ASIC v CBA: s912A does not require perfection

Useful guidance for AFS licensees on their obligations, and the misleading and deceptive conduct provisions 8 min read

There is a growing body of case law considering the general obligation on Australian financial services (AFS) licensees to ensure that financial services are provided 'efficiently, honestly and fairly' under s912A(1)(a) of the Corporations Act. In cases in which liability has been contested, courts have applied a pragmatic approach to the standard of conduct required by s912A(1)(a).

A further example of this is the recent decision of the Federal Court in ASIC v Commonwealth Bank of Australia [2022] FCA 1422. In this decision, Justice Downes made a number of welcome observations on the obligation imposed by s912A(1)(a). In particular, the decision emphasises that the statutory provision is not a standard of perfection, and the existence of errors in systems and processes will not automatically translate into a breach.

The decision also provides guidance on the prohibitions on misleading and deceptive conduct. In particular, the reasonable understandings that should be attributed to the ordinary and reasonable customer about the nature of computerised systems used by financial institutions such as banks to charge fees, and their susceptibility to some error, in assessing alleged misleading or deceptive representations. The judgment also highlights that terms and conditions of a contract will not necessarily give rise to an implied representation that errors in complying with those contractual obligations will never occur, particularly where appropriate contractual disclaimers as to the possibility of error are made.

Key takeaways

• Section 912A(1)(a) of the Corporations Act is not a standard of perfection. It is a forward-looking obligation directed to requiring AFS licensees to take reasonable steps to achieve compliance with the 'efficiently, honestly and fairly' obligation before any specific instance of non-compliance with this requirement has arisen. Even in circumstances where high volumes of errors in systems and processes are identified, establishing a breach requires precise identification of what a licensee should have done to prevent those non-compliances occurring, and then assessing the steps the licensee in fact took against that standard.
• In the absence of expert evidence or evidence of a relevant comparator, it will be difficult for a court to make findings that a licensee's systems or processes were not 'adequate' or 'capable' so as to establish a breach of s912A.
• In assessing whether a misrepresentation will constitute misleading and deceptive conduct, close regard must be had to the persons to whom a representation is alleged to have been made. The acceptance of terms and conditions in a contract by a customer will not always convey an implied representation that a licensee will not make any errors in complying with those terms and conditions. Such terms must be analysed on a case-by-case basis having regard to expectations of the ordinary and reasonable customer.
• In contested proceedings, courts will exercise great care before applying previous decisions which involve facts and/or contraventions agreed between a regulator and a party.

Facts

The ASIC proceedings concerned monthly account fees (MAFs) charged by the Commonwealth Bank of Australia (CBA) on certain transaction accounts offered to customers. In certain circumstances, account-holders were entitled to a waiver of the MAF in accordance with their contract with CBA. During the period from 1 June 2010 to 11 September 2019, CBA identified that it had incorrectly failed to waive MAFs on at least seven million occasions. This was in the context of CBA:

• charging a MAF on approximately 215 million occasions; and
• waiving the MAF on 610 million occasions across over 20 million accounts.

CBA reported the incorrect charging of MAFs to ASIC and remediated each of the affected customers (or made payments to charity where it was unable to remediate the customer).

ASIC's case

ASIC's case against CBA was brought on three bases.

Section 912A(1)(a) of the Corporations Act

• Fairness and Efficiency case: ASIC alleged that CBA contravened s912A(1)(a) by: charging MAFs to customers who were eligible for a MAF waiver; having systems and processes that were 'not capable' of ensuring compliance; and not conducting an appropriate review of 'ongoing failures of CBA's systems to apply MAF waivers'.

Sections 12DA and 12DB of the ASIC Act

• Charging and Notification case: ASIC alleged that on each occasion that CBA notified a customer that a MAF had been charged in a customer account statement, CBA impliedly represented that it had a contractual entitlement to charge the MAF to that customer. This implied representation, when made to customers who were eligible for a MAF waiver and so should not have been charged the MAF, was characterised by ASIC to be misleading or deceptive.
• Systems and Processes case: ASIC alleged that in entering or varying contracts with customers, CBA impliedly represented that it would have adequate systems and processes in place to ensure that it could provide MAF waivers to eligible customers.

