Strata Community Insurance Agencies Pty Ltd and Australian Securities & Investments Commission
[2016] AATA 768
•30 September 2016
Strata Community Insurance Agencies Pty Ltd and Australian Securities & Investments Commission [2016] AATA 768 (30 September 2016)
Division
TAXATION AND COMMERCIAL
File Number(s)
2015/6044
Re
Strata Community Insurance Agencies Pty Ltd
APPLICANT
And
Australian Securities & Investments Commission
RESPONDENT
DECISION
Tribunal Mr P W Taylor SC, Senior Member Date 30 September 2016 Place Sydney The decision under review is affirmed.
………………[sgd]………........................
Mr P W Taylor SC, Senior Member
Catchwords
CORPORATIONS LAW – Australian Financial Services licence – “authorised representative” – cross endorsement of licensees – whether refusal to cross endorse was reasonable – impact of refusal to cross endorse – whether applicant should be exempted under s 926A from requirement for cross endorsement from incumbent licensees – decision affirmed
Legislation
Corporations Act 2001, ss 760A, 766B(3)-(4), 912A(1), 912D, 916A(1), 916C(1)-(2), 916F, 917A(3), 917C(3), 917D-917F, 926A(2)
Corporations Regulations 2001, rr 7.1.04CA, 7.1.04F
Strata Schemes Management Act 1996 (NSW), ss 26, 28
Strata Schemes Management Act 2015 (NSW), s 166
Cases
Re Queensland Power Trading Corporation t/as Enertrade and Australian Securities and Investments Commission [2005] AATA 945; (2006) 89 ALD 346
Secondary Materials
ASIC Corporations (Basic Deposit and General Insurance Product Distribution) Instrument 2015/682
ASIC Class Order [CO 05/1070]
ASIC Regulatory Guide 167 Licensing: Discretionary powers
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
30 September 2016
Strata Community Insurance Agencies Pty Ltd (“Strata”) was incorporated in October 2013. Since 1 July 2014 it has held an Australian Financial Services (“AFS”) licence (under the Corporations Act 2001 (“CorpAct”) Pt:7.6 Division 4). Strata is an underwriting agency specialising in strata and community title insurance. It operates under a binder agreement with, and is a commission remunerated agent for, Allianz Australia Insurance Limited (“Allianz”).
FINANCIAL PRODUCT ADVICE & “AUTHORISED REPRESENTATIVES”
An AFS licensee must comply with the conditions of their licence: see CorpAct s 912A(1)(b). Typically, and in Strata’s case, those conditions include ensuring the competence, training and individual assessment, of anyone who provides “financial product advice” on its behalf. Consistent with those kinds of conditions, a licensee can authorise other unlicensed entities to provide “financial services” on the licensee’s behalf: see CorpAct s 916A(1). If the authority extends to the provision of “financial product advice” - either “personal advice” or “general advice” - the person must be appointed as an “authorised representative”. All “financial product advice” is “general advice” unless it is “personal advice”. A person gives “personal advice” when their advice considers (or where a reasonable person might expect the adviser to have considered) the recipient’s “objectives, financial situation and needs”: see CorpAct ss 766B(3) & (4).
The appointment of an authorised representative imposes on the licensee obligations to:
(a) give an appropriate written authority:- see CorpAct s 916A(1);
(b) specify the authorised services:- see CorpAct s 916A(1);
(c) formally notify ASIC of the appointment, its revocation or alteration: see eg CorpAct s 916F;
(d) take reasonable steps to ensure that its representatives comply with the financial services laws: see CorpAct s 912A(1)(ca);
(e) ensure that its representatives are competent, and adequately trained, to provide their authorised financial services: see CorpAct s 912A(1)(f); and
(f) report to ASIC any actual or apprehended breach of its obligations under s 912A (obligations that include compliance with the licence conditions): see CorpAct s 912D.
STRATA’S POSITION IN THE STRATA INSURANCE MARKET
Strata’s preferred (but not its exclusive) business model is to enter into sub-agency agreements with strata management companies. Under such sub-agency agreements the strata managers would be Strata’s “authorised representatives”. As an “authorised representative” a strata manager could “provide … financial services” and, more specifically “financial product advice”, on Strata’s behalf: see CorpAct Pt:7.6 Division 4, s 916A.
Strata has actually appointed only a small number of strata managers as “authorised representatives”. But it proposes to appoint, and has entered into arrangements with, a number of strata management entities which other AFS licence holders have already appointed as their “authorised representatives”. Two of those other AFS licensees - another specialist strata insurance underwriting agency, and a general insurance broker Strata described as the dominant participants in the strata insurance market - were established many years ago by people now associated with Strata. They became subsidiaries of QBE Insurance (Australia) Ltd, but have been subsidiaries of Steadfast Insurance Group Ltd since February or March 2015. (Notwithstanding the fact that some background events straddle the February 2015 change of ownership, I will simply refer to those two other licensees collectively as “the Steadfast licensees”. Where it is necessary to refer to them individually, I will use the expressions the “Steadfast underwriter”, and the “Steadfast broker”, as appropriate.)
“REPRESENTATIVE” APPOINTMENTS - PROHIBITIONS, PERMISSIONS & LIABILITY
The fact of existing appointments by other licensees, and particularly the appointments by the Steadfast underwriter, has limited Strata’s ability to pursue its preferred business model. (The Steadfast underwriter alone has appointed something approximating 700 professional strata management companies as its “authorised representative”.) This limitation arises because, subject to three permissive exceptions, CorpAct Pt:7.6 Division 5, s 916C(1) prohibits a person from holding multiple representative authorities, and CorpAct s 916C(2) voids any such purported appointment. The exceptions to the multiple representation prohibition apply if either (i) ASIC has exercised its discretionary power to provide a relevant exemption or declaration, (ii) the appointing AFS licensees are all related bodies corporate, or (iii) prior authorising AFS licensees consent to the authorisation by subsequent licensee(s): see CorpAct Pt: 7.6 Division 5, s 916C(1)(a) & (b), Pt:7.6 Division 12, s 926A(2). (I will use the term “cross endorsement” to refer to this kind of consent.)
Despite the legislative provisions that impose joint and several liability on licensees for the conduct of common “representatives” (see CorpAct Pt:7.6 Division 5, s 917C-917F), cross endorsement of “authorised representatives” by AFS licensees does in fact occur. At least in some respects it has been encouraged - in various regulatory refinements.
