Scribd Logo
Upload

Welcome to Scribd!

  • 216 views

    Efficiently, Honestly and Fairly - A Norm That Applies in An Infinite Variety of Circumstances - (2021) 50 Aust Bar Rev 345

    Uploaded by

    D Cosgrave

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content

    You might also like

    Efficiently, Honestly and Fairly - A Norm That Applies in An Infinite Variety of Circumstances - (2021) 50 Aust Bar Rev 345

    Uploaded by

    D Cosgrave
    216 views46 pages

    Original Title

    Efficiently, honestly and fairly_ A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    216 views46 pages

    Efficiently, Honestly and Fairly - A Norm That Applies in An Infinite Variety of Circumstances - (2021) 50 Aust Bar Rev 345

    Uploaded by

    D Cosgrave

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    of 46
    Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 Australian Bar Review Leif Gamertsfelder Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances Leif Gamertstelder’ The general obligation of an Australian financial services licensee to ‘do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’ constitutes a norm of ‘conduct of very wide application. It can apply to all aspects of a licensee's activities, including business models, sales techniques, marketing, disclosures to customers and general risk management practices. It may also ‘extend to matters like contractual terms and the way a licensee manages cybersecurity, data privacy and the use of artificial intelligence. The duty itself sets a standard of reasonableness which a licensee can discharge by being competent, being ethically sound and having regard to the interests of customers in providing financial services. A court may make a range of orders where a licensee fails to discharge the duty, including civil penalty ‘orders. Civil penalties could be up to $555 million per contravention. Individuals involved in a contravention can also be liable under recent changes to the law. Introduction Anolder of an Australian financial services licence must comply with a range of general obligations under s 912A(1) of the Corporations Act 2001 (Cth) (‘Corporations Act’). This article reviews the approach the courts have taken to interpreting the obligation licence holders have under s 912A(1)(a) to ‘do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’." This general obligation has been a feature of financial services law for decades and has taken on additional significance since it became a civil penalty provision on 13 March 2019 as part of a legislative package that implemented recommendations of the ASIC Enforcement Review Taskforce Report? The Second Reading speech made it clear that the new penalty regime was a response to the misconduct identified during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.’ The change is significant. Currently, a contravention of the obligation attracts a maximum penalty of $555 million. Individuals can also be liable under the provision if they are involved in any contravention Just as directors’ duties are a normative, objective, irreducible standard that applies to the oversight of companies, the so-called compendious duty is the comerstone obligation relating to the provision of financial services. This atticle examines the key principles relevant to the duty (including its expansive nature), how the duty has been interpreted and the consequences of a contravention of the duty. Three broad themes can be identified First, the so-called free-floating norm or duty applies in an infinite variety of circumstances. Courts will examine all connected circumstances when evaluating the steps that a licensee took to comply with the duty. All aspects of a licensee's operations can be scrutinised, including the licensee's business model, product design, compliance arrangements, risk disclosures and general communications with customers. It could also involve the review of contractual terms, the use of customer data or even artificial inteligence (particularly machine leaming) models used by a financial services licensee in the provision of financial services.® lilustrating the potential expansive nature of this duty, in August 2020, the Australian Securities and Investments Commission (‘ASIC’) commenced proceedings against a licensee alleging a contravention of the duty in s 912A(1)(a) relating to an alleged failure to implement policies, plans, procedures, strategies, standards, guidelines, frameworks, systems, resources and controls which were reasonably appropriate to adequately manage risk in respect of cybersecurity and cyber resilience.® Page 2 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 Secondly, while the duty is not a best interest duty, it does act as a limit on commercial self-interest. It establishes a middle ground between acting in pure self-interest and acting in a fiduciary capacity. Thirdly, the duty does not impose a standard of perfection. The focus is what would a reasonable person in the position of the licensee have done in the circumstances having regard to prevailing social and industry standards. In this sense, the test is applied ex ante not with the benefit of hindsight. The duty requires a licensee to perform its functions: to a reasonable standard of performance; in an ethically sound manner; and having appropriate regard to the interests of the customer. ‘The following sections examine these overarching themes in more detail, General principles concerning the application of the duty An independent, free-floating statutory norm The courts have confirmed that the obligation to provide financial services efficiently, honestly and fairly is a separate, standalone obligation. In Australian Securities and Investments Commission v AGM Markets Pty Ltd (in lig) [No 3] (AGM Case’)? Beach J expressed the view that itis .. notin doubt that a contravention of the ‘efficiently, honestly and fairy’ standard does not require a contravention or breach of a separately existing legal duty or obligation, whether statutory, fiduciary, common law or otherwise, The statutory standard itsel is the source of the obligation ® In addition, a licensee may also contravene the provision if it fails to discharge a separate statutory duty.” ‘A question arises as to the extent to which the duty is informed by social and commercial norms. When the norm was introduced into the Alational Consumer Credit Protection Act 2009 (Cth), the accompanying Explanatory Memorandum stated that the statutory obligation involves an assessment which ‘reflects an appreciation of .. the need to meet community standards of efficiency, honesty and faimess'."° The factors that inform the duty have also been the subject of judicial consideration. In Australian Securities and Investments Commission v Westpac Secunties Administration Ltd (‘Westpac Securities Case’"" Allsop CJ made the following observations: ‘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 ditected to a soclal 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’ 1? In the AGM Case Beach J respecttully disagreed with the scope of these observations and described the norm in narrower terms: | prefer to view s 912A(1}(a) as enshrining a statutory norm to be read conformably with s 750 and the other provisions of the Corporations Act and the [Australian Securities and Investments Commission Act 2007 (Cth)], of course to be applied to {an infinite variety of corporate delinquency and sel-interested commerciallty. But fo 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"? Page 3 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345, Writing extra-judicially, Justice Black has also expressed support for the view that the duty contemplates industry norms at a particular time: The ‘efficiently, honestly and fay’ standard arguably reflects industry norms of conduct ata particular time, although it may also be founded on an objective minimum standard corresponding to the standard of conduct which would be expected of a licensee by a reasonable client. The common ground between these views is that the duty is a ‘free-floating’ one which will apply in an infinite array of situations and determining what satisfies iin any given cases will require evaluation. As Chief Justice Allsop has noted in an extra-curial speech regarding unconscionability this type of evaluation Is not a formless void of personal intuition. Rather its an evaluation which must be reasoned, o the extent that the limits of text permit, and enunciated by reference to the values and norms recognised by the text, structure and context of any relevant legislation, and by reference to the legal values of the common law and Equity and percelved community values, ‘made against an assessment ofall connected circumstances." Itis obvious that over time the social, commercial and industry norms thet inform the duty will change. In this sense, as Beach J emphasised in the AGM Case each case needs to be considered on its facts: [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. | have emphasised here the notion of connotation rather than denotation to make the obvious point that the boundaries and content of the phrase or its various elements are incapable of clear or exhaustive definiion.