Author: David Mills, Director, Gold Seal.
Acting efficiently, honestly and fairly isn’t just good practice – it’s the law.
The general statutory obligation under Section 912(1)(a) of the Corporations Act for all Australian Financial Services licensees is to do all things necessary to ensure that the services covered by the respective licence are provided “efficiently, honestly and fairly”.
The meaning of these obligations, how they are applied and the consequences of a failure to comply with them became a key issue for the recent Financial Services Royal Commission.
A breach of a licensee’s licence conditions will also be a breach of the Corporations Act and the subject of stiff civil penalties under the Treasury Laws Amendment (Strengthening Corporate And Financial Sector Penalties) Act 2019 received assent after passing both houses of Parliament on 12 March 2019.
This makes it all the more important for licensees (and ASIC) to know what the obligations mean.
There has been very little case law dealing with this topic, until recently in the Australian Securities and Investments Commission v Westpac Banking Corporate (BBSW case) where Justice Beach said that:
“The meaning of the “efficiently, honestly and fairly” standard in s 912A(1)(a) is not in doubt”.
As to what that meaning is, Justice Beach quoted from Justice Foster in another case, Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq), saying that he accepted Justice Foster’s five principles, which are summarised below:
- The words “efficiently, honestly and fairly” must be read as meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.
- The words “efficiently, honestly and fairly” require competence in providing advice and in complying with relevant statutory obligations. They require not just fairness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs.
- The word “efficient” refers to a person who performs their duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect.
- It is not necessary to establish dishonesty in the criminal sense. The word “honestly” may comprehend conduct which is not criminal but which is morally wrong in the commercial sense.
- The word “honestly” when used in conjunction with the word “fairly” tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound.
While these principles do give more detail to the obligations there will always be grey areas.
In a recent speech, James Shipton, ASIC Chair when discussing fairness stated as follows
“Some people might say fairness is intangible. Nevertheless, through the lens of the Royal Commission it was very clear to the community, and even industry itself, that certain types of conduct was very clearly unfair.
The fact is ‘fairness’ is a concept we can all readily understand. Moreover, humans can clearly recognise unfair outcomes.
Fairness means doing what’s right; it’s the quality of being reasonable and just.
Commissioner Hayne acknowledged that fairness ‘may lie at, or at least close to, the heart of community standards and expectations about dealings with consumers’.
From a legal perspective, existing case law suggests fairness is the ethical performance of functions in accordance with professional standards. This would include observance of common law, fiduciary and statutory duties.”
Commissioner Hayne went on to state in both the Royal Commission’s Interim and Final Reports that ‘there is a need to adhere to six basic norms of behaviour’. They are:
- obey the law
- do not mislead or deceive
- be fair
- provide services that are fit for purpose
- deliver services with reasonable care and skill, and
- when acting for another, act in the best interests of that other.
These six principles are not new; in fact they very much align with existing law – especially s912A of the Corporations Act – as well as with our own regulatory work.
We often say treat your clients the way you would like people close to you to be treated. ASIC’s mandate is crystal clear: If the law is broken they need to enforce it.
The simple solution is: don’t break the law.
Build systems and processes within the law and within expectations of fairness and honesty and act professionally.
If you are confident about your governance, management and operational systems, as well as the way you go about your business, there should be nothing to worry about.
For assistance or guidance on any Compliance matter, visit the Compliance section on this website or call 03 9510 5100