Federal Court: authorised representatives of AFS licensees can do anything (almost)

The ruling by the Federal Court in the landmark case between ASIC and BPS Financial has major ramifications for the financial services industry, and we’re here to help walk you through the decision on our CNM Legal podcast.

Quick Overview:

While ASIC technically won the case against BPS Financial, the judge also found that an authorised representative is able to issue their own financial product. This precedent could create a floodgate issue for ASIC as it undermines the longstanding guidance that authorised reps cannot issue their own product.

Chris Mee of CNM Legal, has been watching this case closely  and has recorded a podcast episode running through the intricacies of the case and what it might mean for AFSL authorised reps, ASIC, and the industry more broadly. 

Who wins from this? What’s the potential risk to investors or consumers? Will this bring a new flood of players into the financial services market? And how will ASIC respond?

Prefer to read than listen? Read the transcript of the podcast below.

Welcome to the first episode of the CNM Legal Podcast. Today I’m talking to Chris Mee, who’s a specialist financial services lawyer at C&M Legal, about a recent case that’s going to have significant ramifications for the financial services industry. 

I’ll be talking to Chris from time to time about other important things affecting the industry as and when they arise. Thanks for your time Chris. Can you tell me a bit about the case you want to discuss today?

Yeah, thanks. Thanks Nick. Well I think it’s a landmark decision and we don’t get many decisions in this area of the law often. So any case we have is sort of landmark. It’s a case about it’s called ASIC and BPS Financial. It was handed down by the federal court just a couple of weeks ago. 

Um, and it’s a really important decision for you know, for reasons I’ll talk about later, but in terms of the the actual case, ASIC took this entity to court. BPS Financial is the issuer of this thing called Qoin which is a kind of a digital currency. It’s a non-cash payment facility that you could use to go and buy goods and services online mainly, as you do with, you know, as is the intention with most cryptocurrencies. And so it’s a non-cash payment facility as they use that term sort of in the law. 

So it’s anyone who’s willing to take that as a payment.

Yeah, that’s right. Any merchant who would take it. Its predecessor was a thing called Bartercard and the founders of this BPS Financial wanted to do was actually digitalise that product, that Bartercard product. So they created this thing called Qoin. 

ASIC took them to court on a couple of grounds and one of them is not really going to be the subject of this discussion because it’s not that interesting and it’s not a sort of a landmark decision. But ASIC accused them of making some misleading and deceptive statements about the operation of Qoin. That was the first part of the case.

The second part of the case which I think is the important part is that ASIC said that they were effectively unlicenced to do the thing that they were doing which is issuing this product called Qoin. And that’s the important part of the case. So ASIC won this case in a sense but it’s a really I think a pyrrhic victory for ASIC.

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Um because it opens a floodgate of problems for them from a consumer protection point of view. 

Yeah, okay, that’ll be interesting in the future. Can you start by explaining why ASIC believed they were unlicensed to issue the Qoin facility product? And why could this become so potentially complicated for ASIC? 

If I go back in time, we’ve got a licensing regime. You need an Australian Financial Services Licence if you provide financial services in Australia. That regime is now about 22 years old. It’s been around for that time. Before that existed we had a sort of a diaspora of licensing arrangements for financial services. So there were all these sorts of folks, regulatory bodies around, and different kinds of licences that people needed and not one solitary authority.

So we had this thing called The Wallace Inquiry, and one of the recommendations 

of that inquiry was to actually stick that stuff together. Let’s have one. That’s already. Yeah, and let’s make ASIC in charge of it. You’ve got one licensing regime and a bunch of different authorizations you can get under your AFSL. 

But they also wanted to preserve some of the exemptions that were available prior to this legislation coming in sort of 22 years ago. And one of those things was that you could be the agent of someone who held a licence and not have to hold your licence yourself. So you can imagine back in the day, you know AMP, having a bunch of thousands of financial planners across the country giving advice and obviously remote locations etc should be able to provide advice on behalf of that licensee. Yes, and that’s how it operated and there was a previous regime for that which was carried across in new law. 

So for a whole bunch of reasons. We’ve got a licence from a regime that says you need a licence unless you’re exempt, and then we’ve got a whole bunch of exemptions, and that’s how it works. 

Yes. Maybe we’ll go through that another day.

Maybe. So this case involves two of those exemptions. The first of those is the authorised rep arrangement. So what ASIC have said for sort of forever and a day about this, is that you can’t be an authorised representative of someone and issue a financial product. Because you’re not doing that on behalf of them, you’re actually doing it on your own. 

