In brief 7 min read
Chief Justice Allsop of the Federal Court recently imposed on a bank, by consent of ASIC and the bank, civil penalties totalling $10 million for unconscionable conduct in carrying out an inadequate customer remediation process.
While the decision raises questions about the circumstances in which remediation processes can enlarge rather than mitigate a financial services licensee's liability exposure, it serves to highlight the importance of banks and other financial services licensees having in place robust compliance programs and taking prompt and comprehensive action where possible non-compliance is identified.
This case concerned an incorrect charging of fees (Charging Conduct) to some retail and commercial customers and an alleged failure by the bank to remediate those customers completely (Remediation Conduct).
The fees in question were charged for effecting periodical payments between accounts held in the same customer's name and, separately, when the bank was unable to carry out those periodical payment instructions due to a lack of funds in the transferring account (together, the Same-Name Fees).
Despite the Same-Name Fees being fairly commonplace for Australian banks, the terms and conditions for these customers only contemplated periodical payments being effected from a customer's account to an account held by another person or business. It followed that the terms and conditions did not permit the bank to charge the Same-Name Fees. However, the Same-Name Fees were charged from 2003 to 2016.
The bank became aware of the risk that the Charging Conduct was not permissible in 2011. However, it continued to engage in that conduct following its discovery because it had not formed a concluded view on whether it was permissible. In 2014, the court found, in a separate case, that the charging of the Same-Name Fees was not permissible. At that point, the bank did not cease the Charging Conduct because:
- it could not stop charging the Same-Name Fees without also stopping other fees for which there was no risk; and
- it decided to continue charging all fees and would remediate those customers who were incorrectly charged.
The bank ultimately ceased the Charging Conduct in 2016. It accepted it had sufficient knowledge of its mistake from 1 January 2014 and, consistent with its standard practice of remediating customers over a period of six years, remediated the affected customers going back to 1 January 2008.
ASIC and the bank agreed that the bank:
- as a result of its Charging Conduct had:
- breached its duty to ensure financial services covered by its financial services licence were provided efficiently, honestly and fairly as required by s912A(1)(a) of the Corporations Act;
- breached its general obligation to comply with financial services law in contravention of s912A(1)(c) and
- on 327,895 occasions, engaged in unconscionable conduct in contravention of s12CB(1) of the ASIC Act;
- as a result of its Remediation Conduct had:
- on two occasions, engaged in unconscionable conduct in contravention of s12CB(1) of the ASIC Act;
- breached s912A(1)(a) of the Corporations Act; and
- breached s912A(1)(c) of the Corporations Act.
During the relevant period, ss912A(1)(a) and (c) of the Corporations Act were not yet civil penalty provisions. As such, ASIC and the bank could only agree that the Bank should pay a penalty of $10 million for the bank's unconscionable conduct in contravention of s12CB(1) of the ASIC Act.
When considering whether the bank had engaged in unconscionable conduct, Chief Justice Allsop stressed the importance of courts adopting the following approach:
One must approach this from the proper focal distance or level of abstraction to assess the nature and seriousness of the conduct. There is a modern cast of mind to break down whole conduct, especially relational commercial or relational human conduct, into little pieces to order and taxonomise those pieces, having disaggregated them from the whole…Such analysis can be helpful to ensure the completeness and comprehensiveness of the thought process, but it must never be a substitute for understanding the whole.
His Honour recognised that it should not be overlooked that there is always some degree of consumer vulnerability when dealing with a bank. The reality of the commercial world we live in is that most of what we consider the necessities of commercial life could not occur without standard form contracts of the kind entered into between the bank and the affected customers. His Honour observed that there is an expectation held by all customers of a bank that the bank will always adhere to the terms of these contracts. It is against this backdrop that the seriousness of the Charging Conduct was assessed.
