Australian Securities and Investments Commission takes action on independent expert

In brief

• ASIC has accepted a court enforceable undertaking from an Australian Financial Services (AFS) licensee following an ASIC compliance investigation in relation to certain independent expert engagements.
• ASIC had concerns that, among other things, the licensee failed to maintain internal policies and procedures demonstrating compliance with its AFS licensee obligations and ASIC’s regulatory guidance, including processes to manage conflicts of interest.
• The licensee is not permitted to provide independent expert report services pending a review of its policies and procedures for independent expert report engagements and implementation of all recommendations of this review.

Background

On 20 June 2024, ASIC published a media release in relation to contraventions by an AFS licensee relating to three independent expert report engagements.

ASIC conducted an investigation which reviewed files relating to those engagements, with ASIC holding concerns that the licensee failed to have:

• documented internal policies and procedures demonstrating compliance with its AFS licensee obligations and ASIC’s regulatory guidance;
• internal policies on valuation methodology selection and application;
• documented its assessment of the competence of the technical specialists or its review of their reports;
• robust processes and procedures for managing conflicts of interest to ensure the absence of any conflicts prior to and during IER engagements; and
• processes of review of its internal policies and procedures to account for any changes in law, regulatory guidance, or professional practice.

The licensee admitted to breaches of sections 912A(1)(a) and 912A(1)(aa) of the Corporations Act 2001 (Cth), under which an AFS licensee must:

• do all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly; and
• have adequate arrangements to manage conflicts of interest.

ASIC Deputy Chair Sarah Court remarked:

‘This outcome reinforces ASIC’s previous messaging to independent experts to regularly review internal policies and procedures to ensure they are sufficiently documented and applied.’

‘Independent experts play a gatekeeper role in corporate transactions, and their reports are relied on by investors to make economic decisions. Robust policies and procedures mitigate the chances of reports containing misleading opinions and allow experts to demonstrate compliance with their statutory obligations.’

Commentary

Independent expert reports play a critical role in many corporate transactions, including schemes and takeovers. This includes because such reports usually include an opinion that is intended to influence investors’ decisions in relation to a financial product. Because of this, expert reports typically constitute the giving of financial product advice, thereby requiring the provider of the report to hold an AFS licence.

Independent expert reports are regularly reviewed by ASIC, including as part of its statutory-mandated review of scheme booklets, and it is usual for ASIC to take a keen interest in the content of such reports. However, the matter shows that where ASIC has concerns about compliance, this may have broader consequences, including on an expert’s ability to undertake future engagements.