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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
Author:
Australia | Publication | June 2021
This article was co-authored with Emily Almond and Tess Waldron.
Norton Rose Fulbright has assisted the Australian Securities and Investments Commission (ASIC) in a landmark Federal Court of Australia proceeding. ASIC successfully sought penalties totalling $20.4 million against Forex Capital Trading Pty Limited (Forex CT) and its director Shlomo Yoshai, arising from thousands of contraventions of the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).1
Notably, this is the first decision regarding contraventions of conflicted remuneration provisions, sections 963F and 963J, of the Corporations Act. The decision provides a cautionary reminder to Australian Financial Services Licence (AFSL) holders, in particular those dealing with retail clients in the OTC derivative market, to be aware of and to adhere to financial service obligations so as to steer clear from regulatory intervention and what could be potentially significant consequences.
This article details key findings in the ASIC v Forex CT decision and highlights:
Forex CT carried on a financial services business providing advice to retail clients in relation to over-the-counter (OTC) derivative products, including margin foreign exchange instruments and contracts-for-difference (CFDs). Forex CT employed acquisition agents, account managers and retention team leaders (together, Representatives) to provide financial services to clients.
Complaints made by Forex CT clients triggered ASIC to launch an investigation. Following the initial investigation, in July 2020, ASIC commenced proceedings against Forex CT and Mr Yoshai. By consent, the parties submitted to the Court a statement of agreed facts, joint submissions and proposed declarations and orders.
The Federal Court of Australia found that Forex CT engaged in thousands of contraventions of the Corporations Act and the ASIC Act.
It was determined during the relevant period that, Forex CT and/or its Representatives:
It was found that Mr Yoshai:
In the judgment, Justice Middleton describes Forex CT’s processes and systems as being directed towards maximising client deposits and trading volume, including through the implementation of employee remuneration schemes with the purpose of incentivising Forex CT Representatives to encourage clients to deposit funds and to recommend trades or trading strategies that were not necessarily in the client’s best interests.
The penalties associated with Forex CT’s and Mr Yoshai’s conduct are significant. However, due to the cooperation of the defendants and the parties’ joint approach to resolving the proceeding, Justice Middleton considered it appropriate to order a penalty of $20 million in respect of Forex CT’s contraventions and $400,000 in respect of Mr Yoshai’s contraventions. Mr Yoshai was also disqualified from managing corporations for eight years.
Justice Middleton noted various factors that supported the determination of a significant penalty including:
The ASIC v Forex CT decision demonstrates that the Court will not shy away from fixing significant penalties to punish and deter AFSL holders who breach their financial services obligations. This show of force impacts the Financial Services Sector and should prompt service providers to be alert to their AFSL responsibilities, to review relevant policies and monitor employee conduct associated with services. A failure to do so could give rise to substantial consequences.
This decision is the first of its kind regarding contraventions of the conflicted remuneration provisions, in particular sections 963F and 963J, of the Corporations Act. Conflicted remuneration as defined in section 963A of the Corporations Act means:
“any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
a) could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
b) could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.” 7
The parties submitted and Justice Middleton agreed that Forex CT gave employees conflicted remuneration and failed to take reasonable steps to ensure employees did not accept conflicted remuneration, thereby contravening sections 963J and 963F of the Corporations Act:
Conflicted remuneration provisions contravened by Forex CT | |
963F: Licensee must ensure compliance
A financial services licensee must take reasonable steps to ensure that representatives of the licensee do not accept conflicted remuneration. |
963J: Employer must not give employees conflicted remuneration An employer of a financial services licensee, or a representative of a financial services licensee, must not give the licensee or representative conflicted remuneration for work carried out, or to be carried out, by the licensee or representative as an employee of the employer. |
One contravention during the period 1 January 2017 and 1 April 2019. | 116 separate contraventions during the period 1 January 2017 to 1 April 2019 (an instance for each employee who received conflicted remuneration). |
The contraventions arose from the following factual circumstances:
The ASIC v Forex CT case illustrates that multiple conflicted remuneration provisions in the Corporations Act can be contravened concurrently and that, in relation to section 963J in particular, multiple occurrences can give rise to separate contraventions.
Aspects of the decision relating to conflicted remuneration will be of interest to the Financial Services Sector including financial institutions, investment service providers and insurance brokers. To mitigate the risk of breaching obligations, service providers and their representatives should review remuneration structures and policies to ensure that adequate systems are in place and complied with, so that conflicted remuneration is not provided or accepted.
The decision will also be of interest to mortgage brokers and mortgage intermediaries, who from 1 January 2021 became subject to requirements in the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act), prohibiting acceptance of conflicted remuneration. The definition of conflicted remuneration provided in section 158N of the NCCP Act largely mirrors the definition in section 963A of the Corporations Act. Mortgage brokers and intermediaries need to be aware of and comply with the new requirements so as to avoid future investigative action from regulators.
ASIC’s approach to high-risk retail OTC derivative providers is not a new phenomenon. This sector has been the subject of ASIC surveillance for some time with Norton Rose Fulbright advising ASIC in another proceeding in which the Federal Court imposed a $75 million penalty (see Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 4)11 (ASIC v AGM).
In ASIC v AGM, Justice Beach described OTC derivative products as “little more than gambling”.12 Both Justice Beach in ASIC v AGM and Justice Middleton in ASIC v Forex CT identified the need for general deterrence in the retail OTC derivative market as a relevant factor when determining an appropriate penalty. Justice Beach noted that “the size of the market for retail OTC derivatives in Australia, and the risk of loss to clients exposed to the sort of conduct engaged in…supports the fixing of a significant pecuniary penalty to advance the purpose of general deterrence”.13
Both judgments noted the impact of the regulatory changes that would likely reduce the risk of similar conduct in the future by other retail OTC derivative market participants, or at least significantly ameliorate the scope or effect of such conduct. Following an industry-wide review and consultation process, ASIC recently implemented regulatory changes to strengthen protections for retail clients trading CFDs and binary options:
The significant penalties imposed in ASIC v AGM and ASIC v Forex CT should serve as a reminder to operators within the Financial Services Sector, dealing with retail clients in the OTC derivative market, to comply with their obligations under the ASIC Act and Corporations Act. These cases along with the recent regulatory changes will strengthen consumer protections for these products.
AFSL holders operate under the watchful eye of regulators. Risk management strategies may include:
A proactive approach may assist to prevent the substantial consequences that can arise from breaches of financial services obligations.
Publication
This article first appeared in the September 2024 issue of Financier Worldwide.
Publication
The Digital Markets, Competition and Consumers Act (DMCC Act) received Royal Assent on 24 May 2024 and is generally expected to come into force in autumn this year.
Publication
On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules).
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