Financial Services Update: ASIC cracks down on AFSL compliance breaches

Deficient advice and supervision results in ASIC action

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In this edition:

  • Deficient advice and supervision results in ASIC action; and
  • ASIC tip-off leads to unfair dismissal claim from whistleblower.

Deficient advice and supervision results in ASIC action

Deficient and lax compliance at PGW Financial Services Pty Ltd (PGW) has led to the acceptance by the Australian Securities and Investments Commission (ASIC) of an enforceable undertaking (EU) from PGW. As part of the EU, PGW must appoint an independent expert or risk losing its Australian Financial Services Licence (AFSL). This serves as a reminder to all financial services providers to have appropriate resources and procedures in place when providing advice to clients. PGW provided the EU to ASIC after surveillance by ASIC in April 2013 found deficiencies in its advice to clients and arrangements for supervising its authorised representatives.

First, a little history. PGW had appointed a number of ex-representatives of AAA Financial Intelligence Limited and AAA Shares Pty Ltd (together, the AAA Group). The AAA Group had its AFSL cancelled by ASIC in February 2013 for ‘comprehensively and repeatedly’ failing to comply with its obligations under the Corporations Act 2001 (Cth) (Corporations Act) and the conditions of its AFSL. ASIC was particularly concerned about the level of supervision of the representatives which the AAA Group had appointed and, in effect, their conduct and the advice they provided to retail clients.

Fast forward 12 months to 2014, and PGW has found itself haunted by the legacy AFSL issues of the AAA Group.

The ASIC action focuses around the obligations AFSL holders need to comply with under the Corporations Act. Namely that, in addition to ensuring that their financial services are provided ‘efficiently, honestly and fairly’, they need to:

  • take reasonable steps to ensure that its authorised representatives comply with the financial services laws;
  • ensure that its authorised representatives are adequately trained, and are competent to provide those financial services; and
  • have available adequate resources (including financial, technological and human resources) to provide the financial services covered by their AFSL and to carry out supervisory arrangements.

ASIC’s surveillance of PGW and its 49 authorised representatives found:

  • numerous instances where financial product advice provided by PGW to clients did not demonstrate:
    • a reasonable basis for the recommendations made; and
    • compliance with disclosure obligations applying to advice on switching financial products;
  • failures by PGW to maintain:
    • human and technological resources; and
    • records of financial services provided to clients.

Regarding the supervision of its authorised representatives, ASIC was concerned that PGW failed to:

  • assess the competency of representatives before their appointment;
  • ensure the adequate training of representatives; and
  • respond to failures identified during the licensee’s audit process.

As part of its EU, the ASIC-approved independent compliance expert must also assess PGW’s provision of financial services, including a review of the personal advice provided by its authorised representatives.

AFSL holders should see this case as an illustration of the compliance risks inherent when they ‘rapidly increase their numbers of representatives, particularly where those representatives have come from other licensees’. Changes to a business’s size and structure will alter its risk profile, necessarily meaning that its risk management procedures will need to adapt accordingly. An adequate risk management system should account for the need to monitor and train authorised representatives as part of a strategy to control the risks of a compliance breach.

ASIC has various Regulatory Guides (RGs) which explain its expectations not only of the required practices, but also good and prudent industry practice by AFSL holders (for example, RG104 Licensing: Meeting the general obligations and RG146 Licensing: Training of financial product advisers).

ASIC expects AFSL holders to ensure that their authorised representatives meet their obligations under the Corporations Act. To do this, they must have in place policies and processes for the training, supervision and monitoring of its authorised representatives to meet the standards laid out by ASIC.

Policies should not be ‘tokenistic’; they must be actively enforced by the organisation. It is not enough to just simply ask authorised employees to undertake an internal training program upon their commencement of employment as this is not a reasonable way of ensuring compliance. Proper employee screening should be done prior to their engagement to confirm that prospective employees have adequate training. An AFSL holder is also responsible for ensuring that its authorised representatives maintain the skills necessary to ensure that it continues to provide financial services advice which complies with its legal obligations, in addition to protecting its clients from incompetent financial advice. 

Ultimately, PGW’s chickens came home to roost in this case as the EU reminds them that regardless of how, or by whom, the financial services were provided under the AFSL, PGW was responsible. All AFSL holders should re-visit their own risk management and training procedures in light of PGW’s failures.


