Australia: Efficiently, honestly and fairly - AFSL services

I'd like some "Efficiently, Honestly and Fairly" please, with a dash of "community expectations" thrown in.1

I would like to start with what is, I think, an unarguable proposition.

No matter how good your aim, you must have a target to aim for. An aim without a target is like a rebel without a cause.

An aim of all AFSL holders is, or ought to be, to comply with the relevant financial services laws.

In the wake of the Royal Commission and with recent changes in legislation to facilitate ASIC's ability to take court proceedings, increased regulator resources and lofty potential penalties, the consequences of not hitting the targets could be truly shattering.

Section 912A of the Corporations Act sets out the general obligations of AFS licence holders. From 13 March 2019 these obligations have been added to the list of 'civil penalty' provisions. Prior to this, ASIC could take administrative action but a breach of the provisions was not itself actionable by ASIC as either a criminal or civil penalty breach.

The first of the general obligations is to ensure that a licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. I have always seen section 912A as a 'mission statement' for the rest of the section which is directed at good corporate governance. Section 912A requires licensees to maintain a number of frameworks which, if working effectively, would ensure that the services provided under the licence are delivered efficiently, honestly and fairly. These include arrangements for: managing conflicts of interest, risk management, complaints handling, ensuring representatives comply with the financial services laws, and so on.

However, the requirement to provide the services efficiently, honestly and fairly is not just a statement of what the section is aiming to do. It is also a stand-alone obligation and one that is now actionable in court.

So, what does it mean?

A reader might be forgiven for thinking it means that the licensee has three obligations; to:

  1. provide the services efficiently;
  2. provide the services honestly; and
  3. provide the services fairly.

That reader would be wrong.

In fact, according to the current law, the words do not create three obligations but only one. They must be read together as one obligation. So, the obligation refers to "a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness and fairly having regard to the dictates of efficiency and honesty"2. How clear is your target looking?

I'm not going to spend much time on the words "honestly and fairly" because I think we all get, to quote that well known Australian fictional lawyer Danny Denuto, "the vibe of the thing", except to say that the standard of dishonesty is more about commercial immorality than about criminal dishonesty.3

But, what is meant by "efficiently"? One would have thought "being efficient". When is someone "being efficient"? According to the Macquarie dictionary, this occurs when something is "effective in the use of energy or resources". Efficiency is a process which results in saving of money, time, etc. and the example that is given in the dictionary is "the company achieved internal efficiencies". I will refer to this concept throughout this article as "economic efficiency". The word also carries the secondary meaning of competency in performance.

A business person looking at a section that sets out governance principles about how to operate a good business, which includes frameworks like risk management (which is about the efficient allocation of resources) and that appears in a chapter of the Act4, the objects of which include "the confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services5" might expect the word 'efficiently' to be interpreted in a way that acknowledges economic efficiency.

The Chapter appears in an Act that is administered by ASIC. ASIC is established by the ASIC Act 2001 (Cth) and its statutory objectives include "improving the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy."

My point? Our legislators have not been blind to the need to have a successful economy. It is woven into the fabric of both ASIC's role and the purpose of Chapter 7 of the Act. One would expect to see, therefore, a meaning given to "efficiently" in this obligation to provide the services "efficiently, honestly and fairly" that would encompass the notions of the effective use of resources.

A critical function of law and perhaps the most difficult task of law makers and regulators is to balance competing public interests. For example: to what extent do we intervene in the economy, to what extent do we hamper competitive forces to protect particular sectors of society, to what extent do we use our powers of investigation and coercion and when does that use become oppressive?

The case law to date has failed to give the word 'efficiently' an economic efficiency meaning. Instead it has given the word its secondary meaning of "competency in performance". This discussion of 'competency' has really been directed at the quality of the services provided in terms of its outcome, rather than in terms of the economic efficiency with which it was achieved.

In my view that is an omission and the word should be given both meanings in the context of the section. I am not criticising the judgements in the cases that are referred to in the footnotes. I am, however, trying to shine a light on what seems to me to be the worrying potential for the law on what is 'efficient, honest and fair' to develop in a lop-sided manner.

Courts have a particular function. Judges do not wake up in the morning thinking "Great, I'm going to make some law today". They decide disputes between parties. If any new law is made, it is a byproduct of the process of deciding a dispute. The law is literally the reasoning for their decision (or what lawyers refer to as the ratio decidendi). When the delivery of a professional service, such as the provision of financial product advice, goes wrong there is damage done to an individual or a group of individuals. Those individuals seek compensation from the provider/s of the services through the courts and the court's job is to decide those disputes. The context for and focus of the submissions and the court's decision about the meaning of 'efficiently, honestly and fairly' is, of necessity, about the competence of the service delivered, not about whether it was delivered with an economy of resources.

