Anyone home? The Importance of Checking Your Business Clients Are Opted Out – Financial Services

There is no express obligation for financial service providers to monitor their client lists for companies that are not registered. However, a recent case ASIC vs. Westpac (2022) FCA 515 demonstrated the importance of tracking whether your business clients have been unsubscribed. The case suggests that licensees who do not have adequate processes and controls in place to identify closed business accounts, particularly when they continue to charge fees, may be in breach of their duty to do everything necessary to provide financial services. efficiently, honestly and fairly.

Consequences of cancellation of company registration

The company ceases to exist upon deregistration. Section 601AD of the Act Corporations Act 2001 (Cth) (the “Corporations Act”) states that, on deregistration of a company, all assets of the company (other than assets held by the company in trust) vest in ASIC. All property held in trust immediately before deregistration is part of the Commonwealth. ASIC then has the power of owner over any property entrusted to it.

Tea ASIC case at Westpac proposes that financial service providers whose clients have been opted out must ensure that their systems and services are used in a manner that complies with section 601AD(2). In other words, licensees must be careful to implement and maintain procedures and controls to identify deregistered corporate clients and ensure that funds are not diverted to entities other than the rightful owner – ASIC or the Commonwealth.

The case of ASIC vs. Westpac suggests that this is part of the licensee’s duty to do all things necessary to provide financial services efficiently, honestly and fairly under section 912A of the Corporations Act.

What happened in ASIC vs. Westpac?

On 22 April 2022, the Federal Court of Australia ordered Westpac to pay $20 million in civil penalties for breaching the duty to do everything necessary to provide financial services efficiently, honestly and fairly.

The court made this finding on the basis that Westpac did not have processes or controls in place to identify closed company bank accounts and manage those accounts in a manner that complied with the Corporations Act and ASIC guidance.

The court noted that Westpac did not block withdrawals from logged-out company accounts and, where blocks were in place, Westpac did not have adequate controls in place to prevent employees from unblocking withdrawals. As a result, approximately 21,000 deregistered company accounts remained open, with funds available for transfer to various third parties when the funds actually belonged to ASIC and the Commonwealth.

The Court ruled that Westpac had benefited by continuing to charge and receive interest repayments, overdrafts and loans from funds held in closed company accounts, even though those funds were in fact entrusted to ASIC and the Commonwealth.

Despite being aware of the problems with signed-off corporate accounts, Westpac did not put in place ongoing processes or controls to identify and manage these accounts in accordance with the law until two years later.

Who does it concern?

Although this proceeding was brought against a bank, the policy is likely to apply to financial service providers in general that provide services to corporate clients.

In particular, if the licensee continues to charge the deregistered company fees for financial advice or other services, it may be at risk of breaching its general conduct duties by failing to manage funds in accordance with the Corporations Act and ASIC guidelines. This behavior could also constitute charging “fees for no service” as the company ceases to exist by deregistration.

For example, if a stockbroker sells shares previously held in a dissolved company at the direction of a former director, this would allow assets belonging to ASIC or the Commonwealth to be dealt with in a manner contrary to the Corporations Act. Further, any fees or commissions earned from this trading activity are likely to be funds deposited with ASIC or the Commonwealth.

What if you dealt with funds that belonged to ASIC?

You may be in breach of your general conduct obligations even if you were not aware that your business clients were logged out.

If you have inadvertently dealt with funds that have been deposited with ASIC or the Commonwealth, you should seek advice. It is important to identify the root cause of the breach and implement systems and processes to ensure that the problem is resolved in a timely manner. You should also consider a remedial plan, including transferring funds to ASIC or the Commonwealth where necessary, and assess whether the breach must be notified to ASIC.

In ASIC v Westpac, the court paid little attention to whether Westpac deliberately diverted funds from ASIC. The court found that Westpac had breached its duties by knowing it did not have adequate controls in place to identify closed company accounts and preventing withdrawals from those accounts, and then failing to put adequate controls in place in a timely manner.

Practical measures to protect your business

If you are a financial services licensee with corporate clients, you should:

  • Ensure you have adequate processes and systems in place to identify when a corporate client has been logged out and manage their account in accordance with the Corporations Act and ASIC guidance;

  • Conduct regular reviews of logged out corporate client accounts; and

  • Establish appropriate controls in a timely manner to ensure that further activities are suspended and that funds or other assets are not taken. You should also investigate whether any remaining funds or assets must be transferred to ASIC or the Commonwealth.

The content of this article is intended to provide a general guide to the issue. Professional advice should be sought regarding your particular situation.

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