Power and Australian Securities and Investment Commission
[2005] AATA 338
•15 April 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 338
ADMINISTRATIVE APPEALS TRIBUNAL )
) No W2004/105
GENERAL ADMINISTRATIVE DIVISION ) Re MARK RAYMUND POWER Applicant
And
AUSTRALIAN SECURITIES & INVESTMENT COMMISSION
Respondent
DECISION
Tribunal M J Allen - Member Date15 April 2005
PlacePerth
Decision The decision of the Tribunal is that:
(a) the part of the decision made on 2 March 2004 by a delegate of the respondent (“ASIC”) by which the applicant was refused authorisation to deal in financial products, namely derivatives and foreign exchange contracts (“the financial products”), on behalf of wholesale and retail clients is set aside;
(b) the matter is remitted to ASIC for reconsideration in accordance with a direction that the applicant satisfies the organisational competency requirements of section 912A(1) of the Corporations Act 2001 in respect of dealing in the financial products on behalf of wholesale and retail clients where the dealing is limited to dealing in the financial products as an agent of the client:
(i) with the client’s prior approval;
(ii) via an internet on-line trading service similar to the type operated by CMC Group Asia Pacific Pty Ltd where the operator of such a service holds an Australian Financial Services Licence authorising the provision of such a service; and
(iii) in accordance with such other terms and conditions as ASIC may reasonably impose in relation to the conduct of such activities.
................(sgd M J Allen)................
Member
CATCHWORDS
Corporations and securities – Australian Financial Services Licence – applicant authorised to give advice in relation to certain financial products but not to deal in those products – applicability of ASIC policy statements regarding organisational competency – policy statements specified alternative ways to demonstrate organisational competency – finding that decision-makers not limited to considering those alternatives – finding that applicant’s tertiary qualifications and relevant work experience are, together, sufficient to enable him to have adequate organisational competency for a business of the nature, scale and complexity of that proposed to be carried on by the applicant – decision set aside
Administrative Appeals Act 1975 ss 37, 43
Corporations Act ss 911A, 912A
Skoljarev v Australian Fisheries Management Authority (1995) 22 AAR 331
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
REASONS FOR DECISION
15 April 2005 M J Allen - Member 1. On 2 March 2004 a delegate of the Australian Securities and Investment Commission (“ASIC”) granted the applicant an Australian Financial Services Licence (“the licence”) under the Corporations Act 2001 (“the Act”). The licence authorised the applicant to provide financial products advice to retail and wholesale clients in relation to derivatives and foreign exchange contracts. However, the delegate refused to authorise the applicant to deal in those financial products because, in ASIC’s opinion, the applicant did not possess the requisite knowledge and skills to meet the organisational competency obligations required to deal in derivatives and foreign exchange contracts.
2. The applicant now applies for review of ASIC’s decision to refuse to grant the authority to deal.
3. At the hearing of the matter the applicant was represented by an adviser, Ms Stewart, and ASIC was represented by Mr Rowe. The applicant gave oral evidence about his application generally and Ms Stewart also gave oral evidence about one aspect of the matter. The Tribunal received into evidence the documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (“the AAT Act”) and Exhibits R1 – R5. At the completion of the hearing I made a direction that the applicant provide further documentary information to ASIC concerning the applicant’s tertiary qualifications. This was subsequently done and thereafter the parties filed written submissions on the matters in issue in the proceeding.
Background – The Licence Application
4. On 4 February 2002 ASIC granted the applicant a licence as a futures adviser under the licensing regime then in operation subject to various terms and conditions (T3). Pursuant to that licence the applicant carried on a business of giving advice regarding futures products in Adelaide as a sole trader.
5. In March 2002 a new regime for the licensing of financial intermediaries came into operation and during 2002 and 2003 ASIC issued a number of new or updated policy statements regarding the ways in which it would administer the new regime, including how it would assess applicants for licences under the new regime in terms of their competence and organisational capacities, amongst other things.
6. Under the terms of the new regime a person who held a licence under the old regime could apply for a new licence and have the application “streamlined” insofar as the application covered activities that were previously licensed. Such a person could also seek to obtain authorisation to carry out new activities that were not previously licensed and an application that involved streamlining of previous activities and authorisation of new activities was known as a “composite” application.
