INSIGHT

Federal Court decision highlights it's vital to get incentives right and have strong governance systems

By James Campbell, Felicity McMahon, Cindy McNair, Melissa Camp
ACCC Consumer law Corporate Governance Risk & Compliance

ACCC v Telstra, and building effective compliance programs 7 min read

The recent Federal Court decision ACCC v Telstra [2021] FCA 502 highlights an emerging risk area for boards and senior management in the use of incentive-based remuneration and sales targets for consumer-facing businesses, and their potential to encourage improper sales practices in breach of the Australian Consumer Law (the ACL).

The decision also signals that a business may be held liable for conduct engaged in by third-party service providers in circumstances where arrangements may contain performance metrics that encourage improper sales practices in contravention of the ACL and fail to establish appropriate governance frameworks to prevent such breaches.

Accordingly, the decision reinforces the continued importance of having adequate governance and compliance systems in place – in particular, of effective processes for escalating compliance concerns – to proactively and promptly respond to mounting internal knowledge of improper business practices.

We examine the decision and set out the range of principles and matters you should consider when engaging with regulators and drafting joint penalty submissions.

Key takeaways

  • Increasingly, the use of financial incentives and volume-based targets for sales staff is being scrutinised by regulators worldwide, given their perceived tendency to foster predatory selling behaviours when left unchecked. Indeed, the court's decision follows the highly publicised US$3 billion fine imposed on Wells Fargo last year by US regulators, for perpetuating a pressurised sales environment that led thousands of employees to provide millions of accounts or products to customers by fraudulent or dishonest means.
  • Boards and senior management should carefully consider the use of these strategies, including whether they are always the best way to promote sales growth. If they are to be used, there should be adequate systems in place to manage the associated risks.
  • The imposition of another significant penalty ($50 million) by the court, along with record penalties being achieved by other regulators in similar areas, will likely serve to set the acceptable penalty range going forward for other serious corporate misconduct.
  • In calculating the final penalty, the following factors continue to be looked upon favourably by the court:
    • early cooperation with the regulator, including filing joint submissions with an agreed penalty and behavioural undertakings;
    • prompt and proactive response to improper business practices when they are uncovered;
    • commitment to implementing effective compliance processes; and
    • a display of genuine contrition by the contravening entity.
  • Finally, the court's expectations of company compliance programs cover many of the issues that we discuss in the Allens corporate culture guide, and emphasises the importance of:
    • the appointment of specialist compliance staff;
    • the implementation of an effective compliance program, which deals to the specific risks of improper conduct facing the business;
    • effective systems for compliance concerns to be escalated to more senior management and the Board;
    • the operation of a complaints handling system;
    • whistleblower protections;
    • staff training; and
    • periodic compliance reviews.

The facts

In November 2020, the ACCC instituted Federal Court proceedings against Telstra, for unconscionable conduct in selling post-paid mobile products to 108 Indigenous consumers at its Telstra licensed stores in Broome, Casuarina, Palmerston, Alice Springs and Arndale over a period of two-and-a-half years.

Telstra admitted to the contraventions of the ACL alleged by the ACCC, which included the following conduct:

  • entering the consumer into more than one contract for products or services on a single day;
  • engaging in unfair tactics by not giving a full and proper explanation of matters such as the terms of the contracts, the nature and base costs of the contract, the consumer's total minimum monthly liability and the risk of incurring potentially unlimited excess data charges;
  • falsely represented or created the false or misleading impression that consumers could or would receive a device or devices for ‘free’;
  • selling consumers extra add-ons that they did not want or that sales staff falsely represented or created the false or misleading impression would be ‘free’;
  • not taking adequate steps to determine whether the cost of the products and services were affordable for the particular consumer;
  • manipulating credit assessments and falsely representing to consumers that they had passed the credit assessment to approve consumers for products and services that they otherwise would not have been approved for; and
  • exploited the consumer’s lack of understanding of the terms applying to the transaction and/or took advantage of a cultural propensity for Indigenous Australians to express agreement as a means of avoiding conflict.