The CorpAct Pt:7.6 Division 5, s 916C(1) (conditional) prohibition on multiple representation, and the related provisions imposing joint and several liability were originally inserted in 2001 by the Financial Services Reform Act 2001. The basic contingencies attracting joint and several liability under CorpAct s 917C (as originally enacted) were that different licensees had appointed the same representative in relation to “a particular class of financial service”, and the representative had acted either “within authority” in relation to several licensees, or had acted wholly outside any authority.[1] (Where a representative’s conduct resulted in a licensee actually issuing a financial product, the representative was deemed to have acted exclusively “within authority” in relation to the issuing licensee: see CorpAct s 917A(3).)
[1]Subject to the qualification that no liability would apply to conduct “outside authority” where the representative had appropriately disclosed their lack of authority: see CorpAct s 917D.
Subsequently, in December 2003, the Financial Services Reform Amendment Act 2003 inserted ASIC’s CorpAct s 926A general exemption discretion - relating to various Divisions of CorpAct Pt:7.6, including Division 5. This discretion was later exercised to obviate the “cross endorsement” requirement in some circumstances - see paragraph 11 below.
By 2004, the imprecision of the expression “a particular class of financial service” (in the joint and several liability provisions) was recognised. Concern was expressed that its imprecision may have discouraged “cross endorsement” - even where licensees were in fact providing quite distinct services. For the purpose of clarifying the underlying legislative intent, and better identifying the situations where joint and several liability would arise, Corporations Regulation 7.1.04E was inserted in February 2004 (and shortly thereafter renumbered as 7.1.04F). It had the effect of stipulating that there were two main classes of relevant “financial service” (providing advice and dealing) and three subclasses of products to which those services related (general insurance, investment life insurance, and life risk insurance: see Corporations Amendment Regulations 2004 (No. 2). The Explanatory Statement to the amending regulations made the specific comment that the purpose of the new regulation was “to assist in identifying the activities of representatives for which licensees are responsible and consequently make cross-endorsement more attractive”.
In October 2005 ASIC utilised the discretionary power conferred by CorpAct s 926A(2)(c) and made Class Order 05/1070 - relating to “distributors”. This instrument had the effect of specifically differentiating between a licensee’s “representative” and their “authorised representative”. A licensee could appoint a “representative” as a “distributor”, without the need for cross endorsement, provided the authority of the “representative” / “distributor” was limited to “dealing” in a relevant insurance product. (I discuss this development in paragraph 21 below.)
Subsequently, the “joint and several” liability provisions in CorpAct ss 917A & 917C were themselves amended in 2007. The amendment limited the “within authority” deeming that applied where a licensee had issued an insurance product, and introduced two new related provisions” Corp Act ss 917A(3)(ba) & 917C(3)(ba). The combined effect of these amendments was to limit the “within authority” deeming to situations where an authorising licensee had issued “a particular kind of financial product” prescribed by regulations. (see the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. At the same time, the Corporations Amendment Regulations 2007 inserted the contemplated new regulation - CorpReg 7.1.04CA. The regulation classified six relevant “kinds of financial product” - namely motor vehicle, home building, home contents, sickness and accident, consumer credit and travel, insurance
The Explanatory Memorandum to the 2007 amendment Act described the effect of the amendments as having “refined” the effect of CorpAct s 917C where licensees had appointed a common representative “in relation to different kinds or sub-classes of financial products”. The new provisions stipulated that where a licensee “licenses, issues or transfers” a financial product as a result of the representative’s conduct, that conduct would only be deemed as exclusively “within” the authority of the issuing licensee (thus avoiding “joint and several” liability for other licensees) if the product was one of the prescribed kinds. The Explanatory Statement to the amending regulations provided that the joint and several liability provisions in the Act did not apply where cross endorsement related to different kinds of financial product. That Explanatory Statement also went on to say that the new regulation (7.1.04CA) set out the “kinds of financial product” where joint and several liability would not apply.
The interpretation of the various amendments to CorpAct ss 916A and 917A, and their application to strata insurance (having regard to the diversity of insured risks - see paragraphs 27 & 40 below) is not without its difficulties. But it was common ground in the present proceedings that the general effect of the preceding amendments was to retain the primary (but contingent) prohibition on multiple “authorised” representation. At the same time, the amendments reduced the joint and several liability risks associated with cross endorsement, where the authority of a licensees’ representative related to different classes of service and kinds of financial product. The amendments retained the risk of joint and several liability where the authorising licensees both dealt in the same classes of services and kinds of financial product - as is the case for Strata and the Steadfast licensees.
STRATA’S “CROSS ENDORSEMENT” REQUESTS
Despite the risk of joint and several liability for the conduct of any common representatives, the Steadfast licensees had agreed (at least prior to the February 2015 change of ownership) to cross endorsement of their “authorised representatives”. According to Mr Keating (Strata’s CEO and a person once closely associated with the Steadfast licensees) the Steadfast licensees had previously entered into a number of “standing” arrangements with other AFS licensees. Those arrangements provided for “automatic” cross endorsement consent for common “authorised representatives”. Strata asserted, and there is some evidence consistent with its assertion, that “cross endorsement” was also common amongst other relevant licensees providing strata insurance services.
In September 2014 Strata asked the Steadfast licensees to enter into a “standing cross-endorsement consent agreement” (ie. an agreement providing for advance consent relating to any of its authorised representatives - rather than a “case by case” consideration of individual consent requests). Their only specific response was an October 2014 request for information about Strata’s training requirements and program for its proposed representatives. Strata responded the following day. Its response indicated that it proposed to require representatives to either (i) demonstrate prior completion of relevant training (with relevant training institutions or other insurers), or (ii) complete “Tier 2” training “as set out in ASIC Regulatory Guide 146”. (Regulatory Guide 146 categorises financial products as either Tier 2 (ie. including general insurance products - other than personal and accident insurance - that are “generally simpler and better understood”), or Tier 1 (all other financial products). The training qualifications for “Tier 2” products are equivalent to Certificate III in the Australian Qualifications Framework. The corresponding training level for Tier 1 financial products is the Australian Qualifications Framework ‘Diploma’ level.)
The Steadfast licensees did not pursue any further enquiry about Strata’s proposed training requirements. On the other hand, some other licensees provided both standing and individual cross endorsement consent for their authorised representatives. In the absence of a timely specific response from the Steadfast licensees to its standing cross endorsement requests, Strata then began to submit individual consent requests. (By June 2015 Strata had submitted about 276 requests to the Steadfast licensees.) None of these requests has been successful. The discrepancy between the co-operation of some other AFS licensees, and the lack of response from the Steadfast licensees, prompted Strata’s lawyers to complain to the Steadfast licensees, and to foreshadow a formal complaint to the Australian Competition and Consumer Commission (“ACCC”). Steadfast responded to that complaint in mid January 2015 by (i) expressing its concern about the prospect of joint and several liability, and (ii) asserting that CorpAct s 916C(1) gave an existing licensee an unrestricted subjective discretion to refuse cross endorsement.
