Rainbow Legend Group Pty Ltd and Australian Securities and Investments Commission

[2016] AATA 665

Rainbow Legend Group Pty Ltd and Australian Securities and Investments Commission [2016] AATA 665 (31 August 2016)

Division	Taxation & Commercial Division
File Number(s)	2015/2634
Re	Rainbow Legend Group Pty Ltd
APPLICANT
And	Australian Securities and Investments Commission
RESPONDENT

DECISION

Tribunal	Deputy President S E Frost
Date	31 August 2016
Place	Sydney

The decision under review is set aside and substituted with the following decision:

(a)the applicant’s Australian Financial Services Licence is suspended pursuant to s 915C of the Act for a period of nine months from the date of this decision;

(b)ASIC may lift the suspension before the nine month period has elapsed if the applicant is able to establish to ASIC’s reasonable satisfaction that:

(i)the applicant has engaged a compliance officer, based in Australia, with sufficient experience and skill to ensure the applicant’s activities are conducted in accordance with its obligations under s 912A of the Act; and

(ii)the applicant complies with, or is capable within a reasonable time of complying with, ASIC Class Order [CO 12/752]; and

(c)if the applicant fails within nine months to establish to ASIC’s reasonable satisfaction the matters in subparagraphs (b)(i) and (ii), the applicant’s licence shall be cancelled.

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

Deputy President S E Frost

Catchwords

CORPORATIONS – Financial Services and Markets – Australian Financial Services Licence – Cancellation – Whether applicant breached obligations of financial service licensee – Decision set aside – Decision in substitution that licence suspended subject to conditions

Legislation

Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12DB

Corporations Act 2001 (Cth), ss 761A, 912A, 913B, 915C(1), 989B(2)-(3), 989D, 1041E, 1274(11), 1317B

Cases

Sovereign Capital Limited and Australian Securities and Investments Commission [2008] AATA 901

REASONS FOR DECISION

Deputy President S E Frost

31 August 2016

INTRODUCTION

1. In April 2015 a delegate of the respondent, ASIC, decided to cancel the applicant’s Australian Financial Services Licence (AFSL).  That decision was based on findings of ‘serious misconduct’ by the applicant, and the delegate’s concerns regarding the applicant’s understanding of the importance of compliance with the relevant legislation and the conditions of the AFSL.

2. The applicant disagrees with the delegate’s decision and has asked the Tribunal to review it.

3. I have decided to set aside the decision under review and substitute a decision to suspend the applicant’s licence subject to conditions.  My reasons for that conclusion follow.

THE LICENCE AND THE RELEVANT LEGISLATION

1. AFSLs are issued under s 913B of the Corporations Act 2001 (the Act).  The licence issued to the applicant[1] permitted it to carry on a financial services business to:

   (a)provide general financial product advice for derivatives and foreign exchange contracts;

   (b)deal in derivatives and foreign exchange contracts; and

   (c)make a market for derivatives and foreign exchange contracts;

to retail and wholesale clients.

[1] T4-47; T5-66

1. Several conditions were attached to the licence issued to the applicant[2]. Section 912A of the Act requires the licensee, among other things, to comply with the conditions on the licence.

   [2] T5-67 to T5-84

2. Where a licensee fails to comply with its obligations under s 912A, or where ASIC has reason to believe that a licensee is likely to contravene its obligations under that section, ASIC may suspend or cancel the licence under s 915C, but only after giving the licensee the opportunity to appear at a private hearing before ASIC and to make submissions to ASIC.

3. After complying with those procedural requirements, ASIC decided through its delegate to cancel the applicant’s AFSL. A decision of that kind is reviewable by the Tribunal on application by the licensee: s 1317B of the Act.

BACKGROUND

1. The AFSL was first issued to the applicant, under its previous name Intercapital Markets Co Pty Ltd, on 19 December 2012.  The licence was reissued on 27 February 2013 to reflect the change of name to Rainbow Legend Group Pty Ltd.

2. Licensees must prepare and lodge with ASIC their annual profit and loss statement and balance sheet (financial statements), together with an auditor’s report, for each financial year that ends after the AFSL was first issued.  In the applicant’s case, the financial statements and reports are required to be lodged by 31 October every year.