The role of boards and senior management

While the evidence did not indicate that Telstra's board or senior executives were aware of the admitted conduct at the time they were occurring at its licensee stores, the parties identified several relevant facts about the state of mind of Telstra's board and senior management at the time of the contraventions, which they submitted (and Justice Mortimer agreed) served to 'exacerbate the unconscionable conduct'. This included:

  • Telstra's system of sales targets and financial incentives for its licensed stores, which required and incentivised greater numbers of sales of post-paid services, with rewards increasing based on volume and value of post-paid services sold. This, in turn, led Telstra's licensees to employ similar techniques for their sales staff in the stores. Senior Telstra executives were aware of this, as well as of the risk that the system had the potential to encourage improper sales practices;
  • not having or implementing effective systems or training to prevent improper sales practices, or to properly respond to complaints; and
  • failing to act despite growing management awareness of improper sales tactics through reports from Telstra's credit risk department. Telstra sold affected customers' debts to third-party debt collectors despite this growing awareness, and failed to change its debt selling policy or buy back debt.

Liability for third-party licensed stores

The five stores at the centre of the case were operated by third parties that held dealership agreements with Telstra. While the exact nature of the contractual arrangements between Telstra and the stores was not clear from the facts of the case, Telstra did not dispute its liability for conduct engaged in by staff at the third-party stores, instead admitting that the conduct was engaged in 'on behalf of' Telstra.

While this issue was not in dispute, Justice Mortimer did comment that Telstra 'provided financial incentives in the form of one-off payments to licensees for the supply of services… [and] Telstra was aware the licensees in turn set sales targets and provided financial incentives to sales staff.' This points to a willingness of the court to hold a business liable for conduct engaged in by a third-party service provider in circumstances where the business is aware that terms in its contractual arrangement may encourage improper sales practices in contravention of the ACL.

The penalty decision

Telstra and the ACCC filed a joint submission to the court, supporting the imposition of a $50 million pecuniary penalty, among other behavioural remedies.

In assessing the appropriateness of the penalty amount, Justice Mortimer considered:

  • Telstra's admission that the conduct was extremely serious in nature as it impacted a customer group known by Telstra to be vulnerable, as well as the exacerbating circumstances above. It could be said the misconduct stemmed from the sales environment and strategies implemented by Telstra and its licensees;
  • Telstra's level of 'self-interest' when initially responding to these issues, which was highlighted by the fact that it sought to claw back incentives it paid to its licensees, due to the misconduct by staff, while simultaneously not agreeing to waive the debts of the consumers affected by the licensees' conduct; and
  • the need to ensure that Telstra understood it had to react 'differently, more proactively and more promptly to complaints and investigations'.

The court ultimately weighed the above against the following persuasive factors:

  • high level of cooperation with the ACCC, including filing joint submissions with an undertaking and agreed penalty;
  • implementation of significant and costly remedial and corrective action, including waiving all debts, discontinuing debt selling practices, introducing 'no lock in' contracts, and buying back problematic stores; and
  • issuance of a public apology for its conduct, demonstrating contrition.

These factors ultimately led Her Honour to approve the agreed penalty of $50 million.

Trend towards substantial penalty amounts

The court's imposition of a $50 million penalty follows the Full Federal Court's decision in April this year to affirm a record $125 million penalty against Volkswagen for breaches of the ACL, which we previously reported on. These penalties reflect the continuing trend we are seeing towards increasingly significant penalties being sought and obtained in recent corporate enforcement actions, including by ASIC and AUSTRAC, to achieve deterrence beyond the 'costs of doing business' and will, no doubt, serve to set norms for future misconduct cases.

How can we help?

With the ACCC's continued emphasis on consumer protection, businesses should consider building comprehensive governance strategies internally, which also capture the activities of third parties operating under licensing agreements, to mitigate consumer-related risks.

Allens' corporate culture guide covers many of the issues discussed in this case, and includes best practice guidance on how to ensure the efficacy of your business's compliance program.

If you are looking to update or implement a compliance program, Allens can assist by providing Online Compliance Training, which we can tailor to your business and industry. For further information, please see our Online Compliance Training Hub.