Decision on s912A(1)(a) case

The court dismissed ASIC's Fairness and Efficiency case under s912A(1)(a), identifying the following factors as tending to support against a finding of contravention of s912A(1)(a):

• Section 912A(1)(a) does not impose an obligation on CBA to establish and maintain systems and processes in which an error will never occur. Justice Downes observed that 'if the legislature had required perfection from licensees, the legislation would have stated this'. Relevantly, in this case, although there were at least seven million occasions on which CBA erroneously charged a MAF, these represented a 'very small percentage' (approximately 1%) of the total number of occasions it was contractually required to waive MAFs.
• Section 912A(1)(a) requires AFS licensees to take steps to achieve compliance with the 'efficiently, honestly and fairly' statutory norm before any specific instances of non-compliance have arisen. That CBA had failed to apply MAF waivers on 7 million occasions did not, in and of itself, demonstrate a breach of s912A(1)(a). In the absence of expert evidence or evidence of a relevant comparator, the fact that CBA's systems and processes failed to apply a waiver at numerous points of time did not, of itself, establish those systems and processes were not 'adequate' or 'capable'.
• The court also took into account that CBA took several steps to investigate the causes of the MAF errors, had implemented solutions to rectify those errors and had remediated affected customers.

Decision on misleading and deceptive conduct cases

The court also dismissed ASIC's claims founded on alleged breaches of ss12DA and 12DB of the ASIC Act.

• In relation to the Charging and Notification Case, the court found that the implied representation alleged by ASIC (ie that CBA had a contractual entitlement to charge the MAF to that customer) was not established. This was because, among other things:
  • The ordinary and reasonable customer would understand that a fee such as a MAF may have been charged in error. In particular, they would understand that CBA's systems would be computerised, that not all account statements would be reviewed by CBA personnel before being sent to customers, and that the electronic systems of a bank may malfunction, have design errors or have human error in relation to data input, which may result in incorrect fees being charged.
  • A customer account statement would not be viewed as an invoice, but rather as a record of transactions on an account, which a customer can use to satisfy themselves that no disputed transactions had occurred.
  • The adoption of the Code of Banking Practice by CBA would not be construed by a customer as a representation that no errors will ever be made by CBA.
  • The terms of the relevant contracts acknowledged that CBA may make errors in accounts statements and, if errors occurred, that they would be made 'right again'. This weighed strongly against a conclusion the contractual term made an implied representation.
• The court relied upon similar reasoning to dismiss the Systems and Processes Case, finding that no implied representation was made that CBA would have adequate systems and process in place to ensure that it could provide MAF waivers to eligible customers. This was particularly so given the express statement in CBA's terms and conditions that 'sometimes we can get things wrong'. The court said this negated any implied representation that it would carry out its contractual terms perfectly.
• The court was hesitant to apply previous case law which had similar factual circumstances but were determined on an agreed basis between a regulator and respondent. Her Honour referred to the recent Westpac Omnibus decisions, and also the decision of ASIC v NAB, and reiterated Justice Derrington's comments in the latter case that 'great care should be exercised before applying decisions which involve determinations by agreement between a regulator and a party'.

Implications for AFS licensees

• ASIC v CBA is another example of a court making clear that the general obligation imposed on licensees does not require perfection. The obligation on AFS licensees to do all things necessary to ensure that financial services are provided 'efficiently, honestly and fairly' is concerned with the steps a licensee will need to take to achieve compliance with this norm. AFS licensees need to consider what steps should be taken, and this may require an expert view about what compliance steps are reasonable in the circumstances.
• To assist with complying with s912A(1)(a), AFS licensees should ensure they have appropriate systems to identify issues or errors, that timely steps are taken to rectify and remediate the issue and to minimise or eliminate customer harm, and that they appropriately report breaches (eg in accordance with s912D of the Corporations Act).
• Any claim of an implied representation will be assessed from the perspective of the expectations of the ordinary and reasonable customer (where it is presumed that a customer is likely to take 'reasonable care of their own interests'). Therefore, by providing a financial product or service, it is not necessarily the case that a licensee makes an implied representation that it has adequate systems to ensure an error never occurs. Appropriate disclosure in terms and conditions or other contractual terms may assist in establishing the standard of conduct customers would expect.