Chief Justice Allsop decided, consistent with the parties' submissions, that by engaging in the Charging Conduct the bank had acted unconscionably because, among other things:
- the standard terms did not permit the charging of the Same-Name Fees;
- the bank knew or ought to have known since 2011 that there was a risk the Charging Conduct was unlawful; and
- despite its knowledge of the risk, the bank was slow to investigate the Charging Conduct and only completely stopped issuing charges in 2016.
His Honour held that considering the inequality of bargaining power between banks and their customers, good conscience and commercial common sense demand that any risk of impermissible charges be identified and resolved in a timely manner. The bank's admitted contraventions for its Remediation Conduct related to its failure to make remediation payments to customers that were affected between 2005 and 2007. That is, the period between when the bank should have begun its remediation payments (July 2005) and when it did begin payments (1 January 2008) (the Relevant Period).
Chief Justice Allsop decided that the bank's conduct was unconscionable for three main reasons:
- Because the Same-Name Fees before 2009 were significantly higher than those charged after 2009. Accordingly, many of the customers affected during the Relevant Period suffered substantially greater loss than those customers who were in fact remediated.
- The bank's departure from its usual policy of remediating six years prior to discovery was unfair to customers affected during the Relevant Period.
- The bank knew or ought to have known its remediation policies meant there was a significant risk that not all affected customers would not be properly remediated.
In his judgement, Chief Justice Allsop emphasised the importance of the court acting upon agreed penalty submissions and that promoting cooperation between regulators and defendants is in the public's best interests. His Honour stressed that where orders by consent are sought, the court must be satisfied that what is proposed is 'an' appropriate remedy. That is, the proposed remedy must be one that is capable of fulfilling the objects of specific and general deterrence.
Here, Chief Justice Allsop stated that:
The response of the regulator in its claims to the conduct, and the Bank in its response to the claim, has been, if I may respectfully say, a model of how this kind of regulatory litigation in commercial life should take place.
His Honour then gave significant weight to the bank's cooperation with ASIC in resolving the case.
Taking that co-operation into account, as well as the importance of banks to commercial life and the power they wield over customers, Chief Justice Allsop decided that the penalty in this case would need to leave no doubt as to the importance of 'proper and strong compliance programs' and the need to address risks immediately upon discovery. Put another way, a court will always seek to craft a civil penalty that ensures the cost of contravening an Act will be more than conforming with it. Civil penalties should not be seen as a cost of doing business.
Ultimately, the following agreed penalties were imposed by the court:
- $2 million for both contraventions of s12CB(1) as a result of the Remediation Conduct; and
- $8 million for the 327,895 contraventions of s12CB(1) as a result of the Charging Conduct.1
This decision emphasises the importance of banks and other financial services licensees having in place robust compliance programs and taking prompt and comprehensive action where possible non-compliance is identified.
The decision also highlights the substantial scrutiny that regulators and courts will apply to customer remediation programs and the potential for those programs, if not carried out sufficiently comprehensively, to found an unconscionable conduct claim under s12CB(1) of the ASIC Act, thereby potentially increasing a licensee's exposure to liability.
Given the consensual nature of the contravention and penalty in this case, questions remain about whether an inadequate remediation program will comprise, in all cases, unconscionable conduct. For example, where a licensee does not attempt remediation, will that licensee be similarly exposed to an unconscionable conduct claim? If not, then why should a licensee that has genuinely and in good faith attempted to remediate customers, but fails to do so to ASIC's or the court's satisfaction, have a greater liability exposure (at least from an unconscionability perspective) than a licensee that has not remediated at all?
Despite these unanswered questions, a timely and comprehensive remediation forms a central part of a licensee's response to non-compliance with the law, not least because of its conformance with community expectations and its potential reductive effect on the amount of a pecuniary penalty that may be imposed for that non-compliance.
For context, each individual contravention of s12CB(1) was subject to a possible maximum penalty of $1.7 million. Evidently, the penalty accepted by the parties and the court was nowhere close to the theoretical maximum.