Littlemore and Australian Securities and Investments Commission [2009] AATA 679 (24 August 2009)

GENERAL ADMINISTRATIVE DIVISION		)
	Re		COLIN LITTLEMORE

Decision

For the reasons given orally at the conclusion of the hearing of this matter the decision of the delegate dated 23 January 2009 is set aside and in substitution for the decision set aside the Tribunal orders under ss 920A(1)(e) and 920B of the Corporations Act 2001 that the applicant is prohibited from providing financial services from the date of service of the decision under review for a period concluding at midnight on the date of this decision.

...............[sgd]...............................
Mr P W Taylor SC, Senior Member

CORPORATIONS LAW – banning order – failure to comply with a financial services law – need for an Australian financial services licence or to be an authorised representative – consideration of general deterrence and the maintenance of public confidence in exercising discretion – where applicant has actual belief in the lawfulness of his actions and is not subject to criticism relating to his conduct in providing financial services – decision under review set aside

I certify that the 3 preceding paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member

Signed: .............[sgd]...................................................................

Solicitor for the Respondent Ms A Rees, Australian Securities and Investments Commission

MR TAYLOR: I will announce that my decision is - I will set aside the delegate’s decision and I will make an order in substitution to the delegate’s decision. I will make an order under paragraph 920A(1)(e) and section 920B of the Corporations Act prohibiting Mr Littlemore from providing any financial services for a period that will end at midnight tonight and these are my reasons.

On 23 January 2009, ASIC delegate made a decision banning Mr Littlemore from providing financial services for a period of 12 months from the date of service of the decision. That order was made in the exercise of the statutory power conferred by section 920A(1)(e) of the Corporations Act 2001. That provision permits the discretionary exercise of a power to ban a person from providing financial services on satisfaction that the person has not complied with a financial services law. In this case, section 911A(1) of the Corporations Act, was the relevant financial services law. Subject to certain exemptions it required a person who carried on financial services business in Australia to hold an Australian financial services licence covering the provisions of those services.

One such exemption operates if the person provides financial services as a representative of another person who themselves does hold such a licence or is exempt from the licence requirement. The substantive order that was made against Mr Littlemore by the delegate most specifically involves insurance business he arranged either in a remote sense or in a more direct sense for a company that operated under the name Drysham Diversities Pty Ltd and which seems itself to have operated a business providing financial services.

Drysham Diversities Pty Ltd was incorporated in 1996. Its principal officer was then a Mr Phillip Dryer. It seems, although the evidence is not entirely clear, that Mr Dryer conducted business in one form or another as an insurance broker or an insurance salesman more or less informally as some kind of insurance procurer and provider at least at some time prior to 2004 and probably the inference is that he did so continuously for a substantial period before that time.

Mr Littlemore commenced his association with Mr Dryer and Drysham Diversities Pty Ltd some time towards the end of 2003 or perhaps early 2004. He was, at that time, 65 years of age and had for a time ceased active involvement with insurance related matters. The term ceasing active involvement is appropriate because Mr Littlemore’s past history involved the establishment of an insurance broking business as far back as 1979 and he had substantial experience in that area. He had effectively retired some time prior to 2000 and he returned to more active involvement with the insurance business towards the end of 2003/early 2004, essentially for family reasons, those reasons being most specifically a desire to provide for one of his sons who was embarking upon a sporting endeavour to which the surety of financial reward was perhaps more speculative than other endeavours.

Mr Littlemore, once he began his association with Drysham Diversities, operated initially, in his own mind at least, as a mere agent for Mr Dryer or Drysham Diversities. Mr Littlemore explained in the course of his evidence today that he drew in his own mind, no practical distinction between Mr Dryer and the company which he operated. He understood, initially, that there was a requirement for an Australian financial services licence or status as an authorised representative in order to do the work of procuring insurance business that he commenced to undertake in his association with Mr Dryer. However, Mr Littlemore said today, and previously informed the delegate, that he had at all times assumed that Mr Dryer was working as an authorised representative.

In the earlier period of his involvement with Mr Dryer, Mr Littlemore himself formed the belief that so long as his own activities simply were confined to identifying prospective insureds and communicating their identity and needs to Mr Dryer, he was not himself in a position where he needed any further additional status and that it was sufficient if Mr Dryer had the required status as an authorised representative. Some time after commencing his association with Mr Dryer, Mr Littlemore was told by Mr Dryer that Mr Dryer or his company had some kind of corporate status as an authorised representative and that that status of authority had then been conferred also upon Mr Littlemore.

