ASIC has recently commenced civil proceedings in the Federal Court against Lanterne Fund Services Pty Ltd (Lanterne). ASIC alleges that Lanterne failed to comply with multiple obligations of its Australian Financial Services Licence (AFSL).
Background of Lanterne
Lanterne's business model involves authorising financial services providers to operate as Corporate Authorised Representatives (CARs) or 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 representatives were responsible for over $1 billion in funds under management.
ASIC alleges that Lanterne failed to:
- have in place adequate risk management systems;
- ensure that representatives were adequately trained to provide the financial services listed under Lanterne's AFSL;
- ensure that representatives had the necessary competence and skills to comply with relevant financial services laws;
- have adequate resources to provide financial services and carry out supervisory arrangements; 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 action".1
What does this mean for AFSL holders?
ASIC expects all AFSL holders to comply with the conditions of their AFSL as well as the obligations which arise from the relevant financial services laws.
Key obligations that have been highlighted by the Lanterne case are detailed below.
Implementation of Risk Management Procedures
ASIC expects that all AFSL holders 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 AFSL.
AFSL holders should:
- 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 here;
- have in place procedures to enable the identification and assessment of various risks the business faces;
- 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;
- the analysis of risks should be regularly reviewed and updated.
Training of Representatives
ASIC alleges that Lanterne did not assess whether their representatives had the necessary training, skills and competency to effectively provide the services covered by their AFSL.
All AFSL holders are required to ensure their representatives are competent to provide financial services and provide training for those that do not have the competency. For more information regarding the training of representatives, you can purchase Sophie Grace's Training Policy here.
AFSL holders should:
- implement individual training plans that assess each representative's 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 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 Laws
In addition to the training of representatives, AFSL holders are required to ensure their representatives comply with the relevant financial services laws. According to ASIC, Lanterne failed to provide representatives with clear guidance regarding the nature and extent of their obligations under financial services laws.
AFSL holders should:
- provide representatives with clear instructions about their compliance with financial services laws;
- have robust processes to evaluate and document a representative's background checks;
- 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.
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/.