7. In September 2003 the applicant submitted a composite application to ASIC, describing the type of financial service for which he sought authorisation as “provide financial product advice” and the financial products in respect of which advice would be given were specified as “derivatives, foreign exchange contracts, securities” for retail and wholesale clients (T documents pg 241).
8. In November 2003 the applicant varied that application by seeking authorisation to conduct financial services additional to those previously authorised – i.e. to deal in financial products rather than just advise – and to do so in relation to additional products. The dealing services were specified as:
“2.7.1 Issue, apply for, acquire, vary or dispose of a financial product
2.7.2 Apply for, acquire, vary or dispose of financial products on behalf of another”
and the products in respect of which authorisation was sought to deal on behalf of another person were nominated as derivatives (old law futures contracts, old law securities options contracts and warrants), foreign exchange contracts, and securities (T documents pp 256 – 262).
9. On various occasions between November 2003 and March 2004 ASIC requested, and the applicant provided, additional information regarding the applicant’s qualifications and experience in order to assist ASIC in its assessment of the applicant’s abilities to undertake the various activities for which he sought authorisation. In particular ASIC sought and was provided with information concerning the applicant’s experience in relation to advising on and dealing in foreign exchange and derivative products.
10. In January 2004 the applicant advised ASIC that he sought authorisation to issue and arrange all forms of derivatives but did not require authorisation for securities (T16 p 300).
11. During February 2004 ASIC informed the applicant’s advisers that it was concerned that the applicant may have insufficient experience in dealing in derivatives or foreign exchange contracts and in providing advice on all forms of derivative products other than old law futures contracts. On 17 February 2004 the applicant provided ASIC with information regarding his dealing experience. On 19 February 2004 ASIC informed the applicant orally that it was prepared to grant the applicant an authorisation to advise on old law futures contracts and foreign exchange contracts but was not prepared to grant an authorisation to deal in financial products because of the applicant’s insufficient experience. On 20 February 2004 the applicant requested ASIC to also authorise him to advise on contracts for difference (“CFDs”) (T20).
12. On 24 February 2004 ASIC advised the applicant’s advisers that it was minded to grant a licence under the streamlining provisions, namely authorisation to advise on old law futures contracts and foreign exchange contracts, but that in the absence of further submissions ASIC was minded to refuse the authorisations sought for additional services and products relating to the authorisation that was sought to advise on derivatives generally, in particular CFDs; and to refuse the application to deal in derivatives and foreign exchange contracts (T21). The applicant provided additional information over the next week, but ASIC issued a licence on 2 March 2004 (effective from 8 March 2004), whereupon the present appeal was made by the applicant. The licence issued authorised the applicant to
“… carry on a financial services business to … provide financial product advice for the following classes of financial products:
(i) derivatives; and
(ii) foreign exchange contracts
to retail and wholesale clients.”
13. ASIC considered the application in relation to organisational capacity in light of its Policy Statement 164 (“PS 164”) (T6) – a policy statement that ASIC had reissued in November 2002 - and in the light of a policy document issued in July 2003 entitled “Responsible Officers – Demonstrating Compliance with Organisational Competency Obligations – an ASIC Guide” (“the Guide) (T7). Further reference will be made to PS 164 and the Guide below.
Statutory and Policy Framework
14. Section 911A of the Act relevantly provides that a person who carries on a financial services business must hold a licence covering the provision of the financial services. Section 912A(1) sets out the general obligations of a financial services licensee in the following terms:
“(a)do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
(b)comply with the conditions on the licence; and
(c)comply with the financial services laws; and
(ca)take reasonable steps to ensure that its representatives comply with the financial services laws; and
(d)unless the licensee is a body regulated by [the Australian Prudential Regulatory Authority] – have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and
(e)maintain the competence to provide those financial services; and
(f)ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
(g)if those financial services are provided to persons as retail clients – have a dispute resolution system complying with sub-section (2); and
(h)unless the licensee is a body regulated by [the Australian Prudential Regulatory Authority] – have adequate risk management systems; and
(j)comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph”.
15. ASIC is responsible for the administration of the licensing regime and in that capacity issued and reissued PS 164 to help licensees and licence applicants:
“(a)develop appropriate arrangements (ie measures, processes and procedures) to meet their ongoing requirement to comply with the licensee obligations;
(b)understand what we look for when we assess an application for [a] licence; and
(c)understand what we look for when we assess whether licensee’s are complying with their licensee obligations” (PS 164.4).
