Written by Sarah Mitchell and Andrew Gray
The sole Australian based director (who was also the CEO and responsible manager) of a retail over-the-counter (OTC) derivative issuer, Forex Capital Trading Pty Ltd (Forex CT) was recently found by the Federal Court to have breached his duties under section 180(1) of the Corporations Act 2001 (Cth) (Corporations Act) and aided Forex CT's unconscionable conduct, including by failing to implement an appropriate compliance monitoring program and by authorising a remuneration structure that created a significant risk of non-compliance with the company's legal obligations.
Forex CT carried on a financial services business, providing advice to retail clients in relation to OTC derivative products. The products were of a high risk nature and Forex CT's clients were unsophisticated retail investors with inadequate or incomplete understanding of the operation of the products, with some in financial stress.
ASIC cancelled Forex CT's AFSL in May 2020 after it found its business model disregarded key AFS licensee obligations and resulted in unconscionable, misleading and deceptive conduct.
In July 2020, ASIC commenced civil penalty proceedings against Forex CT and the director in the Federal Court, alleging contraventions of the Corporations Act and Australian Securities and Investments Commission Act 2001.
The Federal Court found Forex CT had (among other things) engaged in unconscionable conduct, including by having implemented a remuneration structure that was likely to incentivise employees in a way that was not necessarily in the best interests of clients, establishing Key Performance Indicators that resulted in a conflict of interest between clients and employees, implementing a trading floor culture that did not adequately promote a culture of compliance, providing inadequate or inappropriate training and guidance to employees and failing to ensure compliance with financial services laws.
The director was found (by admission) to have contravened s180(1) of the Corporations Act by having failed to exercise a reasonable degree of care and diligence in the exercise of his powers and discharge of his duties as a director and CEO, in particular by:
- authorising and implementing the company's remuneration structure, which created a significant risk of non-compliance by the company with its legal obligations,
- approving and/or authorising inadequate and inappropriate training material for the company's employees, which also created a significant risk of non-compliance, and
- authorising a compliance monitoring program that was inadequate to ensure the company provided financial services in accordance with its legal obligations,
each of which jeopardised Forex CT's interests by exposing it to the risk of its AFSL being cancelled and a civil penalty proceeding.
The director was also found to have aided, abetted, counselled or procured Forex CT in engaging in systemic unconscionable conduct.
The Court ordered Forex CT to pay a $20 million penalty. The director was ordered to pay a $400,000 penalty and was disqualified from managing corporations for a period of eight years. In considering the penalty, the Court noted the deliberate nature of the conduct supported the fixing of significant penalties. In disqualifying the director, the Court noted the breaches were serious and described his behaviour as 'incompetent and irresponsible', although not dishonest.
The Federal Court decision followed an earlier decision by ASIC in March 2021 to ban the Forex CT director from providing financial services for 10 years. In banning the director, ASIC noted his lack of understanding or regard for compliance was so serious it justified the making of the banning period for a significant period, particularly as he was someone who oversaw the operations of the company, highlighting (among other things) that former employees had likened the company's trading floor culture to The Wolf of Wall Street.
The director has filed an application for review of ASIC's decision in April 2021, which has not yet been heard.