*® It is important to note while the duty may change over time, that does not infer that the standard required to discharge the duty only ever increases. For example, in a COVID-19 context, it may be that the standard will not require the same steps than say would have been required to discharge the applicable obligations in 2018."” The social and economic environmental factors (that is, ‘all connected circumstances’) need to be taken into consideration Precedent value ‘The case law in this area provides useful guidance on how to approach interpreting the duty, but care must be taken for two reasons. First, as is the case with any statutory norm, the compendious phrase ‘efficiently, honestly and fairly’ is not able to be comprehensively defined. Allsop CJ observed in the Westpac Securities Case: Words such as ‘eficient’, honestly’ and ‘fairly’ and a composite or compendious phrase or expression such as ‘efficiently, honestly and fairy’ do not admit of comprehensive definition. Certainly a degree of articulation of instances or examples of Conduct falling to satisfy the phrase will be helpful and of guidance, as will an articulation or description of the norms Involved."* ‘Secondly, as the duty is informed by community and industry norms, what may or may not be acceptable for the purposes of the duty in one period may differ in another. The facts in Story v National Companies and Securities Commission (‘Story’s Case’)! constitute a potential example of how this free-floating norm may be applied over time. in that case, the Court held that Page 4 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 [on the facts as | have found them, however, the statement was to Dr Story’s knowledge untrue. A question arises as to whether it was deliberately untrue. In view of the way that the case has proceeded, that is, on the basis that there was no actual dishonesty but mere recklessness, | must, | think, accept that when the statement was made, Dr Story was not intending to be deceptive, but that he felt that it was not untoward to make an inaccurate statement in order to attract, Mr Lord's attention. | also fee! that although Dr Story did retreat a bit rom his initial statement that pressure was being put (on him by the girs in the office to go home, the fact that it was coming close to 6 o'clock and that the staff were showing ‘some signs of restlessness, was a factor that cannot be excluded *° The Court was not convinced that knowingly making an inaccurate statement to interest a client in acquiring securities was dishonest although it was held to be inefficient." With respect, some three decades after that decision, prevailing social and commercial norms may lead to a different conclusion having regard to the conduct expected of an ethically sound licensee. Focus on process, not outcomes per se In interpreting the content of the obligation, the focus is primarily on actions taken by the licensee to provide financial services efficiently, honestly and fairly. The principal focus is on process, not outcomes. This is supported by a textual analysis of the provision. The obligation is an adverbial phrase focusing on how the financial services covered by the licence are to be provided. This focus on actions is reinforced by the phrase ‘do all things necessary’. Noncompliance with other laws or a poor outcome in and of itself is not evidence that the duty has been breached. For example, in Re Saxby Bridge Financial Planning Pty Ltd and Australian Securities and Investments Commission (‘Re Saxby Bridge’) the Administrative Appeals Tribunal held that breaches of disclosure requirements did not constitute a contravention of the duty. The cases in this area demonstrate that courts will examine all relevant circumstances (including but not limited to the outcome where applicable) to determine whether the provision of a particular financial service fell short of the standard required by the free-fioating norm. Finally, the test needs to be applied ex ante in respect of the steps that were taken or not taken, not with the benefit of hindsight.2* Consider behaviour more generally In the AGM Case when assessing conduct under s 912A(1)(a) one is ‘looking at the licensee’s behaviour more generally rather than with regard to any one person’# His Honour noted that the language of the section is in the generality of ‘the financial services covered by the licence’” This approach was also evident in Re Saxby Bridge where Handley DP stated that a realistic approach must be taken when examining a financial advisory business involving 250 employees in four offices in three states together with proper authority holders conducting business on their own account. The size of the Saxby Bridge business was probably not large when compared with the financial advisory businesses conducted by larger financial institutions such as banks. Nevertheless, the Saxby Bridge business was large enough to expect that close examination of its operation would inevitably reveal some contraventions of the law among the many thousands of transactions — the applicants estimate approximately 72,000 — over the 6 year period to June 2001. Thus, in the Tribunals view, any contraventions ofthe law must be considered in the context of the operation ofthe business as a whole.””| ‘The Tribunal found a number of minor contraventions of disclosure laws involving mistakes or systemic failures and one significant breach of disclosure requirements (a failure to inform investors of a material conflict of interest), but after considering the business as a whole the Tribunal was not persuaded those contraventions were sufficient to find that the licensee failed to perform its duties efficiently, honestly or fairly.2” It should be noted in considering the business as a whole, the Tribunal considered that the licensee's attitude to compliance was also relevant: Mr Braysich gave evidence over a number of days in the course of the heating and the Tribunal has before it a large volume of material concerning Mr Braysich’s personal involvement in the Saxby Bridge business. The overwhelming Page 5 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 Impression formed by the Tribunal is that Mr Braysich sought to run a business which complied with its obligations under the Corporations Act and offered a quality service to its clients. There was no evidence of fraud or dishonesty, nor is the ‘Tribunal satisfied that there was any intention by Mr Braysich, SBFP or ABS Secures to mislead. The Tribunal finds that ‘Mr Braysich intended and made substantial efforts to comply with his obligations under the Act. Undoubtedly, there were substantial improvements in compliance over the 6 year period. Mr Braysich sought to be in the vanguard of securities dealers taking their compliance obligations seriously and, according to Mir Dally, committed appropriate resources to achieving this. ‘Apart from the breaches of s 849, the Tribunal finds the SBFP and ABS Securities businesses were generally conducted efficiently, and with honesty and faiess, Proper systems were in place to achieve compliance with their obligations under the Corporations Act in accordance with accepted industry norms. The evidence before the Tribunal does not support a finding that the businesses were run incompetently or inefficiently.» ‘The scope of the duty The statutory obligation is engaged where a licensee provides financial services covered by a licence. At frst blush, the phrase ‘provides financial services covered by a licence’ does not immediately strike one as being of great breadth. Contrast this with the phrase ‘in relation to financial services’ as used in s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) and the phrase ‘in relation to a financial product or a financial service’ used in s 1041H(1) of the Corporations Act. The courts have held that the latter phrases are words of great breadth.