(This article first appeared here, and it is republished with the authors’ consent)
By Darrell Choong (Trainee Lawyer) and Venn King (Special Counsel), KHQ Lawyers
There has been a great disturbance in the Force … or the financial services world at least!
A recent case, Validus Advisory Group v Consolidated Tin Mines Ltd  NSWSC 417 (“Validus”) has shone light on the very real consequences of carrying on a financial services business in Australia without an Australian financial services licence (“AFSL”). Doing so can expose corporate advisers to criminal, regulatory and contractual liability.
Requirement to hold an AFSL
Often ‘corporate advisers’ do what their job description says – they provide advice about corporate matters. Under the Corporations Act 2001 (Cth) (the “Corporations Act”), an entity carrying on a business of providing financial services in Australia is required to hold an AFSL with authorisations to provide the relevant, specific services.
Financial Products and Financial Services
An entity generally provides a ‘financial service’ if it conducts certain ‘activities’ in relation to certain ‘things’.
The relevant ‘things’ are ‘financial products’, which include securities (such as shares and debentures of a company), interests in managed investment schemes, derivatives and foreign exchange contracts (amongst other things).
The ‘activities’ include advising in relation to financial products, dealing in a financial product, and operating a registered managed investment scheme (amongst other activities).
Unfortunately, most corporate advisers usually provide ‘advice’ about things which are usually financial products: for example, capital raising by issuing loan notes, corporate re-structuring by undertaking a securities buy-back, or M&A involving a company’s shares.
However, if the activity being undertaken doesn’t involve a financial product, then it won’t be a financial service, and even if it is, if the activity isn’t done as a ‘business’, it won’t require a licence.
“Carrying on a business in Australia” has been defined very broadly by the Courts. A ‘business’ is usually taken to involve activities which are systematic, repetitive and continuous, although one-off events can amount to a business if they are large enough or the relevant intention is there.
The connection to Australia is usually easily met by organisations acting as ‘corporate advisers’ here, meaning that they will almost always require AFSL coverage (either their own, or someone else’s) to undertake their business.
An entity conducting a financial services business in Australia without a licence (or a relevant exemption) faces a combination of significant fines, imprisonment and/or banning orders for the relevant entities and individuals.
As an additional kicker, contracts entered into with an entity providing unlicensed financial services can be unwound from the beginning (i.e. completely cancelled), as illustrated by the recent Validus case.
The Validus case
Consolidated Tin Mines Ltd entered into an agreement with and Validus Advisory Group, for Validus to act as Consolidated Tin’s ‘corporate advisor’ for a corporate restructuring and capital raising exercise. However, Consolidated Tin’s business went south, and Validus sued Consolidated Tin to recover its payments under the agreement.
When Consolidated Tin discovered that Validus did not hold an AFSL, it issued a notice rescinding the agreement under section 925A of the Corporations Act (which allows a party to unwind an agreement with a party conducting an unlicensed financial services business) ) and sought to recover its previous payments.
Ultimately, Consolidated Tin won, and was able to recover its earlier payments, because:
- the agreement related to the provision of ‘financial product advice’ (as Validus was involved with investors providing debt and equity to Consolidated Tin and was also advising Consolidated Tin on its capital structure); and
- Validus was conducting a financial services business without an AFSL.
If you are a corporate adviser, you should think carefully about the strong likelihood that your business activities involve financial products and services. If they do, you should immediately take steps to gain external AFSL coverage of your activities, and consider going through the process of acquiring your own AFSL – to avoid criminal or regulatory liabilities and cancellation of any contracts.
The regulation of financial services is a mine-field for the uninitiated, and it’s best to run any proposed business activities that might involve these concepts past an expect to check.