As a Federal Court judge notes the lack of experience held by the responsible manager of Lanterne Fund Services, Money Management explores what the role requires and how it is assessed.
Last week, “licensee for hire” Lanterne received a $1.25 million penalty for its failure to meet organisational competence requirement and the failure to have adequate risk management systems.
The court said Lanterne breached its obligation to have adequate risk management systems, to maintain competence to provide the services covered by its Australian Financial Services Licence (AFS), to ensure its representatives were adequately trained and competent to provide the financial services covered by its AFSL, to take reasonable steps to ensure that its representatives comply with the financial services laws and to have available adequate resources (including technological and human resources) to provide the financial services covered by its AFSL.
In his judgment, Justice Timothy McEvoy noted that sole director and responsible manager Peter Cozens, who was the firm’s only full-time employee, lacked relevant qualifications to be running the firm, although he had previously worked as a stockbroker.
He said: “Cozens had not completed any formal qualifications. He applied for and obtained responsible manager status through a written submissions to ASIC as to his knowledge and skills for the role. ASIC considered and accepted Cozens’ application and written submissions to be a responsible manager.
“It is an agreed fact that Cozens did not have experience in all the businesses and industries in which Lanterne’s CARs and ARs operated.”
When contacted by Money Management, ASIC said it was unable to comment on the individual application but detailed the application process.
It defines a responsible manager as a person appointed by a licensee that has the knowledge, skills and experience required to provide the financial services it is authorised to on its AFSL and who will have direct responsibility for significant day-to-day decisions.
In considering an AFSL application, ASIC said it takes into account:
- Whether the individual is competent to carry on the kind of financial services business specified in the application.
- Whether they have sufficient financial resources to carry on the proposed business.
- Whether they can meet the other obligations of an AFS licensee (such as training, compliance, insurance and dispute resolution).
Regarding the final point, this was also a failure of Lanterne. Justice McEvoy noted: “There was also no formal or documented review or audit process to assess ARs compliance with financial services laws and nor did Lanterne have any structured or formal processes for monitoring or supervising its staff.
“There was no training provided or offered to CARs and ARs by Lanterne, nor was there any training and competency program in place.”
When considering who can be appointed as a responsible manager, ASIC’s RG 105 states a person can be nominated if they:
- Are directly responsible for significant day-to-day decisions about the ongoing provision of your financial services.
- Meet one of the five options for demonstrating knowledge and skills to cover the services named in the AFSL.
- Are “fit and proper”.
The firm should also consider if they have enough time to act as a responsible manager – in Cozens’ case, he was also the responsible manager for three other entities during the relevant period.
Demonstrating knowledge and skills is covered by four different options covering experience, qualifications and training. A fifth option allows for an individual to make a written submission explaining the nature of the role, relevant qualifications and experience over the last 10 years, relevant credentials, and why they think they have the appropriate skills and knowledge for the role.
If a responsible manager only has appropriate knowledge and skills for some, but not all, of the services and products on the AFSL, then another responsible manager must cover the remainder.
ASIC recommends a firm to have at least two responsible managers but may accept one if the firm is a one-person advisory business, for example.
In a statement about the judgment, ASIC commissioner Alan Kirkland, said: “Lanterne failed to maintain basic risk and compliance management systems. It maintained records using a paper filing system and, as the court noted, had only one full-time employee, its CEO and sole director, Peter Cozens.
“These arrangements were woefully inadequate for a business of this scale and posed significant risk to investors. It is vital for the protection of consumers and investors that licensees take their compliance obligations seriously, and the penalties ordered in this matter highlight that importance.”