16. In paragraphs PS 164.7 and 164.8 ASIC notes that the licensing regime is designed to work in a flexible way, with licensees responsible for complying with the obligations of the legislation, and that it is up to the licensee to decide on the way that it will meet its obligations and to demonstrate the capacity to meet and comply with its licensee obligations. Further, what an individual licensee needs to do to comply with the law would generally vary according to the “nature, scale and complexity” of the business the licensee carries on or will carry on and that, in many cases, there may be a number of possible ways for licensees to comply with what the law requires.
17. PS 164.10 notes that in formulating the guidance contained in that policy statement ASIC has drawn on its “considerable experience as a regulator of financial service providers and our knowledge of regulatory regimes in other countries”.
18. In PS 164.17 ASIC explains the factors that will indicate the nature, scale and complexity of a financial services business. These include the products and services offered, the diversity and structure of the operations (including geographical spread) and the extent of outsourcing of any functions, the volume and size of transactions, the relative proportion of retail and wholesale clients, whether the licensee gives personal or general advice, whether the licensee’s main business is the provision of financial services, and the number of people in the organisation. In PS164.18 ASIC says that it does not take a “one-size fits all” approach and that to do so would undermine the focus of the legislation on regulatory outcomes.
19. Part E of PS 164 deals with the organisational competency obligations of the Act, which ASIC identifies as those set out in s 912A (1)(d) and (e) ie the obligations to have available adequate human resources to provide the services the licence authorises and to carry out supervisory arrangements, and to maintain the competence to provide those financial services. Paragraphs PS 164.73 and 164.73A emphasise that it is up to the licensee to decide on ways it can demonstrate how it meets these obligations and focuses on the knowledge and skills of the people whose training and experience will result in the licensee complying with its organisational competency obligations. These will be the people who manage the business and ensure the quality of the services. Paragraph PS 164.73A(b) states that Part E outlines “… some of the alternatives open to a licensee under which the licensee can most easily demonstrate to ASIC it meets the organisational competency obligations. However, even if these alternatives are not adopted, a licensee can still demonstrate to us that it meets the organisational competency obligations”. Paragraph PS 164.74 notes that what is needed to demonstrate compliance with the organisational competency obligations depends on the “nature, scale and complexity” of the business as well as the role individuals play in the particular business.
20. PS 164.18A states that ASIC’s approach “…will generally be to look to a nominated responsible officers training and experience” and that evidence will be sought that the nominated responsible officer has the knowledge and skills needed to carry out the functions of a nominated responsible officer. At PS 164.83B ASIC states that for a licensee or applicant to determine whether the nominated responsible officers have the necessary knowledge and skills needed for their roles, consideration would be given to:
(a) what the officer is responsible for;
(b) the officer’s education background;
(c) the officer’s relevant experience;
(d) any other credentials of the officer, including association membership or affiliation, or skills or knowledge recognised by an industry association, regulatory body or relevant overseas body; and
(e) any other reasons why the officer can perform in the role, including client feedback, complaints and performance measures.
21. In relation to knowledge and skills, PS 164.84 states that a licensee can ensure, and show ASIC, that its responsible officers meet the organisational competency obligations in a number of ways, and sets out five alternative ways that are described as “the most common”. Those five alternative ways are set out in greater detail in PS 164.104C and, in view of their relevance in the present case, I set them out in full:
“Alternative 1: Meet widely adopted and relevant industry standards or relevant standards set by [the Australian Prudential Regulatory Authority] APRA; AND
The equivalent of at least 3 years relevant experience over the immediate past 5 years in a role that enables the person to understand the responsibilities and requirements of the current role.
Alternative 2: Successfully complete an individual assessment (or recognition of current competency) by an authorised assessor at the equivalent of full diploma level, relevant to the particular industry and/or product; AND
The equivalent of at least 5 years relevant experience over the immediate past 8 years in a role that enables the person to understand the responsibilities and requirements of the current role.