** The words ‘covered by the licence’ indicate a narrower starting point, but we will see that this does not ultimately narrow the scope of the duty. ‘The starting point for identifying the scope of the duty is the definition of ‘financial service’ in the Corporations Act. ‘The term is defined by s 766A(1) as follows: For the purposes of this Chapter, subject to paragraph (2)(b), a person provides a financial service if they: (a) provide financial product advice (see section 7668); of (0) deal ina financial product (see section 766C); or (6) make a market fora financial product (see section 766D); of (d) operate a registered scheme; or (e) provide a custodial or depository service (see section 766); or (ea) provide a ctowd-funding service (see section 766F); or (f)_ engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph. Section 766A(2) of the Act provides that the regulations may set out: (a) the circumstances in which persons faciltating the provision of a financial service (for example, by publishing information) are taken also to provide that service; or (0) the circumstances in which persons are taken to provide, or are taken not to provide, a financial service. ‘The Corporations Regulations 2001 (Cth) deal with a range of circumstances contemplated by ss 766A(1)(f) and 766A(2).* It is then necessary to examine the actual licence issued in order to determine the scope of the duty. Page 6 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 Once a relevant financial service has been identified, the cases illustrate that the courts will review all the connected circumstances to determine whether the licence holder has done all things necessary to provide the applicable financial services efficiently, honestly and fairly. The wide spectrum of matters that the courts have reviewed in this context include:?? business models and the design of financial services or products; risk management related to the applicable financial service, including compliance frameworks, training, controls, monitoring, due diligence, escalation processes, marketing reviews, and conflict management’ as well as the absence of policy; sales techniques, including the content and tone of communication with customers, what was said and not said, the use of behavioural science techniques (social proofing) and sales closing techniques:*” marketing material * risk disclosures, particularly whether they inform customers of relevant risks and potential benefits accruing to the licensee arising from the provision of the financial service;** adequacy of record-keeping, lodgment of financial statements and maintenance of appropriate levels of surplus liquid funds:*® and steps taken to apply for a licence.** ‘These cases demonstrate the expansive examination a court will undertake in reviewing the steps taken by a licensee in providing the applicable financial service efficiently, honestly and fairly. Conceptually, there is no limit to the connected circumstances that the court may consider if the relevant step or activity had a connection with the provision of the financial service covered by the licence. This is the required nexus. Based on this touchstone, examples of matters that a court could review in evaluating whether the duty has been discharged could include the following contract terms — The court could conceivably review the contractual matters relating to the provision of financial services. ASIC has expressed a similar view in Regulatory Guide 104: AFS Licensing: Meeting the General Obligations: However, the ‘efficiently, honestly and fairy’ obligation Is also a standalone obligation that operates separately from the other general obligations. For example, if you have contractual obligations to clients and breach them, this might not be a breach of the other general obligations, but it could amount to a fallure to provide your financial services efficiently, honestly and fairly? In light of the fact that the provision of financial services is given effect to through contractual terms {including the initial dealings as well as variations to financial services), it is unsurprising that Contractual terms are capable of being the subject matter of review in this context. Contracts may also have relevance beyond breach scenarios. For example, the terms of the contracts themselves may have @ bearing on whether the applicable financial service is provided efficiently, honestly and fairly design and distribution obligations (‘(DDOs’) — The DDOs are currently due to commence on 5 October 2021.* A key requirement under those laws will be the making of a target market determination which, among other things, require a firm to assess whether a product issued to a customer within a target market, ‘would likely be consistent with the likely objectives, financial situation and needs of the retail client. The duty to act efficiently, honestly and fairly could be engaged to assess the adequacy of any target market determination or related distribution obligations. data analytics/Al — Where data analytics or Al is used in connection with the provision of a financial service covered by the licence, conceivably these activities could, depending on the manner and extent to which they are used, be reviewed by a court to determine whether the firm had complied with the duty to act efficiently, honestly and fairly. The review could, for example, consider matters such as whether the use of these technologies have been implemented faitly. For instance, it may involve an evaluation of the steps taken to address potential bias, discrimination (including reconstruction), overftting, data drift and model Page 7 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 leakage. The review could also extend to reviewing the steps taken to training, validation and hold out data sets. More broadly, it could consider the extent to which the following matlers were appropriately addressed: — isk assessments; — disclosures: — decisions concerning model design, selection and use; — supervision and monitoring: — testing; and — auditing. This type of review could also extend to the use of personal information and whether that occurred in accordance with privacy requirements and notifications or consents. The duty would also contemplate things such as the provision of product account statements through to dealing with complaints in relation to financial products as well as putting things right in the sense of remediation programs.*® This broader view of the duty is supported on a number of grounds. First, the duty is contained in a section that sets out the general obligations of an Australian financial services licence holder. This would support a broader, rather than a narrower, interpretation of the duty. There is no apparent basis for reading the general obligation down. Secondly, the Corporations Regulations 2004 (Cth) contemplate activities that are clearly incidental to, for example, the issuing of a financial product, including + providing information and advice about voting:## and + handling of insurance claims.” If Parliament intended the duty to have a narrower application, then there would be no need to exclude these types of activities in the Corporations Regulations.