In a landmark decision, the Federal Court of Australia has found that collapsed contract-for-difference (CFD) issuer Union Standard International Group Pty Ltd (USG) and its former corporate authorised representatives, BrightAU Capital Pty Ltd (trading as TradeFred) and Maxi EFX Global AU Pty Ltd (trading as EuropeFX), engaged in systemic unconscionable conduct, resulting in customer losses exceeding $83 million.
This judgment, delivered on December 20, 2024, has significant implications for entities providing financial services under an Australian Financial Services Licence (AFSL), particularly those offering margin forex trading to overseas customers where the provision of the products would breach local laws.
Background of the Case
The case revolved around the conduct of USG and its representatives between 2018 and 2020. The Court heard that customers of EuropeFX and TradeFred suffered substantial losses due to the companies' extensive breaches of the law. These breaches included systemic unconscionable conduct, misleading and deceptive conduct, and the provision of unlicensed personal advice.
The court also found that the companies profited directly from their customers' losses and incentivised their account managers to pressure investors into depositing more funds. The onboarding processes of these companies actively targeted inexperienced or vulnerable customers, many of whom did not understand the risks associated with complex CFD products.
Key Findings of the Court
Systemic Unconscionable Conduct: The Court found that EuropeFX and TradeFred employed a system of conduct and engaged in patterns of behaviour that were unconscionable. This included misleading and deceptive representations about the profits that can be generated; deriving the bulk of their revenue from customers’ trading losses; provision of unlicensed personal advice; and failure to give vulnerable customers any adequate explanations about the risks involved. The companies' actions were designed to exploit their customers' lack of understanding and experience, leading to significant financial losses.
Breach of General Obligations: In an Australian first, the Court found that USG breached its general obligation to ensure that the financial services covered by its AFS licence were provided "efficiently, honestly and fairly." This breach occurred when USG offered services to customers in China, knowing that these customers were likely contravening Chinese law. USG failed to take reasonable steps to warn its customers about the potential civil and criminal liability they faced in China.
Implications for AFS Licensees: This judgment has important implications for AFS licensees providing services to overseas customers. Justice Wigney held that the general obligations of AFS licensees are not limited to financial services provided to customers in Australia. This means that AFS licensees must consider whether their services comply with the laws of the countries in which their customers are located. It is also important to note that AFS licensees, such as USG in this case, are liable for the illegal conduct of the authorised representatives who operate under their AFSLs.
Relevantly, ASIC had warned CFD issuers in 2019 that ASIC would consider whether breaching overseas law is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’.
The conduct of licensees providing services to overseas customers under their AFS licences has attracted considerable attention from regulators globally and this judgment is important in protecting the reputation of Australia’s financial services licencing regime.
Justice Wigney, the judge in this case, condemned the conduct of EuropeFX and TradeFred as “offensive to conscience.”
Conclusion
The Federal Court's decision in this case sets a significant precedent for the financial services industry and am expectation that they cannot use their AFSLs to offer services overseas where the offerings are prohibited. It also clarifies the broad scope of the general obligation with respect to honesty, efficiency and fairness. As the CFD and complex product sectors continue to come under close scruntiy, operators should review their business practices and compliance systems and continue to closely follow regulatory developments.
Written by J Huang and S Pettigrove
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