Alternative 3: A university degree in a discipline relevant to the activities being carried out (eg economics, commerce, business, accounting, information technology, geology or other technical qualification); AND
An approved relevant short industry course listed in the ASIC training register. The course must cover generic and relevant specialist knowledge (this includes existing approved qualifications;) AND
The equivalent of at least 3 years relevant experience over the immediate past 5 years in a role that enables the person to understand the responsibilities and requirements of the current role.
Note: for Alternative 3 an approved relevant short industry course is only necessary if your university degree does not cover all requisite areas of knowledge.
Alternative 4: A qualification which is (a) specifically relevant to the particular industry and/or product; (b) at least the equivalent of a minimum of a full diploma; and (c) recognised under the Australian Qualifications framework, or by a university or another institution of higher education (this includes, but is not limited to, existing approved qualifications, such as the diploma courses, listed in the ASIC Training Register); AND
The equivalent of at least 3 years relevant industry experience over the immediate past 5 years in a role that enables the person to understand the responsibilities and requirements of the current role.
Alternative 5: Where a licensee chooses to adopt some other possibility to demonstrate a nominated responsible officer has the necessary knowledge, the licensee (or … licence applicant) will need to provide us with the following details: (a) the nature of the role performed by the officer; (b) any relevant qualifications or courses completed by the officer; (c) the experience history of the officer over the last 10 years (or thereabouts); (d) any relevant credentials of the officer including association membership or affiliation, or skills or knowledge recognised by an industry association, a regulatory body such as APRA, or some relevant overseas body; and (e) why the licensee or applicant is of the view the officer has the necessary knowledge and skills to carry out the officer’s function.
Note 1: We would typically expect a licensee that provides financial product advice to adopt Alternatives 2 to 4 for those nominated responsible officers whose role relates to the provision of advice. However, depending on the nature, scale and complexity of the licensee’s business, evidence that Alternative 1 or some other alternative has been met may be appropriate …”.
22. In the Guide ASIC provided additional guidance about how the organisational competency obligations for licensees would be assessed, emphasising that responsible officers must have the knowledge and the skills needed to manage the business, ensure an adequate quality of service, and ensure that licence obligations are complied with. ASIC will assess a responsible officer’s experience and knowledge of the financial services and products involved and the officer’s understanding of legal obligations under the licence. ASIC noted that experience to date had shown that some responsible officers have not been able to demonstrate they have the requisite knowledge to understand and comply with licence obligations. ASIC emphasised that “the overriding factor” is that responsible officers must be competent in their role and must have relevant knowledge about the financial services and products, understand and be able to comply with licensees’ obligations, and have the relevant experience to perform the role (T p210).
23. In relation to how organisational competency can be demonstrated, the Guide states that the competence of responsible officers will be considered in relation to each particular service and product offered, having regard to the nature, scale and complexity of the intended business, as well as the inherent complexity of each intended service and product.
24. In relation to the assessment of relevant experience, the Guide says that past experience of an officer must relate to the services and products for which the officer will be responsible, but it is not necessary for the officer to have actually provided the service in relation to each specific product. However, the officer must have performed a role that would require an understanding of how the services are provided in relation to each product and the role must have given the officer an understanding of the relevant legal and compliance obligations related to the provision of that service and of holding a licence.
Applicant’s Educational Qualifications and Work Experience
25. The applicant claimed, and the respondent did not dispute, that the applicant held the following educational qualifications:
1991 – Bachelor of Economics, University of Adelaide, majoring in Economics and Psychology
1992 –Bachelor of Commerce, University of Adelaide, majoring in Accounting, Economics and Finance
1999– Graduate Diploma in Economics, University of Adelaide, majoring in Advanced Economics
1999 – Master of Business Administration, University of New England, majoring in International Business
2003 -Short industry course “Investment Planning 1” conducted by Tribeca Education.
26. In relation to work experience the applicant’s evidence was as follows:
·December 1991 – June 1992 : Fay Richwhite Merchant Bank – Futures Broker Night Desk – derivatives dealing to wholesale and retail clients, mainly on futures contracts and options on futures contracts on interest rates and stock indices.
·December 1992 – June 1993 : Standard and Poor’s Market Services – Financial Markets Analyst in Tokyo with an authorised dealing and trading function – dealing and advising on derivatives (stock index futures and interest rate futures) and dealing and advising in foreign exchange (all major foreign exchange markets).
