ASIC Enforcement Wrap: November & December 2023 | RACQ and Telstra, Greenwashing still in the gun, Financial Services and Credit Panel starts to flex its muscles

This is the last enforcement wrap of the year, bundling up the final two months for some ‘light reading’ over the Christmas break.

Key November & December Takeaways:

• ‍ASIC continues to focus on combating greenwashing, issuing infringement notices to each of Morningstar and Northern Trust Asset Management. ASIC alleges they represented that their funds excluded investments with certain ESG exposures (such as exposure to controversial weapons or having a low score in low carbon transition management), but that there was investment exposure to these claimed exclusions.
• Financial Services and Credit Panel (FSCP) issues strongest decisions to date, cancelling the registration of two financial advice providers. The FSCP has made a total of 13 decisions since May 2023, and prior outcomes mainly resulted in reprimands, a direction that the adviser be subject to compliance audits, or a direction that the adviser engage an independent person pre-vet the next 10 Statements of Advice that the adviser intends to present to a retail client. The FSCP appears to be ‘upping the ante’.
• Insurance Industry Conduct remains an ASIC priority and RACQ receives $10 million RACQ. The Federal Court found statements in RACQ’s PDSs regarding discounts were misleading, because the discounts were sometimes only applied to base insurance premium and not to additional premiums paid for optional extras. A significant penalty delivered on an Enforcement Priority.
• ASIC commences first enforcement action regarding compliance with internal dispute resolution against Telstra Super. This regime came into effect in October 2021, and requires licensees to respond to most superannuation complaints within 45 days. ASIC alleges that Telstra Super failed to respond to a number of complaints on time, failed to inform complainants why there was a delay in response, and failed to inform complainants of their right to complaint to AFCA.

Civil Action:

Civil Penalties Ordered

The Federal Court has ordered civil penalties in four separate cases, totalling over $27 million:

• The Federal Court ordered Mercer Financial Advice (Australia) Pty Ltd to pay a $12 million penalty for failure in fee disclosure obligations and charging fees to customers it was not entitled to charge. Mercer was found to have breached the Corporations Act and ASIC Act by 1) failing to invite clients to attend annual review meetings, 2) failing to provide fee disclosure statements, 3) issuing non-compliant fee disclosure statements and 4) charging clients fees for services that they did not receive. Thousands of clients were affected by these breaches. Mercer admitted to the misconduct.
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• The Federal Court ordered superannuation trustee OnePath Custodians Pty Ltd to pay a $5 million penalty for making false or misleading representations about its right to continue charging fees, and for failing to provide services to members efficiently, honestly and fairly due to its misleading conduct and by deducting fees when not entitled to do so. An example of the misconduct was members being told to pay a fee for advice even though they were transferred to a division where they were not entitled to receive such advice. OnePath also made misleading representations to members, saying that the member agreed to a fees, when it has only been agreed between a Plan Adviser and the member’s former employer.
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• The Federal Court ordered RACQ to pay a $10 million penalty for misleading customers in its PDS about pricing discounts. The Court found the statement was misleading because the discounts were only applied to base insurance premium and not to additional premiums paid for optional extras. Approximately 458,746 customers missed out on approximately $86,476,339 in discounts they should have received. Our detailed article on this case can be found here.
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• The Federal Court has ordered ANZ to pay a $900,000 for breaching continuous disclosure obligation during a $2.5 billion institutional share placement in 2015. The Court found that ANZ failed to notify ASX that more than 30% of the placement shares were to be acquired by its underwriters. The penalty amount is very near the maximum penalty for a single breach of continuous disclosure laws at that time, which was $1 million. ASIC contends that had the contravention occurred today after the maximum penalty increased in 2019, ANZ could have been fined anywhere between $15 million and $780 million for the breach.

Civil Proceedings Commenced

Three civil penalty proceedings were commenced:

• ASIC commenced civil penalty proceedings in the Federal Court against Telstra Super for failure to comply with internal dispute resolution requirements, a first proceeding under the regime which came into effect in October 2021. The regime requires superannuation trustees to respond to complaints within 45 days. ASIC alleges Telstra Super was unable to respond to 106 of 337 complaints within 45 days, failed to inform 85 complainants of why there was a delay in responding and failed to inform 22 complainants of their right to complain to AFCA.
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• ASIC commenced civil penalty proceedings in the Federal Court against Adam Blumenthal for alleged market rigging and breaches of director duties as a director of two companies, Everblu Capital Pty Ltd (EverBlu) and Creso Pharma Limited (now known as Melodiol Global Health Limited) (Creso). ASIC alleges that Everblu breached its obligations as an AFS licensee by failing to properly follow procedures and internal controls, and that Mr Blumenthal 1) lent funds from his private company to Everblu clients, including more than $7 million to Tyson Scholz a known market finfluencer, in breach of its personal dealing policy, to trade in Creso shares, a company which Mr Blumenthal was also a director; and 2) caused certain client orders to purchase Creso shares to create a false or misleading appearance with respect to the market for Creso shares.
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• ASIC commenced civil penalty proceedings in the Federal Court Open4Sale Global Ltd (Open4Sale Global) and two of its directors for allegedly offering shares in the company and distributing application forms without the required disclosure document. Between 2019 and 2023, Open4Sale Global raised approximately $1.3 million from more than 80 investors.

