Authorised representative can be a product issuer, court finds
A recent Federal Court decision has rejected ASIC’s claim that an authorised representative (AR) of an Australian financial services licence (AFSL) holder cannot be the issuer of a financial product under the licence.
The case is Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457. Judgment was handed down by Justice Downes on 3 May 2024.
ASIC has taken the position over many years that issuing a financial product is “by its nature, the action of a principal”, and that an AR cannot act as principal because it is acting on behalf of the licensee it represents; therefore, an AR cannot be a product issuer.
ASIC brought its case against BPS Financial Pty Ltd (BPS) in October 2022. BPS operated a facility for making and receiving non-cash payments using a digital token called Qoin.
ASIC claimed that BPS was carrying on an illegal financial services business because it did not hold an AFSL while it was issuing the Qoin non-cash payment facility (the Qoin Product), which was a regulated financial product.
AFSL exemptions
There are two exemptions from the requirement to hold an AFSL in the Corporations Act 2001 (Cth) (the Corporations Act) which were relevant in this case.
The first exemption in s 911A(2)(a) is where the person is the AR of an AFSL holder.
The second exemption in s 911A(2)(b) is known as the intermediary authorisation exemption. Under this exemption, a product provider without an AFSL issues, varies or disposes of a financial product under an arrangement with an AFSL holder where:
the AFSL holder or its AR makes offers to people to arrange for the issue, variation or disposal of financial products by the product provider; and
the product provider issues, varies or disposes of financial products in accordance with those offers, if they are accepted.
BPS arrangements
BPS did not hold an AFSL, but it had agreements with AFSL holders under which it sought to rely on both of these exemptions.
At first, BPS had agreements with an AFSL holder called Billzy Pty Ltd (Billzy). There was one agreement under which BPS was appointed as the AR of Billzy, and another agreement under which BPS was the product provider and Billzy was to act as the intermediary, using the intermediary authorisation exemption.
BPS then replaced these with a single agreement with another AFSL holder called PNI Financial Services Pty Ltd (PNI), where BPS was appointed as the AR of PNI (the PNI AR Agreement).
Finally, BPS went back to Billzy and again entered into the same two kinds of agreement with Billzy as it had originally.
Did BPS need an AFSL?
BPS argued in its defence that it did not need an AFSL to issue a financial product because of the agreements it had with Billzy and PNI.
Justice Downes ruled against BPS on this point, except in relation to the PNI AR Agreement. The court found that under the PNI AR Agreement, BPS was empowered to act as the issuer of the Qoin Product.
The same defence did not work with the Billzy AR agreements, because the judge concluded that these agreements did not actually authorise BPS to issue the Qoin Product.
The intermediary authorisation agreements with Billzy did not assist BPS either, because those agreements appointed Billzy and its ARs to make offers of the Qoin Product – and as BPS was an AR of BPS under its other agreements with Billzy, BPS was effectively being appointed to make offers to arrange the issue of its own product, which did not meet the requirements of s 911A(2)(b) of the Corporations Act.
“On behalf of”
The finding in favour of BPS on the PNI AR Agreement turned on a very technical analysis of the definition of “authorised representative” in the Corporations Act. That definition describes an AR as “a person authorised … to provide a financial service or financial services on behalf of the licensee.”
ASIC’s argument was that the phrase “on behalf of” means that an AR acts as a representative of, or acts for, the AFSL holder – in other words, there is a relationship of principal and agent between the AFSL holder and its AR.
The court disagreed with this argument. It held that the phrase did not have a strict legal meaning and was not confined to a principal and agent relationship: an AR can issue a product as principal, but on behalf of its AFSL holder, when authorised to do so.
The court concluded that the legislation did not impose an additional rule that a person cannot be an AR of an AFSL holder in relation to a financial product if the AR is itself the issuer of that product.
Implications of the BPS case
The BPS case finding on the right of an AR to issue products may have implications for how participants in the financial services industry structure their licensing arrangements.
For new entrants, it opens the possibility of being able to launch products without an AFSL, provided that an AFSL holder is willing to authorise the issue of those products by an AR under its AFSL. This could lead to the increased use of “licensee for hire” businesses. However, these types of businesses must be very careful to ensure that they properly monitor and supervise the conduct of their ARs, as recently considered in the case of Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353.
What about credit?
A credit representative (CR) of an Australian credit licence (ACL) holder is the equivalent of an AR under an AFSL. ASIC has taken the same approach and ruled that a CR cannot be the credit provider under a regulated credit contract. In this case, however, ASIC has a decision on its side.
In THG Developments Pty Ltd and Australian Securities and Investments Commission [2012] AATA 8, the Administrative Appeals Tribunal (AAT) upheld ASIC’s refusal to grant an ACL to a person who proposed to appoint CRs who would be entering into credit contracts on their own account and in their own name. (The BPS case judgment did not mention this decision of the AAT). The AAT found that under the responsible lending obligations in the credit legislation, it was implicit that the ACL holder was intended to be a party to the credit contract, because there were no responsible lending obligations imposed on a CR.
The tribunal concluded that it would undermine the operation of the consumer credit regime if a CR could enter into a credit contract as principal without being subject to responsible lending obligations. Another reason why ASIC prevailed in this decision was that the credit legislation has a defence for a person who does not have an ACL but is acting a representative of an ACL holder – in that provision, the legislation refers to the licensee as the “principal”, which suggests a principal/agent relationship is required.
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