There were no further effective communications between Strata and the Steadfast licensees. In May 2015 an insurance industry news report attributed to the Steadfast CEO a concern that “cross endorsement” of the Strata “authorised representatives” would give rise to shared liability, and a statement that the Steadfast licensees were not prepared to accept that risk “for a new business with no track record”. Then, on 8 July 2015, the Steadfast licensees formally refused their consent to any “authorised representative” appointments by Strata. (Some other AFS licensees have not responded to, rather than formally refused, Strata’s consent requests.) Conversely, and at about the same time, the Steadfast licensees began to refuse appointment requests by strata managers whom Strata had appointed as its “authorised representatives” (ie. notwithstanding Strata’s own willingness to provide any required “cross endorsement” consent.)
THE REVIEWABLE ASIC DECISION
The absence of a timely favourable response to its various consent requests prompted Strata to react in four ways. First, it adopted a practice of appointing its proposed “authorised representatives” as “distributors”. (I explain the significance of the “distributor” title in paragraph 21 below.) Strata also agreed to substitute distributorship appointments where its authorised representatives had been unable (because of Strata’s appointment) to obtain a corresponding authority from the Steadfast licensees. Second, Strata utilised the services of insurance brokers, and obtained cross endorsement consents from other licensees where that was necessary. Third, in March 2015 Strata forwarded a competition complaint to the Australian Competition and Consumer Commission. Fourth, on 16 July 2015 Strata applied to ASIC for exemption from CorpAct s 916C, and the consent requirement it imposed.
In September 2015 ASIC refused Strata’s exemption request. Strata challenges that decision in these review proceedings.
DEALING AND DISTRIBUTORS
CorpAct s 911B conditionally prohibits a person from acting as an agent in providing “a financial service”. The various permissive conditions include (where the person does not hold their own relevant AFS licence) that the person is either (i) an “authorised representative” of a licensee or (ii) an employee of such a representative. The Class Order ASIC made in October 2005 (see paragraph 11 above) had the practical effect of adding a further permissive condition where a person had been appointed as an “insurance distributor” and their appointment authorised “dealing in … a general insurance product”. This permission, which made the concepts of “authorised representative” and “insurance distributor” mutually exclusive, meant that the multiple representation prohibition in CorpAct s 916C (relating to the appointment of “authorised representatives”) did not apply to prevent persons holding several appointments as an insurance product “distributor”. Correspondingly, however, it limited the permissible scope of the financial service that an “insurance distributor” could provide. The limitation to “dealing in … a general insurance product confined a distributor’s permissible conduct to activities involving applications for, and the acquisition, issue or disposal of, financial products: see CorpAct s 766C. It excluded recommendations or opinions relating to another person’s decisions about such a product - ie. a “distributor” appointment gave no permission to provide “financial product advice”: see CorpAct s 766B.
The Explanatory Statement to the October 2005 Class Order referred to a May 2005 Federal Government paper - Refinements to Financial Services Regulation - and its desideratum of promoting “wide access to general insurance products”. The Explanatory Statement referred to industry practices where insurance products were distributed by persons who were “not traditional participants in the financial services industry” (eg. travel agents, real estate agents and transport and storage businesses). At the same time, however, the Explanatory Statement emphasised the limited permissible scope of an appointee’s activities. It declared that “distributors under the class order can only deal; they cannot provide advice”. The Explanatory Statement implicitly recognised the utility of such distribution practices, and the potential undesirability of requiring “cross endorsement” in relation to them. This desirability was more clearly described in a “regulation impact statement” ASIC prepared in October 2005. It referred to the existing distribution practices as relating to insurance products that were “generally well understood by consumers”. It also described the application of the “authorised representative” concept to those practices as potentially causing an unnecessary regulatory and administrative burden for licensees who wanted to retain the benefit of the existing distribution practices.
In July 2015 ASIC repealed Class Order 05/1070, and replaced it with similarly worded provisions in ASIC Corporations (Basic Deposit and General Insurance Product Distribution) Instrument 2015/682. This new instrument changed the expression “insurance distributor” to “product distributor”, and substituted the expression “risk insurance product” for the expression “general insurance product”, but otherwise retained the overall intent, and the broad practical effect, of the repealed Class Order. It excluded distributorship appointments from the “cross endorsement” requirement that would otherwise apply to permit a person to have multiple appointments as a representative, but limited the permissible scope of a distributor’s activities to “dealing” in a financial product. (This limitation, which precludes providing financial product advice, has resulted in some strata managers refusing appointment as distributors, on the ground that the limitation is inconsistent with their obligations to their owners corporations.)
Although the 2005 and 2015 ASIC instruments made the concepts of “distributor” and “authorised representative” mutually exclusive, a person appointed as a “distributor” still had the status of a “representative” of the appointing licensee. This was made clear in paragraph 5(a) of both the 2005 and the 2015 instruments. As a consequence, and irrespective of the absence of any requirement for “cross endorsement”, all appointing licensees were potentially jointly and severally liable for the conduct of a distributor, in the same way that CorpAct s 917A & 917C imposed potential liability for the conduct of their “authorised representatives”.
STRATA DEVELOPMENTS – GENERAL BACKGROUND
Some background about the range of strata and community title developments, their nature, scope and management, is necessary before moving to address the details of both Strata’s application, and ASIC’s opposition to the grant of any relevant exemption. In sketching that background it will suffice to focus on the concept of strata development, without paying separate attention to the range of organisation models that may occur in community and company title developments.
Strata title developments have become increasingly common since about the 1960’s. Strata’s July 2015 application suggested that up to the present time there was something in the order of 300,000 such developments across Australia. Strata developments typically involve a physical building, with two different types of proprietorship interest. First there are multiple residential, commercial or industrial “lots” within the building that are individually owned or leased. Second there is “common property”, vested in an owners corporation, as agent for the “lot” holders. The “common property” of such developments will typically comprise the building exterior, shared access areas (eg. corridors, stairs, foyers, footpaths curtilages and car parks), building services (including wiring and plumbing), building equipment (eg. lifts and air conditioning) and recreational areas (eg., gardens, playing courts, and swimming pools).
