Financial Services Regulation

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Unravelled: Efficiently, honestly and fairly – overarching and fundamental obligations?

11 October 2018

Written by Partner Michelle Levy

In his recent Interim Report into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne makes a lot of the duties of an Australian financial services licensee and an Australian credit licensee to provide financial services or credit activities, as the case may be, efficiently, honestly and fairly. He described these licence conditions as 'overarching and fundamental obligations'. I suspect this description may come as a surprise to the drafters of the Financial Services Regulation Bill and the National Consumer Credit Protection Bill. These obligations are merely one among a number of licence conditions that went unremarked upon in the Explanatory Memoranda to the Bills introducing the licensing regimes and associated obligations.

That no one thought of these obligations as overarching or fundamental is consistent with the fact that a breach of these obligations does not, of itself, lead to either a civil or criminal penalty. Further, and perhaps to a large part encouraged by this, there were a reasonably large number of admissions by financial services licensees and credit licensees in the Royal Commission to conduct being in breach of the 'efficiently, honestly and fairly' obligation. These admissions were accepted by the Commissioner, who made an exception to the general position that, as a Commissioner exercising executive power and not a judge exercising judicial power, he would not make findings of breaches of law except where the licensee admitted a breach and he agreed. And all of this was done without any public consideration of what is required by the obligation. Again, while nothing much turns on a breach, it may not matter that much.

But that will change. A breach of a licensee's licence conditions will also be a breach of the Corporations Act or the National Consumer Credit Protection Act and the subject of stiff civil penalties (including a disgorgement of profit) under the exposure draft Treasury Laws Amendment (ASIC Enforcement) Bill 2018, released a couple of weeks ago for comment. In the meantime, these obligations are attracting more attention from ASIC.

This makes it all the more important for licensees (and ASIC) to know what the obligations mean.

There has been very little case law dealing with the section, until recently. Even so, in the Australian Securities and Investments Commission v Westpac Banking Corporate (BBSW case), Justice Beach said that:

The meaning of the "efficiently, honestly and fairly" standard in s 912A(1)(a) is not in doubt.

As to what that meaning is, Justice Beach quoted from Justice Foster in Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq), saying that he accepted Justice Foster's formulation in Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq), and that he does so again in the BBSW case.

Justice Foster provided five principles, which are extracted below:

  1. The words “efficiently, honestly and fairly” must be read as a compendious obligation 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.
  2. For those among us who have never described anything as compendious – I think what is meant is two things: first, that the obligation is read as a single obligation and not as three discrete obligations; and second, that the meaning given to each of the three words is coloured by the meaning of the other two.

  3. The words “efficiently, honestly and fairly” connote a requirement of competence in providing advice and in complying with relevant statutory obligations. They also connote an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs.
  4. Efficiently, honestly and fairly requires competence and sound ethical values and judgement. And then, despite making the point that the obligation is compendious, Justice Foster's principles look at the meaning of the words 'efficient' on the one hand and 'honest' on the other:

  5. 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. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect.
  6. It is not necessary to establish dishonesty in the criminal sense. The word “honestly” may comprehend conduct which is not criminal but which is morally wrong in the commercial sense.
  7. The word “honestly” when used in conjunction with the word "fairly" tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound.
  8. This last principle seems to takes us back to the first – the meaning of 'honestly' is influenced by the word 'fairly'.

While these principles do give a little more colour to the obligations, it is hard to say that they advance things much for a licensee (or their lawyer) asking whether a specific incident or course of conduct breaches the licensee's duty to provide financial services or credit assistance efficiently, honestly and fairly. No matter how many times judges rake over the meaning of the terms, there will always be grey areas – they will turn on the reach of the link between the conduct and the financial service or credit assistance as well as the extent to which the section applies to individual incidents.

In my view, there remains quite a lot of room for doubt about what the obligation means and, in turn, when it is breached. As noted above, this does not matter so much when the consequences of admitting a breach are not potentially grave.

But, I suspect that a licensee will be slow to admit a breach of the obligation to provide financial services or credit assistance efficiently, honestly and fairly where they are not certain about what the obligation requires, where ASIC is being encouraged (by the Commissioner and Parliament) to commence proceedings when it receives admissions of breaches, and when the civil penalty might amount to the greatest of 50,000 penalty units ($10.5 million); the benefit derived or detriment avoided by the licensee because of the contravention, multiplied by three; and 10% of the annual turnover of the licensee (to a maximum monetary value of 1 million penalty units ($210 million)). This last penalty is an eye-watering amount, which raises very squarely, again, whether a single incident might amount to a breach of the efficiently, honestly and fairly obligation and, if so, whether it would be possible to start adding the maximum penalty for individual breaches that are part of a single incident. We suspect not, but there is a lot at stake for breaching an obligation that is not, in this lawyer's view, as clear as one might like.

Other articles in this edition of Unravelled

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