Lanterne Fund Services Pty Ltd (“Lanterne”), a ‘licensee for hire’ business, has landed itself in hot water with the Australian Securities and Investments Commission (“ASIC”). On 06 July 2022, the corporate regulator commenced civil penalty proceedings against Lanterne in the Federal Court of Australia.
So, what happened?
ASIC alleges that:
- between March 2019 and October 2021, Lantern failed to meet its obligations at law as the holder of an Australian financial services licence (“AFSL”);
- during this period, Lanterne was responsible for managing 200 authorised representatives (“ARs”) and over 60 corporate authorised representatives (“CARs”), under its AFSL;
- in October 2021, Lanterne’s ARs and CARs (together, its representatives) were responsible for managing approximately A$1.6 billion in assets; and
- despite overseeing over 260 representatives at the time, Lanterne only had 1 full time employee during this period, Peter Cozens, who also acted as Lanterne’s sole director and sole responsible manager (“RM”).
ASIC documents indicate that the ARs and CARs operating under Lanterne’s AFSL ran businesses including:
- digital asset funds;
- climate change advisory services;
- venture capital funds;
- managed investment schemes;
- agricultural advisory services;
- wholesale funds management services;
- corporate advisory services; and
- wholesale property funds.
The ARs and CARs operated in a wide range of different industries, from renewable energy and real estate, to biotechnology and agriculture.
What does ASIC think?
ASIC asserts that in the course of operating its AFSL, Lanterne failed to:
- have adequate risk management systems in place;
- maintain the level of competence necessary to provide its financial services;
- have adequate resources (including financial, technological, and human resources);
- ensure that its representatives were adequately trained; and
- do all things necessary to ensure that the relevant financial services were provided efficiently, honestly, and fairly.
In Court, ASIC is seeking declarations of contraventions of the Corporations Act 2001 (Cth) and orders as to a pecuniary penalty, ancillary matters and costs.
Commenting on the matter, ASIC Deputy Chair, Sarah Court, said, “ASIC is concerned that for an extended period there was a real risk of investor harm”, going so far as to describe Lanterne as operating a “wholly deficient business”.[1]
What can AFSL holders learn from this?
ASIC’s pursuit of Lanterne is another example of the corporate regulator’s ongoing crackdown on financial services misconduct.[2]
To avoid regulatory scrutiny (or worse, punitive penalties), this matter emphasises the need for AFSL holders to:
- Risk management – Implement and document formal systems which identify and mitigate risk. These systems need to be monitored and reviewed persistently. Such systems also need to be subject to independent oversight.
- Maintain competence – Have sufficient RMs with skills and experience in the financial services being offered by the applicable representatives. (For example, do not have a RM overseeing a digital asset fund if they do not understand what the blockchain is!) Also, ensure that all RMs have sufficient time to conduct their roles effectively.
- Adequate training – Establish a training and competency program which documents the skills and competencies required by representatives. This should assess each representative against the required skills and competencies.
- Comply with law – Take reasonable steps to have an effective and documented process for background checks and due diligence of representatives of prospective CARs and ARs.
- Efficiency, honesty & fairness – Do all things necessary to ensure that financial services covered by the licence are provided efficiently, honestly and fairly.
ASIC says that Lanterne fell short on all of the above measures, and that despite this, Lanterne benefited from receiving fees from its CARs and ARs, without using the fees to ensure compliance with its AFSL obligations. A sure-fire way of attracting the corporate regulator’s attention!
The repercussions of Lanterne’s conduct are yet to play out. However, this matter demonstrates the need for AFSL holders to abide by their obligations under the AFSL regime. Failing to do so can lead to disastrous consequences.
For more information, or to discuss financial services queries in general, please contact a member of KHQ’s Corporate & Commercial or Superannuation & Financial Services teams, on +61 (0)3 9663 9877.
[1] ASIC media release 22-174MR issued 07 July 2022.
[2] For context, see our recent article on ASIC’s Information Sheet 270 (Warnings and reprimands) released in June 2022 (“INFO 240”).
This article was written by Thomas Salzano (Lawyer), Venn King (Principal Solicitor), and Natalie Cambrell (Director).
