Should You Conduct Stricter AFSL Supervision? Key Compliance Lessons from ASIC’s Lanterne

Introduction

The Federal Court’s decision to impose a $1.25 million penalty on Lanterne Fund Services Pty Ltd marks a pivotal moment for Australian Financial Services (AFS) licensees. The Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353 has raised the compliance bar, confirming that a “light touch” or “landlord” approach to supervising authorised representatives is no longer acceptable under the general obligations of the Corporations Act 2001 (Cth).

This ruling serves as a clear warning from the Australian Securities and Investments Commission (ASIC) that all AFS licensees are expected to maintain robust and proactive supervision frameworks. For any AFS licensee, understanding the lessons from the Lanterne case is now essential for effective risk management and ensuring your compliance systems can withstand regulatory scrutiny.

The Lanterne Case Explained

Lanterne’s Business Model & Scale of Operations

Lanterne Fund Services Pty Ltd operated a “licensee for hire” business model, authorising other financial services providers to act as Corporate Authorised Representatives (CARs) or Authorised Representatives (ARs) under its Australian Financial Services (AFS) Licence. In exchange for this authorisation, Lanterne charged significant fees, including:

• Upfront payments of around $5,000
• Ongoing monthly fees of up to $3,000 per CAR

Between March 2019 and October 2021, Lanterne’s network grew substantially without a corresponding increase in its compliance and supervision resources. During this period, the key characteristics of its operations included:

Operational Characteristic	Details
Extensive Network	The firm authorised between 62 and 69 Corporate Authorised Representatives (CARs) and between 134 and 205 individual Authorised Representatives (ARs).
Significant Funds Under Management	Representatives operating under Lanterne’s licence were responsible for funds that fluctuated between $1.2 billion and $1.685 billion.
Diverse Industries	Authorised representatives operated across various sectors, including venture capital, managed investment schemes, digital asset funds, wholesale property funds, and climate change advisory.
Minimal Internal Resources	Despite its scale, Lanterne had only one full-time employee, who also served as its sole director and responsible manager.

ASIC’s Allegations & The Federal Court’s Findings

The Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against Lanterne, alleging it had failed to comply with six of its general obligations as an AFS licensee under section 912A of the Corporations Act 2001 (Cth). The Federal Court ultimately agreed with ASIC, finding that Lanterne’s contraventions were serious and systemic.

The Court determined that Lanterne’s conduct fell well short of the standard expected of a licensee. The key failures identified by ASIC and confirmed by the Court were:

Identified Failure	Description of the Breach
Inadequate Risk Management Systems	Lanterne had no formal or documented risk management system to identify, assess, or mitigate risks from its large and diverse representative network.
Insufficient Resources	The firm lacked adequate human (one full-time employee), technological (paper-based filing), and financial resources, with no proper IT security or disaster recovery plan.
Lack of Competence	The sole responsible manager lacked the time and expertise required to oversee the wide range of financial services provided by the representatives.
No Representative Training	Lanterne failed to provide or arrange any training for its representatives and had no processes to ensure they were adequately trained or competent.
Failure to Supervise Representatives	The firm conducted no meaningful due diligence on new representatives and relied on their unverified self-reporting, with no formal audit processes.
Failure to Act Efficiently, Honestly, and Fairly	These cumulative failures resulted in a breach of Lanterne’s overarching obligation to ensure financial services were provided efficiently, honestly, and fairly.

The $1.25 Million Penalty & Other Orders

Reflecting the serious and systemic nature of the breaches, the Federal Court imposed a significant penalty on Lanterne Fund Services Pty Ltd. The Court ordered Lanterne to pay a pecuniary penalty of $1.25 million, which was calculated as $250,000 for each of five key contraventions.

In addition to the financial penalty, the Court made further orders to ensure future compliance and remediation of the identified failures. These orders require Lanterne to:

• Engage an independent expert, at its expense, to conduct a thorough review of its systems, processes, and controls.
• Implement the recommendations provided by the independent expert in a written report.
• Establish a comprehensive risk management and compliance program based on the expert’s recommendations.
• Undergo a follow-up review by the independent expert to report on the adequacy of its implementation of the required changes.