When it’s seen as your product. 

When it’s your product, yeah. And so they have issued regulatory guidance around this. Regulatory Guide 36 has been around for a long time talking about these are the factors that we consider when you’re acting as a principal and not an agent and therefore you should go and get your own licence. So that’s been their view for a very, very long time. And that’s the view they brought to the court to test because BPS Financial, the issuer of the Qoin product— there was no doubt it was the issuer of this product— was an authorised rep of an entity and also acted under another exemption which I’ll talk about a little bit later which is a bit more technical in nature. But it was effectively the authorised rep of someone issuing its own product. And ASIC said well, we think that that’s not an arrangement where you’re doing it on behalf of someone else, you’re doing it in your own right. So therefore you’re effectively unlicenced.

So you should have your own licence.

You should have your own licence. Yeah, that’s what the argument was. So this was taken to court and the federal court single judge of the Federal Court Justice Downs, didn’t agree. Justice Kylie Downes of the federal court handed down this decision, and basically she said you could be the authorised representative of a licencee and issue your own product as an authorised rep. 

Okay, which is sort of the opposite of what you just explained. 

The opposite of what ASIC believes is the law. ASIC believes you’ve got to be doing on behalf of someone else and you, and there’s a liability regime that sits behind that. So a licensee is responsible for the acts of its authorised reps whether it’s inside or outside the scope of their authority. And so it all sort of makes sense that you do it on behalf of them. You’ve got supervisory obligations over those authorised reps. And so that’s been ASIC’s view. 

I suppose the question I’d like to ask is about the licence that they were operating under. it’s not a decision that they’re outside of that licence, it’s about them operating outside of any licence. 

Well they’re basically saying that even though you are authorised and the licensee that you are acting under had the appropriate authorisation, that was ineffective because you were acting as a principal and not as their agent. So it was no authorisation at all. 

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Now the court disagreed with that view, and actually said that an authorised representative arrangement, they had a couple in place over time but one of them authorised them to issue a financial product and the court found that that was fine, which ASIC disagrees with. 

And so what the effect of that is, is that I can issue a financial product as an authorised representative of someone else.

So what’s the potential of this for the industry? Who ‘wins’ out of this argument?

So it’s good for industry because it allows a lot of new entrants to come in that don’t have AFS licences to go around and issue their own products. Good for the industry. Now from ASIC’s point of view, it’s going to be very difficult to regulate this because of the consumer protection aspect of this, which is that anyone can now go and issue a product as an authorised rep.

So for example if I wanted to run my own contracts for a difference trading system, I could go and do that as an authorised representative of someone, I can issue a derivative as an authorised representative of that person and make a market in those derivatives. Yeah, I can do that as an authorised rep. I don’t have to hold my own licence. All I have to do is be rg146 compliant in that respect and comply with my licensee’s training standards and be appointed and that’s it. 

So there’s not not a lot of regulatory control around that sort of entity that is going to be doing that because they’re just an authorised representative of a licensee and not the licensee itself.

Yeah, which is a much simpler process of going through.

It is, yeah and it’s an appointment by the licensee and much easier to get than your own licence. So it’s a floodgate issue. 

So why did BPS Financial lose the case if the judge found that it was legal to issue your own financial product while acting under the authorised representative Arrangement. 

So ASIC won this case because the judge did find that in certain respects they were unlicensed at different periods of time. And that the authorised rep arrangement which was you know successful in the eyes of the federal court for EPS, was only in place for a period of time. It’s a pyrrhic victory because they won the case, but there’s now this decision that states you can be an authorised rep and issue a financial product. And do a bunch of other things, presumably. 

So does that make life, so it does, it makes life easier for a lot of people that want to offer a financial product. 

It does, yeah. 

And would you say that most of those people, or businesses, are working within someone’s AFSL at the moment, or are they all operating outside of the licensing process? And now it’s much easier, so they’ll go find someone to work with. 

I think most people would be either acting as an authorised representative or not issuing their own product in their own name. They would be having to get their own licence. So this allows an avenue for people now not to have to go through that process, find a willing licensee who can appoint them, and then act as an authorised representative and issue their own product.

So to use your words Chris, this decision by Judge Kylie Downes was a pyrrhic victory for ASIC. How big is this decision and how worrying is it for ASIC? 

