ASIC's submissions
130 ASIC submits that a penalty of $1.5 million is appropriate ($300,000 for each contravention of s 912A(5A)), and necessary to achieve specific and general deterrence in this instance. ASIC contends that Lanterne's contraventions concerned core aspects of its operations. They were systemic and did not involve isolated conduct. ASIC submits that the conventions concerned critical aspects of Lanterne's obligations as an AFSL holder such that the necessary processes, systems, and operations were in some cases non-existent and in other cases fundamentally non-compliant with Lanterne's basic obligations as a licensee. ASIC submits that Lanterne's conduct affected all of its CARS and ARs, and therefore potentially adversely affected their provision of financial services to all of their ultimate clients. ASIC notes that Lanterne admits that it put the ultimate clients at risk of harm in relation to the financial services provided to them by the ARs and CARs under Lanterne's AFSL. It is ASIC's position that the potential impact of Lanterne's conduct and risk of harm to ultimate consumers was significant in circumstances where Lanterne had CARs and ARs operating under its licence with an aggregate of up to $1.685 billion under management.
131 ASIC relies on the Birkensleigh report in support of its proposed penalty orders insofar as the report opines on the nature and extent of the contravening conduct and the resulting risks and effect thereof. ASIC submits that Ms Birkensleigh is an experienced risk management and compliance expert who undertook an extensive and careful analysis of Lanterne's operations and procedures. Her opinions can be summarised as follows:
(a) in relation to the adequacy of risk management systems (s 912A(1)(h)) Lanterne's absence of adequate risk management systems meant that risks inherent in Lanterne's business were not properly assessed or mitigated. The operations of the CARs were not homogenous, were broad, and were across a wide range of industries, with over $1 billion in aggregate funds under management, meaning that Lanterne's business had a high degree of complexity and needed an effective risk management system to understand and appropriately manage the risks of each of the ARs and the risks of its own day to day business. The absence of manuals and compliance documents made if difficult for employees and other parties to understand their obligations and ensure compliance. Having considered all the aspects of Lanterne's risk management systems, Ms Birkensleigh concluded that Lanterne's risk management systems, to the extent they existed, were "wholly deficient";
(b) in relation to the compliance of representatives with financial services laws (s 912A(1)(ca)), ARs represent a significant risk to the licensee because if ARs do not understand their obligations and do not comply then this potentially puts clients who are receiving financial services from the AR, under Lanterne's AFSL, at risk of suffering financial loss. Ms Birkensleigh opined that understanding and ensuring that its ARs are operating appropriately is achieved through effective monitoring and supervision by the licensee of its ARs. She concluded that there is no evidence that Lanterne did anything to ensure that its ARs were fully aware of the relevant legislative and regulatory obligations and that without such information the ARs would be unsure about what was required of them to ensure compliance with their specific obligations.
(c) in relation to the availability of adequate resources (s 912A(1)(d)), Lanterne's IT infrastructure and capability were not fit for purpose. Without the right technological resources, client data and other business data would not be secured and could be lost permanently. The lack of an effective disaster recovery plan meant that Lanterne was not prepared for an event that could disrupt its business for an extended period. This would put at risk Lanterne's capacity to provide financial services covered by its AFSL and supervision and monitoring of its ARs.
(d) in relation to competence, and whether a licensee has the appropriate number of suitably qualified responsible managers (s 912A(1)(e)), where, as here, the CARs and ARs cover a diverse range of products and industries, more than one responsible manager would be required as it would be unusual for such person to have the breadth of qualifications and skills to cover such diversity. Further, in determining the number of responsible managers needed, the licensee needs to take into account the number of CARs and ARs it has authorised. Lanterne did not have sufficient appropriately qualified responsible managers with the relevant knowledge and skills to understand the inherent risks in the financial services the CARs and ARs were offering under its AFSL. Consequently there was a real risk that there was not sufficient oversight of Lanterne's CARs and ARs.
132 ASIC submits that Mr Cozens, as sole director and responsible manager, was responsible for Lanterne's conduct and that it may be inferred that the contraventions were a result of Mr Cozens being at least reckless as to Lanterne's obligations as an AFSL holder. In oral submissions ASIC contended that Mr Cozens' conduct was reckless because he communicated an awareness of the relevant provisions, or at least the content of them, to the ARs and in these circumstances it must be concluded that he consciously decided to ignore their requirements.
