“Although we’ve come
To the end of the road
Still I can’t let go”
— ASIC Delegate, Enforcement Hearing 404/2021 (or Boyz II Men)
The penny drops
Recently, Assured Support started publishing “War Stories” – bite-sized summaries of enforcement activities – to complement the more detailed Regulatory Updates we provide to our subscribers.
The feedback has been uniformly positive, but we were alarmed by one recurring comment; people seem genuinely surprised that ASIC aren’t limited to banning advisers or simply banning advisers from providing financial product advice.
The Royal Commission may not have delivered the significant changes some commentators expected, but it did usher in a series of legal reforms that both increased penalties and expanded ASIC’s powers. In fact, the grounds for, and scope of, ASIC’s banning orders were expanded to even allow ASIC to ban persons from controlling financial services businesses or credit activities.
Historically, as you’re probably aware, ASIC could ban or exclude Directors and Officers of Licensees and their Representatives (including Authorised Representatives). Many people considered that these were expansive powers but, too often, the pursuit of ‘bad apples’ frequently identified Executive Managers who were intimately involved in the stocking, promoting and presenting rotten fruit. ASIC had no effective way of disciplining these people who despite their ignorance of, or contempt for, compliance could simply move between licensees and avoid accountability.
In the immediate wake of Commissioner Hayne’s Final Report, that gap was closed and ASIC is also now able to ban persons from acting as an officer, manager, employee or contractor of an entity that carries on a financial services business .
ASIC’s Banning Powers
“ASIC has banned Gerald Cummings and Craig Allen for a period of five years. Mr Cummings was a director and authorised representative of Premier Wealth Management Financial Services Pty Ltd (Premier Wealth Management). Mr Allen is the current director, authorised representative and responsible manager of Premier Wealth Management.
The bans prevent Mr Cummings and Mr Allen from providing any financial services, performing any function involved in the carrying on of a financial services business, and controlling an entity that carries on a financial services business.”
— ASIC Media Release 21-347MR
Let’s start with the law.
The dominant purpose of ASIC’s banning power is to protect investors and consumers but the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures)) Act 2020 expanded the grounds on which ASIC can make a banning order.
Previously, ASIC may have made a banning order on the grounds of a person being “not of good fame or character” or “not adequately trained or competent to provide financial services”, amongst other things but now, in addition to these grounds, ASIC may make a banning order if ASIC has reason to believe a person is not a fit and proper person to, or not adequately trained or competent to:
- Perform one or more functions as an officer of an entity that carries on a financial services business, or
- Control an entity that carries on a financial services business.
In the context of these amendments, the term ‘officer’ has the same meaning as elsewhere in the Corporations Act and will generally include senior managers.
The definition captures traditional means of control, such as having the capacity to cast more than one half of the votes in the general meeting of a body corporate or directly holding more than one half of the issued share capital, and it also captures less conventional means of control, such as having the capacity to determine the outcome of decisions about the body corporate’s financial and operating policies taking into account the practical influence that can be exerted and any pattern of behaviour affecting the entities financial or operating policies.
Furthermore, ASIC may also make banning orders against a person that:
- Has, at least twice, been linked to a refusal or failure to give effect to a determination made by AFCA in relation to a complaint that relates to a financial services business or credit activities,
- Has, within the last 7 years, been an officer of a corporation when the corporation was carrying on a financial services business or credit activities and that corporation was wound up due to an inability to pay its debts (while the person was an officer of the corporation or within 12 months or the person ceasing to be an officer of the corporation), or
- Is insolvent under administration or a Chapter 5 body corporate.
“ASIC has banned Queensland-based adviser Keith Robert McDermott from providing financial services for three years.
The three-year ban also prohibits Mr McDermott from managing, supervising or auditing the provision of financial services and prohibits him from the provision of training about financial services and products. ”
— ASIC Media Release 21-290MR
The scope of a banning order
“For ASIC it would be better if we could ban those in management as well, where there have been specific failures.”
— Peter Kell, ASIC, April 2014
Prior to the Stronger Regulators Act, ASIC was empowered to ban individuals from providing financial services or engaging in credit activities. Now, in addition to these prohibitions, the scope of ASIC’s banning order powers have been expanded to prohibit a person from any of the following:
- Controlling an entity that carries on a financial services business, or controlling another person that engages in credit activities, and
- Performing any function involved in carrying on a financial services business or credit activities.
Further, the introduction of the “fit and proper person” test also means that ASIC can specify the functions that a person is not fit and proper to perform, and therefore tailor banning orders to those functions.
The reason for the changes
“The law sets the bounds of permissible behaviour. If competitive pressures are absent, if there is little or no threat of enterprise failure, and if banks can and do mitigate the consequences of customers failing to meet obligations, only the regulator can mark and enforce those bounds.
But neither the Australian Securities and Investments Commission (Asic) nor Apra has done that in a way that has prevented the conduct described in this report. Why not?””
— Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Interim Report
If you refer to section 5.1 of the Explanatory Memorandum to the Stronger Regulators Bill, you’ll see that the expansion of ASIC’s banning powers was to ensure that ASIC is appropriately empowered to remove individuals from continued involvement in the financial sector. The Stronger Regulators Act implements the recommendations of Chapter 6 of the ASIC Enforcement Review Taskforce Report (ASIC Enforcement Review) that was presented to the Government in December 2017.
Chapter 6 of the ASIC Enforcement Review states that the pre-existing banning powers allowed ASIC to ban a person from providing financial services but did not allow ASIC to ban that same person from being responsible for the provision of financial services by others and/or being responsible for the policies and procedures relating to a licensee’s provision of financial services. This created an unacceptable risk of banned persons continuing to pose a risk to consumers given their previous conduct.