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The AAT Decisions: Can You Win Against ASIC?

Posted on May 25th, 2017 by Sophie Gerber in AFSL Compliance

Each year the Australian Securities and Investment Commission (“ASIC”) makes countless decisions in their role as regulator of the financial services industry. These decisions cover a diverse range of subject matters, from the fitness of individuals to operate in the financial sector to freedom of information requests.

A decision by ASIC can have far-reaching and serious consequences for the recipient. This is particularly so when ASIC issues a ban against an individual or company preventing them from providing financial services. Given the potential reputational risk and financial impact of these decisions, it is not surprising that some financial services licensees will choose to appeal a decision by ASIC. An application for an independent review of an ASIC decision can be made to the Administrative Appeals Tribunal (“AAT”), which has jurisdiction to review the decisions of a wide range of Government bodies in Australia.

Between 1 January 2016 and April 2017, the AAT released their verdict on 32 appeals against ASIC decisions. Of these, the ATT granted four stay applications (to temporarily suspend any ASIC orders until the appeal could be heard) and varied three orders by significantly reducing the penalties ASIC had imposed.

During this period, the AAT also overturned four ASIC decisions. In one such decision, the matter of McCormack v Australian Securities and Investment Corporation, the AAT overturned the decision by ASIC to ban Mr McCormack from providing any financial services for a period of five years.

The facts of McCormack are lengthy and quite bizarre, but in short while acting as a financial adviser Mr McCormack detected a suspected fraud, believing that an individual had wrongfully taken money from his client’s superannuation. Rather than reporting this suspicion to the police Mr McCormack and his client impersonated the person they believed had committed the fraud, forged his signature, withdrew the ‘stolen’ funds from that individual’s superannuation fund, and deposited them in an account belonging to Mr McCormack’s client, thereby ‘returning’ the funds to his client.

Subsequently, it was then discovered by Mr McCormack that there had been no fraud against his client, it was simply a case of mistaken identity. Once again, instead of notifying ASIC or the police about the error, Mr McCormack and his client again impersonated the person from whom they had stolen the money in order to return the money to the individual’s account. The comedy of errors was eventually divulged and an investigation was undertaken. ASIC subsequently banned Mr McCormack from providing financial services for five years.

In its decision, the AAT agreed with ASIC that Mr McCormack had breached s1041H (1) of the Corporations Act 2001 (“Act”), namely that a person must not engage in conduct in relation to a financial product or a financial service, that is misleading or deceptive, or is likely to mislead or deceive. However, having decided this, the AAT then considered the purpose of banning a licensee from providing financial services.

The AAT found that the purpose of a ban by ASIC should be to protect the public, deter like conduct by others in the industry, and to maintain investor and consumer confidence in financial markets, and furthermore that while the effect of such a ban may be punitive on the person or entity, that is not its purpose. The AAT gave weight to Mr McCormack’s unblemished career as a financial planner, the fact that no complaints had been made against him previously, the lack of financial gain to himself in the actions he took, his admission that his behaviour was wrongful and that the third party had not suffered a detriment because of his actions.
The AAT found that while Mr McCormack had breached the Act, a ban in these circumstances would not achieve its intended purpose and its only effect would be to punish Mr McCormack, which was not an appropriate exercise of the discretion. The AAT ordered the reversal of the ban and said that Mr McCormack should be treated as never having been banned.

In another decision, the case of Davidof v Australian Securities and Investment Corporation, ASIC had determined that Mr Davidof had conducted transactions involving MINI warrants that had the effect of creating an artificial price for the products. As this conduct is prohibited under the Act, ASIC banned Mr Davidof from providing financial services for three years.
The AAT overturned this decision because in the AAT’s view the ‘MINIs’ involved in the transactions did not meet the definition of a financial product under the Act, therefore Mr Davidof was not carrying out a transaction that fell under ASIC’s jurisdiction. On that basis the AAT held that there was no basis for ordering a ban against Mr Davidof. ASIC has indicated it may appeal this decision.

Most recently, the AAT upheld the appeal of Mr Hill in Hill v Australian Securities and Investment Corporation and overturned the ASIC decision to disqualify Mr Hill from managing any corporation for one year. The acts of this case are quite detailed but involved several companies that were put into liquidation, in large part because government bodies refused to pay for work that they had contracted these companies to carry out. The overarching allegation by ASIC was that as a non-executive director of these companies, Mr Hill’s actions or inaction caused or significantly contributed to their failure.

The AAT decision was at times scathing in its review of the action brought by ASIC; it appeared that ASIC had little or no evidence to support its allegations, conducted cross-examination during the hearing, the point of which was ‘difficult to discern’ and seemed to misunderstand basic financial principles such as the distinction between a facility to borrow and a facility that has been drawn down. The AAT found that none of the breaches of duty alleged by ASIC were established by the evidence and the decision was set aside. It was noted by the AAT in its judgement that Mr Hill had retired, and had appealed ASIC’s decision only to restore his good reputation.

As well as the discretion to overturn or affirm a decision by ASIC, the AAT has the authority to vary an ASIC decision. In the matter of Rainbow Legend Group Pty Ltd v Australian Securities and Investment Corporation (“Rainbow”), ASIC ordered the cancellation of Rainbow’s Australian Financial Services Licence (“AFSL”).

In its decision, ASIC found that Rainbow had continually failed to meet its compliance obligations, including a failure to lodge required financial statements despite prompting by ASIC, and further that websites owned by Rainbow were making claims in Chinese and English that suggested that its clients would be protected by a compensation scheme that does not exist in Australia.
The AAT set aside ASIC’s decision to cancel Rainbow’s AFSL. Instead AAT suspended Rainbow’s AFSL for 9 months with provision for the suspension to be lifted if Rainbow fulfilled certain compliance conditions. The essence of the AAT decision was that while the group had undoubtedly fallen short of the standards required of an AFSL holder, its actions had not been deliberately dishonest, rather the errors arose due to sloppiness and inattention to proper process. The AAT therefore felt that a cancellation of the AFSL was not necessary and instead imposed conditions to encourage the entity toward better compliance practices.

These AAT decisions are clear examples of how it is not always sufficient for ASIC to state that an offence or breach has occurred, it is also important to consider what action will achieve the purpose of the legislation. The overarching purpose of ASIC’s powers when imposing a ban, disqualification or suspension is to maintain trust and confidence in the financial sector, to protect the public and to act as a deterrent. If a decision ASIC makes does not promote those ends and is merely punitive, then the AAT are unlikely to uphold that decision on appeal.

What is clear from these decisions is that an AFSL Holder’s longstanding history of good conduct will be important and relevant in the AAT’s determinations; maintaining a good reputation throughout ones’ career could assist an individual if they one day find themselves in front of the AAT.

The relatively low number of successful appeals suggests that Financial Services Licensees can be assured that for the most part ASIC is using its powers correctly and in the manner, expected under legislation.

Further information on the published decisions can be found on AustLII.