Having been provided with that information, Mr Littlemore says he expanded his activities somewhat in the sense that he then did begin to communicate more effectively with prospective insureds, including discussing with them their insurance needs and doing more than simply referring them as insurance prospects to Mr Dryer. Mr Dryer and Drysham Diversities at least for an initial period up until early September 2006, had no Australian financial services licence and there was no relevant authorised representative status either available to Mr Littlemore or even purportedly available to Mr Dryer.

At some stage during that period, Mr Littlemore became aware of the fact that Mr Dryer and Drysham Diversities, and I will use the terms hereafter interchangeably, did not hold the relevant licence. He became aware of various applications unsuccessfully made by Mr Dryer to obtain a licence.

The end result of those unsuccessful activities is that Mr Littlemore concedes now, as he did concede to the delegate, that in the first of two periods namely from some unspecified time in 2004, marking the commencement of his association with Mr Dryer, until 5 September 2006, there was no relevant Australian Financial Services licence in place. Mr Littlemore became aware of the licensing non-compliance probably some time during 2006 itself. Thereafter he became an authorised representative of Insurance Advisernet Australia Proprietary Limited and held that status from 6 September 2006, until 20 February 2007.

From 20 February 2007, until early January 2008, Mr Littlemore operated for a second period in which he held no status as an authorised representative. It appears, although it was not known to Mr Littlemore at any time until early January 2008, that his status as an authorised representative had in fact been revoked in February 2007. However, it is uncontentious on the evidence that Mr Littlemore was never aware of the revocation of that authority and nor is it suggested that there was any legislative or indeed any other requirement for him to periodically reconsider or reconfirm the existence of the authority that had been granted to him in September 2006. Indeed, the evidence of his appointment, insofar as it is disclosed by a notice of appointment lodged and registered with ASIC, contains nothing to indicate that there was any time limitation on the authority that had been granted to Mr Littlemore in September 2006.

It would seem – and I so find – that in the second period in which Mr Littlemore operated without formal status as an authorised representative, he did so entirely without an awareness of the loss of his previously conferred authority and, in my opinion, entirely without any reason to apprehend the loss of that authority. In relation to the first period in which he operated without authority, namely from an unspecified time in 2004 until September 2006, the ASIC delegate considered that Mr Littlemore’s non-compliance with the Corporations Law and in particular section 911A(1), was not relevantly excused by his mere belief that Mr Dryer or Drysham Securities, held an appropriate licence or an appropriate authority. The delegate considered it was incumbent on Mr Littlemore, as a person engaged in conduct in providing financial services, more specifically insurance advice and procuring insurance business, where he did so on an understanding that he had an authority, that it was incumbent upon Mr Littlemore to satisfy himself that that authority did, in fact, exist.

Not unreasonably that submission and contention of the delegate is accompanied by the proposition that a person in Mr Littlemore’s position should have, in fact, sighted the relevant appointment as an authorised representative and, perhaps, should have also sighted evidence of the authoriser’s financial services licence. Nevertheless, in imposing the banning order of one year the ASIC delegate specifically noted that nothing adverse had arisen concerning Mr Littlemore’s conduct at any time that he had worked in the financial services industry and he has, indeed, as I noted earlier, done so for a long time. The delegate considered Mr Littlemore’s non-compliance had occurred some years previously, indeed, as it had, and the delegate also considered that Mr Littlemore had an honest belief that he was either an authorised representative at the relevant time or, in fact, lawfully entitled to undertake the work that he was in fact doing.

That latter qualification is specifically appropriate to Mr Littlemore’s evidence, which he more clearly gave today, that during the period of his initial association with Mr Dryer, he believed that he was merely acting as an agent for Mr Dryer and that he did not, himself, require the formal status of being an authorised representative to do the limited referral work that he was undertaking. So far as it appears, the principal and really the sole basis for imposing the banning order, was the delegate’s opinion that it was necessary to deter like conduct and maintain consumer confidence. The delegate considered that a banning order would put others on notice of the necessity of complying with financial services laws and would promote confidence in the financial system.

