In the space of a week, the Australian Securities and Investments Commission (ASIC) cancelled the AFSLs of both Viridian Equity Group and Brite Advisors, with unpaid AFCA determinations the root cause.
When neither firm paid the compensation that was awarded to their clients, the Compensation Scheme of Last Resort (CSLR) stepped in.
This took the form of $450,000 for three former Viridian Equity clients and a much smaller $20,000 to cover Brite’s tab.
Financial Advice Association Australia (FAAA) general manager for policy, advocacy and standards, Phil Anderson had raised the cases as points of concern on a Holley Nethercote webinar last week.
“We saw two businesses last week where the licence was cancelled because of unpaid AFCA determinations which led to payments by the CSLR, so the clouds are disturbing,” Anderson said.
On a subsequent FAAA webinar, chief executive Sarah Abood also noted the firms as potential issues for financial advisers.
The AFCA determinations against Viridian Equity relate to investments in a property development managed investment scheme, which subsequently failed and caused the complainants to lose between $150,000 and $400,000, depending on the case.
The complaints authority added that the project was restricted to wholesale clients or sophisticated investors.
“The financial firm incorrectly assessed the complainants as sophisticated investors. The complainants were ineligible to invest in the project. The financial firm should not have accepted their investment application,” AFCA wrote in one of the determinations.
Who pays for Viridian Equity claims?
On the face of it, financial advisers would be rightfully concerned that, because the determinations relate to retail clients – even ones wrongfully classified as wholesale – that they might get stung with the cost.
However, CSLR chief executive David Berry told ifa that the securities dealing subsector will cover the payments.
“When it comes to working out which one is the right subsector, that comes down to as a CSLR call,” Berry said.
“AFCA doesn’t make that call, they just make the determination. We have a look at how they’ve been treated – sometimes it’s really easy because it’s easily identified as to which classification that would be, sometimes it’s not that easy and we have to make that call.”
Ultimately, when assessing the determinations and Viridian Equity’s licence conditions, the CSLR decided that they fell within the securities dealing field.
“[Viridian Equity] didn’t believe they needed to be members of AFCA, which is something that they can take up with ASIC,” Berry added.
“The challenge for us is AFCA has made a determination, and that determination falls within our scope. So, regardless of what they think, what they did made them eligible.”
According to the AFCA determinations against the firm, Viridian had argued it was “misled into becoming an AFCA member” by an ASIC media release from September 2018.
As a result, the firm was an AFCA member from 3 October 2018 to 25 February 2021, making any complaints lodged during that window subject to AFCA jurisdiction.
“Even if the financial firm was under a mistaken belief about its obligation to join AFCA (which the panel does not need to make a finding on), this did not prevent the formation of a binding contract or limit its operation,” AFCA said.
“There is no evidence or suggestion to support that AFCA (as the other contracting party) caused, contributed to, or concealed the truth in relation to, any such mistaken belief by the financial firm or was even aware of it.
“The financial firm has also not provided any substantive legal argument as to why being allegedly misled by a third party would result in the financial firm’s contract with AFCA being set aside.”
Brite Advisors could be a different story
On the other side of the coin, the relatively minor determination of $21,888.20 against Brite Advisors could wind up being more damaging for advisers.
“I don’t know what’s going to happen with that one. Brite Advisors is actually really big, global firm, something in the order of US$740 million in client AUM,” Abood said.
“Some of that might be picked up by the securities subsector, we’re not sure at this stage, but certainly that’s one we’re keeping a close eye on.”
Brite Advisors has been in liquidation since the Federal Court ordered it be wound up in February 2024.
“Although Brite Advisors’ AFS licence is cancelled, this is on the condition, imposed by ASIC, that Brite Advisors must remain a member of AFCA for a period of 12 months, ending on 29 April 2026,” ASIC said in announcing the licence cancellation.
The regulator has previously explained that it launched the initial court action against Brite in 2023 because it was “concerned that the financial position of Brite, and the value of client funds under its management, were unknown”.
Based on evidence from the receivers, who at the time were acting in the capacity of investigative accountants, there is a discrepancy of around $100 million between the total amount of client funds that they could identify in the bank and trading accounts of Brite and the total amount of client funds on its books as “being reported to clients as being owed to them”.
If the pension fund deficiency ends in client losses, the $20,000 that triggered the CSLR payment will just be the tip of the iceberg.
Oh and the can of worms for Sheild and First Guardian still hasn’t been fully opened yet….
that’s the one we’re all waiting to see unfold.