ASIC appeals landmark judgement relating to issuing financial products under an authorised representative arrangement

By John Bassilios

The recent Federal Court judgement in ASIC v BPS Financial Pty Ltd [2024] FCA 457 (ASIC v BPS) has thrown into question Australian Securities and Investments Commission’s (ASIC) long-standing position that the authorised representative exemption under the Corporations Act 2001 (Cth) (Corporations Act) doesn’t cover the ‘issue’ of a financial product. Although the case marked ASIC’s first overall victory against a non-cash payment facility involving crypto, on 18 June 2024, ASIC appealed against Justice Downes’ findings regarding the authorised representative exemption in the matter.

Background

Previously, we unpacked the potential implications of the authorised representative exemption discussion in ASIC v BPS. For a more detailed analysis of the Federal Court’s judgement and the facts of the case, you can read our previous articles: ASIC’s landmark win against BPS Financial sheds light on financial services law boundaries regarding crypto and Breaking news: authorised representatives can issue financial products. Notably, the first article examines the aspects of the decision that discuss crypto-based offerings.

One of the key arguments ASIC made was the defendant, BPS Financial Pty Ltd (BPS), couldn’t rely on the authorised representative exemption to issue a financial product without holding an Australian Financial Services (AFS) licence. However, the Federal Court rejected ASIC’s contention, noting it was tied to the underlying premise that, to be a representative, a person must be an ‘agent’ of the AFS licensee. According to the Federal Court, a person didn’t need to hold an AFS licence to ‘issue’ a financial product, provided they were appropriately authorised to provide the relevant financial services on behalf of the AFS licensee. Subject to certain restrictions, an AFS licensee is free to determine what an authorised representative acting on its behalf will look like in any given instance. Justice Downes’ reasoning challenged ASIC’s long-established view that the authorised representative exemption applies only when acting as an ‘agent’ of the AFS licensee, not to the issuance of a financial product, which is seen as the action of a principal.

The Federal Court ultimately found BPS had contravened the Corporations Act by operating a financial services business without the required AFS licence.. However, Justice Downes held that, based on her interpretation of the authorised representative exemption, it applied during the ten-month period when the authorised representative agreement between BPS and PNI Financial Services Pty Ltd (PNI), an AFS licensee, was in place (Relevant Ten-Month Period).

ASIC’s appeal

On 22 May 2024, Justice Downes made declarations and orders giving effect to her reasons for judgement.

ASIC has filed its appeal in the Federal Court, arguing Justice Downes erred in holding that:

  • BPS was exempt under section 911A(2)(a) of the Corporations Act from the requirement to hold an AFS licence because it had an Authorised Representative Agreement with PNI;
  • the definition of ‘on behalf of’ in section 9 of the Corporations Act doesn’t assist in resolving the meaning of the expression ‘on behalf of’ in Part 7.6 of that Act; the phrase ‘on behalf of’ is relevant only to determining whether and in what respect BPS was an authorised representative of PNI; and an AFS licensee is otherwise left to decide what an authorised representative acting ‘on its behalf’ will look like in any given case;
  • an authorisation, for the purposes of section 916A of the Corporations Act, can have the effect of authorising a person (in this case BPS) to issue, on behalf of an AFS licensee, a financial product when the licensee isn’t the issuer; and
  • section 911A(2)(a) of the Corporations Act applies when the person providing a financial service has been given a written notice by an AFS licensee authorising the person, for the purposes of Chapter 7, to provide the specified financial service on behalf of the licensee; and when the AFS licensee’s licence covers the provision of the service; but regardless of whether, in truth and as a matter of fact, the person has provided the financial service in a representative capacity as agent for, on behalf of, as representative of, or for, the AFS licensee.

ASIC sought orders, including:

  • allowing the appeal;
  • setting aside Justice Downes’ original orders replacing them with a declaration that BPS breached the Corporations Act by operating a financial services business without an AFS licence covering those services during the Relevant Ten-Month Period; and
  • remitting the matter to the trial judge for determination of penalty and costs.

According to ASIC’s media release, the appeal serves to clarify when a financial product provider, who is an authorised representative of an AFS licensee, is actually exempt from the requirement to hold an AFS license.

What’s next?

The date of hearing has not yet determined, but it will be interesting to see how the legal parameters of the authorised representative exemption will be considered by the court.

If the appeal isn’t granted, it’s likely ASIC will need to revise its ongoing position on the authorised representative exemption regarding the ‘issuing’ of financial products. This will need to involve modifying ASIC’s Information Sheet 251 (AFS licensing requirement for trustees of unregistered managed investment schemes). The sheet currently outlines the scope of the exemption for trustees of such schemes, maintaining that ‘the action of issuing, varying or disposing of an interest in a scheme as a trustee is, by its nature, the action of a principal’.

The development of ASIC’s appeal is crucial for businesses relying on the authorised representative exemption.

If you would like to know more about what ASIC’s appeal means for you, reach out to John Bassilios or a member of our Funds team to learn more.

This article was written with the assistance of Wilson Lee, Law Graduate; Morgan Ashlin, Work Experience Student and Emmanuel VonRussell, Seasonal Clerk.

Contact

John Bassilios

John Bassilios

Partner & Fintech and Blockchain Lead

John has broad experience in financial services, funds management, blockchain, crypto, web3 and corporate law.

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