*# Thirdly, when dealing in financial products, a licence holder necessarily must comply with all other laws in relation to the provision of product. Requirements such as the need to provide periodic statements are an intrinsic part of the product and the product lifecycle. Viewed in that light, it would appear that the duty extends to any such incidental features of a product. Fourthly, Australian financial services licences require a holder to ‘establish and maintain compliance measures that ensure, a3 far as is reasonably practicable, that the licensee complies with the provisions of the financial services laws’. This would include ensuring that incidental matters relating to a financial service (for example, provision of account statements, implementing dispute resolution systems and ensuring that compensation arrangements are put in place for retail customers) are provided in accordance with legal requirements. As this broad compliance obligation is a requirement of the licence, it follows that the duty also applies to steps taken to comply with this requirement. In addition, even in the absence of a legal requirement to establish compensation arrangements, it goes without saying that the duty would apply to remediation activities as remediation is taking corrective action to address a flawed dealing. These matters are two sides of the same coin. This logic is also reflected in ASIC's Regulatory Guide 256: Client Review and Remediation Conducted by Advice Licensees: All AFS licensees have an obligation to ensure that their financial services are provided efficiently, honestly and fairly: 's 912A(1)(a) of the Corporations Act. Complying with this obligation includes AFS licensees taking responsibility for the consequences of their actions if things go wrong when financial services are provided and clients suffer loss or detriment. This includes remediating clients who have suffered loss or detriment as a result of misconduct or ather compliance failure by the licensee or its current or former Page 8 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 representatives.** Finally, the view that compliance with other laws can raise questions about compliance with the duty was also ‘squarely acknowledged in Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) ((Camelot's Case’): The words ‘efficiently, honestly and fairly” connote a requirement of competence in providing advice and in complying with relevant statutory obligations’ There is no reason to doubt this proposition. This would mean that the performance of statutory obligations that are incidental to oF related to the provision of the original financial service also attracts the duty under s 912(1)(a). It is clear that the broader view is held by ASIC. ASIC recently commenced proceedings against a licensee alleging a contravention of the duty in s 912A(1)(a) in relation to an alleged failure to implement policies, plans, procedures, strategies, standards, guidelines, frameworks, systems, resources and controls which were reasonably appropriate to adequately manage risk in respect of cybersecurity and cyber resilience. The proceedings illustrate the potentially very expansive nature of the duty.5" ‘A compendious or concurrent duty? The traditional interpretation of the phrase ‘efficiently, honestly and fairly’ is to read it compendiously, meaning that a ‘person goes about their duties efficiently having regard to the dictates of honesty and faimess; honestly, having regard to the dictates of efficiency and fairness, and fairly, having regard to the dictates of efficiency and honesty’.*? That approach has been followed in a number of cases, including in Camelot's Case® and in Australian Securities and Investments Commission v Avestra Asset Management Ltd (in lg) 5 However, the approach was questioned in the recent Westpac Securities Case. In that case, Allsop CJ expressed the following view: ‘The primary judge's discussion of the standard of conduct expected by the terms of s 912A(1)(a).. was based on ASIC's submissions and was not contested by Westpac. Whilst it is a helpful exposition, | would reserve for an occasion where the matter was fully argued the question whether the phrase Is compendious and, i I is, ts meaning and application, In particular, | would reserve my views as to the consequences of demonstrating unfairness in the provision of financial ‘Sefvices and any need for aditional ethical falling *° In the same case, O'Bryan J held the following It seems to me that the concepts of efficiently, honestly and fairly are not inherently in confict with each other and that the ordinary meaning of the words used in s 912A(1)}(a) is to impose three concurrent obligations on the financial services licensee: to ensure thatthe financial services are provided efficiently, and are provided honestly, and are provided fairy 2* In the recent single judge decision in the AGM Case the Court reamed the traditional position based on Story's Case that the obligation to act e= ciently. honestly and fairly is a compendious one. In referring to the comments made by Allsop CJ and O'Bryan J in the Westpac Securities Case, Beach J observed in the AGM Case: [Slome members of the Full Court queried whether the phrase ‘eCciently, honestly and fairly’ should be read Ccompendiously (O'Bryan J at [422]-1426)). But as this was not decided by at least a majority, | am bound to apply the single Judge decisions unless I consider them to be plainly wrong, which I do not? His Honour went on to state that ‘it is not justifiable to take one word from a composite phrase, artificially elevate its significance and read it in a manner asymmetrically in favour of an investor. * Page 9 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 one exception, ultimately it does not matter which approach is adopted. Young J observed in Story’s Case: However, in the long run it does not seem to me to much matter whether one reads the words cumulatively or disjunctively, because unless a licence holder possesses the three altrbutes whether as one package or as three separate parcels [it ill contravene the provision] * Indeed, in Story’s Case the Court held that Dr Story failed to discharge the duty as he did not act efficiently. The Court held that [aJecordingly, | conclude that on the facts as | have found them, although it would be unsafe to rely on the version which Dr Story gave to the Stock Exchange, he fell short ofthe level of efficiency reasonably expected of a dealer in carrying out his functions under the Act Dr Story was not found to have acted dishonestly due to the circumstances in which the inaccurate statements were made. The duty to act fairy was not considered separately.®" As a matter of logic, the ‘one package or three separate parcels’ approach adopted by Young J in Story’s Case has to be correct. If it were otherwise, an egregious breach of one element or two ‘parcels’ of the duty would not constitute a contravention of the duty. ‘The exception mentioned above relates to the fact that in a given case, each element of the norm may be conditioned by the other two elements, For example, in a remediation scenario it may be important to ensure that every customer's case is adequately addressed to ensure the remediation is fair. This may mean that the overall process is less efficient than it may otherwise be viewed in isolation. This interplay between the elements needs to be kept in mind and that is what Young J was referring to in his famous ‘compendious indication’ statement in Story’s Case. As mentioned above, the requisite standard may also be informed by contemporaneous societal and industry norms and practices. Interpretation of the duty This section examines the way in which the courts have interpreted the norm and each ofits elements. In Camelot’s Case Foster J summarised the duty in the following terms: (a) The words ‘efficiently, honestly and fairly’ must be read as 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 faimess, and fatty having regard to the dictates of efficiency and honesty ..% (0) 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 reaclly defined concept of sound ethical values and judgment in matters relevant to alent’ affairs. (c) The word ‘efficient’ refers to a petson 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 thatthe performance of a licensee's functions falls shot of the reasonable standard ‘of performance by a dealer that the public is entitled to expect...” (d)_Itis not necessary to establish dishonesty in the criminal sense..." The word ‘honestly’ may comprehend conduct which is nat criminal but which is morally wrong in the commercial sense ... (@) The word ‘honestly’ when used in conjunction with the word ‘fairy’ tends to give the flavour of a person who not ‘only is not dishonest, but also a person whe is ethically sound ..7° Page 10 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345, In addition to the summary of the law set out by Foster J in Camelot's Case, the meaning of the duty and the individual elements of the duty have been considered in other cases, These cases are reviewed below. Efficiently In Story’s Case Young J considered whether a licensed dealer performed ‘efficiently, honestly and fairly’ under the Securities Industry (New South Wales) Code. The dealer provided inaccurate advice to a potential buyer to interest or re-nterest that buyer in acquiring securities in a company.” In particular, the dealer stated there was an ‘active bidder in the wings’ when there in fact was none. In that case, Young J expressed the view that [slo far as ‘efficient is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate, see eg Spotts v Baltimore & Ohio Railroad Co...72 Although that definition comes from a case dealing with handbrakes on railway cars, it seems to me that it can be applied to the word used in the current statute."