Schroeder and Australian Securities and Investments Commission

[2021] AATA 3519

Schroeder and Australian Securities and Investments Commission [2021] AATA 3519 (30 September 2021)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:          2019/6818

Re:Mark Schroeder

APPLICANT

AndAustralian Securities and Investments Commission

RESPONDENT

DECISION

Tribunal:The Hon Justice D G Thomas, President
Deputy President Bernard J McCabe

Date:30 September 2021

Place:Brisbane

The decision under review is varied such that the applicant is banned from:

·providing any financial services;

·controlling, whether alone or in concert with one or more other entities, an entity that carries on a financial services business; and

·performing any function involved in the carrying on of a financial services business (including as an officer, manager, employer, contractor or in any other capacity).

for a period of six years.

.............................[SGD]..........................................

The Hon Justice D G Thomas, President

CATCHWORDS

CORPORATIONS – banning order – where applicant banned from providing financial services for a period of six years – where scope of Tribunal review changed as a result of legislative amendments – whether applicant should be banned from providing financial services on the basis that he is not a ‘fit and proper person’ – whether other grounds for a banning order in s 920A of the Corporations Act 2001 (Cth) enlivened – decision under review varied.

LEGISLATION

Australian Securities Investments Commission Act 2001 (Cth): ss 19; 33

Corporations Act 2001 (Cth): ss 79; 180; 181; 760A; 761A; 911A; 912A; 912C; 913BA; 913BB; 915B; 915C; 916A; 920A; 920B; 961B; 961G; 961H; 961J; 961L; 1274B

Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Act 2020 (Cth)

Trade Practices Act 1974 (Cth)

CASES

Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181

Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd and Ors (No 2) [2005] NSWSC 267

Emwest Products Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2002] FCA 61; (2002) 117 FCR 588

Hughes and Vale Pty Ltd v New South Wales (No 2) (1955) 93 CLR 127

Schroeder and Australian Securities and Investments Commission [2020] AATA 2453

Yorke v Lucas (1985) 158 CLR 661

SECONDARY MATERIALS

Australian Securities and Investments Commission, Regulatory Guide RG105 – Licensing: Organisational Competence

Australian Securities and Investments Commission, Regulatory Guide RG98 – ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders

REASONS FOR DECISION

The Hon Justice D G Thomas, President
Deputy President Bernard J McCabe

30 September 2021

Introduction

1. Mark Schroeder, the applicant in these proceedings, was a director of a company called Spectrum Wealth Advisers Pty Ltd. Spectrum conducted a financial planning business. Mr Schroeder was variously (if not consistently) described as the ‘chief executive’ and ‘managing director’ of Spectrum. He was also a responsible manager, and was listed as a key person on the organisation’s Australian Financial Services Licence (AFSL). The Australian Securities and Investments Commission (ASIC) commenced regulatory action against Spectrum after it became aware of irregularities that occurred in 2016‑2018. The action against Spectrum petered out after the company surrendered its AFSL and was wound up. With Spectrum gone from the scene, Mr Schroeder’s actions became the focus.  After a hearing, a delegate decided to ban Mr Schroeder from providing financial services for a period of six years. The banning decision took effect on 21 October 2019.

2. The reviewable decision was made having regard to the law in force at the time. The delegate was satisfied a number of grounds in s 920A(1) of the Corporations Act 2001 (Cth) were made out although she declined to find she had reason to believe Mr Schroeder was not a person of ‘good fame and character’ – the ground referred to in s 920A(1)(d) of the Corporations Act.

3. The case against Mr Schroeder evolved somewhat after the commencement of the Tribunal’s review. The evolution was driven by changes in the law – in particular, by an amendment to the ground referred to in s 920A(1)(d) of the Corporations Act. Whereas that ground referred to ‘good fame and character’ at the time the reviewable decision was made, the amendment required us to focus on whether there was reason to believe Mr Schroeder was a ‘fit and proper person’. As a consequence, a good deal of the evidence at the hearing was directed to a question that was different from the one before the delegate.

4. At the core of Mr Schroeder’s case was the argument that (a) ASIC had failed to adequately identify the specific misdeeds at Spectrum, and (b) to the extent there were any misdeeds, he was not in a position to know or affect what had occurred because of the reality of his position in the company. In those circumstances, we were told, Mr Schroeder should not be held responsible for the behaviour of others. Indeed, Mr Schroeder said it was distinctly unfair that he was being targeted by ASIC while those more centrally involved in what occurred have escaped further attention.

5. As we shall explain, the evidence before us established Mr Schroeder did not discharge his duties as a director, responsible manager and key person. The evidence also established Mr Schroeder, at a minimum, acquiesced in misrepresentations made to ASIC about important matters, or failed to correct them when he became aware of them. At the hearing, Mr Schroeder’s explanations of the shortcomings in his performance ultimately made his situation worse: he said he did not alert the regulator about irregularities or resign from these important roles because he felt powerless – and because he dare not speak up or resign from his position and so be denied an opportunity to take over the ownership of Spectrum.

6. We have concluded there is reason to believe Mr Schroeder is not a fit and proper person to carry out the various functions referred to in s 920A(1)(d) of the Corporations Act. We also concluded there is reason to believe he was involved in contraventions by others at Spectrum – the ground referred to in s 920A(1)(g). But we are satisfied other grounds in s 920A(1) are made out which, on their own, justify regulatory action against Mr Schroeder. In particular, we are satisfied in light of our findings about his unsatisfactory performance as an officer, responsible manger and key person that there is reason to believe Mr Schroeder:

   ·is not competent to provide financial services or perform functions as an officer of a financial services business (the ground referred to in s 920A(1)(da), which was of a more broad effect following recent amendments); and

   ·is likely to contravene a financial services law (the ground referred to in s 920A(1)(f)) or be involved in a contravention by another person (the ground referred to in s 920A(1)(h)).

7. We will begin our discussion with a brief reference to an interlocutory decision we made in the wake of amendments to the Corporations Act. Our interlocutory decision explains why we apply the amended provisions of the Corporations Act in the course of our review. We then proceed to review Mr Schroeder’s history and performance before we discuss the legislative provisions in more detail. With that background, we go on to explore what went wrong at Spectrum. We will explain we are satisfied the discretion to make banning orders under ss 920A and 920B of the Corporations Act has been enlivened. We then explain our conclusion that Mr Schroeder should be subject to banning orders, and describe the form and duration of the orders.

   The applicable law

8. The delegate’s banning decision was made before the Corporations Act was amended by the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Act 2020 (Cth) (FSR Act). A question arose at the outset of these proceedings as to which law should be applied in the course of our review. While the Tribunal usually applies the law in force at the time of the reviewable decision, we concluded in Schroeder and Australian Securities and Investments Commission [2020] AATA 2453 that the transitional provisions inserted by the FSR Act had the effect of requiring us to apply the law as amended in the course of our review.

9. The relevant amendments included changes to sub-sections 920A(1)(d) and (da) of the Corporations Act which provide relevantly:

   ASIC may, in writing, make one or more orders (banning orders) against a person if: may make a banning order against a person, by giving written notice to the person, if:

   …

   (d)ASIC has reason to believe that the person is not a fit and proper person to: of good fame and character;

   (i)    provide one or more financial services; or

   (ii)  perform one or more functions as an officer of an entity that carries on a financial services business; or

   (iii)  control an entity that carries on a financial services business;

   or

   (da)ASIC has reason to believe that the person is not adequately trained, or is not competent to:, to provide a financial service or financial services:

   (i)    provide one or more financial services; or

   (ii)  perform one or more functions as an officer of an entity that carries on a financial services business; or

   (iii)  control an entity that carries on a financial services business;

   …

10. The amendment to sub-section 920A(1)(d) is significant because the delegate declined to conclude Mr Schroeder was not a person of good fame and character. The new formulation of s 920A(1)(d) has a different focus. ASIC says it is more demanding from Mr Schroeder’s point of view. On review, ASIC says the amended ground is made out because the facts suggest Mr Schroeder is not a fit and proper person to do the things referred to in that provision. In reaching a view on that ground, we must have regard to the newly inserted s 913BB which sets out a range of matters which must be considered when applying s 920A(1)(d).

11. The amendment to sub-section 920A(1)(da) is also relevant in these proceedings. The pre‑amendment provision focused on Mr Schroeder’s training and competence to provide financial services. Mr Schroeder points out he did not personally provide any financial services while working at Spectrum. The amended provision invites consideration of Mr Schroeder’s training and competence to undertake other activities performed in and around a financial services business.

