. There was some confusion about the decision being reviewed and the parties were invited to make further submissions on this issue. ASIC contended that the decision which was the subject of the review was the decision by ASIC on 11 July 2011 to grant an AFSL to One RE with conditions that did not include authorisation to operate managed investment schemes ‘of a particular kind’. This decision did not constitute a refusal to grant a licence and as such no hearing was required before the decision was made. One RE accepted the contention that the decision was not a refusal to grant a licence (and therefore no hearing was required) but contended the decision was a refusal to grant a particular authorisation, which was separate and distinct from the decision to grant a licence. Either way, both parties accepted the decision was not a refusal to grant a licence. The implications of each party’s different categorisation are discussed in more detail in these reasons.
One RE was represented by Mr Frank Tearle, director of One RE and one of the officers nominated by One RE to be a ‘responsible manager’ under the AFSL. He is also an executive director of OIG, which he established in September 2009.
LEGISLATIVE FRAMEWORK
ASIC is a statutory authority charged with responsibility for administering certain 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 Act2001 (the ASIC Act), ASIC must strive to, amongst other things, ‘promote the confident and informed participation of investors and consumers in the financial system’.
Part 7.6 of the Corporations Act2001 (the Act) establishes a licensing regime in respect of persons or entities that carry on a financial services business in Australia. ASIC administers the regime and is empowered to grant an AFSL and to impose conditions on such licences (ss 913B and 914A). It is unlawful for a person or entity to carry on a financial services business unless they hold an AFSL covering the provision of the financial services (s 911A). There are exemptions but none are relevant to this case.
Section 913B of the Act sets out when ASIC may grant an AFSL and provides as follows:
(1) ASIC must grant an applicant an Australian financial services licence if (and must not grant such a licence unless):
(a) the application was made in accordance with section 913A; and
(b) ASIC has no reason to believe that the applicant will not comply with the obligations that will apply under section 912A if the licence is granted; and
(c) the requirement in whichever of subsection (2) or (3) of this section applies is satisfied; and
(ca) the applicant has provided ASIC with any additional information requested by ASIC in relation to matters that, under this section, can be taken into account in deciding whether to grant the licence; and
(d) the applicant meets any other requirements prescribed by regulations made for the purposes of this paragraph.
…
(5) However, ASIC may only refuse to grant a licence after giving the applicant an opportunity:
(a) to appear, or be represented, at a hearing before ASIC that takes place in private; and
(b) to make submissions to ASIC in relation to the matter.
Section 912A of the Act sets out the general obligations of licensees. Relevantly, an AFSL holder must comply with financial services laws (s 912A(1)(c)); 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 (s 912A(1)(d)); maintain the competence to provide those financial services (s 912A(1)(e)); and have adequate risk management systems (s 912A(1)(h)).
ASIC has published regulatory guides in respect of its approach to the licensing regime and the obligations of licensees.. In particular, it has published the following guidance:
(a)ASIC Regulatory Guide 104 Licensing: Meeting the general obligations;
(b)ASIC Regulatory Guide 105 Licensing: Organisational competence;
(c)ASIC Regulatory Guide 1, 2 and 3: AFS Licensing Kit (Parts 1-3);
(d)ASIC Regulatory Guide 166 Licensing: Financial Requirements.
A person or entity that wishes to carry on a financial services business in Australia may apply for an AFSL by lodging an application with ASIC (s 913A). As part of the application process, an applicant can seek authorisation to operate managed investment schemes of a particular kind, which permits the licensee to register any number of managed investment schemes without first having to apply for a licence variation. ASIC has set out its approach to granting such authorisation, which is referred to as a ‘kind’ authorisation, in Regulatory Guide 105. ASIC has also provided guidance in relation to the necessary documents to be lodged and proofs to be provided for licence approval in the AFS Licensing Kit guides. An applicant must nominate ‘responsible managers’ being the officers who are to be responsible for significant day-to-day decisions about the operation of the financial services business.
A ‘managed investment scheme’ is a scheme whereby people contribute money, or money’s worth, to acquire rights to benefits produced by the scheme. The contributions are pooled and members do not have the day-to-day control over the operation of the scheme (s 9). Certain managed investment schemes are required to be registered (s 601ED) and must be operated by a ‘responsible entity’ (s 601FB(1)). The responsible entity of a registered scheme must be a public company that holds an ASFL authorising it to operate a managed investment scheme.
One RE applied for an AFSL as it was proposing to operate as a ‘responsible entity for hire’ to operate multiple managed investment schemes. Given the business model proposed by One RE, it is said to be critical to its operation that ASIC provide ‘kind’ authorisation rather than authorisation for a named scheme.
The key issue in dispute is whether One RE should be granted an AFSL with ‘kind’ scheme authorisation. As such, it is instructive to set out in full ASIC’s guidance on licence authorisations for registered schemes and investor-directed portfolio services (see Regulatory Guide 105 at 105.80 to 105.82) which provides as follows:
RG 105.80 If you want to operate a registered managed investment scheme or an investor-directed portfolio service (IDPS), you can either apply for a narrow authorisation—i.e. a ‘named scheme’ or ‘named IDPS’—or apply for the broad ‘schemes of a particular kind’ authorisation or IDPS authorisation.
RG 105.81 The narrow authorisation will only permit you to operate the particular registered scheme or IDPS named on your licence. The broad authorisation will allow you to operate more registered schemes of the same asset kind, or more IDPSs, without varying your licence. However, you must ensure that you have the organisational competence for the extra schemes or IDPSs before you start operating them.