Other Decisions

• The Federal Court made orders appointing receivers to Brite Advisors Pty Ltd. The receivers are tasked with conducting further investigations into Brite and the approximately AUD $1 billion client pension funds under its management. This follows interim asset preservation orders against Brite in October 2023. ASIC investigation into Brite’s affairs is ongoing. ASIC is primarily concerned about a significant variance in the amount of USD $69 million in client funds, and significant concerns over the management of Brite.
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• The Federal Court has found that Zurich Australia Limited (Zurich) did not breach its duty of utmost good faith when it avoided an income protection policy because the insured failed to disclose a prior history of hospitalisation for serious mental health issues. In 2018, OnePath, the previous owner of Zurich’s life insurance business, rejected a claim of a customer, due to the customer’s failure to disclose hospital admissions for a serious unrelated mental health issue between 1999 and 2005. ASIC argued that Zurich/OnePath breached its duty because 1) OnePath should have first made enquiries with the financial adviser who assisted in the insurance application; 2) OnePath should have notified the customer of its intention to avoid the policy; and 3) OnePath failed to inform the customer of her right to dispute the avoidance decision.

Criminal:

• Guilty Pleas/Convictions - Seven defendants were convicted of 25 offences such as dishonestly obtaining financial advantage by deception, creating a false or misleading appearance of active trading and failing to lodge a substantial holder notice of shares in a listed company.
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• Charges Laid – Eight defendants were charged with over 65 counts of offences such as failure to lodge an auditor’s report, aiding and abetting dishonest conduct in relation to a financial product or service, dishonestly using his position as a director to gain an advantage. We highlight the case of Kristofer Ridgway who was charged with two counts of false or misleading information to ASIC during a compulsory examination, demonstrating the need to be truthful when providing information to ASIC.
  
• Sentencing – Peter Neil Landau was sentenced to 6 years and two months’ imprisonment with a non-parole period of 3 years and eight months. Mr Landau was a director of two former ASX-listed companies. He has previously, in August 2022, pleaded guilty to 5 counts of stealing a total of $2.2 million, 1 count of forging and uttering a bank document, one count of authorising the giving of false or misleading information to the ASX, and one count of providing false information to ASIC.
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• Decisions – One defendant was found not guilty of managing a corporation. Another defendant was released having been found unfit to stand trial, on the condition that he obtain and accept treatment recommended by his medical provider, and not provide financial services of any kind.
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Administrative Action:

• ‍Financial Services Bannings – Seven individuals were banned from financial services and/or credit activities for reasons such as submitting false and misleading statements to ASIC, putting himself in a position of real conflict, being deemed likely to be in a position of real conflict, applying client funds for personal use without authorisation, and causing the collection of annual review fees from clients’ super funds when those annual reviews had not been undertaken.
  
  
• License Cancellation/Suspension – Six financial services or credit licenses were suspended or cancelled due to reasons such as `failure to lodge annual financial statements, failure to have adequate resources to provide financial services, no longer carrying on a financial services business and not having a fit and proper person as its officer.
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• Director Disqualification – Four individuals were disqualified for involvement in 25 companies which entered external administration, owing a total of over $60 million dollars, of which over $6 million was owed to the ATO.
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• Infringement Notices – Eight infringements notices were issued by ASIC and the Markets Disciplinary Panel for fines totalling over $780,000 in relation to false and misleading statements, greenwashing and breaches of market integrity rules. In particular, two infringement notices were issued to each of Morningstar and Northern Trust Asset Management. ASIC alleges they represented that their funds excluded investments with certain ESG exposures (such as exposure to controversial weapons or having a low score in low carbon transition management), but that there was investment exposure to these claimed exclusions.
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• Court Enforceable Undertaking – ASIC accepted two court enforceable undertakings. One was made by iExtend which required it to apply for an AFS license, following an ASIC investigation which revealed that iExtend was offering to pay people’s life insurance premiums in exchange for a portion of the benefit if a claim is made. Another was entered by Adam Blumenthal and Everblu Capital Pty Ltd, where Everblu has undertaken to cease offering financial services to new clients, and apply to cancel its AFS license.
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• FSCP Decision – The Financial Services and Credit Panel has cancelled the registration of two financial advisers and prohibited them from re-registering as a financial adviser for a period of 1.5 to 2 years, for reasons such as being found to bean undischarged bankrupt, and having found to have given non-compliant advice to a client.
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• Appeals – The AAT has affirmed ASIC’s decisionto ban financial adviser Pamela Anderson for two years. ASIC found that Ms Anderson recommended that some of her clients invest in a high-risk fund, the Investport Income Opportunity Fund (IIOF), which subsequently collapsed. IIOF was operated by an entity related to Ms Anderson’s former licensee, Financial link. The AAT affirmed ASIC’s findings that Ms Anderson: 1) failed to act in the best interests of her clients; 2) failed to prioritise her clients’ interests by advising them to invest in IIOF; and 3) gave non-compliant statements of advice to clients.

Surveillance:

• Financial reporting and audit surveillance program – Subsequent to ASIC’s audit surveillance program, LinkGroup has restated its financial reports, resulting in $50 million increase in half year statutory loss, and $169 million decrease in full year statutory loss in 2023. 2024 forecast of statutory profit reduced by $169 million due to the amendments.

And that’s a wrap for ASIC Enforcement in 2023.

If any of the above is relevant to you or you want to know more, please feel free to get in touch.

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.