ASIC has commenced civil penalty proceedings in the Federal Court against Commonwealth Securities Limited (CommSec) and Australian Investment Exchange Limited (AUSIEX) for alleged breaches of the Market Integrity Rules, Corporations Act and ASIC Act (CommSec only) relating to systemic compliance failures in the delivery of financial services.
ASIC alleges the conduct spanned a significant period of time and involved failures across multiple systems and business areas. Commsec and AUSIEX submitted over 60 notifications to ASIC relating to the conduct.
It is ASIC’s view that the number, breadth and duration of the conduct is significant and indicates the entities did not have adequate systems and processes in place to ensure compliance with their relevant obligations under their Australian Financial Services licence (AFS licence) and pursuant to the Market Integrity Rules.
CommSec and AUSIEX have co-operated with ASIC’s investigation and entered into a Statement of Agreed Facts and Contraventions (SOAFAC).
ASIC alleges, and CommSec and AUSIEX have each admitted, a contravention of s912A(1)(a) of the Corporations Act in that they failed to do all things necessary to ensure that the financial services covered by their respective AFS licences were provided efficiently, honestly and fairly by reason of various failures in systems, processes and people as set out in the SOAFAC.
CommSec and AUSIEX have also agreed to enter into a compliance programme requiring a review by an independent expert of remediation relating to the conduct, as well as a review of all systems and controls which relate to the financial services provided by CommSec and AUSIEX under their respective AFS licences.
ASIC also alleges, and CommSec and AUSIEX have admitted, multiple contraventions of the Market Integrity Rules, as set out in the SOAFAC, relating to the following conduct:
- CommSec overcharged brokerage fees to customers on 120,933 occasions, totalling $4,352,194 between August 2010 and February 2020;
- CommSec and AUSIEX failed to comply with client money reconciliation requirements;
- CommSec and AUSIEX did not provide accurate confirmations to customers for certain market transactions;
- CommSec did not have appropriate system filters to detect possible trades where there would be no change of beneficial owner (known as wash trading);
- CommSec and AUSIEX failed to comply with their best execution policies and procedures;
- CommSec failed to enter into the required warrant agreement forms with clients and provide an explanatory booklet before accepting an order from a client to purchase a warrant on the market for the first time; and
- CommSec and AUSIEX failed to include the required intermediary identification in regulatory data submitted to relevant market operators.
ASIC alleges, and CommSec has admitted, that contrary to its Best Execution Policy Disclosure published on its website, CommSec made false or misleading representations when it failed to consider ASX CentrePoint (ASXCP) as an execution venue for clients who submitted market orders via the ASB Securities Limited trading platform, as set out in the SOAFAC.
CommSec and AUSIEX have compensated, with interest, those customers who were overcharged brokerage fees.
Generally, breaches of Market Integrity Rules are pursued by ASIC through the Markets Disciplinary Panel (MDP) however, in this instance ASIC has decided to pursue civil penalty proceedings given the systemic compliance failures in the delivery of financial services.
CommSec has been before the MDP for contraventions of the Market Integrity Rules on seven previous occasions since 2012, receiving fines totalling $1,055,000. It has also been subject to a Court Enforceable Undertaking in 2013 for client money and trust account failings.
ASIC is seeking declarations of contraventions, pecuniary penalties and other orders against CommSec and AUSIEX.
The proceedings will be listed on a date to be determined by the Court.
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Background
CommSec and AUSIEX provide broking and execution services to customers, including services that allow customers to trade securities and maintain a trading account online.
Both CommSec and AUSIEX are wholly owned subsidiaries of the Commonwealth Bank of Australia Limited (CBA) and holders of Australian Financial Services licences
which authorise them, among other activities, to deal in financial products for wholesale and retail clients.
CommSec and AUSIEX are also market participants of the ASX Limited (ASX) and Chi-X Limited (Chi-X) financial markets and therefore required to comply with the market integrity rules made by ASIC under s798G of the Corporations Act.
Editor's note:
On 4 May 2021, the matter was listed for hearing on Thursday 3 March 2022 and Friday 4 March 2022 for two days.
Editor's note 2:
The matter was heard on 3 March 2022 and judgment has been reserved.