RG 105.82 Before we can grant you a broad authorisation, you must first be able to demonstrate that you have the organisational competence and capacity (e.g. systems and resources) to operate multiple schemes of the same asset kind, or more IDPSs. You can generally demonstrate this if you have been operating two or more registered schemes or IDPSs for at least the past two years. If you are a first-time applicant, we will consider granting you a broad authorisation if you can show that you have the same level of competence and capacity as an experienced licensee.
ASIC refused the ‘kind’ scheme authorisation because it did not believe One RE would comply with subss 912A(1)(c), (d), (e) and (h) of the Act if the broad ‘kind’ authorisation were to be approved. In its reasons for decision, ASIC stated that it was not satisfied One RE had the necessary level of organisational competence and capacity as a ‘first time’ applicant, there was insufficient detail about the nature of the proposed business to be conducted and it was concerned about whether One RE had sufficient resources (financial and management) or adequate compliance and risk management arrangements to operate multiple registered managed investment schemes.
CATEGORISATION OF THE DECISION SUBJECT OF THE REVIEW AND ISSUES FOR DETERMINATION
One RE submitted that the decision which was the subject of review was the decision by ASIC not to grant ‘kind’ authorisation and that this decision was not a decision to grant, or not to grant, an AFSL under s 913B(1) as ASIC in fact issued a licence. As such, the test under s 913B(1)(b) was not relevant for the purposes of this review and Regulatory Guide 105 was the only relevant consideration.
ASIC contended that the decision was a decision to grant a licence but with certain conditions that did not include ‘kind’ scheme authorisation. Section 11(4) of the ASIC Act gave ASIC the power to “do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions”. Imposing conditions as part of the licensing process was incidental to ASIC’s licensing functions. ASIC is specifically empowered to impose conditions and s 914A(3) of the Act provides that ASIC does not need to give a hearing when conditions are imposed when a licence is being granted. Given the decision being reviewed by the Tribunal was the decision to grant an AFSL with certain conditions, it was still relevant for the Tribunal to consider whether it would have “no reason to believe that the applicant will not comply with the obligations that will apply under section 912A” if the broader ‘kind’ scheme authorisation is included. In other words, s 913B(1)(b) remains relevant regardless of the fact the broad ‘kind’ scheme authorisation, rather than the licence, was refused.
I reject the contention of One RE. ASIC is empowered to grant, refuse or vary an AFSL. There is no statutory provision that gives ASIC power to make a decision about authorisation independent of this process. Nor does One RE refer to such a provision or challenge the power of ASIC to approve particular authorisations as part of the licensing process. The approval of particular authorisations is an integral part of the licensing regime and the practice adopted by ASIC in this regard is set out in its regulatory guides. It is implemented by ASIC imposing certain conditions at the time of the grant of the licence. In my view, the decision by ASIC not to grant an AFSL with ‘kind’ scheme authorisation is a decision under s 913B(1) of the Act. This being the case, the relevant issues are as follows.
Section 913B does not provide discretion to ASIC (and therefore the Tribunal) in relation to the grant of an AFSL. If the applicant meets the five criteria set out in subsection (1), ASIC must grant a licence. If the applicant does not, ASIC must not grant a licence. There is no dispute that One RE meets four of the criteria. The key issue in dispute is whether s 913B(1)(b) is satisfied, namely, whether on the facts of the case and the basis of the information provided by One RE both in support of its application and in the proceedings, there is ‘no reason to believe’ One RE will not comply with the obligations under s 912A of the Act if a licence with ‘kind’ scheme authorisation is granted.
One RE submitted that it has provided all relevant information in satisfaction of ASIC’s various regulatory guides. The proposed nature of the business of One RE is to act as a ‘responsible entity for hire’ to operate multiple registered managed investment schemes, particularly schemes that are in financial difficulty and/or operate in the ‘more risky end of the market’. There is said to be a market for this type of service. It was submitted that One RE meets the net tangible assets requirements set out in Regulatory Guide 166 and has adequate risk management procedures and systems. Furthermore, ASIC has raised no significant issues about these matters that cannot otherwise be resolved. One RE is part of OIG which operates multiple managed investment schemes. Mr Frank Tearle and Mr Justin Epstein, who are directors and the responsible managers of One RE, have extensive experience in the financial services industry and have been involved in the management of registered managed schemes and unregistered schemes through OIG over the past two years. Prior to this, both were involved in funds management with Allco Finance Group Limited, which was a listed company operating globally until its collapse in 2008. One RE submitted that the application for an AFSL with ‘kind’ scheme authorisation should be granted and the decision of ASIC should be varied.
ASIC raised two key concerns. First, One RE has not specified the nature of the business to be conducted and is unable to identify a particular scheme that it proposes to operate. It is said that this makes it difficult to assess whether One RE would be able to comply with s 912A as this assessment is dependent on the nature and size of the schemes. Secondly, and perhaps the more critical issue, One RE has not demonstrated it has the organisational competence and capacity to operate multiple schemes. In particular, One RE does not have at least two years’ experience in operating multiple registered schemes. Operating multiple schemes involves significant systems and resources to ensure there is compliance with the general obligations under s 912A of the Act. Having regard to these two matters, the Tribunal cannot be satisfied, on the basis of the material provided, that there is ‘no reason to believe’ One RE would not comply with s 912A if the ‘kind’ scheme authorisation were granted.
One RE concedes it is a first time applicant and does not have at least two years’ experience in operating registered schemes but contends that Regulatory Guide 105 nonetheless contemplates ‘kind’ authorisation if the applicant can show it has ‘the same level of competence and capacity as an experienced licensee’. ASIC also concedes this but contends that the experience of the companies in OIG and its officers is limited.
The essential facts are not in dispute. The determination of this review turns on the question of whether those facts support the grant, or alternatively refusal to grant, an AFSL with ‘kind’ scheme authorisation.
