Appeal decision: Qoin issuer not exempted from needing its own AFSL

• Authorised representatives seeking to rely on section 911A(2)(a) of the Corporations Act need to ensure that their activities are in their ‘capacity’ as an AR and not on their ‘own behalf’, placing potential limits on the scope of the AR exemption.
• The Court will undertake a factual assessment in determining whether an AR’s activities are in its ‘capacity’ as an AR, which may involve looking at whether the AFS licence holder was involved in the drafting of relevant documents relating to the financial product in question, whether the financial product has any relevance to the business of the AFS licence holder and whether the specific financial product existed prior to an AR agreement being entered into.
• Despite finding that BPS, as the issuer of the Qoin NCP Product, was not acting in its capacity as an AR, the Court did not decide whether, more broadly, an AR can be the issuer of a financial product (ie whether it is possible to be a product issuer while acting ‘on behalf of’ an AFS licence holder), or whether an AFS licence holder needs to be involved in the issuing of the relevant financial product.

As outlined in our previous update, which provides a full summary of ASIC v BPS Financial Pty Ltd [2024] FCA 457 (ASIC v BPS), the Qoin Wallet is a software product that allows the user to view their balance of Qoin tokens for a wallet address recorded on the blockchain and also the system for making and receiving non-cash payments (NCPs), known as the payment facility. Qoin is a notional unit of exchange in transactions undertaken through the 'Qoin Wallet' with the Qoin Wallet built on the Qoin Blockchain. 

ASIC v BPS marked ASIC's first win in court against a NCP facility involving crypto. As discussed in our article, this judgment called into question to scope of the authorised representative exemption in the context of AFS licencing and left the door open for revision of ASIC’s guidance on this topic. Broadly, the two main allegations were that BPS unlawfully carried on a financial services business without holding an AFS licence in contravention of sections 911A(1) and 911A(5B) of the Corporations Act, and that BPS made false and misleading representations in connection with the supply or use of a financial product.

The Court found that BPS had engaged in unlicensed conduct when offering consumers its crypto-based product, the 'Qoin Wallet'. However, despite finding that Qoin Wallet amounted to a 'financial product', the entire Qoin Blockchain was found not to amount to one. This is because the Qoin Blockchain is not the mechanism by which users make NCPs. Relevantly, BPS was found not to have engaged in unlicensed conduct during the 5 November 2020 to 30 August 2021 period, which was the subject of this appeal.

For more details on ASIC’s reasons for its appeal and specific orders sought, please see our previous article.

Section 911A(2)(a) of the Corporations Act exempts a person from the requirement to hold an AFS licence. This exemption applies when a person provides a financial service ‘as a representative of’ a second person who carries on a financial services business and who:

• holds an AFS licence covering the provision of the service; or
• is otherwise exempt from the requirement to hold an AFS licence.

It was not in dispute that issuing the Qoin NCP Product amounted to the carrying on of a 'financial services business', such that section 911A(1) of the Corporations Act required the activity to be done under an AFS licence, unless an exemption applied. BPS sought out PNI, as an AFS licence holder, to authorise it to issue the Qoin NCP Product and provide general financial product advice in relation to it.

ASIC alleged that the primary judge erred as they did not make any findings of fact as to whether or not, in providing its services, BPS was acting on its own behalf or as a representative of PNI. This was based on ASIC’s argument that section 911A(2)(a) of the Corporations Act contains 'an essential representative capacity requirement'.

The Court agreed that section 911A(2)(a) is concerned with the ‘…capacity in which the person provides the service’ and that an authorisation only operates to the extent that the AR, in fact, provides the relevant financial service in that representative capacity.

In determining that BPS was not issuing the Qoin NCP Product as a representative of PNI, the Court highlighted the following points:

1. BPS developed the Qoin NCP Product before it had any dealings with PNI. PNI was not involved in the development of the product initially or at any later time.
2. When BPS issued the Qoin NCP Product for the first time, it purported to do so as an AR under a different AFS licence belonging to a different AFS licence holder.
3. The principals of BPS sought out AFS licence holders for the very reason that they could not issue the Qoin NCP Product without a licence.
4. The financial services business that BPS conducted had no connection to the financial services business operated by PNI.
5. All of the relevant documents relating to the issue of the Qoin NCP Product, including the white paper, Qoin Guide, the combined FSG/PDS and the Terms of Use, were prepared and issued by BPS before any of its dealings with PNI. Relevantly, the Terms of Use:

   1. did not refer to PNI or another AFS licence holder; and

   2. created a contractual relationship between BPS and relevant users and demonstrated that BPS was dealing in its own right and not on behalf of another entity.

6. Although steps had been taken to monitor BPS' services by preparing a compliance plan, holding monthly compliance meetings and maintaining document control over the PDS, the meetings were not 'formal' and BPS had already prepared the draft PDS before engaging PNI, to which minimal changes were made.

The Court found that the above facts suggested that PNI had 'little to do with the issue of the Qoin NCP Product' despite appointing BPS as its AR. The fact that the AR agreement was entered into ‘did not answer the central question as to whether, in truth and in substance, the provision of that financial service was being conducted by BPS “as representative of” PNI.’ It was found that BPS was acting on ‘its own behalf’ as opposed to as an AR of PNI, and should have held its own AFS licence during the 5 November 2020 to 30 August 2021 period.

The Court stressed that the outcome of the appeal was fact dependant. Nonetheless, this appeal suggests a limiting of the AR exemption, where an AR’s products and activities should have a nexus to the AFS licence holder and its products.

Unfortunately, the Court did not decide whether an AR, broadly, can be the issuer of a financial product. It also did not consider whether a person who issues a financial product can never act in their capacity as an AR of an AFS licence holder, or whether an AFS licence holder needs to be involved in some way in the issuing of the relevant financial product.

This article was prepared with the assistance of Ruby Wensor, Law Graduate.