Case note- AFS Licensee for hire fined

In Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353 the Federal Court fined Lanterne $1.25 million after it admitted to contraventions of its obligations as an Australian Financial Services Licensee under sections 912A(1)(a), (ca), (d), (e), (f) and (h) and 912A(5A) of the Corporations Act.

Lanterne’s business involves authorising companies and individuals to operate as corporate authorised representatives (CARs) and authorised representatives (ARs) under Lanterne’s Australian Financial Services Licence (AFSL). Lanterne receives fees in return for the provision of these services and does not directly provide any financial services to clients. ASIC has described Lanterne as a “licensee for hire”.

It authorised over 60 corporate authorised representatives and under them, 205 authorised representatives. The total funds under management of all CARS fluctuated between $1.2 billion in March 2021 and approximately $1.658 billion by October 2021.

Lanterne admitted it breached its obligation as an Australian Financial Services Licensee by failing to have adequate risk management systems by:
(a) failing to identify and assess the risks faced by its business, including the risks relating to its corporate authorised representatives and authorised representatives;
(b) failing to document any identification or assessment of the risks faced by its business, including failing to have a risk management framework and basic risk management tools;
(c) relying on initial due diligence of directors of potential CARs and pro forma monthly compliance self-assessments by the CARs to monitor the CARs and ARs and identify risks associated with their conduct;
(d) failing to have an adequate compliance management system having regard to the nature, scale and complexity of its business and instead relying on a compliance manual that was out of date, inapplicable to its business, and omitted regulatory and compliance obligations of CARs, ARs and Lanterne;
(e) failing to have sufficient employees or officers with appropriate risk management expertise and failing to engage external consultants with risk management expertise for the purpose of risk management;
(f) failing to have any independent oversight or monitoring of its risk management systems; and
(g) otherwise failing to have systems, processes or controls to manage or mitigate risks, including failing to have an incident management process.

Lanterne also failed to:

  • have adequate technological and human resources to provide the services covered by its AFS licence,
  • ensure that its representatives were adequately trained,
  • maintain the competence to provide financial services covered by its AFS licence,
  • take reasonable steps to ensure that its representatives complied with Australian financial services laws, and
  • do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly.

Justice McEvoy concluded:

“During the relevant period Mr Cozens was the only full time employee of Lanterne as well as its only active responsible manager. Mr Cozens was also the sole director and chief executive officer. Lanterne had three part time employees for various periods throughout the Relevant Period (and only two at any given time) whose roles were limited to administrative functions such as bookkeeping and administrative support….

It is an agreed fact that Mr Cozens did not have experience in all the businesses and industries in which Lanterne’s CARs and ARs operated….

Considered as a whole, the conduct which is the subject of the proceeding … was extensive and serious. The fact that ASIC has not revoked Lanterne’s AFSL is beside the point. I accept ASIC’s submission that the failures leading to each contravention were striking in circumstances where they were so comprehensive and consisted of failures to comply with fundamental obligations of a licensee, being the very thing that formed the basis of the business. The failures have occurred over an extended period and involved Lanterne’s senior officer. There has also been an ongoing failure on the part of Lanterne to remedy the contravening conduct. These factors weigh in favour of a significant pecuniary penalty.”

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David Jacobson

Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.

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