THE EVIDENCE
One RE is an unlisted public company limited by shares and was registered with ASIC on 23 March 2011. One RE is a subsidiary of OIG. There are presently six companies in OIG. All companies, including One RE, hold an AFSL and four of those companies operate investment schemes; some registered, some unregistered and a number in ‘wind up mode’. Given the submission of One RE that its experience should be measured against the experience and operational competence and capacity of OIG and its subsidiaries and, in particular, the experience of Frank Tearle and Justin Epstein, it is relevant to consider these matters.
A summary of the licences and businesses operated within OIG is as follows:
(a)On 12 September 2002 an AFSL was granted to Records Funds Management Limited (RFML). It was authorised to operate ‘kind’ schemes. Receivers and managers were appointed on 26 November 2008. RFML operates the Record Realty scheme which is registered. RFML was acquired by OIG on 14 April 2010 and Frank Tearle, Justin Epstein and Michael Witts are the responsible managers.
(b)On 26 June 2006 an AFSL was granted to One Managed Investment Funds Limited (OMIFL). It was also authorised to operate ‘kind’ schemes. OMIFL was previously known as Allco Managed Investments Funds Limited (AMIFL) and Principals Managed Investments Limited. AMIFL was part of the Allco Finance Group Limited, which went into receivership in 2008 and subsequently liquidation. Frank Tearle was an employee of Allco Finance Group Limited from 2003 to 2009 and was a director of a number of its subsidiaries. Justin Epstein was employed by the Allco Finance Group from 2005 to 2007. OIG acquired OMIFL in September 2009. OMIFL operates five schemes: two are registered (EAIT Direct Investments Fund and KPI Global Fund), one was deregistered in November 2011 (International Opportunities Fund), one is in wind up (Everest Alternative Investment Trust) and one scheme has been newly established. Frank Tearle, Justin Epstein and Michael Witts are the responsible managers.
(c)One Funds Management Limited (OFML) was licensed on 5 January 2007. It was previously known as, amongst other things, Everest Funds Management Limited. It is authorised to operate named schemes and operates the Everest Babcock and Brown Income Fund, which is in wind up mode. OIG acquired OFML in November 2010. It was part of the Allco Finance Group. Frank Tearle and Justin Epstein are the responsible managers.
(d)One Asset Management Limited (OAML) was established by OIG and was licensed on 7 October 2009. It is authorised to operate named schemes and currently operates Allco Hybrid Investment Trust, which was transferred from OMIFL in September 2009. This scheme is in wind up mode. The responsible managers are Frank Tearle, Justin Epstein and Michael Witts.
(e)On 27 July 2011 One Fiduciary Services Pty Limited was granted an AFSL but there was no evidence of the nature of the authorisations granted.
In the ‘People Proof’ documents lodged in support of the One RE application, Frank Tearle set out his experience and background. He also gave evidence about these matters and was cross examined by Counsel for ASIC. Mr Tearle was Head of Business Transition and Operations at Allco Finance Group from April 2008 to September 2009. In this role he was reporting to the Allco receivers and was managing a number of the Allco businesses. He was a director of AMIFL, which was the responsible entity of seven schemes. Those schemes have since either ceased to operate or are in wind up mode. One scheme was subsequently transferred to OAML. According to Mr Tearle, this was a ‘difficult environment’ in which to operate at the time and he was required to manage underperforming funds and assets. Twenty offices in Australia and overseas were closed.
From February 2008 to April 2008, Mr Tearle was Acting Global Head of Funds Management. He was responsible for overseeing the management of two ASX listed funds and three non-listed funds, all of which he states were underperforming. Prior to this, Mr Tearle worked in various senior executive roles in the Allco Finance Group, including Director, office of the Chairman, Managing Director of the Hong Kong office, director of Corporate Finance, Fund Manager of one of the Allco Finance Group’s unlisted registered managed investments schemes and General Counsel. He worked as a lawyer in private practice from 1992 until 2003.
Mr Tearle said that he established OIG to continue managing the remaining Allco schemes and to operate new schemes or take over existing schemes in financial difficulties. He developed a particular expertise while working at Allco and believed there was a market for such services and management. He was involved in the establishment and marketing of a number of the Allco schemes when they were first registered and operated multiple schemes as responsible manager of AMIFL (now OMIFL) between May 2006 and February 2007.
As responsible manager and director of four responsible entities within OIG, Mr Tearle has been involved in operating eight managed investment schemes over the last two years. While five of those schemes were deregistered or in wind up mode, Mr Tearle said the responsibilities and experience required was similar to the operation of registered schemes. A scheme that was in ‘wind up mode’ was not open to new investors but the investments in the scheme still needed to be managed. Each of the companies, as responsible entities, was required to comply with the general obligations under s 912A insofar as they applied. There were risk management procedures in place and due diligence in relation to outsourced services. Importantly, distributions and communications to investors needed to be appropriately managed to ensure compliance with the trust deeds and the law.
Justin Epstein did not give evidence but the Tribunal was provided with his ‘People Proof’ lodged with ASIC. Mr Epstein has been a director of OIG since September 2009. Prior to establishing OIG with Mr Tearle, he was Investment Director of LJCB Investment Group from January 2008. From March 2007 until December 2007, Mr Epstein was initially the Investment Analyst in the Allco Principals Trust, which was a private trust, and subsequently Associate Director – Group Strategy and Business Development and Associate Director – Funds Management. From 2000 to 2005, Mr Epstein had various roles in finance and accounting. Together with Mr Tearle, Mr Epstein has been responsible manager and director of four responsible entities within OIG.