> ‘The Court held that knowingly making an inaccurate statement to interest a client in acquiring securities was inefficient although it was not convinced that the conduct was dishonest. The ‘fairly’ element was not separately considered. ‘Subsequent cases have generally reflected this competency or reasonable standard of performance formulation of the ‘efficiently’ requirement.” Camelot's Case involved a recommendation and the giving of advice to trade in investment options (including derivatives) and the dealing in option contracts. The recommendations and advice were designed to generate excessive commissions (referred to as ‘churning’) for the licensee without providing any benefit to the investor. As noted above, in Camelot's Case Foster J described the content of the ‘efficiently’ requirement in the following terms:7° 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 ...Ineficiency 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 While the Court found a contravention in that case, it was not for want of providing the services efficiently, but because the conduct fell short of the ‘honestly’ and ‘fairy’ requirements.”® Re Koala Hydroponics Ltd and Australian Securities and Investments Commission” was a case decided by the ‘Administrative Appeals Tribunal. The case involved a chairman of a group of companies who falled to satisfy, in a timely manner, a number of steps to convert a prescribed interest scheme to a managed investment scheme after the commencement of the Managed Investments Act 1998 (Cth). As a result of delays, the scheme was operating ilegally. ASIC refused to grant the scheme manager, Koala Quality Produce Ltd (‘KQPL’) a licence to operate as a responsible entity due to its failure to act efficiently. The Tribunal made the following observations: {As stated above, in the tribunal's view, none of the evidence suggests any dishonesty by Mr Young. However, there is substantial evidence discussed above to support a finding that he failed to act efficiently in relation to the performance of his duties in transitioning the Koala Scheme. As a result, KOPL failed to comply with the conditions set out inthe instrument of relief, and the Koala Scheme operated in contravention of the provisions of the Corporations Law. Of particular concern is MrYoung’s failure to keep investors properly informed and his lack of appreciation of the relevant regulatory requirements. In the tribunals view, Mr Young's conduct fell short of the reasonable standard that could be expected of a person in his Page 11 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 position: he failed to act efficiently. Despite Mr Young's evidence that the investors have not been misied, the tribunal Considers that his failure to inform investors about transition to a managed investment scheme demonstrates a lack of efficiency that could have been potentially detrimental to the interests of investors who may have had inadequate information on which to make decisions about their investments, To this extent, Mr Young could be said not to have acted fairly in relation to their interests. In relation to s 784(2) [of the Corporations Lavi, the Tribunal concludes that ASIC did have a reason to believe that [Koala Hydroponics Ltd] would not perform efficiently, honestly and fairy the duties of a holder ofa licence of the kind applied for, and, therefore, acted correctly in refusing the grant of a dealers licence .."* In line with eartier cases."® in Camelot's Case Foster J construed the ‘efficiently’ element as imposing a competency or reasonable standard of performance requirement. This approach was also adopted by Beach J in the AGM Case." In that case the defendants operated businesses that offered over-the-counter derivative products being contracts for difference, including margin foreign exchange contracts, to retail investors in Australia. There was a litany of compliance-related shortcomings associated with the manner in which these businesses provided these financial services, While the Court did not make an explicit finding in relation to the ‘efficiently’ element of the duty, it was clearly implicit that the Court was of the view that the defendant fell short of the required standard of performance,' Honestly In Camelot’s Case Foster J described the content of the ‘honestly’ element in the following terms: Its not necessary to establish dishonesty in the criminal sense ... The word ‘honestly’ may comprehend conduct which Is ‘ot criminal but which is morally wrong in the commercial sense ‘The word ‘honestly’ when used in conjunction with the word ‘fairy’ tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound ..! Foster J held in that case that the generation of excessive broking commissions was dishonest for the purposes of the duty: ‘At the very least, this stratagem adopted by Camelot and Mr King was not honest, in a commercial sense, In the AGM Case, Beach J cited Foster J's description of the ‘honestly’ requirement above and concluded that the conduct of the defendants contravened the compendious duty.®* There was no express finding in relation to the ‘honestly’ requirement although it was clearly implicit in the case that the defendants’ conduct failed to comply with that element of the duty. One of the findings in the case was that the defendants ‘told or implied to investors that the [the defendants] (and their associated entities) were “experienced” or “experts”. But they were plainly not.3* On any view, this conduct was net honest in the commercial sense and was not otherwise ethically sound. Fairly In the Westpac Securities Case, O'Bryan J observed: ‘Fairness must be assessed having regard to all relevant circumstances bearing upon the provision of the financial services in question.” His Honour also noted in the judgment: ‘The word ‘fair as used in s 912A(1)(a) has not received detailed judicial consideration. However, it seems to me that there Is no reason why it cannot carty its ordinary meaning which includes an absence of injustice, even-handedness and Page 12 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 reasonableness." However, in the AGM Case Beach J was firmly of the view that seeking to define the ‘fairly’ element through negative Stipulations was an unproductive exercise. His Honour outlined his reasoning in the following passages: 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 ‘ree from injustice’ is question begging and conclusionary. It adds litle to elucidate ‘aly. Second, the phase ‘that which is legitimately sought, pursued, done, given etc is also question begging. No content is given to what is legitimate. There is ltremeciable circularity unless legitimacy simply incorporates other statutory or common lawiequitable normative standards Cf behaviour. Thied, the phrase ‘proper under the rules’ is also devoid of content unless ‘proper’ means ‘in compliance with. Fourth, if one construes ‘fair’ to include ‘fre from dishonesty’ then this al ust suggests that the phrase ‘efficiently, honestly ‘and fairly’ should be read compendiously. Could you convincingly define fairly’ by what it lacks? To say that faity means fee from bias, free from dishonesty, etc, Is to stipulate necessary negative conditions. And to do so may glve you some boundary conditions. But no postive Conditions are stipulated. No content is given, let alone sufficient conditions. But to stipulate negative conditions may not be ‘unhelpful? In the AGM Case the Court posed a question as to the perspective that the courts need to adopt when evaluating fairness: ‘Should ‘fairy’ only be viewed from the perspective of an investor, borrower or other person interacting with the licensee? No. Faimess is to be judged having regard to the interests of both parties. Other statutory provisions may be designed to tilt the scales, but not s 912A(1)(a) and the statutory compasite norm it enshrines. Disproportionate emphasis should not be civen to what is the thi part of a composite phrase in a manner which creates unsatistactory asymmetry in favour of thase with whom the licensee deals. This section is not a back door into an ‘act in the [best] interests of obligation. Other specific provisions of the Act nicely full that role. There is nathing to indicate that s 912A(1)(a) was to have that bias.