It is indeed possible to infer from the delegate’s reasoning a concern not to detract from the importance of insisting upon compliance with section 911A(1) and perhaps underlying that concern was an unstated apprehension that subjective belief in compliance is very easily asserted and, perhaps, must less easily contradicted. That sentiment has long been recognised as one that merits considerable attention and emphasis. The force of any such statutory obligation as that imposed by section 911A, might be unacceptably diminished if mere belief, as distinct from one justified by actual inquiry and objective fact, was allowed to operate as a defence to an accusation of non-compliance. In the course of its submissions today ASIC, through its counsel, rightly and substantially emphasised this point.

In particular, ASIC submitted that first of all it is inappropriate to contemplate a result of these proceedings, that would in any sense shift responsibility from Mr Littlemore and, indeed, any others in a similar situation, from themselves to others by appearing to excuse a lack of diligence and a lack of conscientious regard for achieving positive satisfaction that all requisite authorities existed. Secondly, ASIC contended that the tribunal, as ASIC itself was, should be concerned not to undertake any step that would result in a diminution of public confidence in either the financial services system or the rigour with which it was administered. Each of those submissions is rightly made and merits consideration and I will come back to the way in which that consideration should result in a decision later in these reasons.

It is sufficient to note at this stage, that the issue is not so much one of non-compliance and contravention, and sanctioning non-compliance and contravention, as it is a judgmental exercise of evaluating the quality and character of Mr Littlemore’s conduct, against the background of the statutory discretion, in section 920A. In particular, the decision to be made in the exercise of the banning order power, is not simply to focus upon the fact that non-compliance and contravention has occurred, it is to proceed to the next stage to exercise the discretion in a correct or preferable way, so as to achieve an appropriate outcome in the particular circumstances of the particular individual and the conduct being evaluated. It is this aspect of the present matter that brings attention back to the need to be accurate and precise about the objective character of Mr Littlemore’s conduct.

Before doing that, I want to say a little bit about the way in which the delegate proceeded. It is appropriate to do so, because that view is substantially repeated in the submissions that ASIC made today. The consideration emphasised by both the delegate and ASIC is that making a banning order would have a tendency to deter like conduct to that of Mr Littlemore. In that description, the delegate in particular was no doubt referring to the fact that Mr Littlemore had provided services when he neither held nor was exempted from holding an Australian Financial Services licence or status as an authorised representative. But like conduct properly requires an acknowledgment of both the other findings that the delegate made and which I will shortly confirm as representing my own view.

Those findings were that Mr Littlemore honestly and actually believed at all times that a relevant licence was in place and that Mr Dryer himself had a relevant authority and that Mr Littlemore himself either did not require any additional authority or had himself acquired that status as an authorised representative at the relevant time. So far as presently appears, there is nothing in Mr Littlemore’s conduct in his dealing with financial services customers, that would otherwise trigger the banning order power. In addition, there is a finding by the delegate not contested and not put in issue in the appeal proceedings, that Mr Littlemore has what the delegate called a compliance mentality since 2006. I take it by that, that the delegate accepted Mr Littlemore’s evidence, as I do, that he at all times after he acquired his formal status as an authorised representative, believed he held that status regularly and was aware of the importance of so doing.

At this point, it is necessary to refer to submissions that ASIC indicated prior to the commencement of today’s proceedings, it would pursue, namely a contention that in the light of a critical reading of some parts of the evidence Mr Littlemore gave in the proceedings before the delegate, that there were available findings that Mr Littlemore was at all times either subjectively aware of his lack of status as an authorised representative or aware of the absence of an underlying Australian Financial Services licence. The foreshadowed submission and contention of ASIC was that Mr Littlemore had in fact been indifferent and indeed, recklessly indifferent, to the existence of either of those underlying requirements.

In the light of the evidence that Mr Littlemore gave and in the course of today’s evidence and to which I have referred earlier (namely that (i) in the initial part of his dealings with Mr Dryer, he had an actual subjective belief that the work he was initially doing was simply acting as an agent for Mr Dryer and did not require itself either a licence or status as an authorised representative, and (ii) that Mr Dryer did inform him at some short time after they commenced their association, that Mr Dryer had in place some kind of corporate authorised representative status and that Mr Littlemore was covered by that position, and (iii) that Mr Littlemore was not in fact at any stage indifferent to his obligation to comply with financial services laws, and (iv) that he would not at any time have subjected himself knowingly to the risk of being in contravention of financial services laws) in the light of those four aspects of Mr Littlemore’s evidence, ASIC at the conclusion of his cross-examination, and before the commencement of submissions, expressly resiled from any contention that Mr Littlemore had been knowingly involved or indeed, even recklessly involved, in failing to comply with the financial services law requirement under section 911A.