ASIC does not raise any issue about the character of Mr Tearle or Mr Epstein or their involvement with the Allco Finance Group. ASIC’s key concern is that their experience is primarily limited to the operation of schemes that are no longer operating as active schemes. The broad ‘kind’ authorisation would allow One RE to operate multiple active schemes and this is the experience that is said to be lacking.
The other concern raised by ASIC was about the nature and size of the business to be conducted and the adequacy of One RE’s compliance and risk management systems to conduct such a business.
In the application for an AFSL, One RE provided a business description which included the following:
The One Investment Group operates an “RE for hire” business. It manages its risks by operating a number of licensed entities thereby segregating responsibilities and risks. No current roles have been identified for the Applicant. One Investment Group has sought to obtain the AFSL so that it has a clean responsible entities/trustee ready to be used if required.
ASIC responded to the application by raising a requisition dated 10 June 2011. The requisition was in the following terms:
Please advise how many registered schemes you intend to operate under One RE Services Ltd’s AFS Licence.
Please provide the names of these schemes, size (investor and anticipated funds under management) and the asset type of each scheme.
In the event that One RE Services Ltd does not intend to operate any schemes at this moment in time, please provide a valid justification why this licence is needed. It may be appropriate to reapply for an AFS Licence once you have established schemes that will be operated/managed by One RE Services Ltd.
Mr Tearle responded by email dated 14 June 2011 and noted, amongst other things, “I do not currently know how many registered schemes the Applicant will seek to operate”. Following this email, there is a file note of a discussion between an ASIC officer and Mr Tearle on 16 June 2011. The ASIC officer noted ASIC “did not have any concerns over the RMs” but was concerned about issuing a new AFSL when “there is no specifically defined financial services businesses”. The ASIC officer suggested that One RE consider seeking authorisation for a ‘named’ scheme as opposed to a ‘kind’ scheme so it could identify an opportunity over the next four months. Mr Tearle rejected this proposal.
Following this conversation, One RE provided a revised description of its proposed business dated 23 June 2011, which included the following:
The One Investment Group specialises in taking over the RE/trustee and management roles of funds which are in financial distress. This distress may result from the financial position of the RE/Trustees (e.g. the former Allco Finance Group funds which we now manage) or the financial position of the particular funds (e.g. the former Babcock and Brown funds which we now manage).
In summary, the One Investment Group operates its business at the more risky end of the fund management spectrum.
The One Investment Group attempts to manage this risk by operating a number of licensed entities thereby segregating responsibilities and risks. One Investment Group uses multiple licensed entities so as to mitigate the risk of the problems in one fund contaminating the operations of other funds that it manages.
In order to continue the growth of its business and, equally as important, to continue to manage its existing and future risks, One Investment Group has sought to obtain an additional AFSL.
The Applicant will provide certain advisory services and may act as a responsible entity of registered schemes (a particular kind, as outlined in the Applicant’s AFSL application) or a trustee for unregistered schemes.
...
The Applicant’s roles are expected to be limited due to the One Investment Group’s business model and its approach to managing and controlling risks as described above. That is, the more risky the roles that the Applicant gets, the less roles the Applicant is likely to accept.
The Applicant is confident that it will find roles quickly on the basis of One Investment Group’s business growth to date. As stated above, One Investment Group has demonstrated an ability to identify new mandates and it has a pipeline of new roles.
There is evidence of a further discussion between Mr Tearle and ASIC staff in late June 2011 on this issue and on 29 June 2011, Mr Tearle sent an email to ASIC referring to the previous discussion and explaining the nature of the proposed business to be operated. Mr Tearle described the business as a “pure RE business”. It is apparent from the email that the fact One RE had not identified a particular responsible entity role for a scheme concerned ASIC.
By email dated 11 July 2011, ASIC notified One RE it would not approve authorisation to operate ‘kind managed investments schemes’ at this stage. It was noted:
ASIC’s decision was formed as One RE Services Limited is a first time applicant it would be required to demonstrate the same level of competence and capacity as an experienced licensee. (Please refer to RG 105.82 for ASIC’s policy position).
In addition, ASIC has concerns in relation to One RE Services Limited’s capacity to be able to adequately operate a kind licence at this stage, Licensing note that capacity concerns were also raised with another entity within the One Investment Group.
In light of the above, ASIC has offered One RE Services Limited a draft licence with the opportunity to register a named managed investment scheme within the 4 month registration period.
One RE rejected this decision and lodged an application in respect of the refusal of the ‘kind’ authorisation with this Tribunal on 20 July 2011.
There was no evidence about the managed investment schemes to be conducted by One RE other than what was set out in the business description document referred to in paragraph 37. Mr Tearle confirmed this in his oral evidence at the hearing and in fact confirmed One RE had not identified any particular opportunities. When discussing compliance with financial requirements under Regulator Guide 166, Mr Tearle stated:
I mean, we really haven’t talked about what we had in mind for this entity. But, you know, if we got another scheme – let’s not talk about what – if we did win, you know, the right to the RE scheme, if the cash – we would have to look at the cash and we would have to put in more equity into the organisation.
It is not in dispute that One RE proposes, if granted a ‘kind’ scheme authorisation, to seek to acquire and operate multiple registered and unregistered managed schemes as a ‘responsible entity for hire’. ASIC contended it was not able (nor would the Tribunal be able) to assess potential compliance with s 912A without this detail. One RE contended this detail is not necessary for ‘kind’ scheme authorisation. The relevant guidance is as set out in Regulatory Guide 105 Licensing: Organisational competence and this contemplates a ‘broad authorisation’ without the need to identify a ‘named scheme’.