133 ASIC contends that despite the proceeding being issued in July 2022, and Lanterne having been aware of ASIC's investigation since January 2021, many of the deficiencies which form the basis for the contraventions continue, and Lanterne has not put into evidence plans or proposals to remedy many of the outstanding deficiencies.
134 ASIC does accept, based on the affidavit of Mr Cozens dated 5 April 2023, that Lanterne has taken certain steps. However, ASIC maintains that significant gaps remain to be addressed. ASIC's position is that there is little to be seen in terms of evidence that there have been changes in the conduct of the way in which Lanterne's business is conducted and that it is not apparent whether or not the culture of the business has actually changed. ASIC submits also that Lanterne's position of waiting for compliance orders to be made does not help the market or address the existing risk in the interim.
135 In relation to risk management (s 912A(1)(h)), ASIC accepts, based on Mr Cozens' affidavit dated 5 April 2023 and supporting documents that Lanterne has taken the following steps:
(a) engaged Haystack Compliance to prepare a risk assessment review, which was completed in July 2022;
(b) updated its Procedures Manual to include a section entitled "Risk Management System" which appears to have been copied from the Haystack Report and which provides a framework for identifying risks and outlines who is responsible for ensuring risks are monitored and managed; and
(c) engaged Xenia Compliance Consulting on 30 March 2023 to assist in updating its compliance processes.
136 However, ASIC maintains that:
(a) there is no evidence that the updated "Risk Management System" drafted into the Procedures Manual has in fact been implemented by Lanterne nor any indication of when, how or by whom that work will be done;
(b) there is no evidence that Xenia's work to update Lanterne's compliance processes has yet commenced, or has resulted in any changes to the processes; and
(c) there is otherwise no evidence that Lanterne's actual practices regarding compliance and risk management have changed to address the admitted deficiencies.
137 Accordingly, ASIC submits that many of the admitted deficiencies regarding risk management remain unaddressed, and notes that one of the steps to address the deficiencies was only undertaken shortly before the hearing on penalty.
138 In relation to training (s 912A(1)(f)), ASIC accepts that Lanterne has taken the following steps in respect of its obligations under s 912A(1)(f):
(a) since April 2021, Lanterne has offered formal training to CARs and ARs which is conducted by Haystack Compliance; and
(b) CARs and ARs are required to complete training registers which are collected twice a year and reviewed at compliance meetings between Lanterne and the CAR.
139 However, ASIC maintains that there is no evidence that Lanterne has established a program which documents the skills and competencies required by its ARs to provide the authorised financial services, and which includes a needs analysis which assesses each AR against the documented required skills and competencies. ASIC contends that this remains a significant gap in Lanterne's compliance with its obligations under s 912A(1)(f).
140 In relation to reasonable steps to ensure compliance with financial services laws (s 912A(1)(ca)), ASIC accepts, based on the evidence filed by Lanterne, that Lanterne has taken the following steps to address the admitted deficiencies in its compliance with s 912A(1)(ca):
(a) on or after May 2021, Lanterne commenced using a platform entitled "Salesforce" to record client documentation, including background check information, training registers, and communications with Lanterne (the platform "allows" Lanterne to monitor matters arising from this information);
(b) in August 2021, Lanterne commissioned an external review by Xenia of its systems and processes for monitoring its CARs and ARs; and
(c) in December 2022, Lanterne updated its checklist for onboarding new CARs and ARs, which sets out information required from CARs and ARs and requires confirmation that the information has been provided.
141 ASIC notes that Mr Cozens also gives evidence that Lanterne has formalised its process for having compliance meetings with its CARs and ARs and keeps a record of those interactions.
142 However, ASIC submits that:
(a) there is no evidence as to whether Lanterne in fact utilises the Salesforce platform to monitor matters arising from the information recorded in the platform, nor of any formalised process to do so. Further, the example Salesforce page exhibited to the affidavit of Mr Cozens dated 5 April 2023 contains many blank cells, suggesting either that the platform is not being fully utilised to record information or that Lanterne does not possess critical information about its CARs and ARs;
(b) no documents recording or evidencing the formal process for compliance meetings has been put into evidence, so limited weight may be given to Mr Cozens' evidence about the new process;
(c) while Mr Cozens deposed that Lanterne is working to implement the recommendations of the Xenia report, that evidence is vague and little specific information is given about the status and extent of the implementation; and
(d) there is no evidence that the other aspects of Lanterne's admitted noncompliance have been addressed.