Strata developments are regulated by conceptually similar, but not uniform, legislation in the various states and territories. Typically the legislative provisions (i) impose responsibility for the management of the strata scheme on the “owners corporation” and (ii) stipulate minimum requirements for the constitution and rules or by-laws of the “owners corporations”. The responsibilities of an “owners corporation” include (i) holding annual meetings, (ii) appointing an executive committee and office holders, (iii) keeping appropriate records and financial statements, (iv) maintenance, repair and safety of the common property, (v) compliance with the scheme by-laws, (vi) compliance with any public authority requirements, (vii) establishment of administrative and sinking funds, and the imposition of any required related funding levies, and (viii) effecting insurance - including mandatory insurance against damage to the building (or in some cases only the common property), public liability and workplace safety: see for example the following New South Wales legislation: Strata Schemes (Freehold Development) Act 1973; Strata Schemes (Leasehold Development) Act 1986; Strata Schemes Management Act 1996; Strata Schemes Management Act 2015 (not yet in force); Community Land Management Act 1989.
STRATA MANAGERS - QUALIFICATIONS AND PROFESSIONAL ASSOCIATIONS
It follows from the variable nature of strata developments, and the scope of the responsibilities summarised in paragraph 26, that owners corporations have a wide range of functions. In any particular case, that range of functions, and the effort, knowledge and skill required to carry them out appropriately, will depend on the size and complexity of the particular development. Such is the potential complexity and diversity of strata developments, and the obligations relating to them, that the regulating legislation typically allows an owners corporation to delegate its functions (either partly or wholly) to a “strata scheme manager”: see eg Strata Schemes Management Act 1996, s 28. It is this kind of delegate, a specialist strata management company, that is the focus of Strata’s preferred business model - and apparently also a preference of the Steadfast underwriting agency: see paragraph 36 below. Strata estimates that delegation of insurance requirements to a professional strata manager is the overwhelmingly preponderant practice of owners corporation entities.
Legislation in at least some states and territories regulates the appointment of strata managing agents, and may impose on them specific obligations. In New South Wales, for example, a strata manager must hold an appropriate statutory licence, and only appropriately qualified and registered entities can be licensed as strata managers: see Strata Schemes Management Act 1996, s 26. In addition, under new legislation enacted in 2015 (but not yet in force) strata managing agents in New South Wales will be obliged to obtain a minimum of three quotations for any insurance the agent proposes to an owners corporation: see Strata Schemes Management Act 2015, s 166.
It is obvious that strata managers may have a wide range of functions - depending upon the scope of the manager’s appointment and the terms of any delegation by an owners corporation. Recognising both the diversity and the importance of strata management roles, and despite variations in the relevant state and territory legislation, most jurisdictions have organisations devoted to promoting the interests and activities of commercial strata managers. One such state organisation is Strata Community Australia (NSW). It was described by Strata’s managing director (Mr Keating) as the peak New South Wales organisation involved in training, advocacy and accreditation for the strata management industry. It provides a range of formal qualifications, and accreditation under the Australian Qualifications Framework. Once such qualification is a Certificate of Registration, a qualification requirement that is unique to New South Wales.
Another state organisation is a Victorian entity known as Strata Community Australia (Vic) Community (“SCA Vic”). The Victorian organisation actively promotes the idea that any commercial strata manager should be an “authorised representative” of a relevant AFS licence holder. The reason for this preference is a view about the scope of the obligations that a strata manager is likely to owe to their owners corporations clients, particularly the scope of the advice an owners corporation may require. That view leads to a conclusion that the restrictions inherent in the role of a financial services product “distributor” (see paragraph 21 above) are unlikely to be compatible with the proper discharge of a strata manager’s responsibilities. That conclusion is implicit in the following passage from one of SCA Vic’s explanatory publications:
… the Authorised Representative model most appropriately allows [Owners Corporation] Managers to fulfil their fiduciary obligations to their clients and provide an appropriate level of advice on insurance matters in order to properly service their clients. At the centre of any fiduciary relationship, a duty exists that requires an [Owners Corporation] Manager to make available to the client, all relevant information, which will then enable the client to make an informed decision.
SCA Vic gives effect to its policy preference by restricting its membership to entities that have been appointed as “authorised representatives”. (Notwithstanding that apparent restriction, but perhaps reflecting a widespread support for the policy underlying it, about 70%-80% of strata managers in Victoria are members of the association.)
There is no similar formal requirement or membership restriction in any strata or community title association in the other jurisdictions. But there is some evidence that those associations nevertheless encourage - as a matter of best or better practice - strata managers securing formal appointment as an “authorised representative”. Strata’s managing director said that the strata management community across the country was generally supportive of the SCA Vic policy requiring strata managers to hold appointments as an “authorised representative”. Mr Keating also said that there was currently underway a process of trying to achieve the unification of the various state and territory organisations into one national group and, implicitly, one that would continue to embrace the SCA Vic policy.
Apart from those general preferences, Strata pointed to the fact that some strata management organisations have policies of (i) only providing insurance related services in the capacity of “authorised representatives”, (ii) having “authorised representative” appointments from several licensees, and (iii) refusing to accept appointments as a “distributor” (because such an appointment precludes providing financial product advice).
STRATA INSURANCE
Commensurate with the prevalence of strata and community title developments, and the owners corporations’ insurance obligations, there is significant, and apparently increasing, activity in the provision of strata and community title insurance. Strata’s July 2015 application gave an estimate in the order of $1 trillion for the insurable asset value of the (approximately) 300,000 Australian strata schemes.
There are said to be about 18 specialist strata insurers. One major strata insurer has chosen to operate only by using a “distributor” business model. But most of the strata insurers distribute their products through insurance brokers, and some do so exclusively. Three of the strata insurers (QBE, CGU and Allianz) operate (not exclusively) through underwriting agencies (respectively the Steadfast underwriter, SUU and Strata itself) who hold a binder from the insurer. Of those three, only the Steadfast licensee (and Strata itself) has a practice of appointing strata manager companies as their “authorised representative”.
An insurance broker is typically an AFS licensee, (thus unaffected by any requirement for “cross endorsement”) and able to provide both general and personal financial product advice, as well as a range of insurance product options (ie alternative products of different insurers). There are (at least) several hundred brokers involved in strata insurance. Most brokers operate without appointing any “authorised representatives”. However, some brokers, and the Steadfast broker is one of them, do also appoint “authorised representatives” and, in particular, they appoint strata manager companies in that capacity. Still other brokers may appoint “authorised representatives” and / or “distributors” – as and when circumstances demand. All brokers involved in strata insurance tend to promote themselves as able to provide expert advice and assistance. Mr Keating acknowledged their capacity to give both general and personal advice in relation to strata insurance, but expressed the view that often their advice was limited to general advice, subject to disclaimer and no more extensive than that typically provided by a strata manager (acting in the role of authorised representative).