The balance sheet for One RE as at 29 September 2011 shows net tangible assets of $57,118.00. It is not disputed this satisfies the current financial requirements to be licensed (as set out in Regulatory Guide 166), although there is some concern expressed by ASIC about the assumption in the September 2011 cash flow that OIG will pay for ongoing operating expenses of accounting fees, audit fees, insurance, rent and staff. Under Regulatory Guide 166, a licensee must be solvent at all times, have total assets that exceed total liabilities and meet ASIC’s cash needs requirements. There are five different options available to assess whether a proposed licensee meets ASIC’s cash needs requirements. One RE has used Option 2, which is a contingency-based 3 month projection. One RE relies on Regulatory Guide 166.33, which provides that an applicant “can take into account the financial support you expect a parent company or other entity would provide if needed, but only to the extent that the risk that the support would not be provided is highly unlikely”.
ASIC contended there is no evidence to satisfy the Tribunal that OIG will provide the relevant financial support to One RE. Mr Tearle gave evidence that OIG would provide resources and financial support for One RE and had sufficient assets to do so. The Tribunal was not provided with the balance sheets for OIG but Mr Tearle gave the following evidence:
Tearle:I suppose in my submissions I did make a comment about One Investment Group and its financial position, and I just want to make sure I quote the right numbers. But at 31 October the net tangible assets within One Investment Group were 5.5 million and over 3.3 million of the assets within the group are essentially in cash and securities.
Tribunal: But what – so what does that – how does that give you comfort?
Tearle: It shows we’ve got $3 million in cash sitting in the parent company.
Mr Tearle also explained the relationship between One RE and OIG as follows:
So it’s already part of our processes, which is, you know, confirmed by what is in the documents that were provided to the respondent. In terms of the comfort around how that will operate, I think it’s a little bit like the – how we deal with the employee issues and the free services. You know, I don’t think there’s an obligation to document that. I don’t think there’s – you know, we’re not essentially providing an underwriting agreement for the parent to the licensee, that’s not required by policy. You know, the question is, is there a history of not putting the cash in, or is there a likely – is there a real likelihood we won’t put the cash in if it’s required. I don’t think there is any evidence to support the fact that we won’t put the cash in if it requires more equity. So we’ve demonstrated, whilst not in the risk management statement how we deal with this issue, it is covered in the finance proof, and I would suggest that that’s a more suitable place for it, but I would be happy to amend to ensure there’s a consistency between the two.
Mr Tearle was cross examined by Counsel for ASIC but his evidence was not challenged on this aspect.
Mr Tearle gave evidence about One RE’s compliance and risk management systems. Mr Tearle said the arrangements were similar to the arrangements in place for other companies within OIG and there was no evidence those arrangements were not adequate. Given the potential for the business to grow rapidly with the acquisition of multiple schemes, an issue was raised about how One RE would respond to the greater demands for compliance. In the updated Risk Management System Statement for One RE provided on 29 September 2011, adequate financing and staffing were recognised as risks. Mr Tearle said the financing risks would be addressed by ‘careful’ cash flow monitoring and could be mitigated by cash injection by OIG. Mr Tearle recognised the need for adequate staffing as an issue but considered the risks as low, as demonstrated by the following evidence:
The licensee may not be able to recruit or attain staff as required may result in the licensee not being able to properly perform functions. So the issue itself is – so I think the issue is addressed, whilst not exactly in the form that’s required, but the issue of staffing and the demands of possibly requiring more staff is referred to. Look, we’re still a small business. You know, this time last year there were 10 or 12 of us, now there’s 20. We’re very much on top. We don’t – you know, in terms of the scale, complexity and nature of our business, we don’t have a formal process of review. It’s pretty obvious when someone is not performing, things aren’t delivered. We made someone redundant last week for that reason; they weren’t performing, they leave. And so we’ve – again, it’s – you know, we micromanage our business.
The key issue of contention was the experience of One RE, and its responsible managers, in operating multiple registered managed investment schemes. Mr Tearle submitted it was relevant to consider the previous history of the companies operating in OIG and “people you’re dealing with, you need to see if there’s evidence of them not complying with their obligations”. He further submitted there was no evidence of previous non-compliance and if there had been ASIC “would have submitted it”. Apart from a reference in the email of 11 July 2011 which was not explained, I accept there was no evidence of a history of non-compliance by the companies in OIG. This was not an issue raised by ASIC, either in its reasons for decision or in submissions during the hearing.
Counsel for ASIC submitted that there was no ‘convincing evidence’ that OIG and Mr Tearle and/or Mr Epstein had sufficient experience in setting up and operating multiple active managed investments schemes and this experience was critical to the grant of broad ‘kind’ authorisation.
The evidence is that companies in OIG, and relevantly Mr Tearle and Mr Epstein as responsible managers of those licensees, have operated eight managed investments schemes over the past two years, although not concurrently. Three of those schemes are active and the balance are either de-registered or in wind-up mode. Two of the active schemes commenced within three months of the hearing. Mr Tearle held senior positions in the Allco Finance Group from 2003 to 2009 and during this time it was part of his role to establish and manage multiple managed investment schemes, although he concedes that many of these were in wind up mode by the time he took control of the management. He also conceded his role in establishing schemes for Allco was primarily as legal counsel.
ASIC does not allege that there was any mismanagement or misconduct in respect of the Allco Finance Group schemes by Mr Tearle. Mr Tearle’s evidence was that he managed these schemes after they were already in distress and ASIC did not take issue with this. ASIC’s complaint was that when Mr Tearle was involved with these schemes, his role was limited to legal counsel, he was not a ‘responsible manager’ or ‘responsible officer’ of the schemes in the Allco Finance Group and to the extent he was involved in management, the schemes were in wind up mode.