143 In relation to the availability of adequate resources (s 912A(1)(d)), ASIC submits that Lanterne has not filed any evidence of steps taken to address the deficiencies with its IT resources. The only evidence filed by Lanterne in relation to human resources is the introduction of a business continuity plan.
144 In relation to competence to provide financial services (s 912A(1)(e)), ASIC accepts that Lanterne has sought to appoint an additional responsible manager, and the outcome of the application, at the time of its submissions, is awaiting approval from ASIC. However, ASIC notes that no other steps have been taken to address Lanterne's deficiencies in respect of its compliance with s 912A(1)(e).
145 ASIC submits also that the contraventions occurred over a two and a half year period and were identified by ASIC through an investigation, and not by Lanterne itself. Steps were only taken by Lanterne to address the contravening conduct after ASIC's investigation was commenced.
146 In relation to general deterrence, ASIC submits that the penalty must be sufficient to ensure that penalties for contraventions involving obligations under s 912A(1) of the Act are not viewed as likely to be less costly than licence holders doing all that is required in the implementation of adequate risk management systems, compliance systems, monitoring and supervision of CARs and ARs, IT and human resources, and other aspects of the obligations. ASIC submits that the penalties imposed in this instance will be important to establishing the standards required of licensees in the future and informing investment decisions they will make about their systems and processes to ensure compliance with s 912A of the Act.
147 ASIC submits that specific deterrence is a relevant and important aspect of the determination of the appropriate penalty in this instance because Lanterne has indicated that it intends to continue to operate under the same business model. ASIC reiterates that any penalty must not be, nor be seen to be, an acceptable cost of doing business.
148 In this regard ASIC refers to Lanterne's financial statements for the Relevant Period which provide the following revenue and profit information:
(a) 2020: revenue was $1,416,051 and profit before income tax was $940,301;
(b) 2021: revenue was $1,729,588 and profit before income tax was $1,716,657;
(c) 2022: revenue was $2,116,252 and profit before income tax was $1,948,656; and
(d) in the nine months ending 31 March 2023: total income was $1,017,901 and profit before income tax was $499,982.
149 Although Lanterne makes the point that not all of its profit is derived from the license fees, ASIC submits that the financial statements indicate that the largest component of Lanterne's income was the fees it charged for CARs for operating under the AFSL. Thus, ASIC submits, while it is not possible to identify the precise benefit to Lanterne of its contravening conduct, it is apparent that Lanterne benefited from receiving fees from CARs without applying those fees to invest in the appropriate systems to ensure that the financial services provided under its licence were provided in accordance with the financial services laws. ASIC submits that Lanterne's operating costs were minimal during the Relevant Period and significant profits were derived from the business, in circumstances where Mr Cozens is a beneficiary of the trust company that is the sole shareholder of Lanterne.
150 Having regard to these matters ASIC submits that:
(a) Lanterne prioritised the generation of profits for its shareholder at the expense of investment and expenditure to comply with the law;
(b) this conduct occurred in circumstances where Mr Cozens, based on his experience, should have been aware that Lanterne's compliance arrangements and systems were entirely deficient and that prioritisation of, and investment in, those things was essential to ensure compliance with the law and, ultimately, protection of its CARs' and ARs' clients;
(c) such conduct can properly be characterised as reckless;
(d) Lanterne's delay in implementing wholesale and effective changes to its systems and practices demonstrates that it does not yet fully grasp the importance of ensuring compliance with the general obligations of an AFSL holder; and
(e) there was an absence of contrition on the part of Mr Cozens for the significant and ongoing failures demonstrated by the absence of suitable acknowledgement of the seriousness of the contraventions and that Lanterne's submissions evidenced an attempt to downplay or minimise the seriousness of the contraventions.
151 ASIC submits that the penalty of $1.5 million it proposes takes account of mitigating factors including that Lanterne has not previously been found to have engaged in similar conduct, or any contravention of the Act, and also that Lanterne sought to resolve the proceedings at an early stage.
