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COVID-19: Governance: General licensee obligations in the current context (Australia)

07 May 2020 | Australia
Legal Briefings – By Andrew Eastwood and Anne Hoffmann

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Does the COVID-19 crisis affect the way in which general licensee obligations under section 912A(1) of the Corporations Act 2001 (Cth) are interpreted? Australian financial services licensees (AFS Licensees) must comply with the general obligations imposed on them in section 912A(1) of the Corporations Act 2001 (Cth), which includes an obligation to do all things necessary to ensure that they provide their financial services efficiently, honestly and fairly. 

This legal obligation remains in place in the current economic circumstances. In an ASIC media release dated 14 April 2020, ASIC has specifically stated that it expects licensees to continue to meet their obligations to act efficiently, honestly and fairly.1 However, to what extent is the discharge of general licensee obligations informed by the current circumstances? In other words, does the COVID-19 crisis affect the way in which licensees’ general obligations will be interpreted?

Recent case law and general principles of statutory interpretation provide support for the proposition that contextual factors will be considered by a court making a determination as to whether s 912A(1)(a) has been contravened.

The standard of the obligation has not changed. Even in the most dire economic conditions, an AFS Licensee will still be required to provide its services efficiently, honestly and fairly. What will change is that the assessment of whether a licensee has met that standard will be conducted in light of circumstantial factors. ASIC appears to accept that the obligation to act in an efficient, honest and fair way may be affected by the broader economic conditions. This creates the potential that conduct that would have contravened s 912A(1)(a) in 2018 could be seen as compliant in 2020.

AFS Licensees concerned about complying with their obligations under s 912A(1)(a), as well as other general obligations, should consider the following:

Consider how your customers will be affected The case-by-case nature of s 912A(1)(a) determinations mean that each circumstance will be unique. AFS Licensees should consider how the provision of their particular financial services may adversely affect customers, especially where it could be argued to be inefficient or unfair. AFS Licensees should ensure that their actions are taken within an ethical decision making framework which is in keeping with Australian commercial morality. 
Keep adequate records It is not likely to be sufficient for an AFS Licensee to argue after the event that the discharge of their obligations under s 912A(1)(a) has been affected by the current crisis. Hence, it is important for an AFS Licensee to be able to demonstrate any effect that the COVID-19 crisis has had on its decision-making (e.g. prioritisation of activities) at the time. Accordingly, AFS Licensees should keep adequate, contemporaneous records of their decision making processes, and how the provision of their financial services are affected by the current economic uncertainty and drain on resources. 
Engagement with ASIC ASIC has made a number of statements encouraging licensees to approach ASIC if they cannot meet their general obligations. It is therefore important that AFS Licensees consider early whether they hold concerns about compliance and consider engaging with ASIC accordingly. 

What are the general obligations which might be affected by the COVID-19 crisis?

AFS Licensees are required to comply with the general obligations set out in section 912A(1) of the Corporations Act 2001 (Cth) (the Act) which includes an obligation to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. Other general licensee obligations include:

  • taking reasonable steps to ensure that its representatives comply with the financial services laws (including, for example, Chapter 7 of the Corporations Act which includes requirements relating to the provision of personal or general advice);2 and
  • ensuring that its representatives are adequately trained (including by complying with section 921D), and are competent, to provide those financial services.3

Holders of Australian credit licences are also subject to an obligation to do all things necessary to ensure that the credit activities authorised by the credit licence are engaged in efficiently, honestly and fairly.4

The COVID-19 crisis creates challenges for licensees in relation to the steps they should take to continue to comply with these general obligations. For instance, while dealing with the current crisis, AFS Licensees may:

  • receive an increased number of applications (for example, applications for early release of superannuation funds);
  • receive an increased number of hardship applications regarding outstanding loans;
  • cancel “mystery shopping” campaigns which are otherwise part of the AFS Licensee’s steps to ensure compliance with financial services laws;
  • reduce spending on IT, Compliance and other projects in order to ensure their own financial health; and
  • have to divert staff from one business area to another (for example, loan officers who may be involved in assessing loan files for remediation purposes, may now be required to assist with reviewing loan applications).

