Lanterne penalised $1.25 million: learnings for licensees

By Elliott Stumm and Jonathan Taylor

The Federal Court recently issued a $1.25 million penalty against wholesale licensee for hire firm Lanterne Fund Services, which provides guidance on what is required of an Australian financial services (AFS) licensee to comply with the general obligations. The decision reinforces the message that compliance must be a priority for all licensees.

Background

On 10 April 2024, the Court ordered Lanterne pay a $1.25 million penalty for failing to comply with six of the general obligations of licence holders.

Lanterne holds an AFS licence authorising it to provide certain financial services to wholesale clients only. Lanterne operates a ‘licensee for hire’ business model, whereby it authorises other people to provide financial services on its behalf, including trustees of wholesale managed investment schemes, in exchange for fees.

The order was made following proceedings brought by ASIC where it was alleged Lanterne had failed to:

  • have in place adequate risk management systems;
  • have adequate resources (including financial, technological, and human resources) to provide the financial services and carry out supervisory arrangements;
  • maintain competence to provide its financial services;
  • ensure its representatives were adequately trained;
  • take steps to ensure its representatives complied with the financial services laws; and
  • do all things necessary to ensure the financial services were provided efficiently, honestly, and fairly.

The Court declared Lanterne had contravened the above obligations, which are contained in section 912A of the Corporations Act 2001 (Cth). The contraventions arose due to Lanterne, among other things:

  • failing to have responsible managers with sufficient time effectively to conduct their role;
  • failing to have a sufficient number of responsible managers with appropriate knowledge and skills across the financial services provided by Lanterne’s authorised representatives and in the industries and businesses operated by them;
  • failing to provide or arrange any or adequate training, professional development, or other instructional programs for its authorised representatives; and
  • relying on pro forma monthly compliance self-assessments by its authorised representatives to monitor them and identify risks associated with their conduct.

The decision

The Court considered Lanterne to be effectively a ‘one-man shop’. It was also noted the responsible manager nominated to support Lanterne’s AFS licence was also a responsible manager for three other entities during the relevant period.

In addition to ordering the payment of a penalty of $1.25 million, the Court also required Lanterne to engage an independent expert (and pay their costs) to review Lanterne’s systems, processes and controls, report on the adequacy of them to ensure compliance with the above general obligations and make recommendations as to the steps that should be taken to ensure they are adequate. The independent expert is also to establish a risk management and compliance program and prepare a written report as to the adequacy of Lanterne’s implementation of the recommendations in the compliance report.

What does the decision mean for licensees?

While the decision of the Court is particularly relevant to licensees that carry on a similar business to the one conducted by Lanterne, the decision is relevant to all AFS licensees.

The Court provided guidance on what is required of an AFS licensee to comply with the general obligations. For example, the Court noted that, in terms of the obligation to have adequate risk management systems, the risk management system must describe how the licensee manages risk (including regulatory, authorised representatives, operational and financial risks), together with risk management tools such as a risk matrix of key risks and an incident management process. The risk management system should also integrate a compliance management system to identify, evaluate, and respond to regulatory risks, which should be regularly reviewed.

How can we help?

The AFS laws are complex, and it is important all AFS licensees establish and maintain compliance measures that ensure, as far as is reasonably practicable, they comply with the AFS laws. If you would like to discuss your compliance obligations and how we can help you meet them, please contact a member of the HW Funds team.

Contact

Elliott Stumm

Elliott has deep industry knowledge and specialist expertise in the regulation of fund and investment management businesses.

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