®° Echoing the balance that needs to be struck in this context, Scott Donald has observed the following (One feature of the cases just cited is that they all involve situations in which the interests of the client have been adversely affected by the pursuit of licensee’s selt-interest. This highlights tha, inthis context at least, the requirement to act fairly limits the autonomy of the party to act in is own sel-interest. It does so while stopping short of requiring that the party prefer the interests of the other or, as where there is a fiduciary obligation, eschew the pursuit of self interest altogether. This is of course not a necessary limitation on the operation of s 912A(1)(a). The section could be enlivened where a licensee prefers the interests of one client, or a group of clients, over another, for instance in the allocation of trades by a ssecutites dealer. In practice, however, there are other, more specific rules which deal with such situations.* ‘After considering the use of ‘faimess’ in various contexts, Donald concluded that faimess is a middle ground between acting in pure self-interest and as a fiduciary: Falmess thus represents a point on the spectrum between the self-interested principle of caveat emptor at one extreme and the selfdenying abnegation of fiduciary proscription at the other. It is no surprise therefore that policy-makers In Australia ‘and overseas have started to see fairness as a means to rein in commercial self-interest where the strictness of fiduclary proscription is too sting.» Page 13 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 In Camelot’s Case, Foster J held that generating excessive commissions or churning fell short of compliance in this context as that conduct ‘could not have been justified had Camelot and Mr King paid due regard to the clients’ interests ... [and] certainly did not constitute the provision of financial services fairly within the meaning of 8 912(1)(a) of the Corporations Act’. In the Westpac Secunties Case the Court considered that the provision of ‘personal advice’ rather than ‘general advice’ in telephoning customers to suggest that they would benefit if they consolidated their superannuation accounts with a Westpac subsidiary was a breach of the duty. Allsop CJ made the following observations about the licensee preferring its own interests in that case It could hardly be seen to be fair, oF to be providing financial product advice fairly, or efficiently, honestly and fairy, to set ‘out for one's own interests to seek to influence a customer to make a decision on advice of a general character when such decision can only prudently be made having regard to information personal to the customer. In the AGM Case, Beach J found that the licensee did not provide the applicable services ‘efficiently, honestly and fairly. There was no express finding in relation to the ‘fairly’ element although there were clear grounds for implying the defendants fell short of the required standard in that regard because compliance practices were woefully inadequate.®* Among other things, the defendants: + failed to implement appropriate processes to ensure that marketing material did not contain false or misleading information in that material” and + failed to take appropriate steps to identify and manage conflicts between the interests of the defendants and the interests of clients,*® including failing to take steps to identify any potential ‘front-running’ (that is, the practice of a party placing an order for their own account ahead of a client, knowing that when the client's order is placed it will result in a profit forthe first party). ‘The irreducible requirements In summary, the cases in this area clearly indicate that each element of the duty must be interpreted and applied having regard to the dictates of the other two elements." The irreducible requirements of the duty are for a licensee to perform its functions: to a reasonable standard of performance; in an ethically sound manner, and have appropriate regard to the interests of the customer. Steps to mitigate risk ‘The cases illustrate the types of steps that a licensee needs to take in order to discharge the duty. To discharge the duty, a licensee should ensure that it designs and embeds effective enterprise-wide non-financial risk frameworks and controls, including: + ensuring that all the material steps that it takes in providing financial services to customers are periodically reviewed through the lens of the duty. These matters that should be reviewed include: — the business model; — product design; — distribution channels; — marketing/sales techniqui — terms and conditions used; — the use of personal information; — data analytics/Al; and — risk management frameworks (including cybersecurity frameworks). Triggers for review would also include any material changes to those things; Page 14 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 + using appropriate risk disclosuresiwarnings to address any potential information asymmetry between the licensee and customers, including the disclosure of conficis of interests. These disclosures need to be fit for purpose and adapted to the circumstances. Reliance on a general advice warning may not be ‘appropriate if the applicable advice should only be delivered in the form of personal advice; + communicating with customers in a clear, concise and balanced manner. It is essential to convey the salient points to customers in plain English and deal with customers in a fair manner; + avoiding sales techniques, such as social proofing or pressure tactics, that could lead to poor outcomes for customers; and + ensuring that following the provision of a financial service thet other incidental activities are performed efficiently, honestly and fairly, including the provision of information relating to the financial service (for example, the provision of periodic account statements), handling of complaints and the provision of compensation (where necessary). Penalties and other orders Until 13 March 2019 the main consequence of breach or apprehended breach of the compendious obligation was the potential suspension or cancellation of a licence" and the ability of ASIC to refuse to issue a new licence. With effect from 13 March 2019," s 912A(1)(a) became a civil penalty provision, * but only in relation to conduct, constituting a contravention which occurs wholly after that date, ®® For corporations, a contravention occurring on or after that date attracts a maximum pecuniary penalty the greater of: + 50,000 penalty units or currently $11.1 million (50,000 x $2228), + three times the benefit gained/detriment avoided; or + 10% of annual turnover”? capped at 2.5 milion penalty units which is currently $555 million (2.5 million x $222) While the maximum penalty that can be imposed on a corporation under the capped third limb in s1317G(4)(c) is currently $555 milion, the penalty that can be imposed under the second limb in s 1317G/4)(b) (ree times the benefit derived and ‘detriment avoided) is uncapped and could theoretically be higher depending on the circumstances. The quantum of any penalty that a licensee will utimately be ordered to pay will be determined by a court considering ‘al relevant matters," including the nature and extent of the contravention, the nature and extent of any loss suffered by reason of the contravention and the circumstances in which the contravention took piace, 1° In addition to imposing a pecuniary penalty, a court may also make a relinquishment order under s 1317GAB of the Corporations Act.""° Under s 11076(1) of the Corporations Act, a court may also make any order it sees fit in relation to a contravention of s 912A(1)(a).1"* Further, where a licensee has not complied with the general obligations under s 912A, ASIC may suspend or cancel an Australian financial services licence"? or make a banning order against the licensee or another person involved in the noncompliance. "¥° Proceedings for a pecuniary penalty order must be commenced within 6 years of the contravention of the duty.’ A contravention of s 912A\(1)(a) is not a criminal offence. Accessorial liability ‘A person who is involved in a contravention of a civil penalty provision (such as s 912A(1)(a)) can also be subject to a penalty.'"