3. By February 2014 the applicant had not lodged its financial statements and auditor’s report for the 2013 financial year, the first year for which they were required in relation to its licence.  Accordingly, on 6 February 2014 ASIC sent a letter to the applicant notifying it that its financial statements and auditor’s report were outstanding.  The letter included the following instruction:

   Please take immediate action to prepare and lodge your AFS licensee financial statements and auditor’s report for the 2013 financial year …

   …

   We are giving you this opportunity to rectify the default before taking any further compliance action …

4. On 23 April 2014, in light of the applicant’s continuing failure to lodge the financial statements and auditor’s report, ASIC wrote to the applicant again, this time enclosing a Notice under s 1274(11) of the Act formally requiring the applicant to lodge the required information within 14 days of receipt of the Notice.

5. Twelve days later, on 5 May 2014, the applicant wrote to ASIC, noting that the accountant and auditor were both currently overseas.  The applicant requested an extension of time to lodge the financial statements and auditor’s report.

6. ASIC replied to that letter on 8 May 2014, noting that as the time required for lodgement had passed, it was unable to grant an extension; nevertheless, it would delay compliance action until 23 May 2014.

7. Over nine months later, on 24 February 2015, and since not only the financial statements and auditor’s report for 2013, but also those for the 2014 financial year, remained outstanding, ASIC issued to the applicant a notice of hearing under s 915C of the Act. The notice made reference to ASIC’s concern that the applicant had not complied with its obligations under s 912A of the Act and that ASIC may have reason to believe that the applicant was likely to contravene its obligations under s 912A of the Act. The specific concerns identified by ASIC were that:

   (a)the applicant had not complied with condition 16 of its licence and ss 989B(2), (3) and 989D of the Act in failing to lodge the financial statements and auditor’s reports for the financial years 2013 and 2014; and

   (b)the applicant had contravened or been involved in a contravention of s 1041E of the Act and ss 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (ASIC Act) in reproducing the ASIC logo on its Chinese website; making statements on its Chinese and English websites suggesting that its clients would be protected by a compensation scheme that does not exist in Australia; and making statements on its websites suggesting that it had ‘perfect’ internal risk control or risk management measures.

8. On 16 March 2015 ASIC sent a letter to the applicant noting that Mr David Calver, one of the directors of the applicant, had advised ASIC that he was attending to the outstanding issues and lodgements raised in ASIC’s notice dated 24 February 2015 and that Mr Calver would be attending the ASIC hearing, which was scheduled for 15 April 2015.

9. When Mr Calver attended ASIC’s offices for the hearing on 15 April 2015, he handed over the financial statements and auditor’s reports for both 2013 and 2014. 

10. At the commencement of the hearing on 15 April 2015 the ASIC delegate also provided to Mr Calver information about some additional websites of the applicant which were making claims of the same kind as those mentioned in [14](b) of these reasons.  Those additional websites were not mentioned further in the ASIC hearing; Mr Calver was given a period of time to provide information and make submissions in relation to those additional claims.

11. On 22 April 2015 the applicant provided its submissions in relation to the matters raised by ASIC on 15 April 2015 concerning the additional website claims.

12. On 30 April 2015 the delegate decided to cancel the applicant’s AFSL.  Apart from the late lodgement and website issues, the delegate’s reasons (as corrected on 5 May 2015 – T2) refer to concerns that the issues identified by ASIC were attended to only when the applicant was served, on 24 February 2015, with the notice of hearing.  The reasons state at [38]:

    … It does not behove a compliance mentality if compliance is not internally driven, but rather only achieved when the regulator comes knocking. …

THE LATE LODGEMENT OF THE FINANCIAL STATEMENTS AND AUDITOR’S REPORTS

1. The external accountant for the applicant, Mr Brian Jones (who was also a director of the applicant from 7 June 2012 to 20 August 2013), takes responsibility for the late lodgement of the financial statements and auditor’s reports for the 2013 and 2014 years.  He explains in his witness statement (Exhibit A5) that he mistakenly believed that the applicant was entitled to delay the lodgement of the statements and report for 2013, to the date for lodgement of the statements and report for the following year.  In other words, he thought the relevant material for both years could be lodged, in compliance with the statutory requirements, by 31 October 2014. 

2. Mr Jones does not recall having seen, at the time, the letter from ASIC dated 6 February 2014 (see [10] of these reasons) but he does recall that Mr Calver showed him the letter from ASIC dated 23 April 2014 ([11] of these reasons).  He also recalls that Mr Calver instructed him to make sure that the material was lodged with ASIC as soon as possible.  In his witness statement he says that he was ‘not overly concerned about the notice received from ASIC’, and the reason for that particular state of mind was his belief that lodgement by 31 October 2014 would still have seen the applicant compliant with the statutory requirements. 

