XTrade.AU Pty Ltd 2and Australian Securities & Investments Commission
[2024] AATA 1372
•4 June 2024
XTrade.AU Pty Ltd 2and Australian Securities & Investments Commission [2024] AATA 1372 (4 June 2024)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2024/2667
Re:XTrade.AU Pty Ltd
APPLICANT
AndAustralian Securities & Investments Commission
RESPONDENT
DECISION
Tribunal: Deputy President Bernard J McCabe
Senior Member Diana Benk
Date: 4 June 2024
Place:Sydney
The application for a stay is refused.
...............................[SGD].....................................
Deputy President Bernard J McCabe
Catchwords
PRACTICE AND PROCEDURE – STAY APPLICATION – application for an interim stay order – objectives of the regulators in making a decision – protection – objective of transparency – interim stay dissolved granted - reviewable decision takes effect
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Cases
Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185
Daly and Australian Securities and Investments Commission [2020] AATA 1516
Matai and Australian Securities and Investments Commission [2023] AATA 340
Olive Financial Markets Pty Ltd and Australian Securities and Investments Commission [2022] AATA 5229
Rent to Own (Aust) Pty Ltd and Australian Securities and Investments Commission [2011] AATA 689Sovereign Capital Limited and Australian Securities and Investments Commission [2008] AATA 901
REASONS FOR DECISION
The applicant in these proceedings has asked the Tribunal to exercise its discretion under s 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) to stay the operation and implementation of a reviewable decision. The reviewable decision was made by a delegate of the Australian Securities and Investments Commission (ASIC). The delegate decided ASIC would exercise the power under s 915C of the Corporations Act 2001 (Cth) to cancel the applicant’s Australian Financial Services Licence (AFSL).
The applicant is seeking a review of that cancellation decision in the Tribunal and wants the Tribunal to stay the operation of the decision so the applicant can continue to trade while the review is underway.
The applicant also wants the Tribunal to restrain ASIC from announcing the fact of its reviewable decision. That is something ASIC would ordinarily do on its website and through the issue of a press release in the ordinary course of its functions.
The Tribunal made an interim stay order that has been in force while the interlocutory application was considered.
After hearing from both parties, we have decided it is not desirable to make orders under s 41(2) of the AAT Act. Therefore, the interim stay is dissolved, and the reviewable decision takes effect according to its terms.
Background
The applicant is in the business of providing financial services. It is the Australian subsidiary of an international group based in Cypress. The ultimate controller of the group lives in Cypress and Israel. The group provides a proprietary trading platform that the applicant accesses under an intragroup arrangement.
Amongst other products, the applicant markets ‘contracts for difference’ (CFDs) on various investment products that are traded through the group’s platform. While these products have their place in the hands of sophisticated investors, they are regarded as being very risky because they can quickly generate large losses.
The applicant runs a relatively small operation in Australia. The material in support of the stay application suggests the applicant only had around 140 active clients, although the number of clients may have dwindled since that material was lodged. It was conceded those clients included unsophisticated individual investors.
The reviewable decision concluded the applicant had failed to comply with several of its general obligations under s 912A(1) of the Corporations Act. In particular, the delegate concluded the applicant:
·did not have in place adequate arrangements for the management of conflicts of interest (a contravention of s912A(1)(aa);
·has not complied with the financial services laws in contravention of s912A(1)(c), including:
(i)the prohibition on engaging in unconscionable conduct found in s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) and s 991A of the Corporations Act; and
(ii)failing to take reasonable steps to ensure retail product distribution conduct is consistent with its target market determination as required in s 994E of the Corporations Act;
·failed to take reasonable steps to ensure its representatives complied with the financial services laws as required in s 912A(1)(ca);
·failed to do all things necessary to ensure the financial services provided under the AFSL were provided efficiently, honestly and fairly as required in s 912A(1)(a).
The delegate also concluded there was reason to believe the applicant would contravene its obligations under s 912A(1) in the future.
The applicant concedes it engaged in problematic behaviour. At this stage, we understand it does not seriously contest the factual findings made by the delegate, concedes it failed to comply with its obligations under s 912A(1). The applicant does argue the Tribunal will take a different view on the question of whether there was reason to believe the applicant was unlikely to comply with its obligations in the future. Mr Knowles SC, who appeared for the applicant, said the applicant was confident of presenting material at the final hearing that demonstrated a change in the applicant’s operations, processes and personnel sufficient to reassure the Tribunal things had changed.