·June 1997 to June 1999 : Traded derivatives and foreign exchange on his personal account whilst engaged in full time study.
·June 1999 to May 2000 : Tutoring finance units at the University of Adelaide.
·May 2000 – May 2001 : MTS Financial Planning (“MTS”) – dealing on behalf of his employer in derivatives (Australian and Japanese stock index futures, futures and options, share price indices and Australian Stock Exchange derivatives).
·February 2002 to current : Advising retail clients on trading strategies in derivatives and foreign exchange, concentrating on Sydney Futures Exchange products and foreign exchange.
·November 2003 to current : Dealing on personal account, mainly in stock index and foreign exchange contracts for difference (“CFDs”) with some activity in commodity and share CFDs.
The Applicant’s Current Business
27. The applicant said that the licences he had held since February 2002 enabled him to give more or less unrestricted advice in relation to derivatives and foreign exchange matters. This involves identifying possible investment and trading opportunities and advising clients about how they might undertake these activities to their advantage. His clients are typically reasonably well-educated and experienced investors who seek advice about derivative markets. Generally, they seek advice about only a minor percentage of their investment portfolio. At present the applicant gives advice about shares and equities related securities, derivatives and foreign exchange matters generally.
28. The applicant said that clients often trade on the basis of his advice, usually with share or futures brokers or through specialist market makers who offer an online trading platform. When investing in derivatives or foreign exchange matters time is always of the essence as it is essential that the investor can act to manage a position quickly – either by closing out all or part of the position, or opening further positions. Typically, the applicant identifies expected trading scenarios and then monitors the situation to see whether the scenario develops as anticipated. In the course of monitoring the situation the applicant will offer further advice to the client, who may or may not act upon that advice. However, the fundamental problem with the applicant’s current business, from his point of view and that of the client, is that the applicant must be able to contact the client quickly and the client must have access to the (usually computerised) trading platform via which the client trades. If at any time the applicant is unable to contact the client quickly, or the client is not in a position to trade, then the transaction that the applicant would advise the client to undertake cannot be undertaken.
29. The applicant said that, as a result of client demand, he had identified the possibility of broadening the scope of his business to enable him to trade as an agent on behalf of his clients, so that he can put into effect the strategy that he and the client had previously discussed and agreed based on the identified scenarios. In all cases, the applicant said, he would only act on behalf of the client (by operating the client’s account with the online market provider) where he had the express prior approval of the client to undertake the transaction in question. In other words, the applicant would give advice to the client about a trading strategy and he and the client would agree in advance how that strategy should be managed if it unfolded in the way anticipated. The only trading activity that the applicant would undertake on behalf of the client would be those transactions expressly agreed in advance by the client as part of the trading strategy. It was to broaden his business activities in this way that the applicant sought to extend the scope of his licence by including authorisation to deal as well as advise in relation to derivatives and foreign exchange.
30. The applicant said that he would only deal in the way described above where the client was trading as a principal with another licensed dealer who provided the online trading facilities. One such dealer was a company named CMC Group Asia Pacific Pty Ltd (“CMC”) and Exhibit R3 is a copy of a Product Disclosure Statement produced by CMC in relation to the products it offers.
31. CMC provides an online trading platform for CFDs in respect of shares and other securities, indices, some commodities, foreign exchange, options in respect of currencies, and some other products. Trading is done by clients as a principal with CMC on the basis of maintaining a margin account. In certain circumstances a client may, in accordance with CMC’s contractual arrangements, authorise an agent (such as the applicant) to transact on the client’s behalf with CMC. The client would also be free to trade personally with CMC and all communications would be directly between CMC and the client. CMC communicates with its clients daily by email or by telephone and in this way the client would be immediately aware of any transaction entered into by the applicant as the client’s agent with CMC.
32. The applicant said that he presently, and in the future would continue to, outsource a number of the activities he is and would be required to be responsible for under the terms of a licence. This includes accounting, information technology, legal and compliance functions – although the applicant acknowledged that he was still ultimately responsible for all of these things and the day to day operations of his business. In particular, he would be responsible for administering the contractual arrangements between the client and an organisation such as CMC and in this regard he would do whatever was required by CMC (or similar organisations).