3. Even so, other personal and professional obligations in late 2014 ‘consumed a lot of [his] time and energy, and distracted [him]’, so that the applicant’s file was not provided to the auditor until around December 2014.  The audit commenced in about February of the following year.  The upshot of this somewhat languid approach to compliance with the applicant’s obligations is that the statements and reports were not provided to ASIC until the morning of the ASIC hearing – 15 April 2015.  That means the 2013 material was almost 18 months late, and the 2014 material almost six months late.

THE ALLEGEDLY MISLEADING MATERIAL ON THE WEBSITES

1. There are five websites that are, or appear to be, associated with the applicant.  They are:

   (a) (the first Chinese website);

   (b) (the first English website);

   (c) (the second Chinese website);

   (d) (the second English website); and

   (e) (the third Chinese website).

2. The second English website is the official website of the applicant, and the one that has been registered with ASIC. 

3. ASIC initially had concerns with respect to the first Chinese website and the first English website.  The concerns, notified to the applicant in the annexure (Attachment “A”) to the Notice dated 24 February 2015, were that:

• the Australian Coat of Arms and the ASIC logo appeared on the first Chinese website;

• the statement ‘Insurance compensation up to $2,500,000 under the Financial Service Compensation Scheme’ appeared on both websites – even though such a scheme does not exist in Australia; and

• the statement ‘perfect internal risk control measures’ appeared on the first English website and a statement to the same effect (in Chinese) appeared on the first Chinese website.

1. By 15 April 2015 ASIC had become aware of the existence of the second Chinese website and the second English website, and notified the applicant in writing (Attachment “C”) that it had the following concerns:

• the Australian Coat of Arms and the ASIC logo appeared on the second Chinese website;

• the statement ‘Insurance compensation up to $2,500,000 under the Financial Service Compensation Scheme’ appeared on the second Chinese website.

1. ASIC had no concerns about the content of the second English website.

2. Mr Paul Suen, the Shanghai-based director of the applicant, explained in his first witness statement (Exhibit A1, at [49]) that he had asked the applicant’s IT consultant (Lam Chi Chung, known as Alfred), some time around 2013, to register a website for Rainbow Legend, rainbowlegendgroup.com, and to ‘find and buy a number of domain names similar to the name Rainbow Legend Group in case we want to use these in the future’.  In response to that request, Alfred registered the five domain names listed in [23] of these reasons.  The second English website was the one registered with ASIC. 

3. Mr Suen explained under cross-examination (Transcript page 53) that he thought it was 2015 when Alfred told him about having registered the three Chinese websites.  But Mr Suen stressed that these websites were not the official Rainbow Legend website (Exhibit A1, at [56]).  Alfred told Mr Suen he was using these other websites to ‘make these websites more attractive and to practise my marketing’.  Cross-examination of Mr Suen clarified for me that he felt Alfred was finessing the ‘look and feel’ of the alternative websites so that eventually the official website could be made more attractive.  I accept that Alfred was not using the websites for active marketing of the applicant to potential clients.  Indeed, Mr Suen confirmed (Exhibit A1, at [53]) that the applicant had obtained all its clients through seminars, not through website channels.  Nevertheless, it is unfortunate that the additional websites were available for the public to stumble upon, rather than kept ‘offline’ for experimental and development purposes.  ASIC was right to be concerned that websites containing misleading material (even if not the ‘official’ website of the applicant) were capable of being accessed by the public, who may well have assumed they were looking at the applicant’s official website. 

THE LACK OF A COMPLIANCE MENTALITY?

1. Although the broad concept of a ‘lack of a compliance mentality’ was not raised by ASIC in either Attachment “A” or Attachment “C”, the applicant addressed ASIC’s concerns in its evidence.

2. Hugo Valdivia is the applicant’s compliance manager.  He was appointed to that position by Mr Suen in March or April 2013.  Prior to his appointment he had some experience in risk management, and also as a compliance manager in the USA.

3. Mr Valdivia explained in his witness statement (Exhibit A3):

   I reviewed the AFSL after I commenced employment with Rainbow Legend.  So far as I knew, the AFSL was the only such licence that Rainbow Legend held.

