Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570

The retail sector clean-up targeting over-the-counter (OTC) derivative products remains a priority for ASIC in pursuing consumer protection.

These products have been likened to gambling[1] in terms of the significant risks they present to consumers, and the corresponding rise in complaints in recent years.

The gravity with which ASIC views systemic compliance deficiencies and unconscionable conduct is demonstrated in the recent proceedings commenced by ASIC against Forex Capital Trading Pty Ltd (Forex), an entity which provided advice to “unsophisticated” retail clients with little to no experience as to OTC derivative products, and its only Australian-based director, CEO, and responsible manager, Mr Shlomo Yoshai (Mr Yoshai)[2]. ASIC alleged numerous contraventions of the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investment Commission Act 2011 (ASIC Act) by Forex over approximately two years. In addition, ASIC claimed that that Mr Yoshai contravened section 180(1) of the Corporations Act by failing to exercise a reasonable degree of care and diligence, and aided, abetted, counselled or procured Forex to contravene section 12CB of the ASIC Act prohibiting unconscionable conduct in the supply or acquisition of financial services.

On 29 April 2021, his Honour Justice Middleton made declarations of contraventions of the Corporations Act and the ASIC Act by Forex and Mr Yoshai, and ordered that they pay pecuniary penalties of AUD20 million and AUD400,000 respectively. In addition, Mr Yoshai received a disqualification order of eight years[3]. These declarations and orders were made following the parties’ joint filing of a statement of agreed facts, proposed declarations and orders, and joint submissions.

The Forex judgment demonstrates a crystallisation of the Federal Court’s approach to penalising wrongdoers in the wake of the watershed decision of Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 4) [2020] FCA 1299, in which unprecedented pecuniary penalties of AUD75 million were ordered against the entity and two authorised representatives. Two key trends can be observed, namely, the Federal Court’s sustained focus on general deterrence in the OTC derivative market[4] and its willingness to order hefty penalties in response to what it deems “widespread and regular failures” over a prolonged period[5].

The significant number of contraventions by the defendants paints a picture of the scale of the systemic pattern of misconduct. However, the parties jointly framed Forex’s unconscionable conduct as a single contravention of the ASIC Act, despite its far-reaching effect on thousands of customers[6]. Accordingly, Middleton J noted that he was bound by the maximum penalty prescribed by the ASIC Act for a single contravention[7]. The pecuniary penalties in this case are therefore perhaps lower than what might have been ordered, had ASIC claimed multiple contraventions by Forex.

Middleton J emphasised the “deliberateness” of Forex and Mr Yoshai’s conduct when determining the appropriate penalties, given that Forex reaped direct benefits (i.e. higher net deposits of funds into trading accounts) from encouraging its clients to “expose themselves to increasing losses and ultimately lose the money they had deposited”[8]. This, among other things, contributed to Forex’s culture of non-compliance, resulting in a net loss of around AUD78 million suffered by its clients[9]. These clients were characterised as vulnerable, given their financial insecurity and Forex’s awareness that they lacked appropriate experience or qualifications in respect of OTC derivative products[10].

Middleton J noted that the question of actual knowledge is relevant to penalty. It was agreed between the parties that the Forex team leaders were aware of and actively participated in or encouraged the contravening conduct. In addition, Forex and Mr Yoshai were made aware of concerns previously raised by clients about the conduct, both directly and through complaints to industry bodies. However, it was also agreed that while Mr Yoshai failed to exercise adequate care and skill in overseeing the operation of Forex and making key decisions, he did not have actual knowledge of the individual conduct by each Forex representative[11].

Although Middleton J indicated that these factors supported the imposition of a significant penalty on both defendants, he also considered a number of mitigating factors. The Forex judgment is notable in that it was achieved through a somewhat conciliatory approach by ASIC, in contrast to its markedly aggressive approach in the AGM Markets proceedings. Counsel for ASIC noted the defendants’ early and significant cooperation, and Middleton J took cognisance of the “strong public interest” in following such an approach, as it allows for reduced time, resources and costs involved with the proceedings and facilitates the administration of justice. The Court therefore found that the determination of the appropriate penalties should reflect a significant reduction[12].

The Forex decision is a significant boost to ASIC’s increasingly strict regulatory oversight of the OTC derivative trading market. A product intervention order issued by ASIC which imposed conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (CFD Order) has been in effect from 29 March 2021[13]. ASIC has since issued Consultation Paper 348 seeking comments from stakeholders on its proposal to extend the CFD Order until it is revoked or sunsets on 1 April 2031, citing the CFD Order’s effectiveness in “reducing the risk of significant detriment to retail clients resulting from CFDs”[14]. A similar rationale has motivated ASIC’s ban on the sale of binary options to retail clients, which took effect on 3 May 2021[15]. As regulatory breaches in the OTC derivative market gain increasing notoriety, ASIC is sending a clear message that it intends to keep a close eye on traders and will not hesitate to pursue wrongdoers in that market to the fullest extent.