12. The amending legislation also enlarged the scope and reach of the banning orders that could be made under s 920B.

13. We will discuss the applicable legislation below. Mr Schroeder declined the opportunity to make submissions on the interlocutory issue. The final hearing proceeded having regard to the post-amendment provisions.

    Mr Schroeder’s background, the Spectrum business, and Mr Schroeder’s roles in the organisation

14. Mr Schroeder was formerly an officer in the Australian Defence Force (ADF). He had a lengthy military career and served in a variety of challenging roles in the Royal Australian Air Force (RAAF) and the Royal Australian Navy. He had attained the rank of Squadron Leader in the RAAF when he left the ADF. He had also successfully completed a Master of Business Administration degree at the University of Western Sydney, graduating with distinction: Exhibit 2, supplementary statement of Mark Schroeder dated 28 August 2020, at [15].

15. Mr Schroeder regarded his management and leadership experience in the military as a good grounding for his post-ADF career. In his supplementary statement, he said (at [9]):

    Whilst a Squadron leader with the RAAF, one of my responsibilities was the management of a multi-million dollar aircraft maintenance budget whilst supervising over 1800 ADF personnel. I successfully instigated a large-scale project to restructure and commercialize operations, resulting in significant efficiencies, quality and performance improvements.

16. After leaving the ADF, Mr Schroeder took on roles in the financial services industry. He also undertook some further study that was relevant to his new career. Over the following decade, he held management positions at two of the trading banks. He also took on roles in a range of other financial services firms before he established Schroeder Capital, his own firm, in 2010: supplementary statement at [15]. Schroeder Capital became Spectrum, a boutique financial services firm: Exhibit 1, statement of Mark Schroeder dated 12 March 2020, at [37]. Mr Schroeder has been a director of Spectrum since 2012.

17. Spectrum was in the business of providing financial services – specifically, financial planning advice. Spectrum (and Mr Schroeder) did not provide the financial advice directly to clients. The advice was provided by authorised representatives (advisers) operating under Spectrum’s AFSL. The representatives charged a fee for the advice, and Spectrum would receive a cut of the fee income. Spectrum would also generate marketing and other material that could be used by the representatives to generate more business for themselves, and more revenue for Spectrum: transcript at p 35. Mr Schroeder said the business had good cash flows and was growing at a healthy rate in the early years: statement at [2].

18. On 15 October 2015, Freedom Insurance Group Pty Ltd acquired control of Spectrum and its business. Freedom finalised the acquisition of the company’s shares in January 2016: statement at [2]. Mr Schroeder recalled in his statement that he met with Mr Keith Cohen, a Freedom executive, around the time of the acquisition: statement at [3]. They discussed Mr Schroeder’s ongoing role in the company. While we understand Mr Schroeder had disposed of his shareholding in Spectrum, he was invited to remain as a director. Mr Cohen reportedly said Freedom expected Spectrum’s strong cashflows, sales figures and growth in adviser numbers would assist Freedom in its quest to float on the Australian Securities Exchange (ASX). Mr Schroeder recalled (statement at [4]) Mr Cohen saying:

    “…After the merger, Freedom will take full control over all [Spectrum] operations including sales and compliance[.] Freedom is a big company and [Spectrum] will be given everything it needs to grow in terms of capital and staff resources. Freedom will also supply ‘unlimited’ support from its existing infrastructure, including compliance, admin, marketing and advertising.”

19. Mr Schroeder went on (statement at [5]) to note:

    The discussion then centred around Freedom’s plan to relieve me of the burden of running [Spectrum] so that I could wholly focus on increasing the number of advisers and boosting sales. I recall it being said to me during the meeting words to the effect: “100% of your time is to be used to build the [Spectrum] adviser numbers and increase the number of sales per adviser. Freedom will take care of everything else in Spectrum. Freedom is a big company with plenty of resources. You are no longer running your own business anymore; you are part of a much bigger enterprise.

    Freedom expects you to focus on building the advisers and increasing their sales.”

20. There was some dispute over the titles Mr Schroeder was permitted to use. He said in his statement that he was instructed not to use the title ‘CEO’: statement at [9]. Yet his contract of employment specifically describes him in those terms. He also used the CEO moniker in his email signature block: transcript at p 78. He even used the title in his correspondence with ASIC: see, for example, Exhibit 8, Tribunal Documents, T78 at p 1800. We also note a prospectus Freedom issued in connection with its initial public offering on the ASX in October 2016 described Mr Schroeder as part of Freedom’s senior management team: see T247 at p 3724. Having said that, we note there is evidence from witnesses called by Mr Schroeder saying he was not known within the company as managing director or CEO: see, for example, the evidence of Mr Peter Colnan. We shall discuss that evidence in more detail below.

    Mr Schroeder as director  

21. Mr Schroeder said in his statement that, from the time Freedom took over, he was a director of Spectrum in name only notwithstanding his seat on the board. He explained (statement at [7]):

    After the acquisition, while I remained listed with ASIC as a director of [Spectrum], in actual and practical terms I was never in a position to control anything that Spectrum did at the board level. This is because I was one of three directors. The other directors were Malcolm McCool and Keith Cohen, both of whom were also directors of Freedom and who were appointed to the Spectrum board shortly after the acquisition. …

22. In his statement, Mr Schroeder referred (statement at [7]) to an ASIC historical search to support his claim he was one of three directors. He added he was frequently in the minority at meetings:

    From that point in time and from my observation, Cohen and McCool always voted together to ensure that any resolutions of the [Spectrum] board conformed to their wishes, regardless of my view.

23. Mr Schroeder said he was outvoted on two or three occasions but as ASIC pointed out in its written submissions, Mr Schroeder was unable to identify an example of where that occurred. This lack of specificity brings into question the reliability of his evidence on this issue.

24. That brings us to an anomaly in Mr Schroeder’s evidence. During cross-examination, he was shown historical ASIC searches which recorded the company’s officeholders and their dates of appointment and resignation in the three-year period following Freedom’s acquisition of Spectrum. Ultimately, after the contents of the searches were drawn to his attention, he conceded there were in fact only two directors of Spectrum – Mr Schroeder and Mr Cohen – between 16 February 2016 to 17 October 2018. Between mid-October 2018 and May 2019, those searches showed Mr Schroeder was the sole director of the company. The searches confirmed Mr McCool was not a director during that period. He was the company secretary.

25. It seems Mr Schroeder was not the only person who was confused about the make-up of the board at the relevant time. We heard evidence from Mr Peter Colnan, a business development manager who worked at Spectrum at the relevant time. He was questioned about his understanding of Mr Schroeder’s role. Mr Colnan said he was under the impression Mr Cohen was the managing director of Spectrum. He also believed Mr McCool was a director although he was unsure how he came to make that assumption. Mr Colnan was also surprised to learn during cross-examination that Mr Schroeder was on the board: transcript at pp 185-186. Mr Colnan said he only learned Mr Schroeder was a responsible manager towards the end of his (Mr Colnan’s) time at Spectrum, and he only learned Mr Schroeder was a key person while he was being cross-examined: transcript at p 193.

26. Mr Colnan’s evidence ultimately does not assist Mr Schroeder. While it is consistent with his account that he was effectively ignored, it does not change the fact of his appointment as a director and his holding other key roles.

27. It is one thing for Mr Colnan to be confused about the make-up of the board and other senior positions. It is surprising, and of concern, that Mr Schroeder would be confused about the composition of the board while he was a director – assuming we accept that is what occurred. He said in cross-examination that he only learned Mr McCool was not a director when he (i.e. Mr Schroeder) was preparing to give evidence at the hearing. Mr Schroeder’s confusion did not end there. Under cross-examination by Ms Patterson, counsel for ASIC, Mr Schroeder insisted Mr McCool had a vote – or at least a casting vote – at board meetings. Mr Schroeder said that casting vote would always be cast against him in the event of a disagreement with Mr Cohen. The following exchange ensued (transcript at p 39):

    Ms Patterson: Was that according to Spectrum’s constitution?

    Mr Schroeder: That is according to what was held out to me by those other board members.

    Ms Patterson: So, they told you that a secretary had a casting vote among the board of directors at Spectrum?

    Mr Schroeder: I disagree.

    Ms Patterson: What did they tell you?

    Mr Schroeder: Malcolm McCool always held himself out to be a director to me.

    Ms Patterson: But did you know he was not a director?

    Mr Schroeder: I did not know until recently.