While the applicant took issue with aspects of the delegate’s decision, its case was essentially forward looking. It argues the Tribunal would look favourably upon the changes which had been made to remedy the mistakes of the past and decide a less stringent form of regulatory action was appropriate.
The Tribunal’s stay power
The Tribunal’s stay power is found in s 41(2) of the AAT Act. It is available “for the purpose of securing the effectiveness of the hearing and determination of the application for review.” The power may only be exercised for that purpose “if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review”. Orders under s 41(2) may stay the operation and implementation of the reviewable decision wholly or in part, and the orders may be conditional upon the applicant giving undertakings as to its conduct while a stay order is in force. The orders may extend to administrative action that takes place in consequence of a reviewable decision, such as issuing a press release or making an entry on a register.
Section 41(1) of the AAT Act makes clear a reviewable decision ordinarily comes into effect and operates according to its terms even though an interested person has commenced review proceedings in the Tribunal. The stay power is exceptional, in the sense the Tribunal must be satisfied it is appropriate to make an exception to the usual state of affairs contemplated under s 41(1). Importantly, that exceptional power is discretionary in nature. The sub-section says the Tribunal must have regard to the interests of persons effected by the review, but it does not otherwise prescribe the considerations which must be taken into account when exercising the discretion. That said, we are conscious the Tribunal does not act as an entirely free agent able to exercise its powers under s 41(2) devoid of context. The Tribunal forms part of a decision-making continuum. We step into the shoes of the primary decision-maker and re-make the decision under review on the basis of the material before us, which might be different to the material that was before the original decision-maker in a case like this.[1] While the factual record might be different on review, we ultimately apply the same laws as the primary decision-maker.[2] We also pursue the same statutory objectives. We must keep those objectives in mind when we exercise powers under the AAT Act, like the stay power. In this case, those objectives must be divined from the Corporations Act and the ASIC Act.
[1] There are cases where the Tribunal is required by a particular enactment to make a decision on the basis of more limited material, but this is not one of those cases.
[2] Where the legislation has changed and the amending legislation instructs the Tribunal to apply the new law, as it did in the circumstances discussed in Schroeder and Australian Securities and Investments Commission [2020] AATA 2453, the Tribunal will apply the new provisions – but it otherwise applies the law in force at the time the reviewable decision was made.
Section 760A of the Corporations Act sets out the main objectives of Chapter 7, which includes the power to issue, regulate and cancel AFSLs. Suffice to say s 760A emphasises the regulatory regime is designed to protect consumers and promote efficient markets. Section 1(2) of the ASIC Act requires ASIC to strive to (amongst other things):
(a)maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and
(b)promote the confident and informed participation of investors and consumers in the financial system; …
The Tribunal conventionally approaches these applications having regard to the framework suggested by Downes J in his reasons in Scott and Australian Securities and Investments Commission [2009] AATA 798 at [4]. We will use those matters as headings in the reasons that follow. In doing so, we are conscious the Scott framework should not be applied inflexibly, nor should it be treated as an exhaustive statement of the relevant considerations – but the parties agree it provides a convenient starting point for our discussion.
In this case, the applicant wishes to stay the cancellation order so it may continue trading, but it is prepared to agree to conditions. The suggested conditions might include an undertaking the applicant would inform all existing clients of the reviewable decision. (We understand that has already occurred consistent with the undertakings required in connection with the interim stay.) The applicant would also disclose the reviewable decision to any new clients, or it might give an undertaking that it would not accept any new clients. The applicant also wants ASIC to be restrained under s 41(2) from announcing the reviewable decision on its website or issuing a press release. (ASIC has agreed to refrain from doing both of those things pending the outcome of the stay application.) The applicant does not make any application at this stage for non-publication orders under s 35 of the AAT Act.
The prospects of success
We accept it is not appropriate to conduct a mini-trial for the purpose of assessing the merits of the application. Our consideration is necessarily impressionistic.
If the applicant were able to point to a strong case at this stage, that would count heavily in favour of a positive exercise of the discretion. If the applicant appeared to have a poor case, that would count against the exercise of the discretion. If it has an arguable case, this consideration would not count for or against the exercise of the discretion.