Five Key Lessons for Your AFS Licensee

You Cannot Merely Be a Landlord

The Federal Court’s decision firmly rejects the “licensee for hire” or “landlord” supervision model. An AFS licensee holds the ultimate responsibility for the conduct of its representatives, and this duty is ongoing and cannot be delegated.

Simply onboarding representatives and providing them with policies is not enough to satisfy a licensee’s obligations. The court dismissed this passive approach as inadequate.

If your AFSL operates as a passive umbrella for representatives to run their businesses with minimal supervision, you are likely breaching your licence conditions under the Corporations Act 2001 (Cth). Instead, the licensee must actively ensure that financial services provided under its licence are delivered:

• Efficiently
• Honestly
• Fairly

This goes far beyond merely collecting fees from representatives.

Your Systems Must Be Proactive, Not Just Reactive

The court was highly critical of Lanterne’s reactive compliance approach, which involved responding to issues only after they arose. Relying on representatives to self-report compliance issues through monthly assessments was deemed insufficient and a critical failure.

This passive stance falls short of the “reasonable steps” required by law. An AFS licensee must implement proactive and systematic measures designed to identify risks before they lead to breaches.

A structured approach to supervision should include:

• Regular Audits: Conducting scheduled audits of representative conduct, including reviews of advice files and marketing materials
• Systematic Monitoring: Implementing ongoing surveillance of representative activities rather than relying on ad hoc checks
• Risk Assessments: Continuously assessing risks tailored to each representative’s specific business activities

Your Resources Must Match Your Risk & Compliance Needs

A central finding in the Lanterne case was the severe inadequacy of its resources. Operating with only one full-time employee to supervise over 200 representatives and more than 60 corporate authorised representatives was described as “woefully inadequate.”

The court established a direct link between the scale of an AR network and the resources required to supervise it effectively. Your compliance resources must be proportionate to the size, complexity, and risk profile of your business and its representatives.

Key considerations include:

• Human Resources: Ensuring you have a sufficient number of compliance staff with the right expertise to understand and monitor the diverse services offered by your representatives
• Technological Capability: Maintaining adequate IT infrastructure, including security plans, backup protocols, and disaster recovery plans, rather than relying on outdated paper-based systems
• Financial Management: Assessing and allocating the financial resources necessary to support robust supervisory arrangements

Onboarding Is Not a Set & Forget Exercise

While initial due diligence is a critical first step, the court confirmed it does not fulfil a licensee’s supervisory obligations. Lanterne’s failure to conduct meaningful ongoing checks after appointing its representatives was a key breach.

A representative’s business and risk profile can change over time, meaning supervision must be a continuous process. A compliant framework must extend beyond the initial onboarding phase and include a structured plan for ongoing oversight.

This should involve:

• Periodic Re-assessments: Regularly re-evaluating each representative’s competence, systems, and overall appropriateness
• Ongoing Training: Providing continuous compliance education tailored to emerging regulatory risks and the specific needs of your representatives
• Regular Reviews: Consistently reviewing marketing materials and advice practices throughout the entire duration of a representative’s authorisation

Documentation Is Your Defence

The Lanterne judgment reinforced a fundamental compliance principle: if a supervisory action is not documented, a regulator will treat it as if it never happened. Lanterne’s failure to keep adequate records of its supervisory activities made it impossible to prove that it had taken the “reasonable steps” required under its AFS licence obligations.

The court viewed the absence of documentation as evidence that no meaningful supervision had occurred. Maintaining thorough and contemporaneous records is not just an administrative task, but a core part of the compliance duty itself.

Your documentation should include:

• Detailed reports from audits and compliance reviews
• Records of meetings, risk assessments, and any follow-up actions taken
• Evidence of training programs and competency assessments for each representative

An Actionable Checklist to Lanterne-Proof Your Supervision Framework

Review Your Governance & Resourcing

A critical failure in the Lanterne case was the mismatch between the scale of its authorised representative (AR) network and the resources dedicated to supervision. To avoid similar breaches, an AFS licensee must regularly assess whether its team, systems, and budget are appropriate for its business model.