1. Mr Schroeder continued on in that vein, finally conceding the historical extract that Ms Patterson put to him in cross-examination – the one showing Mr McCool was never a director and that Mr Schroeder was never in a minority of three as he suggested – was the same document he had referred to in his own statement. Mr Schroeder said he did not notice the absence of Mr McCool’s name in the extract when he was completing his statement: transcript at pp 40-41. Mr Schroeder explained Mr McCool had said he was a director, and Mr Schroeder accepted that assertion because he had no reason to disbelieve Mr McCool: transcript at p 41.

2. In written submissions, Mr Martin, counsel for Mr Schroeder, argued ASIC had not definitely established the company search was accurate. Mr Martin pointed out s 1274B of the Corporations Act says the information in the register that was revealed in the search is, at best, prima facie evidence of the underlying facts. In oral submissions, Mr Martin pointed to a diagram describing control arrangements at Spectrum that was reproduced in the annexures to Mr Schroeder’s statement at p 872. The document suggested Mr Cohen was managing director of both Freedom and Spectrum. The diagram also suggested Mr McCool was a director of Spectrum – as was Ms Osborne, Freedom’s Head of Risk Management and Compliance. We note Mr Schroeder did not refer to the document when he gave oral evidence, and he did not suggest Ms Osborne was a director. The document did not seem to support Mr Schroeder’s recollection as was submitted by Mr Martin.

3. We do not need to reach a concluded view about Mr McCool’s status within Spectrum. The evidence Mr Schroeder gave is problematic in any event. His admission that he did not notice the contents of a company search he quoted in his written statement is surprising enough. It suggests a lack of care in his preparation for giving evidence during these proceedings. The fact he was prepared to accept Mr McCool had a casting vote at board meetings over a long period because Mr McCool and Mr Cohen and others within the company claimed Mr McCool was a director also reflects a lack of necessary attentiveness about the formal governance arrangements of the company and about Mr Schroeder’s role and responsibilities as a director. When challenged about his understanding of Mr McCool’s role during cross-examination, Mr Schroeder grasped at the suggestion Mr McCool might have had a casting vote even though he was only the secretary: transcript at p 39. Mr Schroeder could not point to a specific provision in the constitution that would allocate a vote to the secretary if that were in fact the case.

4. Mr Schroeder’s shifting answers to questions in cross-examination about the composition and workings of the board gave the impression he was prepared to rationalise his understanding of Mr McCool’s role on the spot when challenged.[1] Mr Schroeder’s performance in the witness box in relation to this line of questions exhibited a tendency to obfuscate, improvise and tailor his evidence as he gave it. Another illustration of that tendency can be found at p 55 of the transcript. The transcript records Ms Patterson putting a factual proposition to Mr Schroeder. He responded:

   Mr Schroeder: I don’t agree and I don’t recall.

   Ms Patterson: Well it can’t be both, can it, Mr Schroeder?

   Mr Schroeder: Well, I’m not sure. I don’t recall.

   We found Mr Schroeder to be an unreliable witness.

   [1] We note Mr Schroeder said in re-examination that he was under the impression Mr McCool could vote because Mr Cohen had said as much: transcript at p 210.

5. Mr Schroeder also said board meetings of the company were carried on in a casual way. He said he did not know if the meetings were even minuted: transcript at p 208. Mr Schroeder agreed that was not an acceptable way to do business but offered what amounted to a verbal shrug when pressed, saying Freedom’s board ran everything anyway, and that he was effectively powerless. He shifted his position somewhat as his oral evidence unfolded, in what seemed to be another example of tailoring. When he was asked if his evidence suggested he must have known he was effectively participating in a charade, he reluctantly agreed he was “comfortable that the right things were being done” at board meetings: transcript at p 209. That evidence is difficult to reconcile with the thrust of his evidence which depicted him as a put-upon executive with little real power in the face of forces he could neither resist nor control.

6. The passage we quoted from Mr Schroeder’s statement (statement at [5]) in which he recounted the marching orders he received from Mr Cohen suggests he willingly accepted he would act as a subordinate with no interest in managing the business of the company beyond the specific tasks delegated to him. Mr Schroeder provided statements from witnesses who confirmed he had consistently if begrudgingly referred to the narrow scope of his role. They recalled him expressing a sense of frustration and unease. The evidence of Mr Colnan is a good example. Mr Colnan said in his declaration (Exhibit 4: statutory declaration of Peter Colnan dated 10 March 2020) at [12]:

   Mark once told me that he had been asking for additional staff but was gagged by his managers from raising this with the board.

7. Even accepting this evidence accurately states Mr Schroeder’s behaviour and his understanding of how things worked, that is problematic. A director has well-understood obligations to stay informed about the affairs of the company, and the director has powers to demand information where necessary. The specific obligation to stay abreast of the company’s financial affairs is so well-known as to be notorious. Yet Mr Schroeder said in his statement that he was denied access to the company’s books, and that he was not shown the company’s final year accounts. It almost goes without saying that a director placed in that position should resign as a director. But, on Mr Schroeder’s account of his treatment, that is not what he did. To the contrary: he signed the directors’ declarations accompanying the company’s financial statements in the 2017 and 2018 financial years that were lodged with ASIC: Tribunal Documents, T279 and T280. When he was asked in cross-examination to explain the apparent inconsistency between his claims that he was kept in the dark and his willingness to sign the declarations, Mr Schroeder reluctantly conceded he did have a level of familiarity with the company’s finances, and that he had sufficient information to discharge his responsibilities: transcript at pp 90-92, 218.

8. To similar effect, Mr Schroeder was asked about a letter written to KPMG, Spectrum’s auditors, in relation to the 2018 accounts. The letter (Tribunal Documents, T284 at p 4369ff) certified the directors had provided the auditors with all the relevant information they required. The letter also provided information about the company’s accounts and processes. Mr Schroeder acknowledged he read the letter carefully and considered its contents, and he agreed he would have asked for clarification from the company if he was in any doubt about what he was being asked to sign: transcript at pp 135-136. It is difficult to square his answers about the letter (which suggest he was familiar with the company’s finances and had access to the information he required to discharge his duties) with his claim that he was kept in the dark, and that he should be excused from responsibility for events that occurred while he was a director.  

9. ASIC also referred to things Mr Schroeder said during the examination conducted pursuant to s 19 of the Australian Securities Investments Commission Act 2001 (Cth) (ASIC Act) (s 19 examination). He was questioned about the management arrangements at Spectrum. There was some dispute on the evidence before us as to whether the person within the organisation responsible for carrying out audits, Mr Cary Frost, reported to Mr Schroeder or if he reported to Ms Diane Osborne at Freedom. Mr Schroeder denied before us that Mr Frost reported to him: transcript at p 81. Regardless of the formal reporting arrangements, there is evidence from the s 19 examination suggesting Mr Frost and Mr Schroeder worked together to update the Compliance Manual which set out Spectrum’s policies and procedures: Tribunal Documents, T5, s 19 examination transcript at p 236; confirmed in oral evidence at the hearing in these proceedings: transcript at p 51. The Compliance Manual is integral to the operations of an AFSL-holder, which suggests Mr Schroeder was playing a more central role than his oral evidence at the hearing before us might suggest.

10. Mr Schroeder’s answers recorded in the s 19 examination suggested he paid close attention to the provision of financial services by the representatives. Subsequently, at the hearing before the delegate, Mr Schroeder claimed he had regular discussions with Mr Frost and reviewed reports which identified any issues with the representatives. Indeed, Mr Schroeder claimed he spoke with Mr Frost on a daily basis. He said he typically discussed the number of audits being conducted, amongst other things: Tribunal Documents T4, transcript of hearing before ASIC delegate at p 143. Mr Schroeder denied at the hearing before us that he prepared reports to the Freedom board along with Mr Frost about Spectrum’s compliance activities, amongst other things: transcript at p 87. Yet as ASIC pointed out in its submissions, Mr Schroeder had said in answer to a notice issued under s 912C of the Corporations Act that he had prepared the reports in question in conjunction with Mr Frost: see transcript at p 88. Whatever the truth about the extent of Mr Schroeder’s involvement in the monitoring of the representatives and the preparation of reports, his answers to ASIC’s notice imply he did have knowledge of the relevant matters or was prepared to hold himself out as having such knowledge. Again, this casts doubt on the reliability of Mr Schroeder’s evidence generally.