The applicant’s written and oral submissions did not seriously dispute the adverse factual findings made in the reviewable decision, despite criticising some aspects of the delegate’s reasons. The applicant said the Tribunal was nonetheless likely to reach a different, more lenient decision once it was acquainted with the extensive changes that had been made in response to the admitted problems. Mr Knowles argued the Tribunal would be inclined not to cancel the AFSL in circumstances where the applicant had already made those important changes, and where further reforms were in progress. He relied on the Tribunal’s decision in Sovereign Capital Ltd and Australian Securities and Investments Commission [2008] AATA 901 to argue a suspension or some other regulatory action short of cancellation would be preferable in those circumstances. In Sovereign Capital, the Tribunal opined (at [84]):
A licence should only be suspended or cancelled if it is necessary to do so in order to accomplish the objects of the legislative scheme. A suspension will ordinarily be preferable if there is a reasonable prospect that the licence-holder can remedy the defects which prompted the concern. If there is no reasonable prospect of the issues being resolved, cancellation may be the appropriate course. The power to suspend or cancel should not be used merely to punish the licence-holder for transgressions: see Story v National Companies and Securities Commission (1988) 13 NSWLR 661.
Mr Brady KC, who appeared for ASIC, pointed out the Tribunal had recently expounded on that observation in the course of its reasons in Olive Financial Markets Pty Ltd and Australian Securities and Investments Commission [2022] AATA 5229 where it explained (at [247]-[248]):
In Sovereign Capital, the Tribunal decided suspension was the preferable course in all the circumstances because the problems were capable of being addressed during the course of the suspension. In that case, it was thought more stringent action would serve no further purpose and risked becoming a form of punishment. But that decision (and that passage in the reasons in particular) should not be taken to stand for the proposition a licensee can readily avoid the most serious consequences if it belatedly commits to doing better. The key to understanding the decision in Sovereign Capital lies in its references to the centrality of the objects of the regulatory regime and the circumstances of the individual case.
Subsequent cases in the courts and the Tribunal have made clear that achieving the objectives of the legislative regime might require the decision-maker to give significant weight to the deterrent value of regulatory action. …
Mr Brady says this case has much in common with what happened in Olive. In Olive, the applicant had also dealt in CFDs, and there were significant concerns about internal processes and behaviours that had since been reformed. Mr Brady pointed out the Tribunal decided to cancel Olive’s AFSL even as the Tribunal acknowledged the failings were mainly of an historical nature. Mr Brady also took us to those parts of the reviewable decision in this case which discussed some of the behaviours. He argued the failings in this case were, if anything, much more serious than those considered in Olive.
The changes made by the applicant to its operations and personnel might position it to persuade the Tribunal there is no longer a reason to believe the applicant will contravene its obligations, leaving the question of what to do about the historical contraventions. The fact the applicant has acknowledged the contraventions is encouraging. Even so, it is not clear on the limited material currently available that the applicant has a strong case overall. We are nonetheless prepared to accept the case is arguable. In those circumstances, we think this consideration is neutral.
The consequences for the applicant
We were provided with affidavit evidence from the applicant’s Australian-based director describing the likely effect if a stay is not granted. He said the business will cease to operate without a licence, which is obviously true. Mr Knowles noted the applicant’s client base had already dwindled somewhat after the individual clients were informed of the reviewable decision. The director said the applicant’s remaining clients would be forced to find a new provider of financial services while the review proceeds if there was no stay. The director added that the firm’s existing employees and contractors would presumably be terminated, although it seems a number of those individuals have already left.
The director also talked about the financial commitments of the applicant. Apart from its operating costs (which have presumably been reduced if the business is effectively in mothballs), the firm also has monthly commitments to its overseas parent under an intercompany loan agreement. There was some discussion at the stay hearing over the terms of the agreement and how it was recorded in the books of the company. Suffice to say it is clear the company has access to support from its parent company while the review proceeds, although it remains to be seen whether the parent wishes to extend that support.
