The Federal Court has ordered Commonwealth Securities Limited (CommSec) and Australian Investment Exchange Limited (AUSIEX) pay a penalty of $20 million and $7.12 million respectively for breaches of the Market Integrity Rules, Corporations Act and ASIC Act (CommSec only) for systemic compliance failures, including overcharging brokerage fees to CommSec customers on 120,933 occasions, totalling over $4.3 million.
The penalty is the largest ever penalty handed down for breaches of the Market Integrity Rules.
ASIC Deputy Chair Sarah Court said, ‘It is essential that market participants have appropriate systems, governance and controls in place to ensure they meet their obligations to both their customers and the financial markets in which they operate. CommSec and AUSIEX both demonstrated widespread, systemic compliance failures over a nine-year period. CommSec’s failures also resulted in millions of dollars being overcharged to customers.
‘When market participants fail to comply with the Market Integrity Rules, they undermine the integrity of Australia’s financial markets. As today’s decision demonstrates, the penalties for engaging in this conduct are significant. ASIC will continue to take action and seek significant penalties where market and trading participants fail to comply,’ concluded Ms Court.
In addition to the penalties, the Court ordered an independent review and assessment of all systems and controls relating to the provision of financial services by CommSec and AUSIEX, along with a review of the remediation undertaken by the entities. The review is critical given the failures in broader systems and controls at CommSec and AUSIEX and is designed to examine significant aspects of their businesses.
The Court declared that CommSec and AUSIEX contravened the Market Integrity Rules on multiple occasions, including when:
- CommSec overcharged brokerage fees to customers on 120,933 occasions, totalling over $4.3 million;
- 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.
The Court also held that CommSec made a false or misleading representation by stating that it considered ASX CentrePoint (ASXCP) as an execution venue for those customers who submitted orders via the ASB Securities Limited (ASB) trading platform, when it did not consider ASXCP as an execution venue for those orders. This meant customers who placed certain orders via the ASB trading platform were excluded from trading on ASXCP, despite being advised that their orders could be traded there.
The Court also declared that CommSec and AUSIEX failed to do all things necessary to ensure its financial services were provided efficiently, honestly and fairly.
In reaching the penalty decision, Justice Abraham found, ‘The number, breadth and duration of the Reported Conduct is significant and indicates that CommSec and AUSIEX did not have adequate systems and processes in place to ensure compliance with their relevant obligations under their AFSLs and pursuant to the Market Integrity Rules and consequently, the Corporations Act (and additionally for CommSec, the ASIC Act). The conduct is properly characterised as being extensive and systematic, occurring over an extended period of time, which affected multiple aspects of the businesses of both CommSec and AUSIEX.’
The Court acknowledged CommSec and AUSIEX’s early admissions and cooperation in this matter.
At the time of the breaches, both CommSec and AUSIEX were wholly owned subsidiaries of the Commonwealth Bank of Australia Limited (CBA) and holders of Australian Financial Services licences. This authorised them, among other activities, to deal in financial products for wholesale and retail clients.
AUSIEX has since been acquired by Nomura Research Institute.
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.
CommSec and AUSIEX are also market participants of ASX Limited (ASX) and Cboe Australia Pty Ltd (Cboe) financial markets and therefore required to comply with the Market Integrity Rules pursuant to s798H of the Corporations Act.
CommSec have compensated, with interest, those customers who were overcharged brokerage fees.