Because of the number of strata insurers, the different distribution strategies they employ, and particularly the activities of insurance brokers, ASIC contests the accuracy of Strata’s characterisation of the Steadfast licensees as the dominant participants in the provision of strata insurance. ASIC contends that the Steadfast licensees are just two of the many participants in an established, competitive market with various product distribution and advisory practices. More specifically, ASIC challenges Strata’s attempt to focus attention on the significance of the Steadfast underwriter as a “dominant” entity in the segment of the strata insurance market involving underwriting agencies. ASIC says that the reality of the situation is that owners corporations and strata managers have a wide range of options as to how they go about negotiating and arranging their insurance. ASIC says that the preliminary information Strata reported about its initial discussions with the ACCC, and the absence of any evidence of the ACCC’s subsequent active interest in Strata’s March 2015 complaint somewhat corroborates, or is at least consistent with, ASIC’s characterisation of the strata insurance market.
It would be unwise, in my view, to draw any significant inference from the mere appearance of inactivity by the ACCC in response to Strata’s complaint. However, the details ASIC provided about participants in the strata insurance market, together with the information it elicited from Mr Keating in cross examination, do justify description of the strata insurance market as competitive, and involving a wide range of products and service practices.
STRATA’S CLAIM
Strata’s preferred business model of appointing strata management companies as “authorised representatives”, and the similar SCA Vic preference for a strata manager to have the status of an “authorised representative”, relates to the potential complexity of the owners corporations’ obligations. This is particularly the case in relation to the insurance issues that may arise, and to the scope of the obligations that a strata manager may have to its owners corporation’s principal. That complexity, and the practical necessity of obtaining competent advice, is well described in the following extract from the website of an insurance broker involved in strata insurance:
Every building is unique and faces different risks, which need to be taken into account. By working closely with you and helping you make smarter decisions about your insurance, we can help you mitigate your risks, reduce unnecessary costs and save you from taking out ineffective cover and underinsuring your strata building.
Depending on the requirements of your building, an effective strata policy should cover:
●Building and Common Contents
●Legal Liability
●Fidelity Guarantee
●Personal Accident (Voluntary Workers)
●Machinery Breakdown
●Office Bearer’s Liability
●Body Corporate Costs
This is of course dependent on a number of factors. Prior to taking out an insurance policy, we recommend that you seek appropriate, and impartial, advice to understand your individual risks and how to manage them. You will need to ensure you are up to date with all relevant regulation and local laws and that you have calculated all costs involved, especially regarding major building damage and building factors (Is the sum insured accurate? How much is needed for removal of debris, professional services and site-specific costs? Are you aware of any new building standards in the area?)
Strata takes the view that the interests of owners corporations are best served by having both reasonable choice and competent advice. Strata takes the further view that commercial strata managers, with their qualifications, skills and experience are well placed, and with their contractual obligations, are required, to serve the interests of strata owners corporations. Finally Strata contends that, in order to fulfil their advisory obligations to their owners corporations, strata managers really do need to be in a position to give appropriate financial product advice in relation to an owners corporation’s insurance obligations and options. (Indeed, an available implication from Mr Keating’s somewhat sceptical view about the efficacy and expertise of the practices of insurance brokers in general (see paragraph 37 above) was Strata’s view that professional strata managers, at least in relation to the more complex strata developments, were the most appropriate advisers to their owners corporations.) It is that contention that leads on to Strata’s preferred business model, reflecting its view that strata managers consequently require formal status as an insurer’s “authorised representative” in order to be able to give the appropriate level of advice, and to provide owners corporations with an appropriate level of choice of insurance products.
Mr Keating said that Strata’s business model preference was consistent with the views of SCA Vic. He said it was also consistent with a widespread attitude of strata managers. He pointed to the significant number of strata managers who were willing to accept appointment “cross endorsement” from Strata. He said that willingness indicated the prevalent view of strata managers about the scope of advice that owners corporation clients may have reason to request. It also reflected a further view that strata managers could best serve their owner corporation client needs and expectations, as well as having a broader legislative authority to give required advice, when they were an “authorised representative” for a range of AFS licensees.
Strata concedes that the absence of cross endorsement from the Steadfast licensees does not deprive either strata managers or owners corporations of access to its insurance products. But it complains that the existing strata managers are unable to provide their owners corporations with “general advice” about those products. It is this, assertedly lop-sided access to “general advice” that Strata contends is potentially adverse to the interests of both owners corporations and strata managers. Strata describes this as a “disconnect” between the strata manager’s services when acting as a Steadfast “authorised representative” (on the one hand) and when acting as a Strata distributor (on the other hand). It asserts that the “disconnect” effectively reduces the informed choices available to an owner’s corporation, and may have an adverse impact on its insurance decisions.
Strata’s primary contentions in support of its exemption application are to the following effect:
(a)“cross endorsement” of “authorised representatives” is commonplace - to the extent that (i) individual cross endorsement requests are typically answered within weeks, and (ii) many AFS licensees, including the Steadfast licensees, have in place multiple standing cross endorsement agreements that obviate the need to obtain “case by case” consent;
(b)the Steadfast licensees’ 8 July 2015 refusal (and the lack of response from other licensees) contradicts industry practices and, in the absence of relevant explanation, should be characterised as unreasonable; and
(c)permitting the kind of “cross endorsement” it seeks would (i) satisfy the legitimate interests and needs of both owners corporations and strata managers, (ii) positively assist in the efficient and fair provision of insurance services to the strata industry, and (iii) broadly parallel the ameliorating measures ASIC implemented in the Class Order / Instrument relating to “product distributors” - discussed in paragraphs 21 to 24 above.
In relation to the actual form of the relief required to obtain the formal exemption permission it requires, Strata advances a number of alternative contentions. They are to the following effect:
(a)it should be given an unconditional exemption from CorpAct s 916C;
(b)alternatively, ASIC should declare that CorpAct Pt:7.6 Division 5 (containing the s 916C limitation) operates with an appropriately permissive variation. (Both of those alternative possibilities are said to be contemplated by CorpAct s 926A(2).);
(c)alternatively, Strata should be given an exemption that applies only where another licensee has refused cross endorsement consent, and subject to a condition that Strata indemnify the other AFS licence holder against any joint and several liability to which multiple representation might give rise; or
(d)alternatively, ASIC could make a permissive declaration that the consent requirement in s 916C(1)(a) did not apply where a “later” appointing AFS licensee provided an indemnifying undertaking to any AFS licensee from whom the proposed appointee already held a representative authority.
STRATA’S RELIANCE ON CROSS ENDORSEMENT PRACTICES
Strata says that that the cross endorsement of “authorised representatives” has hitherto been generally regarded, and specifically amongst the strata insurance market participants, as “largely” a mechanical and procedural matter. In order to illustrate that proposition Strata has asserted that it has been standard practice for AFS licensees to enter into “standing cross endorsement consent” arrangements. Strata suggested that the practice was encouraged by the general obligations of AFS licensees. Those obligations include (i) taking reasonable steps to ensure their representatives complied with financial services laws, (ii) ensuring that their representatives were adequately trained and competent, and (iii) doing all things necessary to ensure that licensed financial services are provided “efficiently, honestly and fairly”: see CorpAct s 912A.
