‘Licensee for hire’ hit with Federal Court penalty

The Australian Securities and Investments Commission (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.

ASIC alleged that from 13 March 2019 to 5 October 2021, between 62 and 69 corporate authorised representatives (CARs) operated under Lanterne’s AFSL and between approximately 134 and 205 authorised representatives (ARs) operated under those CARs. During the relevant period, 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.

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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:
(a) An initial upfront fee of $5,000 to become authorised under its AFSL, although this fee was reduced or waived in some instances.
(b) Approximately 45 per cent of CARs were charged ongoing fees of $3,000 per month.
(c) The remaining CARs were charged ongoing fees of up to $2,500 per month.

This is one of the first litigated cases related to a “licensee for hire” and the contraventions of that business model.

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, breached its obligation to take reasonable steps to ensure that its representatives complied 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. Lanterne also agreed to a compliance regime being put in place.

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.

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.”