Courts sometimes look to the objects and historical background of legislation when interpreting Parliament's intention. Gleeson J noted in the recent case concerning Westpac's superannuation campaign that "in the original draft of the Financial Services Reform Bill 2001 (Cth), the provision required only that financial services be provided "competently and honestly" and that "this wording was replaced with the wording "efficiently, honestly and fairly" in order to reflect the equivalent provision in the predecessor to the Act, the Corporations Law (Cth)".6

It was also a requirement of that Act that in the interpretation of the law, a construction that promotes the purpose or object underlying the Law (which are sometimes but not always expressly stated in the Law) is to be preferred to one that would not7. For those with a particular interest in this phrase, her Honour sets out very clearly the development of the legal consideration of the phrase up to the present time8.

As 'competent in performance' is one of the meanings of "efficiently" and the cases so far before the courts have concerned the competence of the services delivered it is not at all surprising that the judgements so far, in the context in which they have been given, have not discussed the concept of 'economic efficiency' in interpreting the requirement for AFSL holders to provide the services "efficiently, honestly and fairly."

My concern (and this is simply my personal view) is that if the obligation is interpreted solely as competently, honestly and fairly, 'economic efficiency', which is one of the key objectives of the legislative regime, will be disregarded. This would ultimately be to the detriment of the economy and the economic efficiency of a sector that, according to a 2016 Treasury Report, was the largest contributor to the national economy, contributing around $140 billion to GDP the previous year. My hope is that as we see more common law on the meaning of 'efficiently, honestly and fairly', and that the courts will include the broader economic objective when interpreting the section and provide some guidance to licensees about how to balance the competing public interests of nurturing an economically efficient sector and good consumer outcomes.

Of course, I am not and would never argue that the objectives of 'providing the services competently, honestly and fairly' should have less weight than economic efficiency or that economic efficiency justifies dishonest or unfair conduct. Those requirements and values are fundamental to the proper functioning of our economy and our society, which the economy is there to serve. The industry must do better in delivering on them.

At this moment in history just following the Royal Commission, however, it seems that those values do not need a champion. Perhaps economic efficiency does.

With a dose of 'community expectations'?

When I was at law school I was taught that the society sets out in legislation the standards of conduct it requires of its citizens. If those standards are breached, the Crown takes action on behalf of all of us (as a society) to punish the offender and as a demonstration effect to the rest of the community about the expected standards of behaviour.

The legislation provides the target. The target can be broken down into the physical and fault elements of the offence and proven or defended by evidence.

Once we leave the words of the statute books, who or what defines 'community expectations'? This is a challenge in a changing population in which expectations are increasingly not communal. I was reflecting on this when walking in the city on the left-hand side of the footpath last week. It used to be the case that we all walked on the left and the chances of colliding with an oncoming pedestrian were slight. Now, a significant number of pedestrians walk on the right. You might have noticed something similar when using the escalator. Our behavioural norms are evolving. Variety is a great thing and new cultures add to the richness of our lives, but they don't help us when it comes to defining 'community expectations', or, to use my chosen metaphor, 'to see our target'.

Provided regulators and courts follow the example set by the Royal Commissioner, Kenneth Hayne, I don't think the news is all bad. He made it clear that in almost every case the misconduct that 'failed to meet community expectations' was also in breach of either a law or an expectation set out in an industry code of conduct or other document. In almost every case, the conduct breached basic standards of honesty; standards that, irrespective of our increasingly mixed cultural heritages, we all share. He did not use the potential breadth of the phrase "failed to meet community expectations" as a vehicle for subjectively cataloguing an original and broad ranging list of conduct that may or may not have been a breach of 'community expectations'.

The concern that I've tried to express in this article is that if we are moving to a system where substantial monetary penalties or other punitive measures can be imposed for conduct that is ill-defined, subjective or, worse, provides a tool for ideological agendas, we are moving to a less just, not a more just, society. I have great confidence in our courts, over time and given enough opportunities, to be able to meet the challenges of giving us a target to aim for, but this will come at a cost and I sometimes wish that our legislators didn't make the job so difficult. In the meantime, we will just have to do our best to take aim at ....?

Footnotes

1The views expressed in this article are my own and shouldn't be construed as a 'Firm view'.

2Per Foster J in Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) [2017] FCA 497; Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ASCR 206; [2012] FCA 414 at page 225 and paragraph [69] per Foster J Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 357 ALR 240; [2018] FCA 751 at page 346 and paragraph [2347] per Beach J Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at page 672; 13 ACLR 225 at page 234-5 and paragraph [126] per Young J.

3Per Justice Foster in ASIC v Westpac Banking Corporate.

4Chapter 7 of the Corporations Act 2001, which was inserted into the Act by The Financial Services Reform Act 2001.

5760A(a)

6ASIC v Westpac Securities Administration Limited [2018] FCA 2078 at 113.

7For example, s109H Corporations Law and

8Supra at pages 110 to 118.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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