Providing financial services 'fairly'

By Simun Soljo
Financial Services

In brief 10 min read

The recent Federal Court decision in ASIC v AGM Markets has provided some much needed clarification of what it means to provide financial services 'fairly' in the context of the 'efficiently, honestly and fairly' obligation. While the concept is still 'vague and flexible', this case makes clear that fairness requires balancing the interests of both clients and the licensee, and is not a 'back door' into the best interests duty.

The obligation

Financial services licensees are required to 'do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly' (s912A(1)(a) of the Corporations Act). As more cases are brought by ASIC for breaches of this obligation, we are getting a clearer picture of how courts will interpret it and what it requires of licensees. Working out what the obligation requires has also become much more important after it was made a civil penalty provision from 13 March 2019, with a possible civil penalty of $525 million (or more).

One area that has not received a lot of attention from courts is what it means to provide financial services 'fairly'. Justice Beach's judgment in ASIC v AGM Markets provides some helpful guidance. The facts are of less general interest than the principles, but in short, the case concerned the conduct of an issuer of derivative products that provided personal advice to clients through various representatives. The judge found that the licensee breached various obligations, including the obligation to do all things necessary to provide financial services efficiently, honestly and fairly.

Back to 'compendious indication'?

Before turning to the judge's comments on the meaning of 'fairly', it is worth noting the judge made some general comments about the obligation as a whole, reiterating the principles set out by Justice Foster in ASIC v Camelot (2012), and summarised by Justice Beach himself in ASIC v Westpac (2018).

One of the principles summarised in those cases is that the obligation is a 'compendious indication meaning 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'. This comes from Justice Young's judgment in Story v National Companies & Securities Commission (1988). It is somewhat unclear that it means for the efficiently, honestly and fairly obligation to be a 'compendious indication', but the context in Story is helpful. Justice Young was giving meaning to an equivalent expression in the Securities Industry Code which dealt with licensing of securities dealers. He was concerned that it is 'impossible to carry out all three tasks concurrently', and so it is necessary to interpret each of the elements of the phrase in the context of the others so that they can be complied with at the same time. This does not mean that regard should not be had to each of the elements of the obligation, or that failure to comply with one of them will not result in a contravention of the obligation interpreted 'compendiously'.

Whether the phrase is 'compendious' was questioned recently in the decision of the Full Federal Court in ASIC v Westpac (2019). Chief Justice Allsop noted the previous decisions but otherwise reserved his view on the question. Justice O'Bryan was more willing to give his view. Despite no arguments being made about the interpretation of the section, the judge said that 'I have considerable reservations about the view that the words “efficiently, honestly and fairly” as used in s912A(1)(a) of the Act should be read compendiously in the manner suggested by Young J in Story' (at [424]). Justice O'Bryan was of the view that 'the concepts of efficiently, honestly and fairly are not inherently in conflict with each other and that the ordinary meaning of the words used in s912A(1)(a) is to impose three concurrent obligations on the financial services licensee: to ensure that the financial services are provided efficiently, and are provided honestly, and are provided fairly' (at [426]).

In ASIC v AMG Markets, Justice Beach noted Justice O'Bryan's views, but concluded that 'as this was not decided by at least a majority, I am bound to apply the single judge decisions unless I consider them to be plainly wrong, which I do not' (at [516]). This means that, as far as the cases are concerned, we are back to where we started with Justice Young in Story, and the obligation that the obligation is a 'compendious' one.

What is less clear is whether this makes any difference to the application of the obligation to facts. It does not appear to have made any difference in ASIC v Westpac or in ASIC v AGM Markets. It may be a rare case where the obligations to provide financial services 'efficiently' and 'fairly' are in conflict and so need to be read down so that they can be complied with concurrently. This is especially so given the courts have not given the word 'efficiently' the meaning it often has in a business context, which is to achieve a certain outcome cheaply or using the minimum resources necessary. If 'efficiently' were interpreted in this way, the fairness obligation could be read down where it was just too expensive or difficult to be fair to clients. But in interpreting 'efficiently, courts have instead interpreted it as referring to effectiveness and adequacy of performance. Justice Beach summarises the previous cases in saying that 'the word “efficient” refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate' (at [508]). It seems unlikely that complying with this obligation would make it difficult to also be fair.

What is 'fair'?

Justice O'Bryan in ASIC v Westpac noted that '[t]he word 'fair' as used in s912A(1)(a) has not received detailed judicial consideration. However, it seems to me that there is no reason why it cannot carry its ordinary meaning which includes an absence of injustice, even-handedness and reasonableness' (at [426]).