There was much discussion about the differences between an active scheme and a scheme in wind up mode and when questioned about this, Mr Tearle gave the following evidence:
Well, I can give – the evidence is that other than the issue that was highlighted by Ms Morgan in terms of if you’re winding up a scheme you’re not setting it up, I would suggest that there isn’t any difference, and I will go through the items that the respondent highlighted as being things that are different in a registered scheme, because I – you know, I disagree. The first point was raised was the preparation of legal documents, including constitution compliance plan disclosure documentation. The point is here we still have an obligation to manage the schemes. Even if they’re winding up, we still have an obligation to manage in accordance with the compliance plan. So we still wanted the compliance plan. In August of this year, as part of the – and, you know, normal review process, we took a decision to update the compliance plans for each of the AVRA schemes. So each of the AVRA schemes took onboard a new compliance plan.
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Each of the – all of our registered schemes – sorry, all of our registered schemes, adopted new compliance plans. So that includes registered, not in winding-up, and registered in winding-up. So I disagree that you don’t have to prepare legal documents and you don’t have – you know, the constitution – you know, where you’re constantly – you know, if you operate – you’re a trustee, we have to look at constitution all the time. We don’t necessarily have to change it, but we need to be very mindful in terms of redemptions, in terms of in specie distributions that we might be able to make out of scheme assets. I can’t think of an example where we change the constitution, but we can’t operate as an RE scheme, whether it’s in winding up or not without being closely involved in monitoring the constitution. Disclosure documentation: we don’t have PDSs because we’re not issuing more securities, but that would go to my previous experience. But we do have notices of meeting. We’ve called notices of meeting which essentially have to be issued in the same form as any other registered scheme to ask investors about the different things.
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The taking in new money is only one aspect of registering the scheme. It’s actually one of the easier parts of it in terms of issuing a PDS; there’s a process you go through for that, and, you know, how you hold cash when you issue the units. But we still have, you know, continuous disclosure obligations. We still have obligations in terms of whether it’s illiquid or liquid funds. You know, there’s no distinction under the financial services law. There’s a regime for essentially … things in wind up, but that doesn’t mean that you’re let off the hook in terms of your obligations around how you run that fund. Investment scheme assets: you know, our proposition would be we’re involved investing scheme assets every day of the week; whether that be deciding whether to sell or hold, which is, in our view – you know, there’s no difference – if you’re deciding on whether to sell an asset or hold it, that’s still an investment decision. We still make investment decisions on a regular basis. We have cash we use to invest. So again, just because a scheme is in winding-up, there’s still investment decisions that are taken, and the decision-making process in lots of ways is more complicated, but it’s still there. There’s still investment decision making occurring on a daily – you know, essentially a regular basis. Maintaining members’ rights: well, again, there’s a constitution – we still have to maintain those rights. Record Realty – notwithstanding there’s a prospect of those investors getting very little money from the winding-up Record Realty Trust, you know, it’s still our obligation to protect their interests, and that’s what we’re doing in terms of our – you know, essentially the fights we had with the receiver. So dealing with complaints: look, we don’t like to get complaints, and we don’t actually get very many, but in a fund you’re winding up, you probably get more complaints than you do in a fund that you’re not winding up. So, again, complaints are still –we still have a compliance policy, we still have a complaints register. That complaints register is presented to the Compliance Committee every quarter. Again, there is nowhere that says that you don’t have to – you don’t have to worry about complaints when the scheme is in winding up.
In summary, Mr Tearle gave evidence that the compliance required to operate a managed investment scheme in wind up mode was not significantly different to operating an active scheme. The key difference was that the licensee was not marketing or accepting new money from investors. There was no evidence from ASIC to contradict this evidence.
CONSIDERATION
Section 913B(1) requires the Tribunal to make an assessment of whether there is ‘no reason to believe’ One RE will not comply with the general obligations of s 912A of the Act. The meaning of these words and whether there is a distinction between this and the test for cancellation of licences and banning orders under the Act, where there must be ‘reason to believe’ a person or entity ‘will not comply’, does not appear to have been the subject of Tribunal or judicial comment.
In cancellation and banning, ASIC, and therefore the Tribunal, standing in its shoes, seeks to interfere with an existing right to provide financial services. The decision-maker must form a positive view about whether there is ‘reason to believe’ the person or entity ‘will not comply’. If that view cannot be formed to the reasonable satisfaction of the decision-maker, the licence will not be cancelled or the person will not be banned, as the case may be.
When considering a licence application, the decision-maker must form a view about whether there is ‘no reason to believe’ the person or entity ‘will not comply’. The test is more difficult to establish for an applicant seeking the right to be licensed as it is clear from the words of the section that the applicant must establish the negative to the reasonable satisfaction of the decision-maker. ASIC submitted that “the onus is on the applicant to satisfy the Tribunal that its compliance and risk management arrangements are adequate for the Tribunal to conclude that the applicant would meet the compliance and risk management obligations of a licensee”.
One RE did not specifically address this issue but submitted that there is no evidence its compliance and risk management arrangements are inadequate. The arrangements comply with relevant ASIC guidance. Mr Tearle and Mr Epstein have been involved in the management of ‘kind’ licences for over five years, two other companies in OIG have ‘kind’ scheme authorisation and there is no history of breaches by any company in OIG. One RE submitted that this should be sufficient to satisfy the Tribunal there is ‘no reason to believe’ One RE ‘will not comply’ with the obligations under s 912A of the Act.
