29 June 2021

Breach of director’s duties for remuneration structure that created significant risk of non-compliance

This article was 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.

Background

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.

Proceedings

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.

Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    The Victorian Government has now imposed an industry-wide shutdown of the sector.

    22 September 2021

    On 16 September 2021, the Victorian Government announced a number of changes to the COVID-related restrictions that apply to individuals and businesses in the state.

    20 September 2021

    The ACCC has just unveiled its long-awaited merger reform proposals.

    27 August 2021

    With the current mergers test squarely on the ACCC’s reform agenda, we examine the background to the current debate and ask whether it is the substantive legal test or the merger review process that...

    24 August 2021

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.