The general statutory obligation of Australian Financial Services licensees and Australian Credit licensees is to do all things necessary to ensure that the services covered by the respective licence are provided “efficiently, honestly and fairly”: Section 912(1)(a) Corporations Act and section 47(1)(a) National Credit Act. What does that phrase mean?

In her closing submissions at the end of Round 1 of the Financial Services Royal Commission, Senior Counsel Assisting submitted that it was open to the Commissioner to conclude that the major banks had breached these obligations in respect of the case studies examined by the Commission.

The meaning of these obligations, how they are applied and the consequences of a failure to comply with them has become a key issue for the Financial Services Royal Commission.

Should the obligation to act “efficiently, honestly and fairly” be interpreted broadly or should it be given a narrow legal interpretation?

A broad approach looks at the licensee’s culture, values and ethics and how it treats consumers as evidenced by its conduct. The Commissioner has been instructed to look at community expectation and standards as well as specific misconduct.

A different approach is taken in the separate submissions by CBA and ANZ

ASIC’s Regulatory Guide 104 takes another approach.

ANZ’s Round 1 submission argues that:
“The case law on s 47(1)(a) (and the equivalent obligation under s 912A(1)(a)) suggests that a breach of this obligation requires a finding of ‘systemic weakness’ or ‘absence of proper processes’ ordinarily requiring consideration of conduct “over a period of time rather than a narrow focus on a particular incident”. A ‘one-off’ or isolated instance is unlikely to amount to a breach where the licensee has otherwise acted properly, unless the breach is gross….

Counsel Assisting have submitted that it is open to the Commission to conclude that ANZ breached various obligations which have at their core the obligation to do all things necessary to ensure that the credit activities undertaken by ANZ are engaged in efficiently, honestly and fairly….This standard is recognised as a single, composite concept, rather than three discrete behavioural norms…. Accordingly, the Commission must consider whether ANZ went about its 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.”

CBA’s Round 1 submission argues that:

“The test of “efficiently, honestly and fairly” has been interpreted broadly as encompassing conduct that “is morally wrong in the commercial sense” … or “falls short of the reasonable standard of performance that the public is entitled to expect”….

The … issues required analysis by CBA before it could determine whether a significant breach or likely breach of s 912A(1)(a) had occurred. That assessment required CBA to consider whether the particular conduct concerned involved CBA deviating from the obligation to do all things necessary to ensure the products were provided in a manner that was honest, efficient and fair, and to have deviated from that obligation in a way that was significant for the purposes of s 912D. Such an assessment requires a greater element of judgment compared to other assessments of contravention of law or regulation that are more readily ascertainable… ”

ASIC’s submission did not address the issue but RG104 says:

“RG 104.51 You need to do all things necessary to ensure your financial services are provided in a way that meets all of the elements of ‘efficiently, honestly and fairly’. If you fail to comply with the other general obligations, it is unlikely that you will be complying with the ‘efficiently, honestly and fairly’ obligation.

RG 104.52 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.”

The Commission will resume on 16 April for its Round 2 hearings on financial advice.

This issue will be considered further in that context.