State of Play: Unconscionable conduct in financial services

The doctrine of unconscionable conduct has experienced a resurgence in financial services regulation, with ASIC increasingly bringing enforcement action on the basis of this doctrine. On 17 July 2020, ASIC commenced civil penalty proceedings in the Federal Court of Australia against Forex Capital Trading Pty Ltd and its sole director, alleging numerous acts of unconscionable conduct.

This is just the latest in a series of enforcement actions in response to perceived unconscionable conduct, commenced under ASIC’s “Why Not Litigate?” policy.  This trend can also be seen in ASIC investigations in relation to add-on insurance and other perceived “low value” products, as well as recent litigation, such as in ASIC v Kobelt[1] and the ongoing litigation against ANZ in relation to periodic payment fees. Unconscionable conduct also received some attention in the Financial Services Royal Commission.

In this context, it is useful to refresh on the basic principles underpinning unconscionable conduct in financial services, as well as some of the ongoing variations in approach taken by the courts.

We invite you to reach out to our experts if you have any questions.

THE PROHIBITION

Under financial services law, the prohibition on unconscionable conduct derives from two main sources, as follows:

1. sections 12CA – 12CC of the ASIC Act prohibit unconscionable conduct in connection with the supply or possible supply of financial services to a person. Importantly, the ASIC Act adopts a broader conception of “financial services” and “financial product” as compared to the Corporations Act; and
2. general law, under the rules of equity.

There is some disagreement as to whether the scope of the statutory prohibition is the same as the equitable prohibition. This was most recently demonstrated in ASIC v Kobelt, with the High Court delivering a divided 4:3 judgment containing varying articulations of the scope of the statutory prohibition in the ASIC Act (see below for further discussion).

At its most basic, the doctrine of unconscionable conduct in equity seeks to prohibit one party exploiting a special disadvantage of another party.

The general principles have recently been articulated by the High Court in Thorne v Kennedy:[2]

“A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage “which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests”. The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring “victimisation”, “unconscientious conduct”, or “exploitation”. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.”

This position reiterates the position set out by Mason J in the seminal case on unconscionable conduct of Commercial Bank of Australia Ltd v Amadio.[3] Critically, there must be an abuse or exploitation of another party’s disadvantage.

THE LEGAL THRESHOLDS

Threshold 1: Abuse or exploitation

The requirement for an abuse or exploitation means that the threshold for establishing unconscionable conduct is a high one.

In Paciocco v Australia and New Zealand Banking Group Ltd,[4] Allsop CJ emphasised that a feature of unconscionability is “moral obloquy”.[5]  On appeal, the High Court stated that:

“while a disparity in bargaining power may be necessary to attract the operation of the [unconscionable conduct] provision, the mere existence of the disparity is not sufficient to do so. The existence of a disparity in bargaining power, which is an all-pervading feature of a capitalist economy, does not establish that the party which enjoys the superior power acts unconscionably by exercising it.”[6]

In other words, something further is needed beyond unequal bargaining power.

However, the helpfulness of the term “moral obloquy” was doubted by some High Court judges in ASIC v Kobelt, which we consider below.

Threshold 2: Knowledge

As mentioned above, there must be some knowledge (subjective or objective) of the other party’s special disadvantage.

In Kakavas v Crown Melbourne Ltd,[7] the High Court stated that:

“equitable intervention to deprive a party of the benefit of its bargain on the basis that it was procured by unfair exploitation of the weakness of the other party requires proof of a predatory state of mind. Heedlessness of, or indifference to, the best interests of the other party is not sufficient for this purpose. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm's length commercial transaction. Inadvertence, or indifference, falls short of the victimisation or exploitation with which the principle is concerned.”[8]

It follows that before any finding of unconscionable conduct, a court will closely examine the intricacies and context of the commercial relationship between the parties.

UNCERTAINTIES IN THE LEGAL THRESHOLDS - ASIC v KOBELT

As noted above, the prohibition on unconscionable conduct in financial services derives from two sources: equity and the ASIC Act.  However, section 12CB(4)(a) of the ASIC Act explicitly states that “it is the intention of the Parliament that this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct”.  This raises a variety of questions.  Are the prohibitions coextensive?  If not, is the statutory prohibition capable of capturing a wider range of conduct than the equitable prohibition?  If so, to what extent should the statutory prohibition still be construed by reference to equitable principles?

In 2019, the High Court delivered a 4:3 decision in ASIC v Kobelt, the majority finding that the respondent’s provision of a “book-up” credit system to predominantly Anangu customers at his general store in Mintabie, South Australia did not contravene the prohibition on unconscionable conduct contained in section 12CB(1) of the ASIC Act.

