CommSec and AUSIEX hit with largest ever penalty for market integrity compliance failures

Commonwealth Bank (ASX: CBA) owned online broker CommSec and its former subsidiary AUSIEX have been slapped with a combined $27.12 million in penalties after the Federal Court found both firms breached the Market Integrity Rules on numerous occasions, including overcharging brokerage fees.

The civil proceedings, which were initiated by the Australian Securities and Investment Commission (ASIC), found the brokers failed to do all things necessary to ensure its financial services were provided efficiently, honestly and fairly.

It also determined CommSec overcharged brokerage fees to customers on 120,933 occasions, totalling more than $4.3 million.

CommSec has been ordered to pay $20 million for the misconduct, while AUSIEX (formerly known as CommSec Adviser Services) was hit with a $7.12 million penalty. ASIC said the ruling was the largest ever penalty handed down for breaches of the Market Integrity Rules.

“It is essential that market participants have appropriate systems, governance and controls in place to ensure they meet their obligations to both their customers and the financial markets in which they operate,” ASIC deputy chair Sarah Court said.

“CommSec and AUSIEX both demonstrated widespread, systemic compliance failures over a nine-year period. CommSec’s failures also resulted in millions of dollars being overcharged to customers.

“When market participants fail to comply with the Market Integrity Rules, they undermine the integrity of Australia’s financial markets. As today’s decision demonstrates, the penalties for engaging in this conduct are significant. ASIC will continue to take action and seek significant penalties where market and trading participants fail to comply.”

The court found both firms failed to comply with client money reconciliation requirements, provide accurate confirmations to customers for certain market transactions, and have appropriate system filters to detect possible trades where there would be no change of beneficial owner (known as wash trading).

Other breaches included failing to comply with best execution policies and procedures and failing to include the required intermediary identification in regulatory data submitted to relevant market operators.

On top of the penalties, the court ordered an independent review and assessment of all systems and controls relating to the provision of financial services by CommSec and AUSIEX, along with a review of the remediation undertaken by the entities.

Justice Abraham acknowledged both brokers made early admissions and cooperated during the proceedings.

“The number, breadth and duration of the Reported Conduct is significant and indicates that CommSec and AUSIEX did not have adequate systems and processes in place to ensure compliance with their relevant obligations under their AFSLs and pursuant to the Market Integrity Rules and consequently, the Corporations Act (and additionally for CommSec, the ASIC Act),” Justice Abraham said.

“The conduct is properly characterised as being extensive and systematic, occurring over an extended period of time, which affected multiple aspects of the businesses of both CommSec and AUSIEX.”

At the time of the breaches, both CommSec and AUSIEX – which was acquired last year by Japan-based Nomura Research Institute - were wholly owned subsidiaries of the Commonwealth Bank (ASX: CBA).

Since 2012, CBA has been before the Markets Disciplinary Panel (MDP) seven times for contraventions of the Market Integrity Rules and has received fines totalling $1,055,000.

CommSec executive general manager Richard Burns said these errors never should have happened.

“We apologise to our customers who were impacted by our mistakes,” Burns said.

“CommSec has paid total remediation of $6.5 million (including interest) to customers affected by the issues and this program is now complete.

“We have strengthened our systems and procedures to address these errors. We will implement a Compliance Programme as agreed with ASIC and required by the Court which will be monitored by an Independent Expert and we fully support this process.”