33. At the hearing considerable attention was paid to the precise nature of the work undertaken by the applicant over the years. The applicant said that during his time with Fay Richwhite he had mainly taken orders from wholesale clients and either conveyed the order to a Fay Richwhite operator at the relevant exchange (so that the order could be transacted) or, if it was a Sydney Futures Exchange transaction, he could undertake the transaction himself online. In all cases he had to document the transaction and report to the client.
34. When working with Standard and Poors in Japan, his main duties were as a financial analyst, giving advice to wholesale clients. An important part of his duties was to appear as an expert market commentator with various international media outlets. During that period of employment he was authorised to trade on his own account and he did this via telephone to a broker, with his trading supervised by his employer. The applicant said he thought he averaged about one trade every two weeks, with each position being open for about two weeks.
35. When he was trading on his own account between July 1997 and June 1998 he again traded by telephone to a broker, but in this period he traded more frequently – often 2 or 3 times per day with positions often open only for a day. When he was employed by MTS his role was as both an analyst and a dealer and he was an active trader – about 4 or 5 times per day. He managed MTS’ trading account and was responsible for the record-keeping functions. During this time he had not traded in foreign exchange.
36. The applicant said that based on his experience whilst trading as an employee or on his own account (some of it whilst also employed by others) as at February 2004 he had 60 months and 15 months experience in dealing with derivatives as an employee or on personal trading account respectively, and that in relation to dealing in foreign exchange matters he had 42 months experience as an employee and 15 months as dealing on his personal account (see T documents p 364).
Consideration
37. On the evidence before me it would seem that both the applicant (and its advisers) and ASIC proceeded on the assumption that the applicant had to show that he satisfied the requirements of one of the five alternatives identified in PS 164 and set out at para. 21 above. For reasons that appear below I do not consider that to be a correct approach. The applicant said that Alternative 2 was not relevant and he also acknowledged that he did not meet the experience qualifications required by Alternatives 1, 3 and 4 - because he had taken a break in his employment to study during 1997 and 1998. However, the applicant thought that he had supplied sufficient information to demonstrate that he satisfied Alternative 5 because of his qualifications and experience over the last 10 years or thereabouts. In particular, the applicant thought that his academic qualifications more than met the requirements of any of the alternatives and that he had more than 3 years relevant experience – but that it could not be said to be within the immediate past 5 years.
38. In relation to Alternative 3, ASIC agreed that the applicant satisfied the first two requirements – i.e. in relation to relevant university degrees and a relevant short industry course. However, ASIC contended that the applicant did not satisfy the third part of Alternative 3 relating to at least 3 years relevant experience – and also that the applicant’s position overall did not satisfy Alternative 5 in relation to relevant experience.
39. ASIC has adopted the various Statements of Policy referred to above to guide it in the exercise of the statutory discretion conferred upon it. As Davies J said in Skoljarev v. Australian Fisheries Management Authority (1995) 22 AAR 331 at 336, “… the many reasons which make the adoption of a policy a desirable, indeed a necessary feature, in administrative decision making” were enunciated by Brennan J, in his capacity as President of this Tribunal, in Re Drake and Minister for Immigration and Ethnic Affairs (No.2) (1979) 2 ALD 634. Davies J also observed (at 337):
“… it should no longer be necessary for a decision maker to indicate at any length the considerations which support the application of a policy. Rules and standards are important, both as a means of giving effect to lawful policy which a Government or an authority has determined and wishes to be implemented and as a means of ensuring that decisions, because they have been taken by reference to rules or stated standards, are fair, consistent and not arbitrary”.
In the absence of reason to believe that the Policy Statements promulgated by ASIC were not consistent with the Act, this Tribunal should apply similar policy considerations to those advanced by ASIC.
40. When looking at the five alternatives set out in Part E of PS 164, it seems clear that they represent an attempt to strike an appropriate balance between the knowledge and skills that can be gained by a person from academic study and those that can be gained by working in relevant and comparable areas of employment. Indeed, in its written submissions after the hearing, ASIC stated (submissions of 18 November 2004 at [47]) that Alternative 5 was
“… inserted into PS 164 to provide an experience test of organisational competency as opposed to a test based on academic qualifications as required under the other three alternatives that existed at the time. The policy reasons for including Alternative 5 were to allow applicants who had extensive relevant experience in the particular area for which their licence was sought, but lacked the necessary formal academic qualifications required to satisfy the other alternatives, to avail themselves of a specific authorisation. To reflect the value that ASIC attributes to formal qualifications when assessing an applicant’s organisational competence, the threshold period of experience required in lieu of a formal qualification was set to ‘10 years (or thereabouts)’. This has been interpreted by ASIC as requiring ten years of continuous relevant experience, and the phrase ‘or thereabouts’ as importing a small discretion to consider applicants with slightly less than an enduring 10 years of experience”.