11. Mr Schroeder’s statement in the s 19 examination and before the delegate and the response to the s 912C notice are inconsistent with his claims before us that he was not closely involved with the conduct of all aspects of the business. Even if we accept Mr Schroeder’s account of his role in the business, that is a problem. Mr Schroeder’s account suggests on its face that he did not do his job as a director even though he knew he was being held out to ASIC as a fully-functioning board member and executive. At best, the evidence establishes Mr Schroeder was passive in circumstances when he knew he should have acted. Moreover, there can be no doubt he realised (at least on some occasions) that he should speak up. Mr Martin pointed out in oral submissions that Mr Schroeder considered approaching Spectrum’s auditors to discuss various concerns. Mr Williamson, a senior Freedom executive, insisted Mr Schroeder only approach the auditors through him: annexures to statement at p 771. That was enough to put Mr Schroeder off further approaches.

12. A director who is unwilling or unable to discharge the responsibilities of that office should not remain a member of the board. Mr Schroeder was asked why he did not resign given the constraints under which he claimed he operated, and in light of his evidence that other executives routinely ignored him when he raised matters of concern. His answer was revealing (transcript at p 176):

    Well, that’s a very good question. I mean it was my employment. I had sunk my heart and soul into that business before we got taken over and I did try to buy it back when they had their own issues. So I guess I had a belief that we could [fix it] and a belief in the business.

13. Mr Schroeder went on to insist he summoned the courage to challenge the board over concerns he had in relation to the operation of the Spectrum business once Freedom, the parent company, was the subject of damaging revelations at hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The following exchange ensued (transcript at p 177):

    Deputy President: But the house was well and truly on fire by that point wasn’t it?

    Mr Schroeder: It is for Freedom but not for Spectrum. Spectrum was still running okay other than the fact that you know they were not meeting as many audits as we’d like. And then there was an opportunity to buy it back so I thought well here’s a way I could remediate it, I could fix it myself, you know, we could get the numbers down to a manageable level. We could get the staff we needed. I mean there was plenty of money. I mean I sat down and I watched Freedom put staff on incredibly, like you know dozens of people literally a month would turn up on the Freedom side and were still banging on the door, I’m being told its all under control by management. But anyway as I said, when I got to a point when I was about to go was about the point when I had a chance to buy it back and I thought if I could salvage the business then I could buy it back, so then I stayed on and as it turned out that was probably not a very smart move because everyone else exited and I was left holding the bag as it were. But that was my motivation, the motivation as I tried as I could, I was told it was under control, it wasn’t my problem and then their fortunes changed and I saw a chance to buy it back. Otherwise quite likely I would have gone.

14. None of that does Mr Schroeder any credit. On the most benign view of his evidence, Mr Schroeder allowed himself to be compromised in the performance of his duties as a director. To the extent he was aware of problems emerging in Spectrum’s business – and ASIC insists he was aware – he was reluctant to do anything about them because his economic interests were at stake. And there were problems emerging at Spectrum, as we shall explain below.

    Mr Schroeder as responsible manager

15. Mr Schroeder was also appointed as a responsible manager of Spectrum on 24 January 2017. The responsible manager’s role is derived from the obligation in s 912A(1)(e) to establish and maintain organisational competence to provide the financial services in question. ASIC’s Regulatory Guide RG105 titled Licensing: Organisational Competence fleshes out the concept. RG105 says the focus is on the managers who have “direct responsibility for significant day-to-day decisions about [the supply of] financial services” by the business: RG105 at [105.20]. The organisation is expected to identify those individuals to ASIC. The organisation must also address their roles and responsibilities in internal documentation. It is obviously important that a person nominated to be a responsible manager has the experience and authority required to do the job.

16. There was some controversy about the circumstances in which Mr Schroeder came to be appointed as a responsible manager. In his supplementary statement he said (at [33]) he originally consented to his nomination on the express understanding he was:

    …responsible only for the management of the Spectrum business such as marketing and recruitment in which I was qualified, but not for anything to do with AFSL issues.

17. That understanding does not comport with the role of responsible managers. Mr Schroeder subsequently confirmed in cross-examination that he did have a conventional understanding of the role: transcript at pp 49-51. That makes it difficult to credit his claim that he only agreed to perform a limited role, although he continued to insist that was the case in cross-examination: transcript at pp 52-53. Mr Schroeder also claimed he was not consulted about the decision to make the appointment at the time it was made. He agreed he had signed a nomination form but insisted he did not know the head of Risk Management and Compliance at Freedom had decided to progress the appointment in early 2017. (Freedom’s Head of Risk Management and Compliance, Ms Osborne, had apparently assumed responsibility for interactions of this nature with ASIC.) Mr Schroeder said he expected he would be advised if his name was put forward: transcript at p 48. At the hearing, Mr Schroeder was shown the signed nomination form that confirmed he consented to act. The form appended a Statement of Personal Information which included a description of his qualifications and experience: Tribunal Documents, T266, p 4026ff. The statement expressly referred to an annexed Table of Organisational Competence: Tribunal Documents, T266, p 4031ff. Mr Schroeder suggested in cross-examination that he was not sure he had seen the Table that was mentioned in the form he had signed. The Table describes Mr Schroeder’s role in the following terms:

    Managing all AFSL operations and staff. Assessing advisers, strategic planning, systems management, training program development, training workshops, day to day operations management. Compliance and establishing procedures including reviewing insurance, superannuation and investments strategies for the Group.

18. The position description in the Table: (a) places Mr Schroeder at the heart of Spectrum’s operations and suggests he inevitably knew or should have known about any problems with the supply of financial services; and (b) is impossible to reconcile with his claim that he only agreed to be a responsible manager with respect to a much more limited set of functions. It is difficult to credit Mr Schroeder’s claim that he had not read the Table referred to in the signed form incorporating a Statement of Personal Information. Of course, if he did purport to adopt a document he had not read, that is also problematic. It would suggest a lack of care and candour in dealings with the regulator. Either way, the evidence reflects poorly on the competence and diligence of Mr Schroeder.

19. We note the form provided to ASIC also attached references from business associates who vouched for Mr Schroeder’s qualities. Mr Schroeder admitted he likely arranged for the references to be supplied and he would have passed them on so they could be communicated to ASIC: see transcript, pp 45-46. His active involvement in the preparation of the nomination makes it unlikely he was unaware the nomination was being progressed or of the contents of the nomination.

20. Mr Schroeder also admitted in cross-examination that he had been made aware of follow-up questions from ASIC about his nomination sometime in early 2017. Amongst other questions, the ASIC officer queried whether Mr Schroeder had sufficient experience with financial services, as opposed to general management experience. Spectrum provided a response to ASIC by email dated 12 April 2017: annexure to statement, pp 150-153. The response noted:

    …in his current role as CEO for Spectrum Mark has direct responsibility for most of the significant day-to-day decisions about the running of Spectrum’s business, including involvement in the ongoing monitoring and supervision of authorised representatives and the performing of the tasks specified [in the earlier communication].

21. Mr Schroeder was aware of what Spectrum had told ASIC in this communication by at least the last week in October 2017. We are satisfied that is so because he forwarded a copy of the communication to other employees: see annexures to statement, p 150. He also confirmed in cross-examination (transcript at p 64) he was aware by October 2017 of how Spectrum described his role in its representations to ASIC. If Mr Schroeder’s role was misrepresented in those communications, it was incumbent upon him to contact ASIC and correct the record. He did not do so.

22. ASIC says Mr Schroeder knew what was involved when he was appointed to be a responsible manager, and he did not embrace the role. We are satisfied he knew of the appointment and clearly understood the expectations of, and responsibilities associated with, the role.  We do not accept that Mr Schroeder’s acceptance of the role was limited in the way he describes. In any event, whatever the precise circumstances of his appointment he certainly knew not long after the appointment was made that representations were made to ASIC that he would perform the role in a conventional way. We will discuss below how he failed to perform the role, but it is clear from his own evidence that he knew what was expected of the role and neither embraced it nor resigned from the role of responsible manager when he realised that he could not, or would not be permitted to, fulfil his obligations associated with that role.

    Mr Schroeder as key person

1. In cases where an individual manager or managers play a pivotal role in the provision of the financial services, ASIC may attach a condition to the AFSL requiring the organisation to nominate the manager (or managers) as a key person. The condition obliges the organisation to notify ASIC if the key person departs or ceases to perform their duties. In that event, the organisation is effectively required to provide assurance to ASIC that it will identify a suitable replacement or take other steps to secure the smooth operation of the business. The role of key person (and its importance in the regulatory scheme) is explained more fully in RG105.