Your review should confirm that you have adequate arrangements in place, including:

Area of Review	Key Requirements for Adequacy
Human Resources	The number of compliance staff must be sufficient for the number of ARs and the complexity of their activities. Documented plans for managing the loss of key personnel should be in place.
Responsible Managers	A sufficient number of responsible managers with the appropriate knowledge, skills, and available time to effectively conduct their roles is required.
Technological Capability	Robust IT infrastructure is necessary, including a security management plan, IT back-up protocols, and a disaster recovery plan, moving beyond outdated paper-based systems.
Financial Management	A thorough assessment and allocation of the financial resources required to provide financial services and carry out supervisory arrangements effectively must be conducted.

Implement Proactive Monitoring & Audits

The Federal Court’s decision stresses that a reactive compliance posture, which relies on responding to complaints or issues as they arise, is no longer acceptable. Your supervision systems must be designed to proactively identify risks before they escalate into breaches.

Importantly, relying on self-reporting by representatives is not sufficient on its own. Instead, a proactive framework should include a structured program of reviews and audits with a prescribed methodology.

Key elements of this program include:

Program Element	Description
Regular and Systematic Reviews	Conduct ongoing reviews of representatives’ work to ensure they are complying with financial services laws.
Documented Audit Program	Establish a formal, documented audit program that clearly outlines the scope and frequency of reviews.
Risk-Based Auditing	Base the frequency of audits on a risk assessment of each AR, ensuring higher-risk representatives are reviewed more frequently.
Addressing Findings	Ensure that any negative audit findings, events, or breaches are reported and addressed accordingly through a clear remediation process, following a comprehensive guide to breach reporting.

Strengthen Onboarding & Ongoing Due Diligence

The duty to supervise an AR begins before their appointment and continues throughout the relationship. Initial due diligence is essential but does not replace the need for continuous assessment, as a representative’s business and risk profile can change over time.

Remember that onboarding cannot be a “set and forget” exercise. To strengthen your processes, you should implement a documented framework for the entire lifecycle of an AR’s appointment. This includes:

Process Stage	Required Actions
Initial Screening	Conduct rigorous and documented due diligence and background checks on all prospective CARs and ARs.
Ongoing Checks	Implement a process for conducting continuous checks to ensure representatives remain appropriate to act under the licence.
Annual Reviews	Re-assess each AR’s risk profile at least annually, considering any changes to their business model, client base, or service offerings.
Provide Clear Guidance	Give representatives clear instructions and practical guidance about their obligations under financial services laws.

Prioritise Comprehensive Record Keeping

In any regulatory investigation, documentation is your primary defence. The Lanterne case reinforced a critical compliance principle: if a supervisory action is not documented, regulators will treat it as if it never happened.

Maintaining comprehensive records is not just an administrative task, but a core part of your compliance obligations. Your firm should be able to provide clear evidence of all supervision activities.

This means keeping detailed and accessible records of:

Record Category	Details to Document
Onboarding and Due Diligence	All background checks, qualifications, and due diligence findings for each representative.
Audits and Reviews	Comprehensive records of all audits, surveillance reviews, and follow-up actions taken to address any identified issues.
Meetings and Communications	Documented meeting minutes, compliance updates, and any instructions issued to representatives.
Training and Competency	A maintained record of training for all representatives, reviewed at least annually, including evidence of completion.

Conclusion

The Federal Court’s $1.25 million penalty against Lanterne Fund Services Pty Ltd has reset the standard for Australian Financial Services (AFS) licensees, confirming that a passive “landlord” approach to supervising authorised representatives is a serious breach of the general obligations under the Corporations Act 2001 (Cth). This case serves as a critical lesson that every AFS licensee must now operate with a proactive, well-resourced, and thoroughly documented risk management and compliance framework to withstand regulatory scrutiny.

Navigating these heightened expectations requires specialised guidance to ensure your supervision model is not only compliant but also a strategic asset. Contact the expert AFSL compliance lawyers at AFSL House today to leverage our trusted expertise and tailored compliance solutions, turning your regulatory challenges into opportunities for growth and security.

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