Why ASIC fell hard on Chapel Road.

The actions of Chapel Road and the Australian Securities and Investments Commission (ASIC) have temporarily settled as the two wait for an appeal to be held later this year. Nicole Szollos and Jason Spits look at why ASIC revoked the group’s licence and why Chapel Road feel they have been wronged.

The licence revoke for independent dealer group Chapel Road by ASIC earlier this year was the result of several months of surveillance and investigation.

The case into Chapel Road was originally triggered by the actions of former Financial Wisdom financial planner Robyn Ann-Carrolle Cochrane.

After breaches of compliance were reported by that group to ASIC, Robyn Cochrane was initially charged with fraud and acting without a licence. This occurred in 1998 and last month she was sentenced to a four-year jail term.

Cochrane's son, Steven Michael Cochrane was also involved in the planning industry as a proper authority holder with Chapel Road and it was his subsequent actions which resulted in ASIC sniffing round the doors of that dealer group.

Following charges of misappropriating client money and the cancellation of her proper authority with Financial Wisdom, ASIC accepted an enforceable undertaking from Robyn Cochrane in October 1998 detailing she would not work as an investment adviser for ten years.

But nearly one year later Cochrane was banned for life from acting as a representative of a securities dealer when ASIC discovered she had continued to provide investment advice to former clients without a proper authority. In light of Cochrane's actions ASIC stepped in to take a closer look, and its attention was drawn to Cochrane's son.

Steven Cochrane was also a former Financial Wisdom representative, but had become a proper authority holder with Chapel Road when that group received its dealer's licence in 1997.

Following Robyn Cochrane's enforceable undertaking and ban, a number of her clients had been transferred to Steven Cochrane. ASIC later found that through her son, Robyn Cochrane had continued to advise her former clients and it was this continuation of giving unlicensed advice that resulted in Robyn Cochrane receiving the four-year jail term.

ASIC's further investigation into the activities of the two led to an immediate life ban in January 2000 for Steven Cochrane.

According to ASIC NSW director of deposit-taking, insurance, superannuation and consumer division (DISC), Lucienne Layton, the reason Steven Cochrane was also banned in such a harsh manner was due to the fact he gave tacit support to his mother's actions.

"Steven Cochrane allowed his mother to work out of his business and in doing so gave credibility to her actions," Layton says.

With the two advisers banned the watchdog then shifted its focus and according to Layton ASIC were concerned enough about the breaches to investigate further.

"We were unsure that what went on in this case was just an aberration or the sign of something systemic within the group. It turned out to be the latter and forced us to take the action of revoking the licence," Layton says.

"Of course the industry is more used to the banning of advisers and proper authority holders than an entire dealer group but there is no conscious focus on dealer groups except where certain issues have caused us to look deeper."

Chapel Road's response was immediate and forceful, seeking a stay on the revocation of the licence and an appeal hearing, which has been set down for some time in September in the Administrative Appeals Tribunal (AAT).

It is worth remembering however that ASIC did not fully overturn its revoke of the licence of Chapel Road, rather it set a number of conditions under which the group has to work until the appeal can be heard.

Those conditions were reached by negotiation between ASIC and Chapel Road with the latter to advise prospective clients, other clients and proper authority holders of the revocation proceedings and the stay in writing.Chapel Road also had to provide ASIC with a current client list and contact details of any new clients, as well as an approved product list. During the stay period Chapel Road must also not engage any new staff or representatives.

Considering the activities of Robyn and Steven Cochrane and both life bans the review into Chapel Road seems to be centred on compliance issues.

This is something Layton confirms stating the major concern for the regulator, in light of the action of the Cochrane's and Chapel Road, was the adequate supervision of proper authority holders.

According to a source close to the group, as part of the review ASIC ordered Chapel Road to send all Cochrane client files for an audit. This was at a cost of $40,000 to the dealer group.

ASIC then recommended the group develop a compliance plan and establish a compliance committee. Following that recommendation and with the help of an external consultant, Chapel Road developed both.