2. Spectrum had asked for a variation of its AFSL, to include Mr Schroeder as a key person, as early as 24 January 2017. The request was made around the same time that Ms Osborne, Freedom’s Head of Risk Management and Compliance, was seeking to add Mr Schroeder as a responsible manager. Spectrum relied on the same material which described Mr Schroeder’s role at the company when it nominated Mr Schroeder as a key person. An ASIC officer asked questions in relation to Mr Schroeder’s nomination as a key person in February 2017. The officer sought additional information that clarified Mr Schroeder’s experience and qualifications. Ms Osborne replied to ASIC on 14 February 2017 with a note that purported to quote Mr Schroeder saying he had “day to day responsibilities for running the Spectrum business” and asserting he “would be the most appropriate person to become a key person on the Spectrum licence”: Tribunal Documents T273 at pp 4094-4095.

3. ASIC accepts that email from Ms Osborne may not have been communicated to Mr Schroeder, so it is possible Ms Osborne did not accurately quote him. But curiously, another response was sent to ASIC on the same day from an email account that bore Mr Schroeder’s name ending in ‘@schroeder.com.au’. The email account was an old one that pre-dated Freedom’s takeover of Spectrum. It had been used in the past by Mr Schroeder, and he still had access to it at the time. The email made essentially the same claims about Mr Schroeder’s suitability as those quoted in Ms Osborne’s email. The email was signed ‘Mark Schroeder’.

4. Mr Schroeder was cross-examined in some detail about the email from the @schroeder.com.au account. He initially said he did not have exclusive access to the account. He speculated that somebody else might have sent it using his name: transcript at p 72. That explanation fell apart on closer examination. Mr Schroeder acknowledged he was not specifically aware of anyone else having access to the account: transcript at p 213. While Mr Schroeder noted in re-examination (transcript at p 211) Freedom’s IT manager had signalled the @schroeder.com.au email accounts would be shut down as staff migrated to the Spectrum email system, he also acknowledged he had been instructed by Freedom’s CEO to provide access to his @schroeder.com.au email accounts which indicated Freedom did not already have access. In those circumstances, we infer Mr Schroeder’s account was not accessed by anybody from Freedom in February 2017. We note Mr Schroeder finally conceded it was “highly likely” he was the author of the email: transcript at p 72.

5. Mr Martin argued in written submissions that there must be some doubt over precisely when and if Mr Schroeder became aware of his nomination, and about what ASIC was told. Ms Osborne subsequently provided a signed consent from Mr Cohen agreeing to the variation of the AFSL to include Mr Schroeder as a key person: Exhibit 7.7 – Email from Diane Osborne to ASIC. The email was sent to ASIC and copied to Mr Schroeder on 22 June 2017, so there is no question he was informed of the nomination by that point.

6. We are satisfied Mr Schroeder was aware of his nomination as a key person from February 2017, if not before. Yet for reasons we have already explained, it is apparent Mr Schroeder did not embrace the role of a key person who played a pivotal role in the management of the financial services business as that role was conceived in RG105. On his own evidence, he played a more attenuated role – yet he allowed himself to be held out to ASIC as a key person. ASIC was entitled to expect he would discharge the role of key person as it was conceived in RG105.

   The legislation

7. Having made those general observations and findings about Spectrum’s history and Mr Schroeder’s performance of various roles within Spectrum’s organisation, we now turn to the legislation. The (amended) provisions of the Corporations Act provide a framework for considering the specific findings that are urged upon us by ASIC. Some of those findings are wholly or partly disputed by Mr Schroeder.

8. Chapter 7 of the Corporations Act contains the provisions regulating financial services and markets. The cornerstone of the regulatory system is the AFSL, which is dealt with in Part 7.6. Section 911A provides that every person who carries on a financial services business must apply for and hold an AFSL. The AFSL holder may provide financial services itself, or it may authorise others to provide specified financial services on the AFSL-holder’s behalf: s 916A.

9. Section 912A sets out the general obligations imposed on the holder of an AFSL. Those obligations include relevantly:

   912A General Obligations

   (1)       A financial services licensee must:

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

   …

   (ca)take reasonable steps to ensure that its representatives comply with the financial services laws[2]…; and

   …

   (d)subject to subsection (4)—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 (including by complying with section 921D), and are competent, to provide those financial services; and

   …

   [2] Section 761A of the Corporations Act defines ‘financial services laws’ to include the provisions of Chapter 7.

10. There are specific obligations which apply to the holder of an AFSL that utilises authorised representatives (appointed pursuant to s 916A) to provide financial services that include financial product advice. In such a case, s 961L requires the AFSL holder to take reasonable steps to ensure its representatives comply with statutory obligations that relate to the provision of advice. The relevant sections include obligations to:

    ·Act in the best interests of the client in relation to the advice: s 961B. That obligation includes, broadly speaking, a duty to inquire and ascertain the client’s needs and circumstances: s 961B(2).

    ·Provide advice that is appropriate to the client (assuming, once again, that the provider of the advice has made appropriate inquiries pursuant to s 961B(2) to ascertain the client’s needs and circumstances): s 961G.

    ·Provide appropriate warnings and caveats if the advice is apparently based on incomplete information about the client’s needs and circumstances: s 961H.

    ·Avoid conflicts between the client’s interests and those of the provider or licensee: s 961J.

11. Where the AFSL holder fails to satisfy its obligation under s 961L, that failure is a failure to comply with the general obligation in s 912A(1)(ca) to ensure representatives comply with the financial services laws.

12. ASIC has the power, in limited circumstances, to suspend or cancel an AFSL under s 915B without first holding a hearing. It also has the power to suspend or cancel under s 915C following a hearing. Grounds for cancellation under s 915C(1) include:

    ·the licensee’s failure to comply with its obligations under s 912A (s 915C(1)(a)), or likelihood of failing to comply with those obligations in the future (s 915C(1)(aa));

    ·the fit and proper person requirement (defined in s 913BA) is not satisfied in relation to the licensee or the licence (s 915C(1)(b));

    ·a banning order or disqualification order has been made against the licensee (s 915C(1)(c)) or against one of the licensee’s authorised representatives in circumstances where ASIC concludes the representative is so integral to the licensee’s provision of financial services that the licensee will be compromised (s 915C(1)(d)).

13. Of course, we are not dealing with a cancellation or suspension application under s 915C in these proceedings. We are dealing with ASIC’s power to make banning orders. The grounds for making a banning order are set out in s 920A. The content of the banning orders is dealt with in s 920B. Banning orders may be made where appropriate against the holder of an AFSL, but the power extends to officers and others who may be involved in the provision of financial services. Indeed, the recent amendments to ss 920A and 920B make clear (if there was any doubt) that the power to ban extends to people who have not themselves supplied financial services, but who nonetheless work in that industry – perhaps in a managerial or ‘back-office’ role. Importantly, where ASIC relies on the grounds referred to in ss 920A(1)(d) and (da) to ban a corporate officer of an AFSL holder – as it does here – there is no express requirement that ASIC be satisfied the AFSL holder has hitherto contravened its obligations under s 912A. It follows ASIC is not required to make formal findings against the AFSL holder in regulatory proceedings before taking steps to ban one of its officers on those grounds. That is potentially important in this case because ASIC did not persist with regulatory action against Spectrum. Mr Martin argued the absence of formal findings against Spectrum or Freedom following a hearing before the delegate was a problem for ASIC in these proceedings. That does not inevitably follow.

14. Having said that, ASIC does argue:

    (a)there were serious deficiencies in Spectrum’s monitoring and supervision processes that amounted to contraventions of the financial services laws, and

    (b)Mr Schroeder was involved in Spectrum’s contraventions.

15. A finding that Mr Schroeder was involved in Spectrum’s contraventions will satisfy the ground referred to in s 920A(1)(g). The expression ‘involved in a contravention’ is defined in s 79 of the Corporations Act. That provision mirrors the provision in the former Trade Practices Act 1974 (Cth) which was considered by the High Court in Yorke v Lucas (1985) 158 CLR 661. The Court in that case concluded a person might be involved in the contravention in the relevant sense if they were aware of the essential matters that make up the prohibited conduct, even if they did not know those matters amounted to a contravention of the law: at [9]ff, [17] per Mason ACJ, Wilson, Deane and Dawson JJ. Ms Patterson also drew our attention to the discussion of accessorial liability which lies at the heart of s 79 in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181. In that case, White J analysed the authorities and concluded (at [402]):

    …only actual knowledge of the essential matters will be sufficient but that knowledge may be able to be inferred from a defendant’s knowledge of matters raising suspicion, together with a deliberate failure to make the enquiries which may have confirmed those suspicions.

