In mid-April, the Federal Court ruled that Lanterne Fund Services, a wholesale licensee, must pay the Australian Securities and Investment Commission (ASIC) $1.25 million for breaching its duties as an Australian financial services licence (AFSL) holder.
Lanterne allowed representatives to operate under its licence in exchange for a monthly fee.
However, the company failed to maintain the most basic of compliance management systems, thereby exposing consumers to significant risk.
Here, we delve into the details of the case, and ask experts about the lessons it holds for accountants and finance teams.
Who is Lanterne Fund Services?
Lanterne Fund Services is a Sydney-based company, which, according to its website, “assists the launch and growth of investment managers by providing access to expertise and services”.
One such service is authorisation to act under Lanterne’s Australian financial services licence (AFSL). Lanterne gave this authorisation to more than 60 corporate representatives (CARs) and, beneath them, 205 authorised representatives (ARs). Each CAR paid around $5,000 in upfront fees, plus up to $3,000 per month.
Among them were venture capital funds, managed investment schemes, wholesale funds management services, wholesale property funds, energy trading funds, digital asset funds, agricultural advisory services and climate change advisory services. Collectively, they managed up to $1.685 billion.
Where did Lanterne go wrong?
The Federal Court held that, between March 2019 and October 2021, Lanterne breached six of its duties as an AFSL holder. Lanterne failed to:
- Have adequate risk management systems;
- Have adequate resources (both technological and human) to deliver its licenced services;
- Demonstrate the competence required to deliver its licenced services;
- Provide adequate training for its representatives;
- Take reasonable steps to ensure its representatives complied with Australian financial services law; and
- Do all things necessary to ensure that its licenced services were provided efficiently, honestly and fairly.
Lanterne had just one full-time employee – its CEO, Peter Cozens – and kept all records on paper. There was no formal risk assessment system, no security management plan and insufficient IT infrastructure.
Further, Lanterne did not conduct due diligence on its CARs, give them training or monitor them with qualified staff. Instead, the company relied on CARs self-reporting on any issues with compliance.
“Lanterne’s conduct fell well short of the reasonable standard of performance of an AFSL holder, which the public is entitled to expect,” said Justice McEvoy in his judgement.
“[These] obligations were effectively ignored by Lanterne and, in consequence, the ultimate consumers of financial services were exposed to risks which could have been mitigated, had there been compliance.”
In addition to paying a $1.25 million penalty, Lanterne must undergo an independent review of its systems, processes and controls, and implement all recommendations made.
Lesson #1 for accountants: implement robust risk management systems
Companies holding an AFSL must have adequate risk management systems under section 912A(1)(h) of the Corporations Act.
“The case highlighted failures to properly monitor and supervise representatives, identify non-compliant conduct and escalate issues appropriately,” says Nailia Alimovia, Accountant, and Founder and Chief Financial Officer, XSource Control advisory firm.
“[AFSL holders] should implement detailed policies, procedures and controls to proactively manage compliance risks across areas like marketing, advice, record-keeping, complaints handling, cybersecurity and staff training,”
“Regular testing and reviews of risk systems are essential.”
One efficient solution is the use of comprehensive risk management software, such as Corporate Governance Risk.
“[It] automates and manages compliance and operational risks specifically for financial services,” says Alimova.
Lesson #2: deliver effective training, and ensure organisational competence
Under sections 912A(1)(f) and 912A(5A) of the Corporations Act, AFSL holders must maintain the competence required to provide the financial services covered by its licence.
“The case revealed issues with representatives lacking appropriate qualifications, training and supervision,” Alimova says.
“Companies must have rigorous frameworks to initially assess, and then continually monitor and enhance, the competence of all representatives through targeted education programmes, accreditation requirements, and supervision of their activities by properly qualified individuals.”
Just as with risk management, it’s not necessary to reinvent the wheel. The right software might be all you need.
“Use a platform like Kaplan Professional, which offers tailored training programs, to ensure ongoing professional development and compliance with financial service standards,”she says.
Lesson #3: follow stringent monitoring and audit processes
“Embedding an ethical, consumer-focused compliance culture is crucial to satisfying section s912A(1)(c) [of the Corporations Act],” says Alimova.
“The case demonstrated cultural failures where misconduct was not identified, escalated or remediated appropriately.
“Companies should promote open discussions about compliance risks, provide whistleblower protections, swiftly investigate incidents, and take disciplinary action where needed to deter future breaches.
“Senior leaders must champion the expected culture and behaviours, and set the ‘tone from the top’.”