At a practical level, both tests involve consideration of the likelihood that the applicant will comply with obligations under the Act. It is therefore useful to consider the meaning of ‘reason to believe’, which has been the subject of comment by this Tribunal, primarily in cases of review of decisions by ASIC to ban a person from providing financial services. There has also been judicial interpretation of these words, but in a different legislative context, for instance in cases where the decision of a regulator to commence an investigation or issue a notice have been challenged. In Power v Hamond [2006] VSCA 25, Chernov JA, when considering whether the Legal Ombudsman was entitled to commence an investigation and with whom Maxwell P and Ormiston JA agreed on this aspect, said:
It is now settled law that the question whether there is “reason to believe” a specific matter in a context such as the present is to be determined by the person concerned on an objective basis and that the correctness of the conclusion may be tested in court. Thus, for example, it was said in George v. Rockett that “[w]hen a statute prescribes that there must be ‘reasonable grounds’ for a state of mind – including suspicion and belief – it requires the existence of facts which are sufficient to induce that state of mind in a reasonable person.” Consequently, in order to have launched the impugned investigation lawfully the Ombudsman had to conclude, on an objective basis, that Power’s failure to obtain insurance might amount to misconduct or unsatisfactory conduct. The question, therefore, is whether, in all the circumstances, a reasonable Ombudsman would have so concluded.
In Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602, Deputy President Forgie observed that “what amounts to reasonable grounds will depend on the context” but made a distinction between the level of satisfaction that should be reached in having a reason to believe that a person ‘will’ do something as opposed to whether the person ‘may’ do something. In Re De Souza and Australian Securities and Investment Commission [2009] AATA 725 Senior Member Frost adopted a more flexible approach as follows:
With respect, I have not found it helpful to consider the distinction in that way. The safer course, in my view, is to concentrate on the language of s 920A(1)(f) itself, and to be guided simply by the requirement that is expressed there. The requirement placed on me is to determine whether I have reason to believe that Mr De Souza will not comply with a financial services law. It is not a question, in my view, of the material being “more convincing” or “less convincing”; the material will either give me reason to believe, or it will not. It may be, as Callinan J said in Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49; (2002) 213 CLR 543 at [130], that the expression “reason to believe” poses a “relatively low threshold”, but the threshold still needs to be met.
I prefer this approach but agree with Deputy President Forgie that context is relevant. When considering whether to grant a licence it is relevant to consider the nature and extent of the authorisation sought when assessing whether or not there is ‘no reason to believe’ an applicant ‘will not comply’. Given the authorisation sought by One RE is broad and would allow One RE to operate multiple managed investment schemes without the need to seek variation or approval, I must be satisfied, on the basis of the information provided, that One RE has sufficient experience, resources and risk and compliance systems in place to operate multiple schemes at any one time to comply with s 912A of the Act. I am not so satisfied. My reasons follow.
While I accept that One RE has access to resources of OIG, it is still a small operation, primarily staffed by Mr Tearle and Mr Epstein. This is conceded by Mr Tearle. The authorisation sought would allow One RE to operate multiple schemes at any one time without the need to obtain prior approval from ASIC. The risk of inadequate staffing and financial resources has been identified by One RE as a risk for compliance, properly in my view, given the nature of the broad authorisation sought. Mr Tearle submitted One RE would only operate the number of schemes that it could comfortably manage, having regard to the resources available and, in particular, the financial resources available from its parent. He said compliance was an important consideration for him and there was no history of breach by any company within OIG. I accept that Mr Tearle is genuine in his commitment, there being no evidence to the contrary, but this assurance is of limited assistance in these circumstances. It has no binding or enforceable effect as once ‘kind’ scheme authorisation is granted the licence to operate multiple managed investments schemes is unfettered.
This is a significant consideration and is no doubt the rationale behind the policy guidance set out in Regulatory Guide 105.82, which requires that applicants demonstrate ‘organisational competence and capacity’ to operate multiple schemes. One RE is a first time applicant and therefore does not, and indeed could not, have the experience of operating two or more registered schemes for at least the past two years. It was nonetheless submitted (and the case was argued by both parties along these lines) that the combined experience of companies in OIG and the experience of Mr Tearle and Mr Epstein should be taken into account when assessing this organisational competence and capacity.
Mr Tearle and, to a lesser extent, Mr Epstein have had many years’ experience in the financial services industry but the critical experience in question is their experience in operating multiple registered managed investments schemes. There is no dispute that Mr Tearle has operated multiple schemes in distress and in wind up mode from 2008, in some cases under the management of receivers, in his previous role as an officer of Allco Finance Group and in his current role as an officer and responsible manager of companies in OIG. However, it is also not in dispute that OIG (and Mr Tearle and Mr Epstein as responsible managers) have limited experience in operating multiple registered managed investments schemes that are active, namely still accepting new members.
OIG presently operates three active schemes but two are very new. There is no ‘demonstrated’ experience that can be relied on in respect of those two schemes. The EAIT Direct Investments Fund is still open to new members and has been operating since June 2009. On the other hand, one of the schemes operated (Record Realty) is under external administration and all material assets are therefore controlled by receivers and managers. One scheme was deregistered (International Opportunities Fund) and three others (Allco Hybrid Investment Trust, Everest Babcock and Brown Income Fund and Everest Alternative Investment Trust) remain registered but have been in wind up mode for at least one year, two of which have been in wind up since Mr Tearle became involved in management in 2008 and 2009.
Mr Tearle gave evidence about the issues involved in managing a registered scheme in wind up mode. He said the obligations were substantially the same as operating an active scheme. ASIC submitted that Mr Tearle’s evidence was not convincing about this but the examples provided by ASIC to support this submission were themselves not convincing. ASIC took issue with the fact Mr Tearle could not recall whether he had been involved in amending a scheme constitution and did not specify the investments held in the various schemes operated by OIG. I am not troubled by either of these issues. It was not clear why the evidence about amending the constitution of a scheme was significant. Moreover, Mr Tearle was not asked to specify the investments referred to while giving evidence and as such no inference can be drawn from his failure to do so. The most relevant evidence was Mr Tearle’s concession that the schemes in wind up mode do not issue securities and the disclosure obligations of the Act do not apply.