Strata’s reliance on the general practice it asserted involves an understanding that all licensees are subject to the same basic requirements of competence, probity, training and management. Those requirements give rise to a reasonable expectation that licensees will conscientiously endeavour to satisfy those requirements - because it is in their self-interest to ensure the maintenance of their licence. The argument implies, and seeks to draw from the practice of cross endorsement, a practical recognition that, in the majority of situations, there is unlikely to be any objective justification for any individual licensee to withhold consent to another licensee’s authorisation of an existing “authorised representative”.
However Strata also acknowledged that an AFS licensee would typically make a number of enquiries “when dealing with another Licensee for whom they have not previously provided cross-endorsement consent”. Those enquiries would likely involve (i) information about the other licensee’s training, supervision and monitoring of its representatives, (ii) details of any written agreement between the other licensee and the representative, (iii) satisfaction about the content of the “Financial Services Guide” that would apply to the representative, and (iv) satisfaction about the adequacy of the insurance arrangements that would apply to the activities of the proposed representative. In the absence of satisfactory responses to those kinds of enquiry, Strata conceded that a licensee could properly and reasonably refuse cross endorsement consent. Consistent with that concession, Strata’s own standard form of agency agreement for its “authorised representatives” (i) required the representative to obtain Strata’s consent to any additional appointment by another licensee, (ii) provided that it would not unreasonably withhold consent, and (iii) provided that Strata could, at any time, withdraw its consent.
In October 2014 the Steadfast licensees had requested, and Strata had supplied, information about Strata’s training practices and requirements: see paragraph 16 above. Strata emphasised it had never received any complaint, or enquiry, about the quality or sufficiency of the information it had provided - and invited the inference that it had in fact been a satisfactory response. Strata further complained that the Steadfast licensees’ categorical cross endorsement refusal of 8 July 2015, was unreasoned. It failed to identify, let alone to give Strata any opportunity to address, any legitimate concerns that the Steadfast licensees might have had. Strata complained that in those circumstances, the Steadfast licensees refusal was a marketplace aberration and potentially contrary to a licensee’s obligation to ensure their financial services were provided efficiently, honestly and fairly (see CorpAct s 912A(1)(a)). Strata urged the conclusion that the Steadfast licensees had acted unreasonably in refusing cross endorsement consent. Strata seeks to portray this unreasonable refusal as a tactic, intended by the Steadfast licensees to limit competition and choice in the strata insurance market, and giving rise to “atypical or unforeseen circumstances and unintended consequences” sufficient to warrant the exercise of ASIC’s exemption discretion: see Regulatory Guide 167 paragraph 167.8.
ASIC’S OPPOSITION
In compliance with a Tribunal direction, the parties co-operated to produce a Joint Statement, setting out their respective contentions about the main issues involved in the determination of Strata’s claim. Those main issues essentially involved the following propositions, which take the form of summary re-expressions of the substantive grounds on which ASIC relied in supporting its 30 September 2015 decision:-
(a)Proposition 1:- cross endorsement consent refusal is specifically contemplated by the CorpAct s 916C(1) conditional prohibition, and its occurrence provides no justification for the exercise of the CorpAct s 926A exemption discretion.
(b)Proposition 2:- granting Strata’s exemption would expose the Steadfast licensees to greater risk, impose on them a greater supervisory burden (in relation to the monitoring and assessment of the common “authorised representatives”), and cannot be regarded as a decision relevantly analogous to the previous “product distributor” exemption.
(c)Proposition 3:- the prospect of increased risk to the Steadfast licensees would not be offset or obviated by Strata’s indemnity proposal.
(d)Proposition 4:- granting the exemption might be an exercise in futility, because of contractual restraints precluding the Steadfast licensees “authorised representatives” from accepting similar appointments from other licensees.
PROPOSITION 1:- NO EXEMPTION TO REVERSE SPECIFICALLY CONTEMPLATED CONSENT REFUSAL
ASIC’s primary position was that CorpAct s 916C(1) prohibited multiple “authorised representative” appointments, except with the consent of prior authorising licensees. ASIC’s general policy was not to exercise its exemption powers in CorpAct s 926A to effect law reform and overcome the usual and intended effect of specific provisions in the Corporations Act. ASIC referred to its policy statement - in Regulatory Guide 51: Applications for relief. In that policy ASIC refers to a requirement for “exceptional circumstances” before it would regard it appropriate to exercise its exemption power.
At one point ASIC contended, relying on a passage in Re Queensland Power Trading Corporation t/a Enertrade and Australian Securities and Investments Commission [2005] AATA 945; (2006) 89 ALD 346 at [87] & [88], that the CorpAct s 926A exemption was only appropriately exercised in “exceptional cases”, where the ordinary operation of the relevant provisions would “lead to unusually burdensome results”. However, a fair reading of the whole of Senior Member McCabe’s reasoning suggests that those expressions were merely an attempt to illustrate, rather than confine, situations where exercise of the discretionary power was appropriate. This is made apparent by Senior Member McCabe’s explicit acknowledgement that there were no prescriptive criteria for the exercise of the exemption decision, and his recognition that any exercise of the discretion must have regard to the objectives of CorpAct Chapter 7 - objectives expressed in s 760A in the following terms:
760A Object of Chapter
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
The exercise of the CorpAct s 926A discretion may be appropriate where it would contribute to the Chapter 7 objectives, irrespective of whether or not the situation involves either “exceptional” or “unduly burdensome” circumstances. But the question whether such a potential contribution makes the actual exercise of the discretion determinatively appropriate requires a decision maker to make an impressionistic assessment about a range of factors. Included amongst them will be the nature and extent of the postulated contribution, the degree of confidence about the likelihood of that contribution, the nature extent and probability of adverse consequences of the exercise of the discretion, and perhaps most importantly, the apparent legislative contemplation that the provisions, as enacted, were thought to give effect to the Chapter 7 objectives in a practical, convenient and workable manner.
