The Federal Court has issued a $1.25 million penalty against Lanterne Fund Services, a wholesale licensee which operated as a “licensee for hire”.
ASIC commenced civil penalty proceedings against Lanterne in July 2022 for a failure to meet organisational competence requirement and a failure to have adequate risk management systems.
This is one of the first litigated cases related to a “licensee for hire” and the contraventions of that business model.
ASIC alleged that from 13 March 2019 to 5 October 2021, between 62 and 69 corporate authorised representatives (CARs) operated under Lanterne’s Australian Financial Services Licence (AFSL), and between approximately 134 and 205 authorised representatives (ARs) operated under those CARs. The total funds under management of all CARS fluctuated between $1.2 billion in March 2021 and approximately $1.6 billion by the end of the relevant period.
The businesses operating as CARs under Lanterne’s AFSL included venture capital funds, managed investment schemes, agricultural advisory services, wholesale funds management services, corporate advisory services, wholesale property funds, energy trading funds, digital asset funds, and climate change advisory services.
The fees typically charged by Lanterne during the relevant period to CARs were:
- An initial upfront fee of $5,000 to become authorised under its AFSL, although this fee was reduced or waived in some instances.
- Approximately 45 per cent of CARs were charged ongoing fees of $3,000 per month.
- The remaining CARs were charged ongoing fees of up to $2,500 per month.
The court said Lanterne breached its obligation to have adequate risk management systems, to maintain competence to provide the services covered by its AFSL, 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 a judgment on 10 April, Justice Timothy McEvoy ruled that Lanterne should pay a pecuniary penalty of $1.25 million, equating to $250,000 for each contravention of the Corporations Act. The court also ordered an independent expert be appointed to review and report on Lanterne’s systems, processes and controls, and that Lanterne must implement the recommendations made by the independent expert once the report is received.
This sum was slightly lower than the penalty of $1.5 million that ASIC had suggested due to the mitigating factor that Lanterne cooperated with ASIC but was significantly higher than the $150,000 sought by Lanterne.
Justice McEvoy said: “Whatever may be said about Lanterne’s failure to comply with legislated norms of corporate behaviour and whether there was an element of recklessness in the behaviour, the fact is that there was such a failure. Lanterne’s contraventions of the act are deserving of a significant penalty to achieve the objectives of specific and general deterrence in light of what has occurred.”
ASIC commissioner, Alan Kirkland, said: “Lanterne authorised dozens of representatives to operate under its licence – who together had up to $1.685 billion in funds under management.
“Despite charging those representatives significant fees, 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.”
How did they get the AFSL in the first place? Given the green light by ASIC. This is terrible example of ASIC’s incompetence