How to stay out of trouble? Key risks and lessons for Responsible Managers

Unlike a director or officer, a Responsible Manager (“RM”) is not a legal concept.  The term does not exist in the Corporations Act 2001 (“the Act”).  It is a tool that ASIC has created in its guidance to explain how it believes a licensee can demonstrate that it has the organisational competence to provide the financial services under its licence.

Accordingly, RMs can often be in the dark as to what their role entails and whether they can be held personally liable for breaches of the licensee.

A common myth is that an RM can only get in trouble for contraventions of the law by the licensee when they are a director.  This is not the case.  We have reviewed recent stories involving disciplinary actions taken against RMs and one thing is clear: the position of an RM is not one without risk and there are certain expectations that come with the role that ASIC is prepared to enforce.

What is an RM?

If you are an RM, you would have been appointed because you have direct responsibility for day-to-day decisions about the ongoing provision of financial services.  Further, you would have been found by ASIC to possess appropriate knowledge and skills for some or all of the licensee’s financial services and products.

Accordingly, if you are an RM, this means you have a reasonable degree of seniority in the licensee’s business.

Key risks for RMs

Whilst it is true that the law does not impose any specific obligations for RMs (and, therefore, no specific liability) due to the fact that an “RM” is not a legal concept, an RM appointment may still expose you to the risk of having legal or disciplinary action taken against you.

Since you have the requisite level of involvement in the business to be appointed an RM, you will need to be aware of section 920 of the Act, which sets out the circumstances in which ASIC can make a banning order against a person.

These circumstances include where you:

• have “been involved in the contravention of a financial services law” by your licensee
• are “likely to become involved in the contravention of a financial services law” by your licensee
• are not a “fit and proper person”.

The effect of a banning order is that the person against whom it is made is unable to provide financial services, or manage a corporation which provides financial services, for the time specified in the order.

In order to understand the risks of being involved in the contravention of a financial services law by your licensee, you would firstly need to have a good grasp of what the licensee’s obligations are under financial services laws.  These include:

• the overarching licensee obligations set out in section 912A of the Act such as, for example, the obligation to have in place adequate arrangements to manage conflicts of interest, and the obligation to ensure that representatives comply with financial services laws
• breach reporting obligations
• misleading or deceptive conduct provisions.

We cover these topics in our RM training which we provide through Holley Nethercote Compliance.

Based on ASIC’s enforcement actions against RMs over the past few years, we have identified clear themes that emerge in both the reasons for disciplinary action and the proper behaviours that were expected but found to be lacking.  We set out these “red flags” below.

Red flag #1: Being disengaged and failing to understand (and fulfil) RM responsibilities

ASIC permanently banned Graham Holmes, RM (but not director) of Financial Services Group Australia, on the basis that Mr Holmes served as an RM “on paper” only, receiving fees while not actively fulfilling his responsibilities.

ASIC concluded that Mr Holmes was not a fit and proper person to participate in the financial services industry, citing his lack of involvement in day-to-day decision-making, and failure to oversee critical obligations such as breach reporting and maintaining adequate resources.  He was also found to be involved in the licensee’s breach of financial services laws by failing to ensure representatives acted in clients’ best interests and provided appropriate advice.

ASIC also banned Paul Dortkamp on the basis that he had a poor understanding of his company’s services and obligations.  When a fault in the Spaceship Super Fund onboarding system mistakenly placed members in the wrong superannuation product, he allegedly failed to take timely action to fix it.  ASIC alleged that he wrongly concluded that the problem was “not [his] responsibility”.  However, on appeal, Dortkamp successfully argued that he did understand the business and that he did act promptly and decisively when he identified the incident.  As a result, his two year banned was overturned.

The lessons here for RMs are:

• Be engaged and actively oversee the delivery of financial services so you know when there are potential breaches, don’t just lend your name. You cannot be an RM “on paper” only.
• Know what financial services are being delivered by your business and know your licensee’s obligations, including its breach reporting obligations. Where there are issues, act quickly.

Red flag #2: Lack of oversight and supervision of representatives

Shay Zakhaim and Anthony Anderson, directors and RMs of XTrade, were banned (for three and four years respectively) after ASIC found that they were both involved in XTrade’s failure to take reasonable steps to ensure that representatives followed financial services laws.  XTrade staff were using unfair tactics to push clients to invest more.  ASIC also found that they were both involved in XTrade’s failure to manage conflicts of interest, which led to aggressive, high-pressure sales tactics by representatives.

