Wholesale AFSL hit with $1.25m Federal Court penalty

A wholesale licensee which authorised 60 corporate authorised representatives which in turn authorised 205 authorised representatives has been hit with a $1.25 million Federal Court penalty.

The Australian Securities and Investments Commission (ASIC) said that Lanterne Fund Services had been ordered to pay the penalty after it was found to have breached its license obligations between March 2019 and October 2021.

• The court was told by ASIC that Lanterne had failed have adequate risk management systems,
• have adequate technological and human resources to provide the services covered by its AFS licence,
• ensure that its representatives were adequately trained,
• maintain the competence to provide financial services covered by its AFS licence,
• take reasonable steps to ensure that its representatives complied with Australian financial services laws, and
• do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly.

Lanterne operated a ‘licensee for hire’ business model. It authorised over 60 corporate authorised representatives (CARs) and under them, 205 authorised representatives (ARs). The businesses of the CARs operating 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.

In addition to a typical upfront fee of $5,000 per CAR, Lanterne charged each CAR up to $3,000 per month in ongoing monthly fees.

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.’

Lanterne admitted that it:

• did not have a formal or documented risk management system or any systems of processes in place to identify, assess or mitigate risks,
• was reliant on CARs self-reporting any exceptions to compliance with their obligations and Lanterne had no formal or documented review or audit process to assess whether a representative complied with financial services laws,
• conducted no discernible due diligence on the CAR and only limited background checks on the individuals involved with the CAR,
• did not have enough appropriately qualified responsible managers with sufficient time to conduct their roles,
• did not offer or provide training to its CARs or ARs, did not require evidence or information about training, and did not maintain any records of training,
• had insufficient human resources to enable it to monitor and supervise its representatives,
• did not have an adequate IT infrastructure, IT resources plan, security management plan, IT back-up protocol or disaster recovery plan and maintained its records using a paper filing system until September 2020.

In handing down the penalty, Justice McEvoy said the contraventions were serious and systemic.