AFSL cancellation upheld – a cautionary tale

ASIC’s decision to cancel the AFS licence (AFSL) of Olive Financial Markets for contraventions of financial services laws has been upheld by the Administrative Appeals Tribunal (AAT). The decision is a warning for AFS licensees that they may still face regulatory action for historical contraventions, even if the underlying conduct has been addressed and there is limited likelihood of it reoccurring.

Background

Between 2013 and 2018, Olive Financial Markets Pty Ltd (Olive) operated two businesses on the Gold Coast, namely a managed discretionary account (MDA business) and a managed superannuation service (superannuation business).

As part of the MDA business, Olive offered contracts for difference (CFDs) over equities, commodities, and foreign exchange. In marketing the superannuation business, clients were usually cold-called and advised to roll over their superannuation from their existing fund to be managed by Olive.

Both businesses were operated by several of Olive’s authorised representatives.

AFSL cancellation

On 16 March 2020, ASIC cancelled Olive’s AFSL because it had not complied with its obligations to, among others-

• provide financial services efficiently, honestly, and fairly, and
• take reasonable steps to ensure its representatives complied with their obligations to act in the best interests of clients.

Olive was also found to have made false or misleading statements, engaged in unconscionable conduct, and breached anti-hawking prohibitions.

ASIC said CFDs are generally not suitable for inexperienced investors due to their inherently risky and complex nature, and Olive did not take an appropriate level of care in marketing them. ASIC took issue with Olive’s method of using telemarketing staff with sales backgrounds, rather than financial planning, to outline the MDA and superannuation products to prospective clients. This system was problematic because it involved use of advice templates that were virtually identical for each client, with no explanation of the advice or testing of the client’s understanding.

Olive received a multitude of complaints about both businesses over an extended period. Olive’s Financial Services Guide included a complaints handling process. However, ASIC said it lacked the detail and internal dispute resolution systems required by the Corporations Act.

ASIC noted ‘serious and systemic’ contraventions that occurred over an extended period, stating ‘cancellation is the only appropriate option given the seriousness of [Olive’s] conduct and the need to deter similar conduct elsewhere’.

Olive’s review application

Olive applied to the AAT for a review of ASIC’s decision on the basis it had since made improvements to the businesses. Those improvements included, in relation to the MDA business, introducing measures to ensure-

• only clients who passed an RG 227 test with an understanding of CFDs were accepted (RG227 deals with disclosure of CFDs to retail clients)
• qualified financial advisors reviewed statements of advice, and
• weekly assurance reviews were conducted to review client suitability.

Olive had also stopped actively marketing the superannuation business, although it had not ceased the business altogether.

The AAT acknowledged the improvements made and noted it did not have reason to believe Olive is likely to contravene its obligations in the future. However, the AAT found the “problems went undetected-or were ignored-over a long period partly because of serious shortcomings in the compliance arrangements and complaints handling process” and this “bad behaviour went on under the noses of senior managers who manifestly failed to supervise those for whom they were responsible”.

As a result, Olive’s AFSL cancellation was upheld.

Next steps?

The decision reiterates for AFS licensees the importance of ensuring compliance with their obligations under financial services laws and proactively dealing with complaints. Where there have been historical contraventions, demonstrating changes in practices is important but may not be enough to save a licence. Our Investment Funds and Litigation teams can assist you in undertaking proactive audits of your processes, or in responding to regulatory action from ASIC.