16. Justice White went on to explain the person must have knowledge of the matters at the time of the contraventions. It is not enough to learn of the matters after the contravention occurred: at [405].[3] His Honour also referred to the need for some sort of proximity between the individual and the matters in question, concluding there must be a “practical connection” between the individual and the contravening conduct: at [410].[4] That is a relatively high bar.

    [3] Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd and Ors(No 2) [2005] NSWSC 267 at [114] per Palmer J

    [4] Citing Emwest Products Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2002] FCA 61; (2002) 117 FCR 588 at [34] per Kenny J

17. ASIC also argues Mr Schroeder is likely to become involved in the contravention of a financial services law by another person (the ground referred to in s 920A(1)(h)) and he is likely to contravene a financial services law himself (the ground referred to in s 920A(1)(f)). Both of those grounds are ‘forward looking’ and do not require us to make findings of historical contraventions.

18. We will return to the application of the law to Mr Schroeder.

    Spectrum’s contraventions

19. We have explained Spectrum’s business model relied on authorised representatives providing financial planning advice to clients under the auspices of Spectrum’s AFSL. Under that model – which we understand is common in the industry – Spectrum provided marketing and other support to the representatives. It also received a share of the fees the representatives charged. Importantly, though, Spectrum was also obliged to diligently recruit, train, monitor and supervise its authorised representatives. ASIC says Spectrum failed to do that in various respects. We will consider whether that proposition is made out before turning to the question of how any of that reflects on Mr Schroeder.

20. ASIC referred to several problems that emerged at Spectrum while Mr Schroeder was a director, responsible manager and key person.

21. One of ASIC’s concerns arose out of the fact Spectrum’s own policy documents said “a complete review of all [r]epresentatives will be conducted annually”: Tribunal Documents, T80 at p 1817. As ASIC pointed out, Spectrum had advised ASIC in a letter dated 12 September 2017 – a letter signed by Mr Schroeder – that “formal audit reviews” of Spectrum advisers were generally conducted on an annual basis, although additional unscheduled reviews might occur in response to complaints or other indications of trouble, such as higher than usual ‘clawback’ rates.

22. Spectrum was not conducting annual audits of all its representatives as envisaged in the policy documents. Mr Schroeder admitted as much under cross-examination: transcript at p 137. When pressed about his role in that shortcoming, he defended the position, suggesting Spectrum was still “running ok” even if it was not running “as many audits as we’d like”: transcript at pp 176-177. Our attention was also drawn by Mr Schroeder to evidence about an audit report prepared by KPMG in August 2018 which was discussed in a report to the board of Spectrum in November 2018: Tribunal Documents, T5, p 534. We were told (statement at [59]) the report said:

    Overall adviser compliance program is robust and well documented with appropriate actions taken to respond to potential poor adviser practices.

23. The report in question was not produced in evidence so it is difficult to know what to make of its observations and recommendations. In any event, the report does not clearly contradict the evidence provided by ASIC which said there was a significant number of active representatives who generated large amounts of fees without being subject to audits over a 30-month period: Tribunal Documents, T34, spreadsheet at pp 1323-1336. That evidence, provided by ASIC, on its own confirms there was a problem because it is inconsistent with Spectrum’s policy and suggests, on its face, Spectrum was not providing adequate or appropriate supervision of its representatives.

24. The explanation for Spectrum’s failure to comply with its own policies seems clear enough. While it had hundreds of representatives, it had only one employee (Mr Frost) who was tasked with conducting the reviews. It seems unlikely Mr Frost would, without assistance, have been able to conduct meaningful routine reviews of such a large number of representatives in accordance with Spectrum’s policies.

25. While Mr Schroeder told ASIC in September 2017 that regular reviews were being conducted, he made much in these proceedings about warnings he said he gave to Freedom executives during the same period about the need for more resources to conduct auditing and compliance activities given the growth in adviser numbers: see, for example, transcript at p 213ff recording answers given in re-examination. Mr Martin pointed out in written submissions that Mr Schroeder claimed he had been raising warnings about the adequacy of compliance resources since mid-2017 (although we note Mr Schroeder said during re-examination that he had been sounding the alarm since late 2016: transcript at p 214). Mr Schroeder said he was criticised internally for raising his concerns directly with the new chair of the Freedom board in the course of 2018. Mr Schroeder recalled being told by Freedom executives he “would be sacked on the spot and terminated for not performing [his] duties as they were expected” if he ‘went over the heads’ of executives again: transcript at pp 219-220. ASIC points out in its submissions that the first written record of Mr Schroeder raising an issue about the adequacy of resources is an email addressed to Mr Craig Orton, the Chief Operating Officer of Freedom, on 11 June 2018. There is further correspondence with Mr Orton in November 2018 on the issue. Mr Orton noted Mr Schroeder had asked for an additional compliance manager in light of the increased number of representatives. Mr Schroeder provided a report to the board on 25 November 2018 (annexures to statement at p 651) where he pointed out there was (still) only one compliance manager for the monitoring and supervision of:

    (a)328 representatives who were authorised to provide general advice;

    (b)97 representatives who were authorised to provide personal advice; and

    (c)70 corporate authorised representatives.

26. In that report, Mr Schroeder warned:

    We no longer have sufficient resources to adequately fulfil our responsibilities of monitoring and supervising our authorised representatives… We therefore need additional resources just to meet our annual audit requirement for each [representative], let alone the list of other compliance duties that we are required to conduct for each adviser.

27. ASIC was critical in its submissions of Mr Schroeder’s claims that he warned the board of Freedom or anyone else. ASIC submitted Mr Schroeder was sounding the alarm late in the day, and even then he was only warning that problems might arise in the future. The fact Spectrum had already failed to conduct audits in accordance with its own policies suggested the problems with its resourcing had long since taken hold.

28. This evidence, to which we have referred, points to a conclusion that:

    ·Spectrum was not taking reasonable steps to ensure its representatives complied with financial services laws. Spectrum was not even complying with its own policies about conducting regular audits of representatives, so it effectively rendered itself blind to any problems. In the circumstances, it cannot satisfy the requirement in s 912A(1)(ca).

    ·To similar effect, the identified gaps in resourcing at Spectrum confirm it did not have available adequate resources to carry out supervisory arrangements contrary to the obligation imposed under s 912A(1)(d).

    ·Spectrum failed to do all things necessary to ensure the financial services covered by the licence were provided efficiently, honesty and fairly. The conclusion that Spectrum did not satisfy the obligation in s 912A(1)(a) flows from Mr Schroeder’s own evidence, that the parent starved the organisation of the resources required to carry out the regular monitoring functions required under its own policies over a lengthy period.

29. ASIC also submitted that Spectrum failed to produce documentation that established it had complied with its own policies regarding the screening and pre-vetting of new representatives. In addition, ASIC had asked for documentation recording the training activities Spectrum actually carried out in accordance with its policies.[5] ASIC says there were significant gaps in the documentation provided by Spectrum. We were not provided with anything to dispute that evidence, although we note it is unclear whether:

    ·the activities occurred but were poorly documented and imperfectly recorded; or

    ·the activities referred to in the policy documents did not occur.

    [5] We note Spectrum was obliged to produce a document in their possession when requested by ASIC pursuant to s 33 of the ASIC Act – but we would expect Spectrum had the relevant documents to hand as part of its compliance system and processes.

1. Taken at face value, that evidence – or perhaps the paucity of evidence confirming Spectrum ensured its representatives were adequately trained and competent to provide the financial services they were supplying under the AFSL - suggests Spectrum did not discharge the obligations in s 912A(1)(f) and perhaps s 912A(1)(e). However, it would be unfair to hold the absence of evidence in this regard against Mr Schroeder. Spectrum has been wound up and Mr Schroeder has long since resigned. It is unlikely that he would now have access to the documents in question if they existed.

2. Even if we give Mr Schroeder the benefit of the doubt on those issues, ASIC points to other evidence regarding contraventions by Spectrum. We were referred to the results of a surveillance and audit process that ASIC conducted into Spectrum’s representatives. ASIC provided evidence of a review it conducted of 166 client files maintained by representatives providing financial product advice. Thirteen of them were found to contain personal advice. ASIC concluded material in 12 of the files suggested the four representatives who provided the advice had failed to comply with their obligation to act in the best interests of the clients. We have already described the ‘best interests’ obligations set out in Div 2 of Part 7.7A in Chapter 7 of the Corporations Act.