Now this goes sort of against the grain of the entire regulatory regime that ASIC has put in place for licensees. Yes, because they want to be able to regulate the people who issue the product, and it’s going to be difficult for them when I can go and start my own, you know, CFD trading platform without having an AFS licence. The only thing you can’t do legislatively under the law as an authorised rep is to operate a registered scheme or provide a traditional custodian service. So that’s the only thing that it blanket outs in the law. But because of this decision pretty much everything now, everything else is kind of in play.

Do you think that many people will give up their licences and then go under someone else instead?

It’s possible. I think you’ll just find a whole bunch of new entrants that people who get, you know, understand the nature of this decision. And I think ASIC are going to have to look to the government to legislate around this decision because I don’t know that they can appeal it. They’ve won the case. They actually got the result they were looking for so from a consumer protection point of view that particular matter was okay, but I just think it’s opened up a whole Pandora’s box of issues for them moving forward. Good for industry, bad for them.

So what do you think we can expect from ASIC over the short term and medium term? Do you think they’re going to change the way they do things? What are they going to put in place? What does it mean for AFSL holders as well as people that are on the RG126?

I think they’re going to continue to stick to their guns in terms of their view. They’ll probably say, I expect that they don’t agree with the decision. Nothing will come out in the short term. It’s going to take a while for it to reverberate around there, and they’re going to have to work out what they’re going to do, but I don’t know that they can let it stand the way it is. The problem for them is I don’t think they’re going to be able to get an appeal to do it, given that they were found for them. So I think it’s going to be one of those decisions that stands, and people can then rely on it. And I think there might be another test case, but I think they’re probably going to have to legislate it, ask the legislature to change the law to make it clearer that you cannot be an issuer of a product, of your own product, and an authorised representative of a licensee.

So you mentioned one of the exemptions was being an authorised representative. What’s the other exemption that you mentioned that you said you’re going to tell us about?

Yes. So there’s another exemption in the Act from the requirement to hold a licence to issue a product. We call it the outsourced dealer exemption. It’s in 911A 2B of the Act and under that under that exemption if you engage an AFS licensee to issue a kind of financial product that you’re issuing, they can arrange to make offers on your behalf of that product. If you’re the issuer of a product, you don’t have a licence. You can engage a licensee who is authorised to issue a product of that kind. 

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They can arrange for offers of that product to be made and you can accept them after those offers have been made by them. The nature of it is unclear and it’s never been tested. And this is the first time it’s been sort of dealt with in a case.

Interesting. 

And so and so the history of that exemption I think is around intra corporate sort of transactions where you’ve got, you know banks dealing with acute things like securitization vehicles that might be their own companies that need to issue a product but don’t have a licence shouldn’t have to get one for a function that they’re just doing once maybe in relation to that. So we think that that’s sort of what it was for.

And how does that relate to our case?

So BPS had an arrangement where they did this with an AFS licence seat and that licensee acted as the outsourced dealer under the exemption. 

It also appointed BPS as its authorised representative to give advice. And ASIC again has a view that you can’t make that appointment of the issuer as an authorised rep. And the court actually did agree with ASIC on that point. They said there needed to be a sort of third party involved. And so they lost on that aspect of the case, not because the exemption didn’t work, but a way that the exemption was structured in terms of the appointment of BPS as an authorised rep. So for that reason, it’s another sort of landmark decision because we don’t have anything on that particular section of the Act and it’s been in there for 22 years.

So ASIC one on that point and BPS Financial did ultimately lose the case but ASIC has got to be at least a little bit worried about what happens next based on that judgement about authorised reps being able to issue their own financial product or products. 

Yeah, in terms of commentary on that actual decision, you know, I think that it’s a hard decision to swallow in terms of, you know for ASIC particularly, but I kind of agree with ASIC’s view on this. I think they’re actually right about that and I’m not sure that this is decision is correct in the legal terms 

And because they lost that decision. Can they appeal it? And do you think they will

The party BPS can certainly appeal that decision, and know, who knows if they will or not, but the problem really is whether or not you know, ASIC is probably the one that wants to appeal parts of it, but probably can’t because it won the case. 

Yeah, if people have questions that they would like to put to you directly. Can they do that?

Yeah. Absolutely. Yeah happy will keep will give you my email and and and address and absolutely happy to or take calls from people as well about this because it is a big issue and I’m expecting something to come out from a sick in the next few months at least about it because it’s not just in one regulatory guide that they talk about this issue. It’s in a number of places. 

Cool. Thanks very much for your time. Yeah. 

Thanks Nick