There was no evidence, other than from Mr Tearle, about the differences between operating a registered scheme in wind up and an active scheme. In the absence of this evidence and in order to adequately assess the issue, I formed the view that it was necessary to consider the relevant provisions of the Act governing the operation of managed investment schemes.
It is clear that both types of registered schemes must be operated by a ‘Responsible Entity’ which must be licensed and must comply with the requirements of Part 5C of the Act. The obligations under Part 5C are extensive. A responsible entity must operate in accordance with its constitution and compliance plan and must comply with the financial services laws and any conditions on its licence. If a responsible entity accepts new members there are additional obligations under Part 7.9 of the Act to provide disclosure to investors about the investments through a ‘product disclosure statement’. There are continuing obligations to ensure the disclosure is accurate and there are sanctions for false or misleading disclosure. The obligations under these provisions are significant. It is also reasonable to assume that an active scheme, which is constantly being marketed to new members and generating new investments, will operate differently to a scheme that is closed. The nature and extent of an active scheme is likely to be more dynamic and complex because the scheme is growing and changing as investors change. While I accept that managing a scheme in wind up mode is challenging because the scheme is invariably in financial difficulties, I am not satisfied that this experience is comparable to the experience of managing an active scheme.
I therefore have some doubts about whether OIG and Mr Tearle and Mr Epstein (and therefore One RE) have the organisational competency and capacity contemplated by Regulatory Guide 105.82 to operate multiple registered managed investments schemes at this stage. Mr Tearle gave evidence of his experience in managing schemes but this experience was primarily in operating schemes in wind up mode. If One RE was granted ‘kind’ scheme authorisation, Mr Tearle said One RE would market itself as a ‘responsible entity for hire’ and this would not be confined to schemes in wind up mode. The ‘kind’ scheme authorisation sought is broad but One RE and its associates cannot demonstrate a history of successfully operating multiple registered schemes that are open to new members and unrestricted in their operations over a significant period of at least two years.
ASIC has set a benchmark for ‘kind’ scheme authorisation in Regulatory Guide 105 to assist applicants and decision-makers within ASIC in assessing whether a licence should be granted under s 913B(1) of the Act. These guidelines provide useful insight for a decision-maker about the relevant regulatory issues, having regard to the experience of, and policy developed by, the regulator administering or enforcing legislation. They are relevant to the consideration of whether or not there is ‘no reason to believe’ an applicant will not comply with the obligations under s 912A of the Act. Demonstrated ‘organisational competency and capacity’ over a two year period with no history of breach would provide evidence to support a finding that there is ‘no reason to believe’ an applicant will not comply. It is appropriate for me to have regard to these guidelines in determining whether an AFSL, with the broad authorisation sought by One RE, should be granted (Re Drake and Minister for Immigration and Ethnic Affairs (1979) 2 ALD 634). I note that Regulatory Guide 105 does not expressly differentiate between registered schemes in wind up mode and schemes that are otherwise unrestricted and still open to new members. This appears to be an oversight. I am satisfied that there is a significant enough difference between the two to cause me concern about whether One RE would be able to comply with the obligations under s 912A.
One RE submitted there was no evidence that One RE will not comply with s 912A of the Act. In my view, this is not the test. As observed by Senior Member Frost (now Deputy President), it is relevant to consider the language of the relevant legislative provision. Under s 913B(1) it is not necessary for me to form a view about whether One RE will or will not comply with the obligations under s 912A of the Act but rather whether there is ‘no reason to believe’ it will not comply. While the expression ‘reason to believe’ poses a ‘relatively low threshold’, the requirement that there be ‘no reason to believe’ sets a benchmark that has the practical effect of shifting the onus to an applicant for an AFSL to establish, to the reasonable satisfaction of the decision-maker, that it will comply with the obligations under s 912A. If there is any doubt based on the objective facts, the decision-maker will not be able to form such a view.
Having regard to the nature and extent of the experience of One RE and its associated entities and responsible managers to date, the broad and unfettered nature of the ‘kind’ scheme authorisation sought and the concession by Mr Tearle that there are some risks that will need to be managed, I cannot be satisfied there is ‘no reason to believe’ One RE will not comply with s 912A of the Act.
During the hearing, I raised with both parties the question of whether conditions restricting the operation of the ‘kind’ scheme authorisation may be appropriate to satisfy s 913B. ASIC submitted that conditions would not be appropriate but if additional conditions were to be imposed, they should involve six monthly reviews by an independent expert of One RE’s compliance over a two year period. One RE submitted that such conditions would not be commercially acceptable. It was implicit that One RE would not wish to proceed with ‘kind’ scheme authorisation on these terms. Neither party made submissions about alternative conditions and in the absence of submissions or evidence on this issue, I could not be satisfied that further conditions would adequately address my concerns. However, I note that if One RE still wishes to seek ‘kind’ scheme authorisation to act as a ‘responsible entity for hire’ and subsequently identifies conditions that may satisfy ASIC about compliance, such as limiting the number or type of ‘kind’ schemes authorised, it may apply for a variation of its licence under s 914A of the Act.
CONCLUSION
I therefore affirm the decision of ASIC to grant an AFSL to One RE without ‘kind’ scheme authorisation.
I certify that the preceding 73 (seventy three) paragraphs are a true copy of the reasons for the decision herein of Senior Member J L Redfern.
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Associate
Dated 15 May 2012
Dates of hearing 13 December 2011, 26 April 2012 Advocate for the Applicant Mr F Tearle Counsel for the Respondent Ms K Morgan Solicitor for the Respondent Ms A Rees
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