What has ASIC said about licensees’ responsibility to comply with the general obligations in the current environment?

Over the past few weeks, ASIC has made a number of announcements on how it intends to perform its role and how it expects AFS licensees to conduct their business in the current crisis.

In its first statement following the outbreak of the pandemic in Australia on this issue, ASIC (together with APRA and the RBA, in the form of the Council of Financial Regulators) stated on 16 March 2020:

APRA and ASIC acknowledge the importance of the continued flow of credit to affected customers and industries in the current environment. Banks and other lenders are therefore encouraged to work constructively with affected customers during any period of disruption. For their part, APRA and ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations. Both agencies also stand ready to deal with problems firms may encounter in complying with the law due to the impact of COVID-19 through a facilitative and constructive approach.5

ASIC went on to confirm in later updates:

  • “ASIC is committed to working constructively and pragmatically with the firms we regulate, mindful they may encounter difficulties in complying with their regulatory obligations due to the impact of COVID-19.”6
  • “ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating when administering the law.”7
  • “[a]s difficult as the operating environment currently is, advice licensees must remain focused on meeting their general obligations. You should review existing measures and adapt processes and procedures as required. This includes those relating to the oversight of advice. For example, if your audit program involves on-site visits, you should put measures in place that allow you to conduct audits remotely.”8
  • “[d]espite the challenges posed by COVID-19, ASIC expects entities to treat customers fairly, avoid adding further financial harm or burden to consumers, and act to maintain the integrity and efficiency of markets… In addition, financial services and credit licensees and participants in financial services markets continue to have legal obligations including, where applicable, to:
    • act fairly, honestly and efficiently;
    • report material breaches of the law;
    • maintain records of the financial services they provide; and
    • ensure appropriate supervision of the provision of financial services and credit activities, even where staff are working remotely.”9

ASIC has also issued some guidance to advice licensees on how to document their compliance with the obligations if they occur through new channels:

It is very important that you continue to keep records of the financial services you provide during the COVID-19 period. Your records should, for example, allow you to demonstrate that you have complied with the best interest duty and related obligations, which will be critical in the future if you receive a client complaint or if your file is audited. Records include more than just the fact find and SOA. They include other documents that support your advice such as working papers, research and file notes.10

The Australian Banking Association (ABA) has sought guidance from ASIC on how the obligation that credit activities authorised by the credit licence are engaged in efficiently, honestly and fairly as set out in the National Consumer Credit Protection Act 2009 (Cth) will be applied in the current circumstances. By way of example, the ABA has referred to the fact that ASIC has previously not looked favourably at interest-only loans, but that changing the terms of a principal-and-interest loan to an interest-only loan may provide welcome relief in the current circumstances.11 ASIC’s response was that:

We agree that application of the general obligations set out in s 47 of the National Consumer Credit Protection Act 2009 (NCCP Act), including the obligation to act in an efficient, honest and fair way, may be affected by the circumstances in which a licensee is operating that are beyond its control, including the broader economic conditions. For example, in the current circumstances and given the volume of hardship applications being made to the banks, it will not necessarily be unfair to take longer in processing some of the applications for hardship than would otherwise be the case.

This obligation should not be regarded as a barrier to offering consumers appropriate hardship arrangements. Hardship arrangements ordinarily do not reduce the amount ultimately payable by the consumer and may result in a larger amount being paid for credit in the longer term. On its own, this increased cost would not suggest a failure by the lender to act fairly.12

(emphasis added)

It therefore appears, at least in the context of the National Consumer Credit Protection Act 2009 (Cth), that ASIC accepts that the obligation to act efficiently, honestly and fairly has to be considered in the context of the relevant broader economic conditions.

What legal principles apply?