® Section 79 of the Corporations Act defines involvement in these terms: ‘A person is involved in a contravention if, and only if, the person: Page 15 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 (a) has aided, abetted, counselled or procured the contravention; or (0) has induced, whether by threats or promises or otherwise, the contravention; of (6) has been in any way, by act or omission, directly or indirectly, knowingly concemed in, or party to, the ‘contravention; or (4)__has conspired with others to effect the contravention.*°* In Yorke v Lucas"'” Mason ACJ and Wilson, Deane and Dawson JJ held that in order to establish in civil proceedings that a person is liable as an accessory to a statutory contravention, in addition to all of the elements of that contravention being proven, it must be proven that the accessory had knowledge of the essential facts constituting the contravention."#® Similarly, Wilson, Deane and Dawson Jd in Giorgianni v The Queen"? held that an accessory’s participation ‘must be intentionally aimed at the commission of the acts which constitute it."22 However, it is not necessary to prove the accessory was aware that the acts constituted an offence; ignorance of the law is not a defence.'% So, for example, if an individual within a licensee was knowingly involved in the design and distribution of a manifestly flawed product which fell short of the standard required by the compendious duty, that individual may be liable for being knowingly concerned in a contravention of the applicable provision. Liability of directors and officers Where a breach of the compendious duty occurs, it may also lead to liability for directors and officers under s 180//) of the Corporations Act. Section 180(1) provides: A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (©) occupied the office held by, and had the same responsibilties within the corporation as, the director or officer. In Australian Securities and Investments Commission v Cassimatis [No 8]'% individuals were found to have breached their directors’ duties under s /60(1) by failing to prevent a contravention of the Corporations Act. In that case, Edelman J made the following conclusions in the context of a business model that involved all its customers being provided with effectively the same advice service regardless of their circumstances: [My ultimate conclusion without relying upon hindsight is that a reasonable director of a company in Storm's circumstances ‘and with Mr or Mrs Cassimatis’ responsibilities would have been aware of a strong likelinood of contravention of the Corporations Act if he or she exercised his or her powers to cause or permit the Storm model to be applied to clients who were in the class pleaded by ASIC, particulary investors who were retired or near retirement with few assets and limited income. Or, to put this conclusion in negative terms, a reasonable director of a company in Storm's circumstances and with Mror Mrs Cassimatis' responsibilties would have been aware of a strong likelihood of contravention of the Corporations Act i he or she did not exercise his or her powers to prevent or prohibit the Storm model from being applied in such indiscriminate circumstances which included application to clients who were retired or near retirement with few assets and limited income."2° (On appeal the Full Court in Cassimatis v Australian Securities and Investments Commission" upheld the first instance decision. The Full Court held (Greenwood J and Thawley J, Rares J dissenting) that reasonable directors ‘occupying the office of the appellants and having the same responsibilities as the appellants would not have run the risk of the harm or jeopardy to the company and its interests (including the catastrophic impact of the loss of its licence) which arose as a result of its business model The Court also noted that the shareholders cannot ratify or approve conduct that contravenes s 180(1) Page 16 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345, [T]he shareholders cannot sanction, ratify or approve, qua themselves as directors, their own conduct in contravention of '5 180. Nor can they release themselves from such a contravention. That follows because of the normative, objective, ltreducible standard of care and diligence directors must live up to, as adopted by the Parliament."2 The Cassimatis case is an unusual one. However, it does point to potential legal risk in this context for directors. if directors were aware of an ongoing failure to act efficiently, honestly and fairly in relation to the provision of financial services and that was capable of ultimately causing damage to the corporation’s interests, it is possible that an action against the corporation could also involve allegations against directors for a failure to comply with directors’ duties in addition to any allegation of being involved in a civil penalty contravention under s /317E(4) of the Corporations Act Where a breach of s 180(t) is found, a person is liable for a maximum civil penalty of 5,000 penalty units or currently $1.11 million (5,000 x $222). Also, on application by ASIC, the court may ban a person from managing corporations.‘ Defences and rel ‘A person is not liable for a contravention of a civil penalty provision in some circumstances where a mistake of fact has occurred. ®® A court also has the power to grant relief in other circumstances. ® Conclusions The free-floating obligation of a licensee to do all things necessary to ensure that the financial services covered by a licence are provided efficiently, honestly and fairly is a comerstone duty. The duty has an extremely broad application. It applies to all functions that a licensee performs which have @ nexus with the provision of financial services covered by the licence. The evaluative process required to ascertain what steps are required to discharge the obligation could in given situations be inherently challenging given the task is informed by social and ‘commercial norms which have @ protean nature. However, in this sense, the duty presents no greater challenges than say directors’ duties or other statutory norms such as the prohibition on misleading or unconscionable conduct or the duty of fiduciaries to act in another's best interests. Licensees should have frameworks in place to ensure that they are able to periodically evaluate whether the steps they take in providing financial services are adequate to support the discharge of the duty, Author of Governance and Conduct Obligations in Financial Services (LexisNexis Butterworths, 2017); LLB (ist Class Hons), BA (GU), MinfoTech (UTS), MAppFin (KAPLAN) . The views expressed in this article are personal to the author. Thanks to the impressive Judy Zhao LLB (Hons), BSc (Psych) (ANU) for her insightful feedback on a draft ofthis article. Thank you also to Jakob Gamertsfelder for his feedback 11 A.cognate provision is contained in s 47/1)(a) of the National Consumer Credit Protection Act 2009 (Cth): A licensee ‘must] do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairy’. The observations in this article are relevant to an obligation of a contractual nature found in the Banking Code of Practice, namely cl 10 (engaging with customers in a fair, reasonable and ethical manner). Another development to keep in mind when considering fairness obligations is the law of unconscionabilty. Its arguable based fon the Full Federal Court's decision in Australian Competition and Consumer Commission v Quantum Housing Group Ply Ltd (2021) 388 ALR 577 that the statutory prohibition against unconscionabilly effectively imposes a general obligation of fair dealing with consumers: at 597-8 {88)-[89] (Allsop CJ, Besanko and MeKerracher Ju). Note UK financial services law also contains cognate provisions. These are set out in the Financial Conduct Authonty Handbook {at June 2021) section 2.1.1 which sets out rules, guidance and other provisions made by the Financial Conduct Authority (FCA) under powers given to It by the Financial Services and Markets Act 2000 (UK). These include: + Principle 3: ‘A fim must take reasonable care to organise and control its affairs responsibly and etfectvely, with ‘adequate risk management systems’ + Principle 6:'A firm must pay due regard to the interests of iis customers and treat them fairly; and Page 17 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 + Principle 7: A fim must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading’. While the UK Principles are not examined in this article, they have also been applied by the FCA to impose remedies for conduct that would appear to breach the compendious duly, Eg, in December 2018, the FCA fined Santander UK Plc £32.8 milion for breaching Principle 6 by falling to ensure that its probate and bereavement process has sufficient regard to the interests of its customers and those who represented them on their death, In 2016 the FCA fined Lloyds Banking Group ple £117 milion for falling to fairly handle customer complaints about the mis-selling of payment protection insurance: see respectively FCA, ‘Final Notice to Santander UK plc’ (Notice, 19 December 2018) -; FCA, ‘Final Notice to Lloyds Bank plc, Bank of Scotland ple and Black Horse Limited (together Lloyds Banking Group “LBG")’ (Notice, 4 June 2015) -, See further Laurence White, ‘Financial Services: “Efficiently, Honestly and Fairly” (1 November 2019) Law institute Journal. 