Why ASIC shut down Chapel Road.

ASIC effectively shut down Chapel Road when it revoked the dealer group’s licence in May. However, concerns about a number of other dealer group’s compliance procedures only produced enforceable undertakings. Jason Spits and Nicole Szollos investigate why ASIC came down so hard on Chapel.

When Australian Securities and Investments Commission (ASIC) investigators knocked on the door of the office of Robyn Cochrane in coastal town of Toukley just north of Sydney, neither she, nor the Chapel Road financial planning group, had any idea where it would all end.

Robyn Cochrane never had a proper authority with Chapel Road, yet that summer's day three years ago set off a chain of events that ended in the decimation of the Chapel Road financial planning group.

ASIC's investigation into Robyn Cochrane, who had been a member of the Financial Wisdom financial planning group, soon spread to her son Stephen Cochrane, who was a member of Chapel Road at the time.

ASIC NSW director Lucienne Layton told Money Management the watchdog was so concerned with its investigations into Stephen Cochrane that it decided to broaden its investigation to the entire Chapel Road dealership. (See story opposite: How it all began)

"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.

Chapel Road's response was immediate and forceful, seeking a stay on the revocation of the licence which has been successful, subject to certain conditions laid down by ASIC. Chapel Road also sought an appeal hearing, which has been set down for some time in September in the Administrative Appeals Tribunal (AAT).

ASIC's Lucienne Layton says the major reason for the revoking the licence, in light of the action of Steven Cochrane, was the adequate supervision of Chapel Road financial planners.

Those close to the group said ASIC supposedly did not view the 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 at the time 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 were prepared to speak further on this point until after the appeal.

ASIC's next step after the review into Chapel Road early last year came in 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.

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 the steps it deems necessary to protect consumers.

The recent attention towards tax effective schemes and the Australian Tax Office's (ATO) increased focus on them presents another angle into the Chapel Road licence ban. Like a number of 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.

This scheme is currently part of a test case involving the ATO who alledge that deductions from the scheme far outweigh the funds that were invested.

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 has been pointed out to ASIC, the regulator says 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."