ASIC suppossedly did not view the developed compliance plan and committee as sufficient or up to standards, and this was one of the contributing factors that attributed to the loss of the group's dealers licence.

However this was still unknown to Chapel Road, who in accordance with procedure were awaiting a report of the review to be issued.

At this stage diverging stories have since come to surface about proceedings after the audit.

However since the appeal of the licence revocation is still waiting to be heard by the AAT, no documents have been made publicly available as yet.

Neither ASIC nor Chapel Road are prepared to speak further on this point until the appeal has been concluded.

ASIC's next step after the review into Chapel Road in early 2000 came the following December when the dealer group was issued with a show cause notice.

These are normally followed two weeks later by a delegate hearing, where a representative from ASIC and the dealer meet and present written statements as to why action should or should not be taken against the dealer.

With the Christmas period and holiday time delay, the delegate hearing was held in February this year. The result of the delegate hearing was unfavourable for Chapel Road, with the delegate deciding there was sufficient cause for a licence revoke, which occurred on May 1 this year.

At the time ASIC stated in its press releases that the main theme of the licence revoke was the issue of compliance, and the inadequate training and supervision of the Chapel Road proper authority holders.

But sources close to Chapel Road have questioned ASICs dealings with the small independently owned group compared with some other planning groups that have been in similar positions.

These include Count and Westpac in mid and late 1999 and Suncorp Financial Planning in early 2000 as well as D&D Tolhurst and Grosvenor Securities earlier this year.

Each case, according to ASIC's own information available through its website, dealt with breaches of compliance but neither the dealer groups, or the advisers involved received bans.

This leads to the question as to why Steven Cochrane was slapped with a life ban without first receiving an enforceable undertaking as his mother did. The answer is in the structure of the process.

According to ASIC, if a dealer group picks up and reports the unlawful behaviour of one of its representatives, it can apply for an enforceable undertaking to address any issues which may need to be dealt with.

However in the event that this does not occur or the dealer does not approach ASIC, which it must do under law to receive an undertaking, the regulator will take steps it deems necessary.

The recent attention towards tax effective schemes and the Australian Tax Office's (ATO) increased focus also presents an angle into the Chapel Road licence ban. Like other groups, Chapel Road was involved with offering tax effective investment schemes.

An industry source says with the limited research into tax effective schemes a few years back, Chapel Road jointly funded and set up specialist research group Quaestus Securities in 1999 with the help of Charterbridge Davey and Saxby Bridge. Today, Chapel Road still holds 50,000 shares in Quaestus, and Charterbridge Davey holds 5000.

After the research group was set up, representatives from the involved dealer groups sat on the Quaestus board and external research consultants were also employed.

Another source close to the group just after it was formed says many tax effective schemes were looked over and many were also knocked back. But one scheme not knocked back was the now much publicised Budplan scheme offering investments into teatree oil research to an investor group that included airline pilots.

Information was not forthcoming from the sources however, of the names of other tax effective schemes that were promoted to high net worth income earning clients.

While Chapel Road waits for its appeal review to be heard before the AAT, a review that is not expected to be heard before September, the Chapel Road camp say business for the dealer group is now essentially defunct. Only four representatives remain under the Chapel Road banner.

About a dozen have departed to Benwest Investment Services and it has also been heard that a number of others will be heading over to Pivotal, Securitor, Mawsons and Garrisons. This represents a gutting of the group, which had as many as 70 advisers in late 1999 and around 40 in late 2000.

While this point has been mentioned to ASIC, the regulator says that unfortunately the processes have to be maintained and agrees conditions will be hard for any group caught in similar circumstances.

"If the appeal with the AAT is not successful they will lose their licence and are unlikely to regain it and if they win they can continue in business as they were prior to the action," Layton says.

"It is a black mark but we don't enter into action like this lightly. We agree clients may have issues about going ahead with that dealer group but the aim is to provide them with protection."