Five separate judgments were written: Kiefel CJ and Bell J (writing jointly), Gageler J and Keane J comprising the majority; Nettle and Gordon JJ (writing jointly) and Edelman J comprising the minority. To complicate matters, judicial consideration of the relationship between unconscionable conduct in equity and unconscionable conduct in the ASIC Act, is not split along majority-minority lines.

At a high level, the judges reached the following conclusions:

Does the equitable prohibition on unconscionable conduct involve a consideration of moral obloquy?

Keane J offered a full throttled endorsement of the relevancy of moral obloquy to unconscionable conduct.  His Honour held that the term ‘unconscionability’:

“imports the “high level of moral obloquy” associated with the victimisation of the vulnerable. As five members of this Court observed recently in Thorne v Kennedy, a finding of unconscionable conduct requires the unconscientious taking advantage of a special disadvantage, which has “been variously described as requiring ‘victimisation’, ‘unconscientious conduct’, or ‘exploitation’”.”[9]

While not using the term “obloquy”, Edelman J also acknowledged the “equitable preconditions imposed in the twentieth century, by which equity had raised the required bar of moral disapprobation”.[10]

Conversely, Gageler J took the opposing view, going so far as to express regret as to having used the term judicially on a prior occasion:

“In Paciocco v Australia & New Zealand Banking Group Ltd, I referred to unconscionable conduct within the meaning of s 12CB as requiring “a ‘high level of moral obloquy’ on the part of the person said to have acted unconscionably” . “Moral obloquy” is arcane terminology. Without unpacking what a high level of moral obloquy means in a contemporary context, using that arcane terminology does nothing to elucidate the normative standard embedded in the section. The terminology also has the potential to be misleading to the extent that it might be taken to suggest a requirement for conscious wrongdoing. My adoption of it has been criticised judicially and academically. The criticism is justified. I regret having mentioned it.”

What I meant to convey by the reference was that conduct proscribed by the section as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience. To that view of the statutory standard I adhere.[11]

In line with Gageler J, minority judges Nettle and Gordon JJ expressed reservations about the use of the term as a legal standard, but stopped short of finding it to be actively misleading:

“It is sometimes said that unconscionable conduct entails “moral obloquy” or a “high level of moral obloquy”. So to describe unconscionable conduct, however, reveals little of the requisite character of unconscionability. Such descriptors are better seen as emphatic expressions of conclusion rather than expressions of applicable standards.”[12]

While Kiefel CJ and Bell J did not express a direct view on whether moral obloquy is an integral part of the equitable conception of unconscionability, their Honours tacitly accepted this, as will be explained below.

What do the voices in the majority say on whether statutory unconscionability requires the existence of a special disadvantage?

Kiefel CJ and Bell J noted that unconscionable conduct involves “the existence of a special [dis]advantage of which some takes … [u]nconscientious advantage”[13] --- and essentially couched their analysis solely along these lines.  The concept of “special disadvantage” has long been integral to the equitable concept of unconscionable conduct in Australia: e.g. Blomley v Ryan [1956] HCA 81, Commercial Bank of Australia Ltd v Amadio [1983] HCA 14.

The judgment displays a reluctance in many respects to consider statutory unconscionability differently to equitable unconscionability, their Honours holding that:

• if the legislative intention were to fix a standard for the supply of financial services in trade or commerce lower than that of conduct that answers the description of being against conscience, it is to be expected that the draftsperson would have employed another term;[14] and
• [t]he term “unconscionable” is not defined in the ASIC Act and is to be understood as bearing its ordinary meaning. The proscription in s 12CB(1) is of conduct in connection with the supply of financial services that objectively answers the description of being against conscience. … In Kakavas v Crown Melbourne Ltd and Thorne v Kennedy it was said that a conclusion of unconscionable conduct requires not only that the innocent party be subject to special disadvantage, but that the other party must also unconscientiously take advantage of that special disadvantage. This has variously been described as requiring victimisation, unconscientious conduct or exploitation.[15]

Nevertheless, Kiefel CJ and Bell J were firm in their position that such a question was not open to be decided on the basis that no submissions were made on this point.

