“In the course of its carrying on a financial services business in this jurisdiction [they] engaged in conduct .. that was dishonest according to the standards of ordinary people and [their] conduct was known to be dishonest according to the standards of ordinary people”

— Royal Commissioner Kenneth Hayne

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Fairness (in context)

“I think a servant of the Enemy would look fairer and feel fouler”

— Frodo Baggins, Submission to The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (or “The Lord of the Rings”)

 The ‘fee for no service’ scandal was arguably the centrepiece of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission) and required billions of dollars to be paid in remediation.

We know that ‘fee for no service’ refers to charging fees for services that were never actually provided to customers, but what does this conduct mean for licensees in a legal sense? 

In the context of fees paid for financial advice that is never delivered, it will often mean a breach of contract as between the advisor and the affected client. 

Fees paid for financial advice that is never delivered may also constitute a breach of the licensee’s general obligation under section 912A(1)(a) of the Corporations Act to “do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly” (the “EHF Obligation”) 

However, this will not be so in every case. 

The above proposition is significant given a breach of the EHF Obligation is deemed to be a reportable situation under the breach reporting regime. 

Let’s use the following example to explain our position further.

It’s Magic

Magic Financial Services Pty Ltd (Magic) audited ten (10) client files of a servicing advisor that acts as their authorised representative. 

They identified that in one (1) client file the advisor did not deliver an annual review in accordance with the terms of an ongoing fee arrangement with that client in one servicing period. 

An investigation revealed that the servicing advisor made an administrative error when inputting the affected client’s details into their system and this resulted in that client being mis-categorised as a ‘fixed term agreement’ client. Consequently, the servicing advisor was not reminded to provide an annual review and failed to do so in the period preceding the investigation. 

Magic remediated the fees paid by the affected client for the material period. 

In the above example, the servicing advisor has likely breached their ongoing fee agreement with the affected client by failing to provide an annual review. 

Whether this conduct means that the licensee has breached their obligation to do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly is a question which is determined separately from the issue of breach of contract.

What does ASIC say? 

ASIC Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104) states: 

“RG 104.56… However, the ‘efficiently, honestly and fairly’ 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 failure to provide your financial services efficiently, honestly and fairly”

RG 104.56 therefore provides that a licensee or authorised representative that breaches a contractual obligation owed to a client may amount to a failure of the EHF Obligation. This does not mean that any or all breaches of a contractual obligation will constitute a breach of the EHF Obligation.

 What does the EHF Obligation require? 

The EHF Obligation is a stand-alone statutory obligation that applies at the licensee level as evidenced by the language of section 912A(1)(a) of the Corporations Act. 

In the case of Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) [No 3] (2020) 275 FCA 208 (AGM Markets), Justice Beach found that numerous systemic deficiencies in the operations of the defendants separately or cumulatively constituted a breach of the EHF Obligation. 

Justice Beach applied the following principles concerning the EHF Obligation to reach this conclusion: 

•  The words “efficiently, honestly and fairly” are to be read as a compendious (meaning a brief expression of a comprehensive matter) indication requiring a licensee to go 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” 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. 
• It is not necessary to establish dishonesty in the criminal sense. The word “honestly” may comprehend conduct which is not criminal but which is wrong in a 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. 

(Per the cases of Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206 at [69] and Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147 at [2347] to [2350])

Justice Beach further held that these observations are consistent with the purpose of Chapter 7 of the Corporations Act as set out in section 760A. 

What does this mean for Magic? 

Distilling the judicial reasoning detailed above, the EHF Obligation requires that Magic do all things necessary to ensure that Magic (and its representatives) provide financial services: 

• Efficiently, honestly and fairly in the ordinary meaning of the words, 
• With the competence that a member of the public could reasonably expect, and 
• In accordance with commercial morality and sound ethical values. 

In AGM Markets, Justice Beach confirms that when assessing compliance with the EHF Obligation

“…one is looking at the licensees behaviour more generally rather than with regard to any one person” 

Concluding thoughts

Applying the law to the Magic example, we believe that it would be reasonable to conclude that, despite the failure, Magic has not breached the EHF Obligation.

This is because the breach of contract arises from one human error and does not evidence a broader failing at the licensee level. 

Although there is often a presumption that every compliance failure is a licensee failure, it’s simply not true. Context is a critical consideration.

As always, we welcome any thoughts or queries on this topic. 

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