   I undertook research to acquaint myself with the ASIC requirements for the AFSL.  I found that the Australian rules and regulations were not much different to the rules and regulations in the United States of America but there were differences.  I recall I had discussions with Paul Suen about the requirements for the AFSL.  While I do not recall all of those conversations I do recall a conversation to the following effect:

   Me:“We need to make sure that Rainbow Legend follows the ASIC rules and regulations.  I need to do some more reading of the Australian regulations and get familiar with the requirements.”

   Paul:“Okay.”

   When I commenced work at Rainbow Legend, I saw there was a compliance manual.  I began reviewing the compliance manual and I thought it was incomplete.  I started working on updating the compliance manual.  I realised that it would have taken too long to update as the original compliance manual was complicated.  In or about February 2015, I became aware from my internet research that there were a number of businesses in Australia that sell completed compliance manuals for businesses such as Rainbow Legend.  I thought it would be more efficient to buy a completed compliance manual than continue to update and amend the existing manual.  In or about April 2015, I contacted one of these companies in Australia, HM Law Pty Limited, and purchased a template compliance manual from this company.  I completed the details to finalise the compliance manual for Rainbow Legend in around April 2015.

4. It emerged in cross-examination of Mr Valdivia that he also purchased some other template documents from HM Law, including a 138-page Procedures Manual (Exhibit R3, Tab 9).  The Procedures Manual indicates at page 78 that Compliance Committee meetings should generally be held quarterly, and at pages 78-80 includes a template Compliance Committee Meeting Agenda.  Mr Valdivia used that agenda to create Compliance Committee Meeting minutes as a record of meetings that are recorded as having taken place on 12 September 2013, 10 December 2013, 12 March 2014 and 10 June 2014 (Exhibit R3, Tab 13).  While Compliance Committee meetings may well have taken place on those dates, the minutes were not created until after Mr Valdivia received the template Procedures Manual from HM Law in around April 2015, as he conceded at Transcript page 77.

5. The same occurred with the applicant’s Conflicts of Interest Register.  There was a very rudimentary register created initially – a copy of the blank form appears within Annexure A to Mr Valdivia’s second witness statement (Exhibit A4).  It seems that the form was never populated with any information, and that may be unobjectionable if, as seems to be the case, no conflicts were ever identified.  But later, after Mr Valdivia received the documents from HM Law, he created conflicts registers that indicate that they were ‘last updated’ on those same specified dates in 2013 and 2014 (Exhibit R4, pages 118-125).  Plainly, they were not.

THE POWER TO CANCEL LICENCES

1. Section 915C(1) of the Act gives ASIC the power to suspend or cancel an AFSL in either of the following cases (among others):

• the licensee has not complied with its obligations under s 912A of the Act – paragraph (a) of s 915C(1);

• ASIC has reason to believe that the licensee is likely to contravene its obligations under s 912A – paragraph (aa) of s 915C(1).

1. The applicant in this case concedes that the power to cancel the AFSL has been enlivened. Nevertheless it submits that it has taken remedial action, such that it is now unlikely to contravene its obligations under s 912A of the Act. That renders the correct or preferable decision, in its submission, either simply to set aside the cancellation decision or, alternatively, to set aside the decision and substitute a decision to suspend the licence until certain specified conditions are complied with.

CONSIDERATION

1. It is clear that the power to cancel or suspend the AFSL has been enlivened because the applicant has not complied with its obligations under s 912A of the Act. Specifically:

• The applicant has failed to comply with s 912A(1)(b) (comply with the conditions on the licence) by failing to lodge on time, in accordance with condition 16, the financial statements and auditor’s reports for 2013 and 2014;

• The applicant has failed to comply with s 912A(1)(c) (comply with the financial services laws) by causing the registration of multiple websites which contained false or misleading statements in relation to the applicant, in breach of s 1041E of the Act and ss 12DA and 12DB of the ASIC Act (each of which provisions is a ‘financial services law’ – see s 761A of the Act).

1. Of course, that does not mean that the power must be exercised.

1. In Re Sovereign Capital Limited and Australian Securities and Investments Commission [2008] AATA 901 the Tribunal said:

   [81]The power to suspend or cancel a licence like the one in question here must be exercised having regard to the purposes of the regulatory regime. The purposes of the regime can be gleaned from the [Corporations] Act and from the ASIC Act.