The applicant is also concerned about the impact of adverse publicity surrounding the reviewable decision if it becomes public knowledge. Bad publicity is always a risk in regulatory processes, and anyone who is involved in a regulated occupation knows that. As Downes and Jagot JJ explained in Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185 at [76]:
It is difficult to accept that harm (even serious harm) to the recipient’s reputation resulting from public awareness of the banning order will be a sufficiently cogent reason to justify the grant of a stay in most cases. This is because the risk of harm of this type is inherent in the nature of a banning order.
To similar effect, the Tribunal explained in Daly and Australian Securities and Investments Commission [2020] AATA 1516 at [17]-[18]:
The Tribunal will look carefully at requests to suppress news of a reviewable decision even where the Tribunal is otherwise prepared to issue a stay under s 41(2). The reasons for that caution are obvious enough. The Tribunal’s review mechanism is intended to operate in a transparent way. But the Tribunal is also conscious that others who continue to deal with an applicant will be understandably angry if they later discover they were kept in the dark about a reviewable decision that might have influenced their choices as consumers of the applicant’s services.
While the Tribunal will consider the reputational damage and economic loss that an applicant might experience if the reviewable decision is published while the review proceeds, it might not give those concerns much weight. Requests for suppression orders – for that is what they are, in substance – will be scrutinised very carefully where the reviewable decision in question relates to a person’s right to participate in a regulated occupation. Participation in a regulated occupation brings many benefits, including (in many cases) economic advantages that accrue to licence holders. Those economic advantages flow from the establishment of barriers to entry that incidentally reduce competition between the favoured few. The licence necessarily carries with it a requirement that the licensee conform to the rules and participate in regulatory processes according to law. Most of those regulatory regimes – including the one established in Chapter 7 of the Corporations Act 2001 (the Corporations Act) – place a premium on transparency. It follows that a risk of bad publicity accompanying adverse regulatory action will often be regarded as an incident of a licensee’s participation in a regulated occupation.
In all the circumstances, we are not persuaded this consideration weighs heavily in favour of exercising the discretion. We would add it is not entirely clear how much of an advantage a stay order would confer on the applicant if we did order it: the applicant runs a very small operation and many of its existing clients have already decamped after learning of the reviewable decision.
The public interest
The objectives of the regulatory regime have already been discussed. In a case like this, we are particularly concerned about the need to protect consumers in the short term while the review proceeds.
In written submissions, the applicant explained:
The evidence available to the delegate indicated the scope of the Applicant’s efforts to improve compliance and early signs that these were successful in that there had been a drop in complaints since these efforts commenced. It is in the public interest to allow businesses to provide financial services to their clients and earn an income. [Emphasis added]
We should say at once the submission embodied in the last sentence we have highlighted is misconceived for reasons explained in Daly that have already been quoted. Participation in a regulated industry is a privilege, and those who claim the privilege must conform to a regulatory regime which emphasises the interests of consumers and the orderly and transparent regulation of the market. The Tribunal must keep that in mind when exercising its powers. While the interests of the applicant are relevant, Downes J and DP Hack explained in Rent to Own (Aust) Pty Ltd and Australian Securities and Investments Commission [2011] AATA 689 at [47] the Tribunal must keep in mind the need for:
… good regulation and good administration, not an overanxious desire to permit regulated activity wherever possible.
We acknowledge it would be unfortunate if refusing the stay would harm the applicant’s existing clients who have positions in the market. We note the delegate’s decision expressly gave the applicant time to deal with its clients’ affairs in a way that would minimise the risk of loss. The delegate permitted the applicant to continue dealing with those clients to assist them to exit their investments in an orderly way. That aspect of the delegate’s decision would remain in effect if we refused the stay.
The evidence of changes being made to the applicant’s operation suggest the risk of harm has been reduced. It remains to be seen whether those efforts are sufficient. The adverse findings made by the delegate are very worrying, and the public – particularly that part of the public which uses the applicant’s services – is generally entitled to the benefit of the regulator’s decision: see Scott at [10].
We are satisfied the public interest weighs against ordering a stay, although somewhat less heavily than would otherwise be the case given the improvements which may have been made.
The consequences for the respondent in carrying out its functions depending upon whether a stay is granted or not
We are not satisfied ASIC will be compromised in carrying out its functions if the operation of the decision under review were stayed. The stay process is part of the larger review process, and the review process is a feature of the regulatory process. The issue of a stay is not ordinarily regarded as some sort of rebuke or setback for ASIC. ASIC is not impacted in its role if the applicant in this case were permitted to continue trading in the short term.