41. The above comment indicates that regard must always be had to both academic qualifications and work experience. The comment also indicates that ASIC places considerable value on formal qualifications – as evidenced by the fact that under Alternative 3 a person with a university degree at undergraduate level and a relevant short industry course need have only 3 years relevant experience in the immediate past 5 years – whereas under Alternative 5 a person without formal qualifications must have 10 years experience.
42. It is relevant and important to note at this point that the alternatives set out in PS 164 are not the only ways in which an applicant can demonstrate organisational competency. As noted at para. 19 above, ASIC states in PS 164.73A(b) that Part E sets out only some of the alternatives open to an applicant and that it is possible to demonstrate organisational competencies even if one of those alternatives is not adopted. PS 164.84 refers to the five alternatives as being “the most common” ways of demonstrating organisational competence, clearly leaving open the possibility that a person who does not satisfy one of them may still be able to demonstrate the required competence.
43. Those statements by ASIC indicate that it is not appropriate for a decision maker (whether within ASIC or this Tribunal) to consider an applicant’s organisational competency only in terms of the five alternatives. One must always look at the position of the applicant overall and in the light of the “nature, scale and complexity” of the business and its needs if it is to meet the obligations of a licensee. An applicant who is unable to bring him/herself within the bounds of one of the “most common” ways of demonstrating organisational competence may, nevertheless, have a sufficient mix of knowledge and skills to satisfy the requirements.
44. In the present case it is not in dispute that the applicant has well in excess of the minimum academic qualifications that would enable a person such as the applicant to satisfy the requirements of Alternative 3. He has two undergraduate degrees, a graduate diploma and a masters’ degree, as well as having completed a relevant industry short course. All of his academic qualifications are relevant to his past, present and future activities as an adviser or dealer.
45. The question that must then be addressed is whether the applicant has sufficient relevant work experience to complement the formal qualifications such that it can be said that he has sufficient organisational competency to meet the needs of a business of the nature, scale and complexity of that which he plans.
46. As noted at para. 36 above, the applicant contends that by February 2004 he had well in excess of three years experience of dealing in both derivatives and foreign exchange, but that it was not continuous experience. ASIC contends that:
(a)the applicant’s experience at Fay Richwhite should be ignored (or given very little weight) because very little of it involved retail clients and it ceased 12 years ago (and therefore outside the scope of Alternative 5);
(b)his experience at Standard & Poors did not involve a dealing function on behalf of wholesale or retail clients – he dealt only on personal account;
(c)the MTS experience did not involve dealing for wholesale or retail clients, didn’t include foreign exchange transactions, and only involved dealing for his employer;
(d)dealing on personal account should not be considered relevant experience because such activities are not “dealing” for the purposes of the Act (in the sense of requiring a licence to carry out such activities);
(e)licensed dealers must have “back office/compliance” procedures – whereas the applicant has no experience in providing services such as opening accounts, dealing with discretionary accounts, reconciling client accounts, dealing with client money, or monitoring risk on behalf of clients;
(f)the applicant’s experience with CFDs is limited to operating a personal account with CMC since November 2003 and he wants to deal on behalf of clients with other online dealers with whom he has not previously operated accounts and is not experienced with their facilities;
(g)the applicant’s last experience of dealing foreign exchange for retail clients was at Fay Richwhite in 1991–92.
47. In my opinion it is fair to say that the work done by the applicant in his various periods of employment and periods of dealing on his own account has not been exactly the same as the activities he wishes to undertake on behalf of clients if the licence he seeks were to be granted. However, it is equally fair to say (and I so find) that over a period of approximately 14 years the applicant has worked in a number of positions domestically and internationally, and has traded on his own account, in a way and to an extent that this has given him a very practical knowledge of the nature and trading features of the markets and products of interest to him. He has, in addition, been authorised to give advice about these matters since 2002.