152 In relation to actual loss suffered, ASIC acknowledges that there is no evidence of actual loss but it submits that this does not allow the court to make a finding that no loss or damage flowed, or that the potential losses were insignificant: Australian Securities and Investments Commission v MobiSuper Pty Limited [2022] FCA 990 at [119]-[120] (Charlesworth J) (ASIC v MobiSuper). Rather, the extent of the compliance failings and the size of the funds under management by CARs and ARs combine to create the potential for extremely significant loss and harm.
153 As has been mentioned, ASIC does not seek a penalty in relation to the contravention of s 912A(1)(a) due to the overlap between the factual matters relied upon as a basis for that contravention and the other contraventions. ASIC submits that the factual and legal elements of the contraventions of s 912A(1)(ca), (d), (e), (f), and (h) are distinct from one another and address separate and qualitatively different aspects of the business conducted by the holder of the AFSL. ASIC contends that Lanterne has contravened each requirement by a different species of conduct and therefore that the course of conduct principle does not apply and Lanterne's conduct should be treated as five discrete contraventions of s 912A(5A).
154 Applying subsection (a) of s 1317G(6) of the Act (the court has insufficient information for the calculations under subsections (b) or (c)), the maximum penalty for one contravention by a body corporate of s 912A(5A) over the relevant period would be $10.5 million. Accordingly, the maximum penalty for five contraventions would be $52.5 million.
155 ASIC acknowledges that comparisons to penalties in other cases are of limited utility and that in any event it has not identified any other recent cases which might be used as a suitable comparator.
156 In response to Lanterne's submission that the conduct was at the less serious end of the spectrum, senior counsel for ASIC submitted that this had a tendency to downplay the conduct in as much as it amounted to a suggestion that the contraventions were trivial in nature, rather than a reference to the absence of any obvious harm or loss arising from the contraventions. ASIC submitted that Lanterne could not say that the contravening conduct is towards the less serious end of the spectrum and still be contrite about the seriousness of the contraventions. ASIC also submitted that Lanterne's conduct has been insufficient to demonstrate contrition, noting Mr Cozens' affidavit of 8 May 2023 in this regard.
157 ASIC also emphasises that the present proceeding is about the responsibilities of Lanterne not its ARs, and contends that Lanterne cannot make the submission in the abstract that because there is no evidence of non-compliance on the part of the ARs they were all competent and compliant. ASIC submitted that an absence of evidence cannot give rise to any inference of compliance and competence.
158 In relation to Lanterne's ability to pay any pecuniary penalty ordered, ASIC referred to Australian Competition and Consumer Commission v High Adventure Pty Limited [2005] FCAFC 247 at [11] where Middleton J observed:
… by focusing on the detriment to the respondents the judge ignored both the seriousness of the contravention as well as the need to fix upon an appropriate penalty by reference to the need to deter future contraventions. As the cases to which the judge was referred show, the principal, if not the sole, purpose for the imposition of penalties for a contravention of the antitrust provisions in Part IV is deterrence, both specific and general. This rule is so well entrenched that citation of authority is unnecessary. Moreover, as deterrence (especially general deterrence) is the primary purpose lying behind the penalty regime, there inevitably will be cases where the penalty that must be imposed will be higher, perhaps even considerably higher, than the penalty that would otherwise be imposed on a particular offender if one were to have regard only to the circumstances of that offender. In some cases the penalty may be so high that the offender will become insolvent. That possibility must not prevent the Court from doing its duty for otherwise the important object of general deterrence will be undermined.
ASIC contends that it is entirely irrelevant to consider the impact of the total penalty on Lanterne's business, and it is submitted that the impact on Lanterne's business has not been quantified and cannot demonstrably be linked in any causative way to the proceeding or what has occurred as a result of ASIC's investigation. ASIC also submits that any penalty needs to be in addition to the costs of compliance, which Lanterne must bear.
159 ASIC submits that Lanterne's failure to comply with its fundamental obligations as a licensee is striking given that this was the very thing that formed the basis of its business. ASIC contends that this, and the involvement of Lanterne's senior officer, weigh in favour of a significant penalty to deter Lanterne and other licensees from disregarding critical obligations and putting ultimate consumers of the financial services at real risk of harm.