When ASIC announced the Federal Court had ordered Lanterne Fund Services to pay a $1.25 million fine, the regulator explicitly described Lanterne as a “licensee for hire”.
This term, and terms like “licensee of last resort”, are used informally from time to time to describe the licensees the industry’s fringe dwellers go to when they can’t find any other licensee prepared to take them on.
But ASIC’s tag is one of the few times it’s been used so formally and publicly.
Lanterne exhibited some specific characteristics that caught the regulator’s eye, and which the court subsequently found constituted unacceptable conduct by the business.
Lanterne is a wholesale licensee, meaning its advisers cannot give personal advice to retail clients. Nevertheless, ASIC’s action against the licensee is relevant to all advisers who might be attracted to – or even currently subject to – low-cost and low-touch licensee offers.
It’s unlikely that the findings against Lanterne surprised many of its authorised representatives. They would have been aware and presumably supportive of Lanterne’s low-cost, low-supervision model.
The licensee has been fined $1.25 million. If Professional Planner were taking bets, we’d wager that the fine – and the cost of remedial action Lantern has been ordered to undertake – will be funded by increasing the fees Lanterne charges its Authorised Representatives. Or at least, to those ARs that hang around to pay it, and don’t go scrambling about for another licensee of last resort.
But it’s just possible that some advisers authorised by Lanterne were shocked and surprised by ASIC’s actions and the court’s decision. If they were, indeed, unaware of the lack of supervision and to lax internal processes, it only serves to highlight why due diligence should be a two-way street. It’s not only licensees that need to be careful which advisers they authorise; advisers also need to do their homework when choosing a licensee.
ASIC’s Regulatory Guide RG36 ‘Licensing: Financial product advice and dealing’ sets out the key obligations of a licensee. It serves as a handy checklist for advisers. The guide says licensees must:
- Do all things necessary to ensure that the financial services covered by the AFSL are provided efficiently, honestly and fairly;
- Have adequate arrangements in place to manage conflicts of interest;
- Comply with AFSL conditions;
- Comply with the financial services laws;
- Take reasonable steps to ensure that representatives comply with the financial services laws;
- Have adequate resources;
- Maintain the competence to provide the financial services;
- Adequately train representatives and ensure that they are competent to provide the financial services;
- Have adequate risk management systems;
- Have compensation arrangements where financial services are provided to retail clients; and
- Have a dispute resolution system that satisfies s912A(2) of the Corporations Act where financial services are provided to retail clients.
(The last two points at least don’t apply to Lanterne, which was a wholesale licensee.)
The ASIC guide represents a handy list of issues advisers can and should ask a prospective licensee about, and they should insist on seeing evidence to support the responses.
It should be obvious that one potential red flag is a licensee fee significantly below market rate. The clear obligation for a licensee to “have adequate resources” suggests that the fees it charges its ARs should be sufficient to fund its operations, including compliance checks and monitoring, and risk-management systems, so that it doesn’t cut corners or overlook issues that inevitably arise from time to time.
There are a lot fewer advisers active in the market now than there were five years ago, and for any licensee for whom the number of advisers on the licence is still a relevant metric, competition to attract new advisers can be fierce. This in turn can put pressure on licensees to offer advisers sweet deals.
And that’s fine, unless a result of these deals is to denude a licensee of the resources it needs to do its job efficiently, honestly and fairly. Then advisers – and their clients – are potentially exposed to all sorts of risks.
It’s an adviser’s responsibility to ensure the bona fides and the substance of the licensee that authorises them just as surely as it is the licensee’s task to thoroughly vet the advisers it takes on.