3. Mr Schroeder did not seriously contest ASIC’s findings (set out in Tribunal Documents, T53 at p 1458ff) in relation to the four representatives although he did suggest the problems were not widespread or suggestive of wider systemic failure. While we agree there may be some question over the extent of these contraventions, there is little doubt, based on the examples to which ASIC referred[6], there were some contraventions of the financial services laws and other obligations.

   [6] See, in particular, transcript at pp 282-283 and closing submissions of ASIC at [145]ff. See also Tribunal Documents T11, pp 970-971

4. ASIC also provided evidence about the behaviour of several other representatives that were the subject of regulatory action. The most prominent of these examples was Mr Gurumukh Mehra who had been banned from providing financial services for three years after ASIC found he failed to comply with his obligation under s 961B on a number of occasions. Mr Mehra had argued he should not be criticised for the way in which he dealt with clients because they all knew what they wanted and did not require his detailed advice or assistance. That misses the point of the obligation. Spectrum’s own monitoring and auditing processes, such as they were, did not detect the issues that were later apparent to ASIC. That points to the inadequacy of those processes. Mr Schroeder had supported Mr Mehra during the regulatory proceedings, and he had written to Mr Orton, of Freedom, on 28 September 2018 expressing sympathy for Mr Mehra’s position after the banning order was made: annexure to statement at pp 627-628. That unflagging support demonstrates a lack of insight into Mr Mehra’s behaviour that does not reflect well on Mr Schroeder.

5. There were several other examples provided by ASIC where authorised representatives had failed to comply with their obligations and Spectrum either failed to detect or act appropriately upon the issues[7].  We also note ASIC’s finding that Spectrum did not have adequate processes that were designed to identify instances where representatives provided personal advice when they were only authorised to provide general advice. We do not need to repeat all of ASIC’s findings here. Suffice to say they underlined the conclusions we have already reached on the shortcomings in Spectrum’s monitoring and supervision of its representatives.

   [7] See, for example, contraventions relating to Darren Tappouras, Ngoc Tran, Sean Lewis and Yuri Athuhovski: transcript at p 148ff, closing submissions of ASIC at [161]ff.

   The specific grounds for making a banning order against Mr Schroeder

6. We have made adverse findings about Spectrum. It is clear the shortcomings in its monitoring and supervision of its representatives lead to a conclusion that it contravened its obligations under s 912A(1). But where does that leave Mr Schroeder?

7. ASIC argues we can be satisfied the discretion to ban Mr Schroeder in particular (as opposed to Spectrum) is enlivened on a number of grounds. We will address each in turn.

   Was Mr Schroeder involved in Spectrum’s contraventions of the financial services laws?

8. The reference to ‘financial services laws’ in this context includes a reference to the obligations imposed under s 912A(1). We have made findings about a number of contraventions by Spectrum, including contraventions of sub-sections 912A(1)(a), (ca) and (d). Does the evidence establish Mr Schroeder was involved in those contraventions in the sense intended by s 79 where that concept is defined?

9. Mr Schroeder says we should not find he was involved in the contraventions because he was kept in the dark about so much of Spectrum’s operations. He gave evidence to that effect which, on its face, suggests an unacceptable ignorance about aspects of the company’s business affairs. He also provided us with statements from witnesses who tended to confirm his assertion that he was not playing the role one would expect of a director, responsible manager and key person. On the other hand, we have also found there is documentary evidence suggesting Mr Schroeder knew it was being held out (most obviously to ASIC) that he was performing those roles as intended. It seems he was a party to a number of such communications with ASIC, and he may have even been the author of several communications that were apparently designed to reassure ASIC that the monitoring and supervision arrangements (in which he held positions of responsible manager and key person) were in good hands. When pressed in cross-examination, he retreated from some of his claims that he was kept completely in the dark. Of course, claiming he was wholly ineffectual made for an unattractive defence.

10. While there might be some room for doubt over precisely what Mr Schroeder actually knew, there is compelling evidence that he was involved in the contraventions under sub‑sections 912A(1)(a), (ca) and (d) in that by his own account he repeatedly warned the board about the resourcing issues that were compromising Spectrum’s audit and review processes. It follows he was aware of the essential facts which comprise a contravention. While he may have issued an internal warning or warnings about some of the shortcomings, he took no further action. He did not resign as a director, responsible manager and key person. He did not report the matter to ASIC and made only a half-hearted attempt to speak with the auditor. While we note ASIC had doubts about the extent to which Mr Schroeder sounded the alarm, we are satisfied his evidence establishes he was aware of the ongoing problem by mid-2017, at least, and failed to deal with the issues appropriately. It follows we are satisfied the ground in s 920A(1)(g) is made out.

    Does the Tribunal have reason to believe Mr Schroeder is not a fit and proper person to provide financial services or to be involved in a financial services business?

11. The ‘fit and proper person’ requirement that was inserted into the Corporations Act has a different focus from the provision it replaced, which referred to ‘good fame and character’. Dixon CJ, McTiernan and Webb JJ quoted Sir Edward Coke in their judgment in Hughes and Vale Pty Ltd v New South Wales (No 2) (1955) 93 CLR 127 explain (at 156-157) the fit and proper person requirement:

    …is said to involve three things, honesty, knowledge and ability: “honesty to execute it truly, without malice, affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it”.

    [citations omitted]

12. It is well-understood that the precise meaning of the expression ‘fit and proper person’ will depend on the context in which it is used. In this case, the benchmark is what is expected of a person playing a role in a financial services business. Section 913BB directs us to matters we must consider in deciding whether an individual meets the standard. As it happens, none of the matters referred to in s 913BB(2)(a)-(j) are relevant here – but the residual category referred to in s 913BB(2)(k) (i.e. “any other matter ASIC considers relevant”) brings us back to the general understanding of the concept.

13. Mr Schroeder occupied senior management roles in the Spectrum business. He was a director (in fact an executive director), responsible manager and key person. The duties which ordinarily attach to the office of director are well-understood. The general duties are spelled out in ss 180 and 181 of the Corporations Act, and the scope of the role is clear. Relevantly, directors must familiarise themselves with the affairs of the company, and they would be expected to pay particular attention to the company’s financial state and the health of its core functions and any other function that generates risk, including regulatory risk. A director who pleads ignorance of problems because he was bullied or ignored by other directors or officers should not expect to be excused. Where the failure to take action or resign from the position appears to be prompted by concerns for the director’s own welfare and economic interests – which is what happened in this case – the failure is worse.

14. The same analysis applies to Mr Schroeder’s failure to discharge the focused obligations that are incumbent on a responsible manager and key person. The best that can be said for Mr Schroeder is that he failed to embrace his obligations and perform them diligently. At a minimum, he knowingly allowed himself to be held out to ASIC and (presumably) the wider public that he was diligently discharging the roles when on his evidence he occupied a more confined role.

15. Mr Schroeder’s evidence that he allowed himself to be bullied and ignored by other corporate officers even as he knew he was being held out to others (and to the regulator) as an officer, responsible manager and key person is sufficient reason on its own to find he is not a fit and proper person to provide financial services or to be involved in a financial services business. As the report of the recent Royal Commission shows, it is vitally important that senior managers are aware of, and fulfill, their obligations in financial services business. They must take those obligations seriously and perform them diligently and fearlessly. Mr Schroeder did not do that.

16. It follows the ground in s 920A(1)(d) is made out. We should emphasise that our finding on this point would be justified even if we doubted Mr Schroeder was specifically aware of any contraventions at Spectrum. The evidence of Mr Schroeder’s approach to his various roles in contradistinction to the way in which he was held out is enough on its own to provide reason to believe he is not a fit and proper person to be involved in a financial services business.

    Does the Tribunal have reason to believe Mr Schroeder is not adequately trained or is not competent to (a) provide financial services or (b) be involved in a financial services business?

17. Mr Schroeder has made clear he has never provided financial product advice or other financial services himself. He wants to remain involved in the industry as a manager.

18. We have already referred to evidence that ASIC questioned whether Mr Schroeder had the credentials and experience required to be involved in the business when he was nominated as a responsible manager and key person. ASIC officers pointed out at the time that Mr Schroeder’s experience and credentials were not obviously relevant to the roles he was being asked to undertake.

