Last week the Federal Court disqualified two former directors of Avestra Asset Management Ltd, a Queensland-based responsible entity that operated a number of registered and wholesale managed investment schemes. The directors were disqualified from managing corporations and restrained from providing financial services for a period of ten years due to multiple contraventions of the Corporations Act.
What went wrong?
Back in 2015, the Federal Court ordered the shut down of five investment schemes run by Avestra which was drawn into Malaysia’s 1MDB crisis. The orders were made after a report from provisional liquidators which found that: Avestra had failed to invest according to the fund’s individual mandates, had made undisclosed related-party transactions and committed numerous breaches of corporate law. Following the closure of the schemes, action was commenced in the Federal Court against Avestra for contraventions of the Corporations Act.
The Federal Court concluded that Avestra had committed numerous contraventions of the Corporations Act which included:
- failing to notifying scheme member of a material change to investment risk;
- undertaking related party transactions without member approval;
- failing to act in the best interest of the scheme members;
- failing to exercise a degree of due diligence where a reasonable person would exercise if they were in Avestra’s position;
- failing to put in place adequate procedures to manage conflicts of interest arising wholly, or partially, when providing financial services;
- failing to necessarily ensure that financial services under Avestra’s AFS licence were provided efficiently, honestly and fairly; and
- in the case of the two directors, failing to comply with duties owed by them as officers of the responsible entity and as directors of Avestra.
Avestra’s failures resulted in the investment portfolios of two of the schemes becoming heavily exposed to high-risk investments that were at odds with the investment strategy and risks that had been presented to the retail investors in those schemes.
The Risks are Real!
Clearly, Avestra is a prime example of a RE that had complete disregard to its AFSL and RE obligations. It also illustrates how epically an RE can breach its obligations without sufficient risk management systems and supporting control measures in place.
Justice Beach disqualified the two directors for ten years to specifically to deter them from contravening the Corporations Act and as a general deterrence measure for the wider financial services community. The length of the disqualification reflects the severity of the directors’ conduct and the seriousness in which the Courts view this conduct. Justice Beach noted further that “if Avestra had observed effective compliance and conflict-management practices, it is likely that the episodes of misconduct would not have unfolded … They were shortcomings that created or reflected a significantly deficient corporate culture, which enabled Avestra to act with a systematic and serious disregard of its fiduciary and regulatory obligations.”
How CompliSpace can help
To assist you to understand and implement ASIC’s expectations regarding Risk Management, CompliSpace is running a workshop on 26 May 2017. Click here for further details.
CompliSpace delivers industry specific web-based programs to manage your risk and compliance requirements that can be quickly tailored and configured to suit an organisation’s needs and are kept up-to-date with legal and regulatory changes by our team of specialists. CompliSpace also offers consulting services, such as Risk facilitation workshops and independent risk framework reviews.
Our team of compliance professionals and lawyers combine extensive expertise with practical technology-enabled solutions to simplify the complexity of the regulatory environment and allow our clients to focus on allocating resources toward improving financial performance.
Please contact Brooke Benson to discuss your risk management and compliance requirements further.