The question of how an AFS Licensee’s general obligations are affected in the context of the COVID-19 crisis may be considered by reference to the obligation to provide services “efficiently, honestly and fairly” under s 912A(1)(a) of the Act. Both case law and general principles of statutory interpretation confirm the view latent in ASIC’s statements that circumstantial factors are relevant to s 912A(1)(a) determinations. 

Case law related to efficient, honest and fair

There has been some debate about whether the terms “efficient”, “honest” and “fair” should be read compendiously13 or as three separate obligations.14 That debate is not yet resolved. Notwithstanding this, identifying what each word entails provides some guidance about what an AFS Licensee’s obligations are in either case.

  1. The word “efficient” requires that the person adequately performs their duties, produces the desired effect, and is capable, competent and adequate.15 Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance the public is entitled to expect.16
  2. The concept of “honesty” is looked at through the lens of commercial morality rather than criminal law and it may comprehend conduct which is not criminal but which is morally wrong in the commercial sense.17 The word “honestly” when used in conjunction with the word “fairly” tends to give the flavour of a person who is not only honest but also ethically sound.18
  3. The word “fair” carries its ordinary meaning which includes an absence of injustice, even-handedness and reasonableness, although judges have regularly commented on the inadequacy of these circular definitions.19 It has expressly been stated that fairness must be assessed having regard to all relevant circumstances bearing on the provision of the financial service. These relevant circumstances likely include commercial constraints (see below).20

The manner in which courts have defined these concepts (see bolding in particular) means that it is natural that all of them will be assessed in light of prevailing commercial circumstances. This is because normative concepts such as reasonableness and morality are inherently embedded in their social and historical context.

While these definitions are helpful they should only be considered as a guide. Ultimately, the application of the obligations under s 912A(1)(a) will be unique to each AFS Licensee, the relevant conduct in question and accord with the nature of their business. This is another factor which supports the conclusion that commercial circumstances are relevant when considering whether an AFS Licensee has met their general obligations. As Allsop CJ noted in the Westpac case:

“Words such as “efficiently”, “honestly” and “fairly” and a composite or compendious phrase or expression such as “efficiently, honestly and fairly” do not admit of comprehensive definition … Care needs to be taken that phrases used by judges in individual cases, in which they explain and articulate their views as to the success or failure in satisfying the norm in s 912A(1)(a), do not become rules to apply as defaults…” 21

Finally, whether certain conduct by an AFS Licensee meets the requisite standard is not to be viewed only from the perspective of an investor, borrower or other person interacting with the licensee. Regard must be had to the interests of both parties.22

Statutory interpretation and context

More general principles of statutory interpretation also support the notion that commercial circumstances such as economic uncertainty will influence a determination as to whether an AFS Licensee has met their general obligations. There has been some debate in recent cases as to how deeply a court should peer into the intention of Parliament in construing this obligation. The further a court is prepared to look into the intention of parliament in creating the law, the more likely it is that the court will adopt a broad contextual view of s 912A(1)(a).

In the Westpac case Allsop CJ was of the view that:23

“The provision is part of the statute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to. The rule in the section is directed to a social and commercial norm, expressed as an abstraction, but nevertheless an abstraction to be directed to the “infinite variety of human conduct revealed by the evidence in one case after another.””

Beach J was not prepared to take such a broad footing in the AGM case, instead focusing his construction on the express objects of the Corporations Act:24

“I prefer to view s 912A(1)(a) as enshrining a statutory norm to be read conformably with s 760A and the other provisions of the Corporations Act and the ASIC Act, of course to be applied to an infinite variety of corporate delinquency and self-interested commerciality. But to say this is not to deny that it may implicitly pick up some aspects of what some might identify as social and commercial norms, although reasonable minds might differ as to where to ground such an otherwise free-floating concept.

Section 760A provides:

The main object of this Chapter is to promote:

  1. confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
  2. fairness, honesty and professionalism by those who provide financial services; and
  3. fair, orderly and transparent markets for financial products; and
  4. the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

Hence, although there is uncertainty about the extent to which contextual normative concepts should inform a judge’s decision making, even the narrower view proffered by Beach J accepts that such notions have a role to play.

