Should you be conducting more stringent monitoring and supervision of your authorised representatives? – Key take-aways from the Lanterne Case

In proceedings brought by ASIC, Lanterne Fund Services Pty Ltd was ordered to pay a $1.25 million penalty by the Federal Court after it failed to comply with multiple obligations of its Australian Financial Services (AFS) Licence.

If you are an AFS Licensee or Australian Credit Licensee (Licensee) which authorises representatives to provide financial services or engage in credit activities on your behalf, you have a range of obligations in relation to these representatives.

Background of Lanterne

Lanterne's business model involved authorising financial services providers to operate as Authorised Representatives (ARs) under its AFSL. From March 2019 to October 2021, Lanterne only had one full time employee, being its sole Director and Responsible Manager. During this period Lanterne did not provide financial services directly to clients, but its ARs were responsible for over $1 billion in funds under management.

Lanterne failed to:

• have in place documented risk management systems to identify, assess and mitigate risks;
• conduct appropriate due diligence on its ARs;
• have appropriately qualified Responsible Managers with the capacity to effectively fulfil their duties;
• ensure that ARs were adequately trained to provide the financial services listed under Lanterne's AFSL;
• have documented reviews and audit processes to ensure that ARs had the necessary competence and skills to comply with relevant financial services laws;
• have adequate IT infrastructure, resources, security management plans, back-up plans or disaster recovery plans;
• have adequate human resources to carry out supervisory arrangements of its ARs; and
• ensure that financial services were provided efficiently, honestly and fairly.

ASIC Deputy Chair Sarah Court has reminded AFSL holders that "ASIC expects all licensees to ensure their business develops, implements and maintains robust risk and compliance procedures... when ASIC sees a business it considers to have deficient risk management processes, we [ASIC] will look to take ".¹

What does this mean for Licensees?

ASIC expects all Licensees to comply with the conditions of their AFS or credit licence as well as the obligations which arise from the relevant financial services or credit laws.

Key obligations that have been highlighted by the Lanterne case are detailed below.

Implementation of Risk management Procedures

ASIC expects that all Licensees implement robust risk management procedures with an aim to mitigate and reduce risk with their business. This includes risks posed by appointing representatives to the AFS or credit licence.

Licensees should:

• conduct appropriate screening of its representatives;
• ensure their risk management procedures are documented and that they accurately reflect the nature of the business, especially in relation to any representatives appointed. You can purchase Sophie Grace's Risk Management Policy and Matrix
• have in place procedures to enable the identification and assessment of various risks the business faces;
• review existing marketing or promotional material;
• develop controls or other measures to manage or mitigate risks and ensure where the risks relate to the appointment of representatives, that the controls are adequate; and
• the analysis of risks should be regularly reviewed and updated.

Training of Representatives

Lanterne did not assess whether their had the necessary training, skills and competency to effectively provide the services covered by their AFSL.

All Licensees are required to ensure their representatives are competent to provide financial services or engage in credit activities and provide training for those that do not have the required competency. For more information regarding the training of representatives, you can purchase Sophie Grace's Training Policy

Licensees should:

• implement individual training plans that assess each representatives skills and where there are deficiencies and how these can be addressed;
• conduct internal training or employ the services of an external training consultant; and
• maintain a record of training for all Corporate Authorised Representatives that is separate from the one maintained by the individual representative. This record should be reviewed at least annually and should include evidence that the representative has completed the training.

Compliance with Financial Services and Credit Laws

In addition to the training of its representatives, Licensees are required to ensure their representatives comply with the relevant financial services and credit laws. According to ASIC, Lanterne failed to provide ARs with clear guidance regarding the nature and extent of their obligations under financial services laws.

Licensees should:

• provide representatives with clear instructions about their compliance with financial services and credit laws;
• have robust processes to evaluate and document a representative's background checks;
• have clear communication and reporting lines with all representatives;
• meet regularly with representatives to discuss compliance and ensure the items discussed are documented;
• monitor and supervise representatives through regular and systematic reviews and audits of the representative's work. The Lanterne proceedings highlight that relying on self-reporting by the representative will not be sufficient on its own.

Record Keeping

Licensees should be able to provide clear evidence of the procedures they have in place in relation to onboarding, training, compliance, monitoring, communication and reporting.

This is not a substantive list. The Lanterne case highlighted a number of areas where ASIC indicates Licensees can improve their practices in relation to representatives. It is important for all Licensees who authorise representatives to consider their current monitoring practices and what can be improved.

If you have any questions in relation to the contents of this article or unsure whether you are complying with ASIC's regulations, please contact us or visit the Sophie Grace Shop.

Footnote

¹ Australian Securities and Investments Commission, 'ASIC issues civil penalty proceedings against wholesale licensee Lanterne Fund Services for risk and compliance failures' (Media Release 22-174MR, 7 July 2022) 6 https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-174mr-asic-issues-civil-penalty-proceedings-against-wholesale-licensee-lanterne-fund-services-for-risk-and-compliance-failures/.

Further Reading

• ASIC issues civil penalty proceedings against Lanterne Fund Services
• Notice of Filing
• AFSL Representatives Policy
• Australian Credit Licence Representatives Policy
• AFSL Authorised Representatives Manual
• Australian Credit Licence Credit Representatives Manual
• AFSL Training Policy
• Australian Credit Licence Training Policy
• CPD Training requirements for AFSLs not providing personal advice

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.