In the present case, having regard to the features of the strata insurance market to which I have referred earlier in these reasons, I am not satisfied that the exemption Strata seeks would make any significant contribution to the Chapter 7 objectives. The evidence I have summarised justifies description of the business of providing strata insurance, and advising about strata insurance needs and products, as served by a wide range of active insurers, insurance brokers, and their respective “authorised representatives” and “product distributors”. There is no real substance, in my view, in Strata’s broad contention that its ability to distribute its insurance products to strata management companies is being substantially impeded, to an extent relevant to the potential exercise of the CorpAct s 926A discretion, by the cross endorsement refusal by the Steadfast licensees. Strata is able to deal and distribute its products through both brokers and distributors. Strata management companies have access to both. Indeed, strata management companies may actually have obligations to seek advice from brokers, and products from a range of insurers, in relation to strata insurance in order to fulfil their contractual obligations to their respective owners corporations. Those contractual obligations (which are alluded to in the passage cited in paragraph 31 above) cannot be avoided by either the fact of the strata manager’s exclusive appointment as the “authorised representative” of a particular insurer, or by any limitations in the scope of any such appointment.
I accept the possibility, alluded to by Mr Keating, that the advisory practices and performance of insurance brokers involved in the provision of strata insurance may vary. I also accept that strata managers, if they are to fully discharge their contractual obligations to their owners corporations, may desire, and justifiably desire, to have the freedom to provide (as distinct from obtain from brokers) general advice on behalf of a number of different strata insurers. But neither of those matters is, in my view, sufficient to warrant the exercise of the exemption discretion as something that will meaningfully further the Chapter 7 objectives. As a matter of objective analysis, and even before considering the issues of either joint and several liability or indemnity, I am unable to identify a factual basis to warrant a conclusion that the postulated exemption is either necessary or even desirable to further the Chapter 7 objectives.
PROPOSITION 2:- ADVERSE EFFECT ON INCUMBENT LICENSEES
ASIC’s related reason for refusing Strata’s application is its apprehension that doing so could adversely affect the Steadfast licensees, by exposing them to the risk of joint and several liability for the conduct of an authorised representative in relation to Strata’s insurance products. ASIC says that the consent requirement in CorpAct s 916C was plainly intended to operate for the benefit of an “incumbent” licensee (ie. one who had first granted “authorised representative” status) and a decision that exempted another licensee from the cross endorsement consent requirement was inherently likely to increase materially the risk of an existing licensee incurring an additional liability, in relation to conduct for which it would not otherwise be responsible.
Strata’s response to ASIC’s apprehension of adverse impact on the Steadfast licensees is to concede the potential, but to dismiss it as a practically insignificant concern, and one about which Steadfast was, in reality, unlikely to have had any genuine concerns. Strata’s concession about potential adverse impact was partly reflected in an explicit concession that, notwithstanding the underlying training and supervision requirements inherent in a licensee’s statutory obligations (see paragraph 3 above) a licensee faced with a cross endorsement request could reasonably and properly enquire, and insist on, satisfaction about the training and supervision practices. That concession was consistent with Mr Keating’s evidence that a prudent licensee presented with a cross endorsement consent would reasonably make enquiries of the kind referred to in paragraph 48 above, and could reasonably refuse consent in the absence of a satisfactory response to them, including the absence of a satisfactory indemnity agreement.
Strata’s dismissal of the practical significance of training and supervision enquiries was reflected in Mr Keating’s evidence that, in his experience, potential problems with training and indemnities were fundamentally hypothetical. He said he had never had an instance of refusing consent, nor of unsatisfactory indemnity arrangements. Whilst he accepted that there were scenarios where cross endorsement consent might be refused, he said the more typical approach would be to identify, discuss and attempt to resolve the contentious issues, rather than simply refuse consent. Based on this evidence, and the absence of any specific reasons for the Steadfast licensees’ consent refusal, Strata contended that apprehensions about joint and several liability were of little practical significance.
Strata emphasised that point by providing an analysis of various scenarios. First of all, Strata contended that no joint and several liability would arise where it issued an insurance product as a result of the conduct of one of its “authorised representatives”: see paragraph 10 above. Second, Strata highlighted that no such liability would arise where an “authorised representative” only acted “within authority” in relation to a particular licensee. Third, Strata pointed out that existing licensees were already exposed to the risk of joint and several liability, irrespective of cross endorsement, where an existing licensee’s “authorised representative” also held an appointment by Strata as a “product distributor”. Finally, Strata contended that its proposed exemption could potentially advantage an existing licensee. That potential could arise, because of joint and several liability, where a common “authorised representative” acted outside their actual authority (although subject to the effect of any indemnity arrangement between the appointing licensees).
ASIC disputed the contention that, as the underwriting agent, Strata would “issue” an insurance product, and therefore attract the exclusive “within authority” deeming provided for in CorpAct s 917A(3) - see paragraphs 10 above. ASIC did not otherwise dispute the logic and accuracy of Strata’s analysis of the potential for joint and several liability. Instead, ASIC emphasised that, even on Strata’s analysis, some potential for joint and several liability remained, and the question whether that risk was acceptable to an existing licensee asked to provide “cross endorsement” was one that the Corporations Act permitted the licensee to answer in a subjective and self-interested fashion. ASIC particularly emphasised that a licensee could readily apprehend a significant risk where a strata manager was authorised and encouraged to give “general advice”. In essence, ASIC pointed to the “general advice” preference referred to in paragraph 31 above, and suggested that, in the context of strata management companies, with their close association with, and obligations to, their owners corporations, there was a corresponding risk of straying beyond “general advice” into “personal advice”. ASIC contended that such a risk was a matter of genuine and legitimate potential concern to an existing licensee - and highlighted the difficulty of characterising any refusal of cross endorsement consent (at least of the kind sought by Strata) as unreasonable.
There are a number of reasons why I do not accept Strata’s contention that there is no practical potential for cross endorsement to disadvantage the Steadfast licensees, and that their refusal of consent must consequently be characterised as unreasonable. First of all, I do not consider that Strata’s October 2014 response to the Steadfast licensees’ training enquiry, even with the benefit of the evidence Mr Keating gave about training issues usually being uncontroversial, demonstrates that training issues could not have been a matter of legitimate practical concern. The impression I have from both Strata’s response, and Mr Keating’s evidence, was that they addressed training in a general sense - directed at the basic qualifications and competence of persons appointed as “authorised representatives”. The reference in Strata’s response to “Tier 2” training (see paragraph 16 above) confirms that impression. It is reasonable where the matter under consideration is a “standing cross endorsement agreement” - with its contemplation of cross endorsement in relation to the future appointment of unspecified people as “authorised representatives” - to focus on that kind of general training requirement. But it is not the only training consideration. The more direct purport of the Steadfast licensees request in the present case, where they were primarily being asked to consent to the cross endorsement of people they had already appointed as “authorised representatives” (and thus, implicitly, were satisfied of their basis competence and integrity) can, and I think should, reasonably be understood as an enquiry about what level of training Strata would provide to those representatives in relation to its particular products and practices. When the request is viewed from that perspective, it seems to me that nothing in Strata’s October 2014 response provided any meaningful information.