Summary

Both recent case law and general principles of statutory interpretation provide support for the proposition that contextual factors will be considered by a court making a determination under section 912A(1)(a). The factors which support this conclusion include:

  • The broad definitions given to the elements of s 912A(1)(a) and the judicial insistence that each case will turn on its facts.
  • The fact that the three obligations of s 912A(1)(a) have to be complied with concurrently (whether or not they are to be read compendiously) suggests that a balancing act will be always be required.
  • Normative concepts such as fairness are inherently embedded in their societal context.
  • The requirement that regard is to be had to the interests of both parties.
  • O’Bryan J’s express view that “fairness” in s 912A(1)(a) must be assessed having regard to relevant circumstances.25
  • Parliament’s intention in passing the law was to apply general community standards of morality to corporate behaviour. What the community is reasonably entitled to expect will change depending on the economic context.
  • The objects of Chapter 7 of the Act specifically call out flexibility and innovation which suggest that the law should respond to changes in the political, economic and social reality.

From a legal standpoint, the standard of the obligation has not changed or been “watered down”. Even in the most dire economic conditions, a AFS Licensee will still be required to provide its services efficiently, honestly and fairly. What will change is that the assessment of that standard will be conducted in light of circumstantial factors applying at the time of the relevant conduct.

Conclusion

In summary, the obligation to provide services “efficiently, honestly and fairly” must be understood in light of prevailing commercial circumstances. Both ASIC and the Federal Court should be alive to this when assessing whether conduct falls foul of the obligation in s 912A(1)(a).

Having said this, AFS Licensees need to be mindful that they are still obliged to discharge these obligations and that ASIC has specifically stated that it is committed to enforcement action in this area.

Endnotes

  1. ASIC, ’20-086MR: Details of changes to ASIC regulatory work and priorities in light of COVID-19’, 14 April 2020.
  2. Section 912A(1)(ca).
  3. Section 912A(1)(f).
  4. National Consumer Credit Protection Act 2009 (Cth), s 47(1)(a).
  5. Council of Financial Regulators, ‘Statement by the Council of Financial Regulators’, 16 March 2020.
  6. ASIC, ’20-070MR: ASIC recalibrates its regulatory priorities in light of COVID-19’, 23 March 2020.
  7. Ibid.
  8. ASIC, ‘COVID-19 information for financial advisers and advice licensees’, 3 April 2020.
  9. ASIC, ’20-086MR: Details of changes to ASIC regulatory work and priorities in light of COVID-19’, 14 April 2020.
  10. ASIC, ‘COVID-19 information for financial advisers and advice licensees’, 3 April 2020.
  11. ASIC letter to ABA, ‘Regulatory approach to lending during COVID-19 pandemic’, 24 April 2020.
  12. Ibid.
  13. Story v National Companies and Securities (1988) 13 NSWLR 661; Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation)(No 3) [2020] FCA 208, [506].
  14. Australian Securities and Investment Commission v Westpac Securities Administration Ltd (2019) FCAFC 187.
  15. Story v National Companies and Securities Commission (1988) 13 NSWLR 661, 672.
  16. Ibid, 679.
  17. R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93, 110.
  18. Story v National Companies and Securities Commission (1988) 13 NSWLR 661, 672.
  19. Australian Securities and Investment Commission (ASIC) v Westpac Securities Administration Ltd [2019] FCAFC 187, [426].
  20. Ibid, [427].
  21. Ibid, [173].
  22. Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation)(No 3)[2020] FCA 208, [522].
  23. Australian Securities and Investment Commission v Westpac Securities Administration Ltd (2019) FCAFC 187, [173].
  24. Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation)(No 3) [2020] FCA 208, [519].
  25. Australian Securities and Investment Commission (ASIC) v Westpac Securities Administration Ltd [2019] FCAFC 187, [427].

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