Similarly, ASIC banned Mark Bringans for his failure to ensure that his company addressed egregious misconduct by an outsourced call centre.  The licensee’s offshore agents engaged in pressure-selling and gave unlicensed personal advice, amounting to unconscionable conduct.  ASIC found that Mr Bringans was disengaged, that he “did little more than attend monthly compliance meetings,” and ignored his key duty as RM to ensure compliance with financial services laws.  He was deemed not fit or competent for an RM role.

The lessons here for RMs are:

• The section 912A general obligations, including the obligation to ensure that representatives comply with financial services laws, rests with the licensee. However, ASIC expects RMs to take on the responsibility of monitoring and supervising representatives as well as outsourced or offshore service providers.
• Have proactive oversight over staff, conduct regular audits and correct any unconscionable conduct immediately.

Red flag #3: Failure to detect or remediate misconduct

ASIC recently banned Andrew Moore of Crown Wealth Group, for 3 years for failing to address a “fees for no service” misconduct by a representative.  ASIC found that Mr Moore did not recognise the seriousness of the issue, or act to remediate affected clients (where over $81,000 in fees were left unrefunded).  Mr Moore also waited six months to report the breach to ASIC and should have identified it as reportable much earlier.  ASIC deemed him not competent or adequately trained for these reasons.

ASIC also banned Dr. Robert Payne of Guildfords Funds Management after finding that he demonstrated a lack of competence and diligence as an RM.  Notably, he was also the managing director.  Mr Payne allegedly had no control or oversight over a rogue director and two corporate authorised representatives under his licence.  This enabled unauthorised derivatives trading and other breaches that caused investor losses.  He also allegedly failed to grasp the extent of his firm’s compliance failures, downplaying their significance and his responsibility.

The lessons here for RMs are:

• Ensure you have enough resources (both human and technical) to detect problems. Ensure you allocate enough time to fixing the issue when it is identified.
• Do not ignore or downplay the significance of issues. Promptly investigate and treat early signs of misconduct as serious compliance risks.
• Client remediation and breach reporting should be done in a timely manner, if not immediately.

Red flag #4: Misleading, dishonest or unconscionable conduct

ASIC has also banned RMs for either directly participating in, or being involved in (due to a failure to oversee and prevent), a range of unethical conduct, including:

• making dishonest claims about investments (e.g. Peter Surtenich of Suetonius Wealth Management)
• using misleading onboarding tactics and inappropriate advice practices such as rolling clients’ super into SMSFs and investing it in highly speculative investments (e.g. Joel James Hewish of United Global Capital)
• high-pressure sales tactics and unfair treatment of clients (Shay Zakhaim and Anthony Anderson of XTrade).

The lesson here is that RMs are expected to uphold the clients’ best interests and maintain ethical conduct at all times.  Even where an RM does not directly participate in unethical conduct, ASIC will very likely hold the RM personally responsible where clients are being subject to such conduct.

Red flag #5: Inadequate systems, resources, or compliance Infrastructure

Mark Schroeder, RM and senior manager of Spectrum Wealth, was banned by ASIC for 6 years.  Mr Schroeder appealed ASIC’s decision to the Administrative Appeals Tribunal (as it was named then), and his banning was upheld (and even widened).

As the senior manager of Spectrum Wealth, Mr Schroeder presided over numerous compliance failures.  Under his watch, Mr Schroeder failed to do all things necessary to ensure services were provided efficiently, honestly and fairly, failed to ensure its representatives complied with the law (by taking no reasonable steps like regular audits or adequate training), and lacked sufficient human and technological resources to meet its licence obligations.  ASIC found Mr Schroeder was involved in these contraventions and showed a poor understanding of a licensee’s obligations, indicating he was likely to reoffend.

Mr Schreoder’s banning provides a good summary of all of the above lessons and is a reminder that an RM is responsible for driving the compliance culture in the licensee’s business.  RMs should ensure that the licensee has enough staff and technological resources to ensure compliance, and where there is a lack of such, to ensure that the licensee invests in more robust compliance measures.

If you are a Responsible Manager, what should you take away from this?

ASIC expects RMs to be active leaders, not passive placeholders.  When RMs fail in supervision, delay action on misconduct, or neglect compliance infrastructure, ASIC views it as a breach of the fit and proper person and competency requirements under the Act.

In practice, being an RM means:

• Showing up.
• Actively supervising.
• Staying informed.
• Taking ownership.
• Acting fast.
• Putting clients first.
• Leading the compliance culture.

Join our 3-hour RM training course where we work through your responsibilities as an RM, run through scenarios and simplify your obligations as best we can.  Feel free to also check out our webinar by Managing Partner, Paul Derham, on RM 101 – An introduction to what it means to be a Responsible Manager.

Require further assistance?

Holley Nethercote Lawyers are well experienced in assisting with all aspects of wholesale client issues.

Author: Ellie Khor (Associate)