In ASIC v AGM Markets, Justice Beach was not so sure. He said (at [520]-[521]):

Let me say something about “fairly”. Judges applying s912A(1)(a) have usually not sought to define “fairly” except to explain its structural setting in the composite phrase. This is unsurprising. And of course no dictionary definition could be adequate for the task given the intrinsic circularity with such definitions. For example, take the Macquarie Dictionary definition. First, the concept of “free from injustice” is question begging and conclusionary. It adds little to elucidate “fairly”. Second, the phrase “that which is legitimately sought, pursued, done, given etc.” is also question begging. No content is given to what is legitimate. There is irremediable circularity unless legitimacy simply incorporates other statutory or common law/equitable normative standards of behaviour. Third, the phrase “proper under the rules” is also devoid of content unless “proper” means “in compliance with”. Fourth, if one construes “fair” to include “free from dishonesty”, then this all just suggests that the phrase “efficiently, honestly and fairly” should be read compendiously.

Could you convincingly define 'fairly' by what it lacks? To say that fairly means free from bias, free from dishonesty, etc, is to stipulate necessary negative conditions. And to do so may give you some boundary conditions. But no positive conditions are stipulated. No content is given, let alone sufficient conditions. But to stipulate negative conditions may not be unhelpful.

If the dictionary definitions are circular and inadequate, where does this leave us? It may be that defining fairly by what it is not or what it is opposed to (such as injustice, illegitimacy, impropriety, bias or dishonesty) will guide the application of the obligation by the courts. They may find a licensee has acted unfairly where one of these is present. But it seems the obligation is still lacking clear substantive definition. It is easier for licensees to work out what fairness is not, and so what they should avoid, rather than what it is and so what it requires.

'Fairness' is not just about the client

Justice O'Bryan goes on to say in ASIC v AGM Markets that the 'fairness' obligation needs to be interpreted in a balanced way, and not just by reference to what is in the client's interests (at [522]):

Should “fairly” only be viewed from the perspective of an investor, borrower or other person interacting with the licensee? No. Fairness is to be judged having regard to the interests of both parties. Other statutory provisions may be designed to tilt the scales, but not s912A(1)(a) and the statutory composite norm it enshrines. Disproportionate emphasis should not be given to what is the third part of a composite phrase in a manner which creates unsatisfactory asymmetry in favour of those with whom the licensee deals.

So in working out what is 'fair' in providing financial services to clients, the interests of both clients and the licensee need to be taken into account. Fairness involves a balancing exercise between their respective interests.

An implication of this is that the fairness obligation will require different things in different contexts. What is fair in dealing with sophisticated wholesale clients who are able to look after their own interests may not be fair when dealing with retail clients. The requirement is likely to be interpreted in a way that is 'suitably vague and flexible' (ASIC v AGM Markets at [524]) and that has regard to the circumstances of the licensee and the services being provided.

Not a best interests duty

A 'best interests' obligation has been imposed by the general law and in legislation in specific contexts. The Corporations Act requires providers of personal advice to act in the best interests of retail clients in relation to the advice. Equity also requires fiduciaries to act in the best interests of those to whom they owe fiduciary duties (although the equitable 'best interests' obligation may not be the same as the one imposed by the Corporations Act).

Justice O'Bryan makes clear that the 'efficiently, honestly and fairly' obligation is not a best interests duty. He says (at [522]) that:

This section is not a back door into an “act in the [best] interests of” obligation. Other specific provisions of the Act nicely fulfil that role. There is nothing to indicate that s912A(1)(a) was to have that bias.

Attempts to extend the 'fairness' obligation in particular to include a sense of acting in the best interests of clients can therefore be rejected on Justice O'Bryan's analysis. It would, in his view, 'tilt the scales' in favour of the client and create an 'unsatisfactory asymmetry', whereas the concept of fairness requires consideration of both the licensee's and the client's interests.

Will AFCA take note?

It will be interesting to see if AFCA takes note of Justice O'Bryan's comments about the meaning of 'fairness'. Under its jurisdiction in determining a dispute, AFCA must do what is 'fair in all the circumstances' (or in the context of a superannuation dispute, what is 'fair and reasonable in all the circumstances').

AFCA is currently undertaking a review of its fairness jurisdiction 'to develop a fairness standard'. We have previously drawn attention to decisions of AFCA which appear not only to disregard the interest of the licensee in determining what is 'fair', but also disregard the licensee's contractual and legal obligations. The determination of what is fair in the context of a particular dispute requires close attention to the circumstances of the individual client, and this may require some different considerations to those that are relevant in determining whether the licensee is carrying on its business fairly. However, the clarification by Justice O'Bryan in ASIC v AGM Markets that the 'fairly' obligation requires consideration of the interests of both the licensee and the client, and that it is not a 'back door' into the best interests obligation, may provide useful guard-rails in interpreting AFCA's jurisdiction and should be taken into account in formulating its 'fairness standard'.