48. All the applicant’s work experience is, in my opinion, relevant to the work he wishes to undertake as a dealer in the sense that it has given him a depth of knowledge of markets and products as well as trading routines and practices. That work experience may not meet the requirements of the various alternatives in PS 164 because of the break in continuity, but it is no less relevant experience because of that. The question remains, however, whether that experience, together with the appicant’s tertiary qualifications – which are relevant and well-beyond anything that the five alternatives contemplate – are sufficient to enable the applicant to discharge his duties to a business of the nature, scale and complexity contemplated.
49. On the evidence before me that business appears to be relatively uncomplicated and of a small scale. The applicant would provide an additional service to clients to whom he already gives advice about trading in particular products on particular platforms. He would be a sole trader with no representatives to supervise and he plans to deal only as an agent on behalf of clients, and then only with the specific, prior consent of the client – which means that no issues arise about the management of discretionary accounts. This trading would be done on accounts previously put in place by the client with a third party product provider (which is, in turn, the holder of an Australian Financial Services Licence via online trading platforms, and the applicant’s ability to trade on behalf of his clients will be subject to the normal operating rules of the platform provider. The trading would occur in circumstances where the client would at all times be in a principal relationship with the platform provider and would be advised directly and immediately of all transactions undertaken by the applicant on behalf of the client. No client funds would be handled by the applicant. Such a business involves, in essence, taking a logical step further the advice that the applicant has been authorised to give for several years.
50. It is not necessary, as the Guide makes clear, that the applicant must have himself provided such a service in the past. I am satisfied that the applicant has, by virtue of holding a licence (albeit one that authorises different activities) for over three years, an understanding of the obligations of a licensee and the compliance arrangements that must be in place. At the hearing attention was paid to the changing nature of the application that was made to ASIC on behalf of the applicant and the seeking of authority to issue financial products - when the applicant said, and I accept, that it was never his intention to do so. ASIC maintained that this was an indication that the applicant did not sufficiently understand the provisions of the Act and that he would not, therefore, be able to meet all his obligations as a licensee. I do not accept that to be so and I am satisfied, from the evidence of Ms Stewart, that any lack of precision in the terms and scope of the application was a result of a misunderstanding on Ms Stewart’s part about what she understood to be ASIC’s view about the issuing of financial products. Bearing in mind that the applicant is a qualified accountant and presently, and intends to continue to, outsource a number of functions that are necessary to provide the services and carry out supervisory arrangements, I am satisfied that the applicant’s qualifications and experience do give him a suitable and sufficient understanding of how the service he proposes, in relation to each of the products involved, is provided. I am satisfied that the applicant would be in a position to satisfy the organisational competency obligations imposed on him by s 912A(1)(d) and (e) for a business of the nature, scale and complexity contemplated.
51. Accordingly, my decision is that, pursuant to s 43 of the AAT Act:
(a)the part of the decision made on 2 March 2004 by a delegate of ASIC by which the applicant was refused authorisation to deal in financial products, namely derivatives and foreign exchange contracts, on behalf of wholesale and retail clients is set aside;
(b)the matter is remitted to ASIC for reconsideration in accordance with a direction that the applicant satisfies the organisational competency requirements of section 912A(1) of the Corporations Act 2001 in respect of dealing in the financial products derivatives and foreign exchange contracts on behalf of wholesale and retail clients, where the dealing is limited to dealing as an agent of the client:
(i) with the client’s prior approval;
(ii)only in derivatives or foreign exchange contract products offered via an internet on-line trading service similar to the type operated by CMC Group Asia Pacific Pty Ltd where the operator of such a service holds an Australian Financial Services Licence authorising the provision of such a service; and
(iii)in accordance with such other terms and conditions as ASIC may reasonably impose in relation to the conduct of such dealing.
I certify that the 51 preceding paragraphs are a true copy of the reasons for the decision herein of Mr M J Allen, Member
Signed: ....................(sgd N Wee)........................
AssociateDate of Hearing 29 September 2004
Date of Decision 15 April 2005
Counsel for the Applicant Ms Jacqui Stewart
Counsel for the Respondent Mr James Rowe
Solicitor for the Respondent Australian Securities & Investments Commission
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