ASIC tip-off leads to unfair dismissal claim from whistleblower

The foreign-exchange broker at Pepperstone Financial (Pepperstone) who told ASIC about alleged insider trading activity between the Australian Bureau of Statistics (ABS) and National Australia Bank (NAB) has launched an unfair dismissal claim against Pepperstone after he was sacked.

Joel Murphy was running the sales division of Pepperstone when allegedly he says he noticed suspicious trading on the foreign exchange market between two clients, NAB employee Lukas Kamay and ABS employee Christopher Hill.  Pepperstone informed ASIC about the unusual activitiy, which led to an investigation by the Australian Federal Police.  The AFP’s investigation revealed an alleged $7 million insider trading operation and Mr Kamay and Mr Hill were arrested in May after the Police monitored foreign exchange trades allegedly made by Mr Kamay through his Pepperstone account.

Mr Murphy claims that his employment contract with Pepperstone was terminated on the same day that the news of the insider trading scandal broke.  According to a report by the Sydney Morning Herald, Pepperstone’s reason for Mr Murphy’s termination was due to ‘global FX market volatility being at record lows … and the entire FX trading market contracting’.
Mr Murphy is claiming that he was unlawfully terminated by Pepperstone as a result of the protected disclosure and that he should have been offered protection under the whistleblower protection provisions under the federal Corporations Act 2001 (Cth) (Corporations Act).  The Corporations Act protects certain whistleblower activities, and protects whistleblowers from victimisation. These protections are designed to encourage people within companies, or with special connections to companies, to alert ASIC and other authorities to illegal behaviour.
To fall within the whistleblower protections under the Act, the whistleblower must meet the following criteria:
  1. they must be an officer, employee, contracted supplier or employee of an contracted supplier of the company the disclosure is about;
  2. the conduct must be reported to ASIC, a member of the company’s auditing team, an officer of the company, member of company senior management or another person authorised to receive that information at the company;
  3. they must disclose their name to the authorised person/ASIC when making the disclosure;
  4. they must have reasonable grounds to believe that the company or an officer/employee of the company has, or may have, contravened the Act or the Australian Securities and Investments Commission Act 2001 (Cth); and
  5. the disclosure is made in good faith.

Mr Murphy is seeking damages of $904,779 based on bonuses he says he was owed for the period.

However, even though the Corporations Act makes it a criminal offence to victimise a whistleblower, as well as entitling the whistleblower to seek reinstatement and compensation, ASIC is not actually obliged to take action itself under the Act to protect the whistleblower.  On its website ASIC maintains that it ‘can and will’ investigate allegations of victimisation, but that due to its limited resources it will concentrate on investigating the alleged misconduct rather than the victimisation.  Under ASIC’s current whistleblower approach, it’s up to the whistleblower to enforce their rights for protection and reinstatement or compensation if they believe that they have been victimised as a result of their disclosure. The ASIC website repeatedly recommends that the whistleblower seek their own legal advice.

The Senate Economics Committee’s (Committee) report on ASIC’s performance (see our blog) acknowledged the importance of encouraging whistleblowers and was generally scathing  in its criticism of ASIC’s approach, and highlighted the need for legislative reform.

The Committee also acknowledged the importance of companies having internal whistleblower systems in place. Employees are more likely to report misconduct, fraud and corruption, if they are confident that the company will protect them.  A company whistleblower policy is also a sign that the comany takes its ethical obligations seriously. Vincent Quattropani, Managing Director, Your-Call Disclosure Management Services explains the organisational benefits of having a clear and comprehensive whistleblowing policy:

‘from our experience, companies that have a robust whistleblowing regime, that is compliant with Australian Standards and legislation, will always operate at a higher level of corporate governance’.

Having an internal, well-communicated whistleblower process benefits the company by encouraging the reporting of non-compliance to them in the first instance.  While painful in the short term, the disclosure enables a company to fix problems which can minimise or avoid the risk of significant financial losses to the company, legal penalties and public relations discussion.


How CompliSpace can help
Australian Financial Services Licence holders are inundated with a raft of corporate governance obligations and an ever-growing compliance burden, that can distract focus away from core business activities.

CompliSpace provides industry-specific policies, programs and procedures to ease the burden of compliance.

Our compliance and corporate governance solutions include Whistleblower, AFSL, AML/CTF and other industry-specific compliance programs.

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This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on 1300 132 090 and we will be happy to assist.

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