2° Explanatory Memorandum, Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (Cth) [1.1], For an overview of the history conceming the provision, see Paul Latimer, ‘Providing Financial Services "Efficiently, Honestly and Fairly” (Pt2) (2020) 37(6) Company and Securties Law Journal 382; Joshua ‘Anderson, ‘Duties of Efficiency, Honesty and Fairness Post-Westpac: A New Beginning for Financial Services Licensees and the Courts?" (2020) 37(7) Company and Securities Law Journal 450, Commonwealth, Parliamentary Debates, House of Representatives, 24 October 2018, 10873 (Josh Frydenberg). 4 This is the maximum penalty that can be imposed under the capped third limb in Corporations Act 2004 (Cth) s 4317G(4)(6) (‘Corporations Act) although the penalty that can be imposed under the second limb in s 13176(4)(b (three times the beneft derived and detriment avoided) is uncapped and could theoretically be higher in some circumstances, 5 Machine learning (‘ML’) models typically ‘learn’ from pattems in existing data and make predictions or classifications by {generalising these learnings on unseen data. if the ML. model Is exposed to bias through the data collection, model development or deployment process, there Is the risk of undesirable downstream consequences, especially where an output of the model relates to the provision of financial services. It Is plausible that the so-called compendious duty would require licensees which deploy ML models to take reasonable steps to ensure that the models do not learn or are otherwise not impacted by biases, such as historical, representation, measurement, aggregation, evaluation or deployment biases: see, eg, Harini Suresh and John V Guttag, ’A Framework for Understanding Sources of Harm throughout the Machine Learning Life Cycle’ (2021) arXiv:1901.10002v4 [cs.LG] For a broader discussion of the fair and ethical use of Al, see also Markus D Dubber, Frank Pasquale and Sunit Das, (eds), The Oxford Handbook of Ethics of Al (Oxford University Press, 2020), 6 The concise statement, originating process and statement of claim and other information are provided in the medi release that announced the proceeding: Australian Securities and Investments Commission (‘ASIC), ‘ASIC Commences, Proceedings eganst Ri Advice Group Ply Lid for Aleged Fallre to Have Adequate Cyber Securty Systeme (eda Release, 20-191MR, 21 August 2020) . 7 (2020) 275 FOR 57, 149 [512] (AGM Case). 8 Ibid 9 Ibid 148 {507}, 10 Explanatory Memorandum, National Consumer Credit Protection Bill 2009 (Cth) [2.1 0} 14. (2019) 272 FCR 170 (‘Westpac Securities Case’) 42 Ibid 210 (173) 13 AGM Case (n 7) 150 [519]. In Joffe v The Queen (2012) 82 NSWLR 510, 518 [34], the Court observed: ‘The objects of the Chapter are described in s 760A and include, as a central element, the promotion of public confidence in the fairness and honesty of markets for financial products. 14 Justice A Black, LexisNexis, Australian Corporation Law Principles & Practice (online at January 2019) [7.7.0075}. 18 Chief Justice James Allsop, ‘Values in Law: How They Influence and Shape Rules and the Application of Law’ (Hochelaga Lecture, University of Hong Kong, 20 October 2016) [30] 48 Corporations Regulations (n 32) reg 7.1.30, AT Ibid reg 7.1.33. Exposure draft legislation has been released which defines insurance claims handling as a financial sefvice which would result in insurance claims handling attracting the duty under Corporations Act (n 4) 8 912A(1}(a): Exposure Draft, ‘Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers (2020, ‘Measures}) Bill 2020: Claims Handling . Exposure draft regulations would repeal reg 7.1.33: Exposure Draft, ‘Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers) (Claims Handling and Setting Services) Regulations 2020: Claims Handling! 48. See Corporations Regulations (n 32) pt7.1 divs 3-4. 49 ASIC, Regulatory Guide 256: Client Review and Remediation Conducted by Advice Licensees (RG 256, September 2016) RG 256.13-RG 256.14, 50 Camelor’s Case (n 34) 225 [69] (Foster J) (emphasis added). 51 See ASIC, ‘ASIC Commences Proceedings against RI Advice Group Ply Lid for Alleged Failure to Have Adequate (Cyber Security Systems’ (n 6) 52 Story’s Case (n 19) 672, 53. Camelot’s Case (n 34) 225 [69]-{70] (Foster J). ‘54 Australian Securities and Investments Commission v Avestra Asset Management Ltd (in lia) (n 35) 561 [181] (Beach J}. This passage is also quoted by Reeves J in Australlan Secunties and Investments Commission v CFS Private Wealth Ply Ltd [No 2] (n 40) (34), 55 Westpac Securties Case (n 11) 209 [171] 56 Ibid 267 [426], 57 AGM Case (n 7) 149 [516] ‘5B bid 151 (528) 59 Story’s Case (n 19) 672, 60 Ibid 685, 61 Many of the cases focus on one or two ‘parcels’ or elements of the duty and do not generally make adverse findings in relation to all three, Eg, in the decision in Australian Secunties and Investments Commission v Cassimatis (No 8] (n 34) Edelman J held that ASIC did not prove that the services were not provided honestly, but nevertheless found that the applicable financial services had not been provided efficiently, honestly and faily: at 337 [673] 62. Camelot’s Case (n 34) 225 [69] (Foster J), 63. Story’s Case (n 19) 672. (64 Re Hres and Australian Securities and Investments Commission (2008) 105 ALD 124, 183 [237]. 65 Ibid 66 Siory’s Case (n 19) 672. 67 ibid 679, 68 RU Ebrington Nominees Pty Lid v Corporate Affairs Commission (SA) (1989) 1 ACSR 93, 110. 69 Ibid 70. Story’s Case (n 19) 672. TA Ibid 685. 72 102 F2d 160, 162 (1938), Page 20 of 21 Efficiently, honestly and fairly: A norm that applies in an infinite variety of circumstances — (2021) 50 Aust Bar Rev 345 73 Stony’s Case (n 19) 672. 74 Anderson (n 2) 483. 75 Camelot’s Case (n 34) 225 69}. 76 Ibid 226 (71H172 (Foster J), 77 Re Koala Hydroponics Ltd and Australian Secunties and Investments Commission (n 41). 7B Ibid 549 [96}-199] (Handley DP). 79 Stony’s Case (n 19) 686. 80 Cameiot’s Case (n 34) 226 (6). 81 AGM Case (n 7) 148-9 [508] 82 Ibid 146-8 [488}-504) 83. Camolot’s Case (n 34) 225 [69] 84 Ibid 226 (72) 85. AGM Case (n 7) 149 (509}-[510} 86 Ibid 135 [433], being a matter that supported a finding of unconscionable conduct: at 126 [413] 87 Westpac Securities Case (n 11) 267 [427]. 88 Ibid 267 (426) 89 AGM Case (n 7) 150 (520}-1621] ‘90 Ibid 150 [522]. This concept of balance being inherent in evaluating falmess is also reflected in the Australian Financial Complaints Authority's (‘AFCA’) operational guidelines. In those guidelines, AFCA provides information on the effect of doing whatis fair in all the circumstances (its touchstone for determining complaints) ‘An outcome that is disappointing to one of the parties does not mean itis unfair to that party. An essential feature of faimess is that it be applied equally to all the parties. Thats, fairness is a two»way street and must be applied to both sides of the scale, AFCA must also take into account ll the circumstances of the complaint. This means that applying faitness in circumstances that may lock similar on the surface may result in ditferent outcomes that favour the financial fim or complainant, AFCA, Operational Guidelines fo the Rules (Guidelines, April 2021) 74 ‘See also discussion of the balance required in evaluating the obligation in Michael Vrisakis, Tamanna Islam and Shan- Verne Liew, "The Faimess Doctrine: A Return to the Stalus Quo?’, Herbert Smith Freehills (Web Page, 26 March 2020) -

    You might also like