19. The evidence does not suggest Mr Schroeder possessed the training or competence required to provide or be involved in managing the provision of financial services. In particular, the evidence of his unsatisfactory approach to carrying out the roles he held as officer, responsible manager and key person provides reason to believe he is not competent. The evidence of Mr Schroeder’s largely uncritical support for Mr Mehra notwithstanding the concerns about that individual’s performance provides further reason to believe he was not competent to play a role in managing such a business.

20. In those circumstances, the ground in s 920A(1)(da) is made out.

    Does the Tribunal have reason to believe Mr Schroeder is likely to contravene a financial services law in the future, or be involved in the contravention of such a law by another person?

21. The grounds in ss 920A(1)(f) and (h) are forward looking. They do not require that we find a history of past contraventions, but it stands to reason that a history of being involved in contraventions in the past is a relevant consideration.

22. Our finding that Mr Schroeder has been involved in contraventions of financial services laws provide us with reason to believe he may contravene (or become involved in contraventions of) those laws in the future.  But even if there was some doubt about him being knowingly involved in those contraventions, our observations about Mr Schroeder’s approach to his obligations as a corporate officer, responsible manager and key person also provide reasons for believing he is likely to contravene (or become involved in the contravention of) financial services laws. The lack of insight Mr Schroeder demonstrated while giving evidence suggests such an outcome is not unlikely. We have already observed Mr Schroeder was an elusive witness who made assertions about the composition of the board which he should have realised were incorrect, and that he was capable of tailoring his evidence as it unfolded and was challenged. When faced with evidence of contraventions – like those of Mr Mehra – he failed to recognise the importance and severity of those issues. He consistently sought to defend obvious failings by insisting he should not be held responsible because he was merely ineffectual in the various roles he held. Even if we accept that characterisation of his conduct, it is scarcely reassuring. An ineffectual officer is likely to get into trouble in a financial services business given the complexity of the obligations.

23. We are satisfied the grounds referred to in s 920A(1)(f) and (h) are made out.

    The discretion is enlivened. Should Mr Schroeder be banned?

24. Having satisfied ourselves that grounds in s 920A(1) have been made out, the discretion to ban is enlivened. But should it be exercised?

25. We should begin by emphasising that the aim of imposing a banning order is not to punish Mr Schroeder for anything that occurred. These are regulatory proceedings. Our focus is, first and foremost, on the public interest. The public interest forms the basis for the objectives set out in s 760A of the Corporations Act, which says:

    The main object of [Chapter 7] is to promote:

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

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

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

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

26. Mr Schroeder sought to downplay the seriousness of some of the matters that were put against him. The fact that ASIC’s investigation of Spectrum and Freedom came to an early conclusion meant that we did not have the opportunity to examine all of the detail that might otherwise have been available. Moreover, we accept Mr Schroeder may have had difficulty producing evidence of what happened at Spectrum and Freedom in circumstances where Spectrum has now been wound up. Even so, we are satisfied the evidence about inadequate monitoring and supervision is of significant import. That evidence bespeaks a culture that promoted growth, sales and revenue over compliance. Mr Schroeder contributed to that culture by occupying senior roles which he did not perform as was required. By not speaking up (to the regulator, if necessary) or stepping down, he helped allow this culture to flourish. That culture lies at the heart of the behaviour which has been recently highlighted in the Royal Commission, and which threatened achievement of the objectives in s 760A. The seriousness of Mr Schroeder’s shortcomings weighs heavily in favour of a ban.

27. Mr Schroeder sought to disclaim responsibility for some of the issues on the basis that he was operating under constraints in his various roles. That is not good enough. The regulatory regime cannot achieve the objectives set out in s 760A of the Corporations Act if officeholders in various roles do not faithfully, competently, fearlessly and diligently discharge their obligations. Mr Schroeder’s passivity in the face of improper constraints is not adequate conduct.

28. A ban is necessary to communicate a message to the wider public which will promote confidence in the regulatory system. Quite apart from that, a ban is also justified in order to deter similar conduct by others in the industry. We reach that view notwithstanding the evidence Mr Schroeder provided which set out the personal hardship he has already experienced following the regulatory action. We have also taken account of the fact we have not been provided with clear evidence that any individual client was exposed to substantial detriment or unacceptable risk as a direct consequence of Mr Schroeder’s conduct. We have also considered the fact Mr Schroeder has hitherto enjoyed a good record and appears to be a man of good character.

    The term and scope of the ban

29. That brings us to the details of the ban. ASIC maintains that a six-year ban is necessary and appropriate although we are also being asked to consider the scope of the banning order given the new powers in s 920B.

30. The delegate referred to the matters discussed in Regulatory Guide RG98 ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders when making the reviewable decision. RG98 includes a tariff of sorts in which different behaviours and considerations are identified and organised in a way that provides guidance to decision-makers. While we emphasise RG98 is a guide only, it has been developed out of the case law and has the benefit of promoting consistency. We accept we should have regard to that guidance.

31. More serious conduct generally attracts a longer ban (although individual circumstances must also be factored in). A person engaged in relatively minor conduct involving inadvertence or carelessness might face a ban of up to three years. That would ordinarily be appropriate where the individual also sought to cooperate with ASIC, and where there was little or no loss to investors. A ban of 3-10 years would be appropriate where, for example:

    ·The “[c]onduct shows incompetence, irresponsibility or a high level of carelessness, but with the possibility that the person may develop requisite skills and abilities”;

    ·There is “[f]alse, misleading or deceptive, or unconscionable conduct”;

    ·The conduct involved a “[d]isregard for the law and compliance with regulations”.

32. A banning period of 10 years or more might be appropriate in circumstances that include:

    ·The “[c]onduct shows serious incompetence and irresponsibility”;

    ·There is a “likelihood that the person will engage in contravening conduct in the future”.

33. Mr Schroeder’s behaviour was not the product of mere carelessness and inadvertence, and there is limited evidence of him actively assisting ASIC. We note Mr Martin argued Mr Schroeder had cooperated with ASIC throughout the investigative process to the extent he flew to Brisbane to prepare for and participate in the s 19 examination. Yet one of our central findings is that Mr Schroeder allowed himself to be a party to representations to ASIC that tended to obscure problems and misstate his role. The findings we have made about his want of diligence in performing his various roles over an extended period suggest a banning term towards the middle of the 3-10 year range. Given Mr Schroeder failed to resign out of concern for his personal interests and continues to protest he was impotent in his role in the governance and management arrangements at Spectrum until late in the day[8], we do not have a high level of confidence that he will learn from the experience. Having said that, we are also conscious that he has already suffered significant loss and reputational damage, and it may be difficult for him to find other equivalent work at this stage of his life notwithstanding his impressive record of military service.

    [8] Mr Schroeder resigned from Spectrum in May 2019 due to a disagreement with Mr Sean Williamson, a senior Freedom executive: see annexure to statement, pp 798-799.

1. In all the circumstances, we are satisfied a six-year ban is appropriate.

2. That leaves us to discuss the scope of the banning order. Mr Schroeder is not seeking to provide financial services but he prefers to work in the financial services industry. Our reasons and the findings we have made should make it clear he has no place in the industry for the term of the ban. It is therefore appropriate to vary the banning order by specifically banning Mr Schroeder from:

   ·providing any financial services;

   ·controlling, whether alone or in concert with one or more other entities, an entity that carries on a financial services business; and

   ·performing any function involved in the carrying on of a financial services business (including as an officer, manager, employer, contractor or in any other capacity).

   Conclusion

3. The decision under review must be varied in light of the changes to the orders that may be made under s 920A and 920B of the Corporations Act following the amendments.

   Decision

4. The decision under review is varied such that Mr Schroeder is banned from:

   ·providing any financial services;

   ·controlling, whether alone or in concert with one or more other entities, an entity that carries on a financial services business; and

   ·performing any function involved in the carrying on of a financial services business (including as an officer, manager, employer, contractor or in any other capacity).

   for a period of six years.

I certify that the preceding 115 (one hundred and fifteen) paragraphs are a true copy of the reasons for the decision herein of the Hon Justice D G Thomas, President, and Deputy President Bernard J McCabe

................................[SGD].....................................................

Associate

Dated: 30 September 2021

Dates of hearing:	2, 3 and 4 September 2020 13 October 2020
Counsel for the Applicant:	Mr A G Martin
Solicitors for the Applicant:	Norton Smith Lawyers and Corporate Advisers
Counsel for the Respondent:	Ms S Patterson
Solicitors for the Respondent:	Australian Securities and Investments Commission