Against this background, the ideal of promoting confidence in the financial services industry, and deterring others from temptations of non-compliance, could in my opinion, in the circumstances of Mr Littlemore’s personal situation, only be slightly, if at all aided, by the banning order that has been made.

I so say because it is necessary to bear in mind the underlying reality. There is a statutory prohibition in section 911A that covers precisely Mr Littlemore’s conduct.

Non-compliance is made an offence by section 1311(1) of the Corporations Act, and that offence is explicitly declared to be one of strict liability in subsection 1311(6). The potential penalties that apply to a conviction for non-compliance extend to 200 penalty points and or two years imprisonment. It is simply not the case that the absence of a banning order could, against the background of that very significant potential penalty, operate as any kind of encouragement to future non-compliance.

In Mr Littlemore’s case, the absence of a banning order or even the truncation of a banning order under section 920A, might be interpreted as involving some leniency to Mr Littlemore. It is not, however, and I wish to stress, it is not a matter of leniency at all insofar as the decision I have made. It is necessary to bear in mind a number of factors that are particularly relevant to Mr Littlemore’s circumstances and it is these factors I alluded to when I said I would come back to ASIC’s submissions about the importance of not appearing to undermine public confidence in the financial services regulation system, and its other submission, that it is inappropriate to consider the exercise of the discretionary power conferred by section 920A, in any sense that would involve shifting responsibility from one person to another by a lack of inquiry.

The considerations that are particularly apposite to Mr Littlemore’s circumstances are these. First of all, at the commencement of his association with Mr Dryer, he was referred to Mr Dryer as a result of other inquiries he had made about the prospect of resuming work as an - I will use the inexact and I hope not unduly pejorative description - insurance salesman. I would infer from that that Mr Dryer had for good or ill at that stage, namely the latter part of 2003, and the early part of 2004, had some kind of established reputation of being involved in the insurance business. A history of such involvement would, in my view, not unreasonably carry with it a connotation of reasonable expectation that Mr Dryer was doing so lawfully. That impression was certainly one Mr Littlemore had, and it was only confirmed by his visual observation of Mr Dryer’s activities and his observation of the business that was able to be contracted, the insurance business that was able to be contracted, through Mr Dryer’s office.

Mr Littlemore gave evidence of being aware of insurance business being written by Mr Dryer with a number of well known and clearly reputable insurers, including Suncorp, AMP and Allianz, to name but three. Mr Littlemore’s recollection was that the insurance was arranged with the insurers through Mr Dryer’s office, and ordinary communication such as the issue of cover notes, the issue of policies was arranged by the insurers through Mr Dryer’s organisation. Mr Littlemore gave evidence, which I accept, that he reasonably believed that the existence of such arrangements, over a substantial period of time, encouraged him to the view that such reputable insurers would clearly not be dealing with Mr Dryer except on the basis that they were satisfied of the regularity of his status.

That inference provides a substantial basis to accept Mr Littlemore’s evidence, which in fact was never contested at the end of the day by anyone; that at all times, Mr Littlemore had an actual belief, and an honest belief, in the regularity and lawfulness of what he was doing. Against that background, and against the background of Mr Littlemore’s again unchallenged evidence that he did periodically inquire of Mr Dryer about Mr Dryer’s status, it seems to me that it is proper to conclude not only that Mr Littlemore had at all times an honest and actual belief in the lawfulness of his conduct, but also that it was a belief that was not unreasoned in the sense that it was arguably justified by his own observations of the regularity and apparent lawfulness of Mr Dryer’s dealings.

Secondly, Mr Littlemore’s state of mind was certainly not one that was the result of a complete absence of inquiry on his part.

At the end of the day the fact remains that Mr Littlemore did not have the requisite status as an authorised representative at any time prior to September 2006. He concedes as much. It is also appropriate to observe that (notwithstanding the findings I have just made about Mr Littlemore’s actual state of mind, the apparent justification for it and my finding that it was a state of mind that was not unreasoned) the fact also remains that he did not make specific inquiry to require the production or even obtain a formal record of his own status as an authorised representative. Nor did he at any stage satisfy himself of the existence of the underlying Australian Financial Services licence, or indeed the name of the licence holder.