Second, whilst I accept the force of Strata’s argument that it should be regarded as an “issuer” of strata insurance (albeit on behalf of Allianz), that argument is not the only tenable interpretation of CorpAct s 917A(3)(c). ASIC adopted the contrary interpretation of that provision, and asserted that only Allianz as the actual insurer was the relevant product “issuer”. Strata neither did contend, nor could it reasonably have contended, that ASIC’s interpretation was fanciful. In my view, the proper interpretation and effect of CorpAct s 917(3)(c) is a fairly arguable matter, and presents a significant obstacle to characterising as “unreasonable” the Steadfast licensees’ refusal of cross endorsement consent.
Third, I do not accept that there is a persuasive analogy between the exemption Strata seeks in the present case, and the exemption provided for in relation to a “product distributor”. The essential difference between the two situations is that a distributor is not intended to provide any kind of advice, whereas the provision of “general advice” is, in the present case, the postulated purpose of Strata’s “authorised representative” appointments. The advisory function of an authorised representative is, by its nature, likely to involve a considerably greater element of risk and potential liability than that of a product distributor.
Fourth, I do not accept that the indemnities proffered or contemplated by Strata materially contribute to a conclusion that cross endorsement was not, and could not have been, a matter of practical concern to the Steadfast licensees, or otherwise material to the exercise of the exemption discretion. The fundamental difficulty with the suggested indemnity is that it postulates, in every case, the ability to differentiate exclusively between conduct attributable to one licensee rather than any other. This postulation seems rather optimistic. More specifically, its optimism is at odds with the fact that CorpAct s 917C(4) adopts the default position of joint and several liability - irrespective of whether or not the representative has acted within the scope of their authority. Where an “authorised representative” acts outside the scope of their authority, and joint and several liability arises, it is inherently likely to be problematic to ascribe the liability as relevantly attributable to one or other of the authorising licensees. That difficulty in turn highlights the difficulty of characterising as unreasonable a refusal of cross endorsement consent.
Finally, I do not accept the basic premise underlying Strata’s argument that the Steadfast licensees cross endorsement refusal - that it must be classified as unreasonable because they could not have had any legitimate concern about the risk of joint and several liability. It is implicit in Strata’s preferred business model that it sees a potential advantage in being able to deal directly with strata managers. Correspondingly, the Steadfast underwriter already has that ability and advantage. It is readily conceivable that the Steadfast underwriter wants to retain that advantage, to the extent that it is lawful for it to do so. It is, to my mind, fundamentally wrong to contend that a consent refusal must be characterised as unreasonable merely because either (i) consent could not occasion a relevant or material liability detriment, or (ii) the refusal is primarily (perhaps even exclusively) motivated by a desire to maintain a perceived commercial advantage.
I recognise that Strata’s complaint about the Steadfast licensees cross endorsement consent refusal involves much more than a grievance about commercial advantage. Strata contends that the refusal distorts the strata insurance market, and impedes the proper and cost efficient distribution of both insurance products and advice to the strata managers and owners corporations. But I do not accept the validity of Strata’s argument in that regard - essentially for the reasons given in paragraphs 35 to 39 above.
PROPOSITION 3:- INADEQUATE INDEMNITY PROPOSAL
The potential statutory joint and several liability does not preclude licensees from agreeing to provide reciprocal indemnities “for a liability in respect of the representative” - where the conduct primarily concerns one particular licensee: see CorpAct s 917F(6). Strata went on to say that cross indemnities of these kinds were commonly provided for in standing cross endorsement arrangements between licensees. Strata contended that the effect of these common indemnity agreements was that licensees who consented to their representative holding multiple authorities could limit their ultimate liability to situations where the authorised representative had in fact only been providing services on the licensee’s behalf. Strata said that the practice of providing indemnities of this kind tended to preclude the possibility of a reasonable basis for refusing cross endorsement consent. Indeed, because of that practice, Strata characterised the Steadfast licensees’ suggested apprehensions about joint and several liability (see paragraph 18 above) as deliberate obfuscation and without foundation.
I have already described as problematic the assumption underlying Strata’s indemnity proposal in relation to cross endorsement. ASIC’s opposition to the exemption application raised the additional consideration that, in the absence of a contractual agreement between the relevant licensees, the indemnity would not clearly be enforceable - either by, or in favour of, the Steadfast licensees. Strata’s responses to this concern were that (i) ASIC could require Strata to give an indemnity undertaking that ASIC could enforce for the benefit of affected licensees, or (ii) the exemption relief could be expressed as conditional on Strata providing an indemnity undertaking to the affected licensees.
Neither of Strata’s responses to ASIC’s concerns is persuasive. As to the first, there is no good reason, especially in the light of what I regard as the potentially problematic nature of any undertaking, for imposing on ASIC the role of enforcing such an indemnity in favour of other licensees. As to the second, the suggested undertaking would either have to be conditional on acceptance by the Steadfast licensees (an acceptance they could not be required to give) or it would be subject to some consideration of “reasonableness”. However a standard of reasonableness would be inherently difficult to apply - given my view about the problematic nature of the assumption underlying the usual form of “cross endorsement” indemnity suggested by Strata in its submissions.
PROPOSITION 4:- THE FUTILITY OF EXEMPTION
ASIC’s further contention was that the claimed exemption might be an exercise in futility, given that many of the Steadfast licensees’ authorised representatives were likely to be subject to contractual restraints limiting their ability to accept appointments from other licensees. Given the conclusions I have reached on the first three of ASIC’s propositions, this matter merits little attention. However, I record my scepticism that this speculation would, on its own, provide a determinative reason against the exercise of the exemption discretion. I am sceptical because no existing “authorised representative” could be appointed unilaterally by Strata. Every appointment would have to be consensual and reflected in a written agreement. It is, to my mind, highly unlikely that any existing Steadfast licensee’s “authorised representative”, who was subject to a contractual restraint against accepting other appointments, would accept a Strata appointment unless they were prepared either to challenge the efficacy of the contractual restraint, or accept whatever consequences might follow from its breach. Either way, it is far from persuasive to conclude that the possible existence of (unspecified) contractual restraints would alone warrant, or indeed provide a relevant reason for, refusal of an otherwise appropriate exercise of the exemption discretion.
CONCLUSION
The decision under review is affirmed.
I certify that the preceding 71 (seventy-one) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member ....................[sgd]..................................................
Associate
Dated 30 September 2016
Date(s) of hearing 5, 6 & 27 July 2016 Date final submissions received 24 August 2016 Solicitors for the Applicant Radford Lawyers Counsel for the Respondent Ms D Tucker Solicitors for the Respondent Australian Securities and Investments Commission
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