Validus Advisory Group Pty Ltd: an important reminder of the requirement for an AFSL
Validus Advisory Group Pty Ltd v Consolidated Tin Mines Ltd  NSWSC 417 stands as an important reminder of the consequences of carrying on a financial services business without a licence, and the broad scope of activities that are covered by the licensing regime.
Consolidated Tin Mines Ltd (Consolidated) was an ASX-listed resources company. In July 2016, it appointed Validus Advisory Group Pty Ltd (Validus Advisory) to act as its corporate advisor in relation to a corporate restructure and capital-raising exercise.
Among other things, the agreement between Consolidated and Validus Advisory provided that Validus Advisory would:
- complete due diligence;
- prepare a prospectus for the purpose of Consolidated’s relisting on the ASX;
- act as Consolidated’s corporate advisor and liaise with regulators and third parties regarding any restructure, placement, prospectus, capital raising, acquisition, sale or joint venture;
- provide continuing support and advice as necessary in the way of investor relations, acquisitions and procurement of Australian professional services.
The agreement provided that Validus Advisory would receive $300,000 in up-front payments, and 3% of all capital raised.
Shortly after entering into the agreement, Consolidated appointed voluntary administrators, and then entered into a deed of company arrangement.
Subsequently, Validus Advisory announced that it had raised $34 million on Consolidated’s behalf. It sued Consolidated to recover its 3% commission (approximately $450,000).
In the course of defending the proceeding, Consolidated searched the ASIC register and became aware that Validus Advisory did not hold an Australian Financial Services Licence (AFSL), nor did it act as representative for any other licensee.
Accordingly, Consolidated issued a notice rescinding the agreement pursuant to s 925A of the Corporations Act 2001 (Cth), and filed a counter-claim seeking to recover the amounts it had previously paid.
The Australian Financial Services Licensing Regime
Subject to certain exemptions, a person who carries on a financial services business in Australia must hold an AFSL covering the provision of the financial services in question: s 911A. That provision creates a criminal offence.
A financial services business is defined as ‘a business of providing financial services’: s 761A.
Again subject to certain exemptions, s 766A provides broadly that a person provides a financial service if they:
- provide financial product advice;
- deal in a financial product;
- make a market for a financial product;
- operate a registered managed investment scheme;
- provide a custodial or depository service;
- provide a crowd-funding service; or
- engage in other relevant conduct as prescribed by the regulations.
Relevantly, financial product advice is defined by s 766C as meaning a recommendation or statement of opinion, or a report of either of those things, that:
- is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
- could reasonably be regarded as being intended to have such an influence.
Section 925A, which Consolidated sought to invoke by serving the rescission notice, applies in relation to agreements between two parties (the service provider and the client) where the agreement constitutes, or relates to, the provision of a financial service by the service provider.
Further, s 925A will only apply if:
- the agreement is entered into in the course of a financial services business carried on by the service provider; and
- the service provider does not hold an AFSL covering the provision of the relevant financial services, and is not covered by any relevant exemptions.
In those circumstances, the client may give the service provider a notice rescinding the agreement. It may do so either before or after the agreement has been completed, but it must do so within a reasonable period after becoming aware of the relevant facts (ie that the service provider was unlicensed).
The giving of a notice under s 925A has wide-ranging effects. Among other things:
- the agreement will be rescinded: s 925B;
- the Court may make other consequential orders: s 925D;
- the service provider will not be entitled to recover any commission or fee for the unlicensed services: s 925F (including by way of set off or quantum meruit); and
- the client (or ASIC) may recover the amount of any commission or fee that has already been paid: s 925H.
After receiving the rescission notice, Validus Advisory failed to attend the final hearing.
Justice Stevenson held that the agreement related to the provision of financial product advice, for two reasons.
First, the agreement contemplated Validus Advisory dealing with investors in relation to the possibility of acquiring debt or equity in Consolidated. Justice Stevenson held that this ‘necessarily involved Validus giving a recommendation or a statement of opinion that could reasonably be intended to influence those investors to invest in [Consolidated].’ Justice Stevenson noted that financial product advice was not confined to formal advice, but extended to any explicit or implicit encouragement to invest.
Secondly, the agreement involved Validus Advisory providing advice to Consolidated about the appropriate capital structure, including by modelling and forecasting and preparing a prospectus: see .
Justice Stevenson accepted that Validus Advisory had been conducting a financial services business without holding the necessary AFSL, and that Consolidated had issued the rescission notice within a reasonable time.
As a consequence, Validus Advisory’s claim was dismissed, and Consolidated recovered its earlier payments made under the rescinded agreement, save for certain amounts which had been paid on to third parties.
Although the matter was not the subject of a contested hearing, it illustrates three key points.
First, carrying on a financial services business without an applicable AFSL does more than expose the unlicensed party to criminal or regulatory consequences. It may also create rights of rescission, and exposure to the possibility of disgorgement of fees.
Secondly, the scope of services requiring an AFSL is broadly defined. For example, the meaning of ‘financial product advice’ extends well beyond the work that might traditionally be associated with a financial advisor, and includes a wide variety of promotional activities.
Thirdly, as a consequence of those broad definitions, virtually every aspect of the AFSL regime is subject to a series of exemptions and exclusions. Accordingly, determining whether an AFSL is required for a particular business activity is a task requiring detailed consideration and advice.