That is not necessarily true if the stay order extends to restraining ASIC from publicly announcing news of the reviewable decision in the ordinary course. ASIC has an educative role, and it needs to be viewed as an active ‘cop on the beat’ if the regulatory process is to operate effectively. Members of the public and the financial press rely on ASIC to point out bad behaviour when it occurs – although any information ASIC provides about the reviewable decision should include news that review proceedings have been commenced, and a stay has been sought. If ASIC is restrained from making an announcement in a particular case, that might create a false sense of security in the market. Participants in the market who rely on ASIC might be misinformed. Over time, participants may feel compelled to seek out other sources of information about provider behaviour that increase transaction costs. ASIC might also be embarrassed if it were approached for information about a particular trader ASIC knows to be the subject of regulatory action.
The risk of embarrassment is somewhat less where the applicant does not seek more far-reaching non-publication orders under s 35 of the AAT Act. Mr Knowles acknowledged the applicant did not expect ASIC to be restrained from responding to enquiries, for example. The applicant merely wishes to restrain ASIC from making a public announcement. But that is still problematic because it makes it harder for ASIC to play its educative role in a coherent way. As the Tribunal explained in Matai and Australian Securities and Investments Commission [2023] AATA 340 at [20]:
I have more serious concerns about ASIC being placed in an awkward position if it were required to refrain from publicising the reviewable decision. While the absence of s 35 orders means ASIC could respond to enquiries from members of the public or the media, it is unable to manage the dissemination of information about the reviewable decision in an orderly way. The orderly dissemination of information about regulatory action is an important value evident in the legislation.
Concerns for the efficacy of the regulator weigh heavily against the issue of a stay that extends to restraining ASIC from publication of the reviewable decision, but those concerns do not otherwise weigh against exercising the discretion to order a stay of the reviewable decision itself.
Whether the application for review would be rendered nugatory if a stay were not granted
This concern brings us back to the proper purpose of a stay application. The applicant says its business will be damaged if it is suspended pending the outcome of the review process. Clients will leave and staff will be terminated, and the losses involved will be difficult to recover even if the applicant is successful upon review.
As it happens, the applicant does not have many clients – and it has even fewer after it disclosed news of the reviewable decision as it was required to do as a condition of the stay. The individual clients appear to be small investors; it is not as if they are high net worth individuals or corporations who individually generate significant income streams that will be difficult to replace. It also appears some of the staff have already been terminated. The applicant will also retain the benefit of its association with the international group that provides access to the trading platform.
Mr Knowles pointed out the failure to obtain a stay might have consequences for the applicant’s internal reforms. He noted the applicant planned to engage outside advisors to undertake the next round of reviews and reforms. That will be an expensive process and it may be difficult to justify doing so if the business ceases trading in the short term. That will impact on the way the review is conducted and on the prospects of success.
We accept there is some evidence the absence of a stay will have implications for the review process, but we do not accept it will be rendered entirely nugatory. We do not think this consideration weighs in favour of ordering a stay.
Other matters that are relevant
The length of time that will pass before a hearing can be held is obviously relevant to our consideration. The applicant expects to produce a substantial amount of material to explain what occurred and additional material to explain the reforms. That process will take time, and there may yet be a need for expert evidence from ASIC. The potential for delay can be a reason for and against the exercise of the discretion. In this case, we accept it does not count against the exercise of the discretion, but we think it has limited weight in all the circumstances.
CONCLUSION
On balance, we are satisfied it is not desirable to make orders under s 41(2) of the AAT Act. The public interest concerns are sufficiently serious to tip the balance, even as we acknowledge there is some evidence that changes to the applicant’s operations and personnel have already been made. It follows the application for stay orders is refused.
45. I certify that the preceding 44 (forty-four) paragraphs are a true copy of the reasons for the decision herein of
................................[SGD]........................................
Associate
Dated: 4 June 2024
Date(s) of hearing: 31 May 2024
Counsel for the Applicant:
Patrick Knowles SC
James Walker
Solicitors for the Applicant:
HWL Ebsworth Lawyers
Counsel for the Respondent:
Matthew Brady KC
Solicitors for the Respondent:
Australian Securities and Investments Commission
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