   [82]Section 760A of the Act says Ch 7 is intended to promote:

   (a)   confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

   (b)   fairness, honesty and professionalism by those who provide financial services; and

   (c)   fair, orderly and transparent markets for financial products; and

   (d)   the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

   [83]Section 1 of the ASIC Act identifies a series of objects for ASIC. Some of those objects are relevant to this discussion given the Tribunal steps into ASIC’s shoes when making its decision. In particular, s 1(2) provides ASIC must seek to:

   (c)   maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and[3]

   (b)   promote the confident and informed participation of investors and consumers in the financial system; ...

   [84]A licence should only be suspended or cancelled if it is necessary to do so in order to accomplish the objects of the legislative scheme. A suspension will ordinarily be preferable if there is a reasonable prospect that the licence-holder can remedy the defects which prompted the concern. If there is no reasonable prospect of the issues being resolved, cancellation may be the appropriate course. The power to suspend or cancel should not be used merely to punish the licence-holder for transgressions: see Story v National Companies and Securities Commission (1988) 13 NSWLR 661.

   [3] Correct reference is Australian Securities and Investments Commission Act 2001 (Cth), s 1(2)(a)

2. With respect, I agree with those observations.

3. The shortcomings in the applicant’s behaviour in this case do not indicate any dishonesty.  Nor is it the case that any client or potential client of the applicant has suffered any financial or other detriment.  Nevertheless, the applicant has fallen short of the standards that are rightly expected of entities holding an AFSL.

4. The late lodgement of the financial statements and auditor’s reports can be attributed to three factors – first, Mr Jones’ ignorance of the legislative requirements; secondly, his failure to heed the information contained in the Notice dated 23 April 2014 from ASIC and to respond in a meaningful way to the requirement to lodge the documents; and thirdly, Mr Calver’s failure to monitor what Mr Jones was doing.

5. The rogue (albeit unofficial) websites created the opportunity for clients and potential clients to be misled about aspects of the applicant’s business, including the level of risk that individuals may be exposed to by dealing with the applicant.  Those irregularities arose because Mr Suen did not properly supervise, or require any feedback on, Alfred’s website activity.

6. The overall impression is one of sloppiness, of insufficient knowledge of and inattention to proper process.  The applicant notes that the business was in the start-up phase, with only a dozen clients, but even so, it is more by luck than good management that no client or potential client was disadvantaged

7. Mr Valdivia’s retrospective creation of Compliance Committee meeting minutes and conflict registers, to give the appearance that they came into existence on earlier dates, demonstrates how ill-suited he is to the role of compliance manager.  And I am not satisfied that the content of the template documents provided by HM Law has ever really been embraced by the applicant’s officers.  Indeed, I suspect that creating the documents was seen as the end-game, and there was little or no focus on continuing awareness of and active compliance with the content.

8. Nevertheless, in all the circumstances, I do not consider cancellation of the AFSL necessary.  But nor do I think the cancellation decision should simply be set aside so that the applicant can resume its business without some sort of reminder of the importance of compliance with the law.  While I consider it unlikely that the late lodgement of financial statements and auditor’s reports will be repeated, the applicant’s general approach to compliance needs to improve.

DECISION

1. I therefore consider the appropriate course is to set aside the cancellation decision and to substitute the following decision:

   (a)The applicant’s Australian Financial Services Licence is suspended pursuant to s 915C of the Act for a period of nine months from the date of this decision;

   (b)ASIC may lift the suspension before the nine month period has elapsed if the applicant is able to establish to ASIC’s reasonable satisfaction that:

   (i)the applicant has engaged a compliance officer, based in Australia, with sufficient experience and skill to ensure the applicant’s activities are conducted in accordance with its obligations under s 912A of the Act; and

   (ii)the applicant complies with, or is capable within a reasonable time of complying with, ASIC Class Order [CO 12/752]; and

   (c)if the applicant fails within nine months to establish to ASIC’s reasonable satisfaction the matters in subparagraphs (b)(i) and (ii), the applicant’s licence shall be cancelled.

I certify that the preceding 47 (forty-seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost

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

Associate

Dated 31 August 2016

Dates of hearing	8 & 9 March 2016
Final submissions received	10 March 2016
Counsel for the Applicant	Ms R Francois
Representative for the Applicant	Brown Wright Stein Lawyers
Counsel for the Respondent	Ms V Bosnjak
Solicitors for the Respondent	Australian Securities and Investments Commission