FSR GPS: When Is An Incorrect Misstatement Not Misleading Or Deceptive? - Financial Services

In this edition of the FSR GPS, we highlight some key principles that can help AFS licensees identify when an immaterial misstatement may:

not constitute misleading or deceptive conduct; and
therefore, not automatically be reportable as a significant breach to ASIC under section 912DAA of the Corporations Act 2001 (Cth) (Corporations Act).

As with our previous primer on the need to assess fault elements, the aim of this article is to highlight scenarios where licensees may be over-reporting incidents that may not give rise to an actual contravention of financial services law.

Regulatory cost of over-reporting misstatements

Immaterial misstatements have become an immense regulatory burden for AFS licensees, as the ASIC breach reporting regime now treats misleading or deceptive conduct contraventions as automatically reportable. This has led many licensees to either:

individually breach report immaterial errors or misstatements to ASIC, at significant administrative cost to the licensee in the context of no corresponding consumer harm; or
assess that an immaterial error or misstatement is not misleading or deceptive on 'common sense' or 'commercial' grounds, or by building a legally tenuous argument that a misstatement is 'confusing' and therefore, not sufficient to constitute misleading or deceptive conduct.

Below, we highlight when the application of the established principles for misleading or deceptive conduct can yield a legally sound conclusion that an immaterial misstatement is not misleading or deceptive. These points are particularly salient following recent decisions in which the Federal Court found that particular conduct did not result in misleading or deceptive conduct.

Does a materiality threshold exist for misleading or deceptive conduct?

Potentially. As the courts have repeatedly emphasised, the applicable legal principles for misleading or deceptive conduct are well known. The test is whether the conduct has a sufficient tendency (i.e. a real and not remote probability) to lead the relevant person or persons into error.

This has been described as 'a quintessential question of fact'.¹

Although there is no specific legal principle that an immaterial misstatement is not misleading, we consider that a rigorous application of the established legal doctrine can result in a factual conclusion that an immaterial misstatement is not misleading, where the circumstances of the communication, when considered as a whole, will be such that there is no real chance of the communication leading the relevant person into error.

In the same way that a communication can be misleading when the target audience is likely to grasp only the 'dominant message' of a communication, in our view it follows that the opposite outcome must also be possible: in other words, in some contexts, the relevant audience may be likely to grasp only the dominant message, resulting in an outcome where the actual likelihood of the person being led into error by the non-dominant message being merely remote or hypothetical.

It is well established that conduct that only has a remote likelihood of causing an error is not misleading or deceptive. For example, a recent Federal Court decision emphasises that, in some contexts, a misrepresentation will not even be sufficiently credible to be believed by the relevant person or persons. As Downes J observed:

Having regard to the characteristics of the class of customers referred to above, a notional customer would not have been misled or deceived because they would not have regarded any such representation as being credible, even if it had been made.²

Prior cases have also reaffirmed the view that it is not appropriate to automatically assume that a misstatement is misleading or deceptive by focusing only on whether a particular sentence or statement within in a broader communication is incorrect:

[I]t would be wrong to select particular words or acts which although misleading in isolation do not have that character when viewed in context.³

As a final example, depending on the circumstances, one might be entitled to assume that the relevant person or persons would take reasonable care of their own interests. In another decision, the High Court observed that:

[T]he heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests. What is reasonable will or course depend on all the circumstances. The persons likely to be affected in the present case, the potential purchasers of a suite of furniture costing about $1,500, would, if acting reasonably, look for a label, brand or mark if they were concerned to buy a suite of particular manufacture.⁴

It follows then that the next question is - when will a making an immaterial misstatement only result in a remote likelihood of error?

When is the risk of error only remote?

For an immaterial misstatement, the risk of causing an error may be remote once all the relevant circumstances have been taken into account.

As the High Court has emphasised, to determine whether conduct is misleading or deceptive, it is necessary to take into account all of the relevant factors surrounding a communication. A single incorrect sentence cannot be viewed in isolation:

It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole.⁵

Our analysis of the case law has found that there can be some circumstances where the presence of particular factors will reduce the tendency for a communication to lead the relevant person or persons into error.

Some of these factors include:

the context in which the communication is viewed, and whether the communication can be retrieved by the relevant person for further review;
the characteristics of the relevant person or of ordinary and reasonable persons to whom the communication was directed;
the importance of the communication to the person or persons;
the plausible ways in which the communication could have been perceived;
other representations (including both prior representations and inconsistent representations within the same communication) about the subject matter of the misrepresentation; and
the credibility of the alleged misrepresentation and the communication as a whole.

Once all of the relevant factors have been taken into account, in some cases, a robust and diligent factual assessment may conclude that the realistic likelihood of actually causing an error is remote and therefore, the communication is not misleading or deceptive.

What is a 'remote' likelihood?

It is not possible to definitively identify any particular scenario as a situation where an immaterial misstatement will not be misleading or deceptive, as this is fundamentally a factual question that will depend on each relevant factor, e.g. as canvassed above.

Once each of the relevant factors above has been considered as part of a probability assessment of an error arising, the next step will be to consider whether the resultant likelihood of error is 'real' or only 'remote'. A real probability does not require the probability to be greater than 50%, or 'more likely than not' to lead into error. It only requires that the conduct be 'prone to', or 'has a propensity', of its nature, to mislead.

Again, this is a question of fact. In some contexts, a misstatement can still be misleading even if many of the factors above operate to reduce the likelihood of an error.

In our view, the probability of error can be regarded as remote (and therefore not misleading or deceptive) if, factually speaking, the probability of error is fanciful or theoretical, and not realistically plausible.

For example, if it is not reasonably conceivable that the relevant person would actually form an incorrect impression when reading the communication as a whole, then the immaterial misstatement could be regarded as not being likely to mislead or deceive.

Is a misrepresentation misleading if it is not adverse?

The position as a matter of law is that it does not matter if the potential error is favourable or adverse. The only test is whether the misrepresentation has a sufficient tendency to cause an error.

That said, there are specific qualifications to this position in a financial services context. For example, for a regulated disclosure document (such as an FSG, PDS, Cash Settlement Fact Sheet, SOA or ROA), an exception is available from the defective disclosure regime for a misleading or deceptive statement that is not materially adverse.

Prior to the commencement of breach reporting reforms in 2021, the starting position had been that a breach of the misleading or deceptive conduct prohibitions in section 1041H of the Corporations Act and 12DA of the ASIC Act would not have entitled an affected person to damages if no actual loss is suffered. However, a contravention of these prohibitions is now deemed to be significant for breach reporting purposes, even if the representation is not adverse.

Footnotes

1. ACCC v Telstra Corporation Limited [2007] FCA 1904, [15] (Gordon J), citing ACCC v Telstra Corporation Limited [2004] FCA 987, [49] (Gyles J).

2. ASIC v CBA [2022] FCA 1422, [128].

3. ACCC v Dukemaster Pty Ltd [2009] FCA 682, [10] (Gordon J), as cited with approval in ACCC v Dateline Imports Pty Ltd [2015] FCAFC 114, [179] and ASIC v CBA, [82].

4. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44, [9] (Gibbs CJ).

5. Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592, [109].

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.