Those shortcomings, Mr Littlemore concedes, and they are in my opinion, significant shortcomings. Nevertheless, at the end of the day, the issue in this case is not the existence of Mr Littlemore’s contravention; it is the decision that should be made in the exercise of the power, the banning power, conferred by section 920A.

My opinion, against the background of a proper understanding of Mr Littlemore’s circumstances, even though the exercise of the banning power is primarily one directed towards the protection of the public, is that an order of the kind that I have indicated I would make at the commencement of these reasons – namely, truncating the banning order that has been made so that it will expire effectively forthwith – creates no precedent and could provide no encouragement to future non-compliance with financial services law. Nor could it discourage compliance having regard to the significant punitive regime to which I have referred earlier.

The exercise of the discretion certainly is one which should be informed by a number of objectives including the one ASIC emphasised in its submissions, namely the objective of general deterrence. However, where the mechanism by which a banning order is conceived to promote the public interest is really ultimately put essentially on that basis against the background of its impact upon a man whose conduct is otherwise not criticised. Proper regard must be had to both that man’s personal qualities and to the punitive effect that, in fact, will apply to a banning order and which, in fact, identifies the mechanism by which the process of general deterrence will have its impact.

In that regard it is necessary to consider Mr Littlemore’s financial and personal circumstances. He returned to work at the beginning of 2004, perhaps late 2003, prompted primarily by a desire to generate income that would equip him to provide adequately for one of his sons. The order that has been made has already operated for some eight months; it has already, on the basis of Mr Littlemore’s evidence today, resulted in him ceasing to operate in providing financial services and, more specifically, ceased being involved with procuring the arrangement of insurance business.

At Mr Littlemore’s time in life and having regard to the reason why he resumed work in the first place, it seems to me that the impact of the banning order which has already operated would inevitably represent a significant financial detriment to him and would also reflect a perhaps less tangible – but I would expect equally cogent sanction – in that it has significantly disappointed his ability to carry out the motives with which he resumed employment in the first place.

The fact that the banning order that has operated has had that effect and would have a similar effect in the sense of depriving any such person who received a similar order from the prospect of using their usual income must enhance one’s properly informed impressions of the likely effect of a banning order in demonstrating a sanction for Mr Littlemore’s conduct and operating to provide a significant potential for deterrence of other conduct in the future.

At the end of the day, however, general deterrence is not a readily measurable concept; it is an idea which appeals with different degrees of enthusiasm to different minds. It is, to my mind, an idea that should be applied with a proper, and perhaps even a jealous regard, for the circumstances of an individual case. That is so lest the valid utility of a general concept be used impermissibly to interfere with what would otherwise be the proper exercise of the statutory power in particular circumstances of the individual case.

In my opinion, in the circumstances of Mr Littlemore’s conduct in a situation where no substantive criticism is made of his conduct in providing financial services, where it is accepted, and I find, that he at all times had an actual belief in the lawfulness of his own conduct and where there was, at least the appearance of regularity in Mr Dryer’s conduct, both preceding Mr Littlemore’s involvement and at least for a time subsequently. it seems to me that the proper exercise of the discretion is that which I have indicated, namely that whilst a banning order is appropriate it is not appropriate – certainly not the preferable outcome – for that order to continue to have a duration longer than the end of today. Those are my reasons.

The comment that I did want to make and I had intended to include it in the reasons, and I think this should be added to the reasons is this: ASIC’s responsibilities in exercising a discretion of the kind conferred by section 920A are very considerable and it is not a discretion that is easy to exercise with a great deal of confidence in some situations, of which Mr Littlemore’s, I think, is a good example. I would like to commend ASIC’s decision-makers for the stance that was taken today in response to Mr Littlemore’s evidence.

The institutional imperatives of maintaining confidence in the rigour with which the financial services laws are administered is one thing but it is quite another to also be appropriately responsive to the nuances of evidence and new information as they emerge and I am particularly grateful that those appearing for ASIC and participating and instructing today had both the flexibility, the insight and the judgment to make the concession that they made, a concession which I must say I thought was entirely appropriate. Thank you.

Administrative Appeals Tribunal of Australia

Littlemore and Australian Securities and Investments Commission [2009] AATA 679 (24 August 2009)