Inquiry raises concerns about ‘systemic misuse of accountants’ certificates’
Senators want to see sanctions applied to accountants previously reported to ASIC over the misclassification of clients as wholesale investors.
Labour Senator Deborah O'Neill and Liberal Senator Paul Scarr have raised concerns about the extent to which accountants' certificates are being misused in the market as part of the inquiry into investor and wholesale client tests.
In a recent hearing, the Australian Financial Complaints Authority and ASIC both provided evidence on the current issues surrounding the use of accountants' certificates and the misclassification of clients as wholesale or sophisticated investors.
AFCA Lead Ombudsman, investments and advice, Shail Singh said since starting operation in November 2018, AFCA has received around 140 complaints relating to the wholesale and sophisticated investor classification issues.
In its submission, AFCA said one particular financial firm had multiple complaints raised against it in relation to the firm failing to adequately assess their client's suitability to be classed as a wholesale client.
"In one case, a retail client was not aware that the financial firm had obtained a wholesale client certificate for the purposes of offering the client a wholesale product," it said.
"The client was not made aware of the certificate, that they had been classed as a wholesale client and placed into a product that was for wholesale clients only. In concluding our investigation, in our view, the financial firm did not show that it was adequately assessing a client’s suitability to be a wholesale client and there had not been adequate changes to policy procedures and training to prevent the reoccurrence."
Speaking in front of the inquiry, Singh said the accountant that provided the certificate was also an authorised representative of the financial firm.
"The certificate was provided by a Chartered Accountant who was the sole director of a company that was a corporate authorised representative of the financial firm giving the advice," said Singh.
Senator O'Neill said the behaviour of the firm demonstrated clear "conflict of interest issues" and how the risks in the current settings can "manifest into corrupt behaviour which is completely unprofessional and unethical".
Singh said it was difficult to estimate how widespread the issue was with providers of wholesale services not required to be a member of AFCA.
ASIC Commissioner Kate O'Rourke said ASIC was still in the process of investigating the financial firm referred by AFCA.
"We hope to provide the committee with that particular information in relation to that referral," said O'Rourke.
When asked about whether the misuse of accountants' certificates was a widespread issue, O'Rourke said she didn't have specific data but that the Corporate Regulator has heard anecdotally about accountants' certificates being misused.
"You'll have seen in our submission that we do think there's value in there being a penalty associated with the misuse of the accountant certificates model, because we think the fact that there isn't one may not, may be exacerbating the misuse of them," said O'Rourke.
In its submission to the inquiry, ASIC also referred to two specific examples dating back to 2017, where the wholesale investor test had been inappropriately applied.
“In the matter of Kwickie International Ltd, we became aware of a small number of accountants who had acted as trustees for trusts set up for the apparent sole purpose of enabling their clients to be classified as wholesale investors,” the submission said.
“The clients then received offers for shares in Kwickie—an unlisted company—without a prospectus being provided. We used our modification powers to ensure that shares in Kwickie could not be offered via a trust structure.
“This meant that the wholesale investor test continued to be applied consistently with the policy rationale, and safeguards for retail clients continued to apply.”
In another matter involving the Guvera Group, ASIC said it became aware of accountants who advised their clients of an investment opportunity in Guvera Limited, an unlisted public company.
“Clients invested in Guvera through a private investment company and in some cases were classified as wholesale investors through use of trust and company structures, to avoid treatment as retail clients,” it said.
Senator O'Neill and Senator Scarr expressed concern about accountants engaging in this behaviour not receiving appropriate disciplinary action.
"Have [these individuals] been sanctioned? Have they been dismissed from the profession and have they been noted anywhere publicly as people to be avoided?" O'Neill questioned.
"How bad do you have to be before you lose your licence to practice as an accountant? You've got this high level of certification that allows you to sign off on a certificate and enable someone to be a wholesale investor and you get away with this [type of behaviour]. It's like going through a red light, causing chaos and then being able to just keep going."
Senator Scarr said he would like to see ASIC follow up with the professional bodies to ensure they've taken appropriate action against the individuals involved in misclassifying clients as wholesale clients.