While the personal views of Kiefel CJ and Bell J on the relevance of moral obloquy were left unstated, their Honours touched on the issue obliquely when describing the Full Federal Court’s own consideration of question.  Their Honours wrote:

“The Full Court made clear that it approached the determination upon a view that consideration of moral obloquy had a role to play but was not a substitute for the statutory words. Their Honours correctly took into account the findings that Mr Kobelt acted with a degree of good faith and not dishonestly as among the circumstances to which it was necessary to have regard in determining whether his conduct fell below the statutory norm of conscience.”[16]

This judicial restraint of Kiefel CJ and Bell J sits against Keane J’s heavy reliance on the concept of moral obloquy.  All three judges acknowledged that in the absence of a statutory definition the term “unconscionable” must be given its ordinary meaning.  However, as was noted above, Keane J considered that  “in its ordinary meaning, the term ‘unconscionable’ requires an element of exploitation. The term imports the ‘high level of moral obloquy’ associated with the victimisation of the vulnerable.”[17]

Therefore, while Kiefel CJ and Bell J reserved judgment on whether the ASIC Act incorporates a lower standard of unconscionability than that found in equity, Keane J was of the view that that both prohibitions on unconscionable conduct demand attention to moral obloquy.

We consider the opinion of Gageler J, the other majority judge, below.

Are equitable unconscionability and statutory unconscionability coextensive? What then is the purpose of section 12CB(4)(a) of the ASIC Act? 

Voices in the majority

Gageler J considered that section 12CB(4)(a) makes clear “that the statutory conception of unconscionable conduct is unconfined to conduct that is remediable on that basis by a court exercising jurisdiction in equity” and that such a “determination by a court … is required by s 12CC to be informed by the numerous considerations specified in that section”.[18]  His Honour concluded that:

“The judgment required of a court exercising jurisdiction in a matter arising under s 12CB is a heavy one. For a court to pronounce conduct unconscionable is for the court to denounce that conduct as offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society. Those values are not entirely confined to, or entirely removed from, the values which historically informed courts administering equity in the development of the unwritten law of unconscionable conduct.”[19]

This sits somewhat uneasily with the conclusion reached by Keane J.  As noted above, Keane J considered that the ordinary meaning of “unconscionable” remains the same in equity and in statute.  Therefore, Keane J reasons that while section 12CB(4)(a) does not limit statutory unconscionability to equitable unconscionability, neither does it provide a different (much less a broader) interpretation of the doctrine:

“The direction in s 12CB(4)(a) means that the application of s 12CB(1) is not limited to conduct that has been held to be “unconscionable” under the general law, but it does not operate to give the term “unconscionable” a meaning different from its ordinary meaning. Adherence to the ordinary meaning of the term “unconscionable” is appropriate for two reasons rooted in the nature of the judicial function. First, the courts must give effect to what Parliament has enacted. Here, it must be acknowledged that the Parliament has deliberately chosen to use this expression as the focus of attention, and not a more open-textured or morally neutral expression that would be less certain in its scope. And secondly, the appellant did not propound a meaning for “unconscionable” different from its ordinary meaning; and so the respondent had no occasion or opportunity to meet such a contention.”[20]

Moreover, Keane J held that the multi-factorial analysis contained with section 12CC is consistent with the existing approach taken by courts of equity, and that section 12CC does not abrogate the requirement of some form of moral obloquy:

“The approach contemplated by s 12CC to the determination of “unconscionability” for the purposes of s 12CB is consistent with the settled approach of a court of equity, which takes a “more comprehensive view, and looks to every connected circumstance that ought to influence its determination upon the real justice of the case”. The ultimate issue under the statute is whether the conduct in question is rightly to be characterised as unconscionable. In determining that issue, s 12CB calls for a judgment as to whether the impugned conduct exhibits the level of moral obloquy associated with predatory conduct.”[21]

Keane J’s statement above does not align with the findings of Gageler J, nor the three minority judges (as will be seen below).

Voices in the minority

The judgments of Nettle and Gordon JJ, and Edelman J, approach unconscionability in a manner closer to that of Gageler J.

Nettle and Gordon JJ held:

“The assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of facts by reference to the values and norms recognised by the statute, and thus, as it has been said, a normative standard of conscience which is permeated with accepted and acceptable community standards. It is by reference to those generally accepted standards and community values that each matter must be judged.”[22]

Edelman J went even further, stating that it is was Parliament’s intention that the existence of special disadvantage was not to be an integral component of the statutory prohibition.  Edelman J found that:

“This legislative history clearly demonstrates that although Parliament's proscriptions against unconscionable conduct initially built upon the equitable foundations of that concept, over the last two decades Parliament has repeatedly amended the statutory proscription against unconscionable conduct in continued efforts to require courts to take a less restrictive approach shorn from either of the equitable preconditions imposed in the twentieth century, by which equity had raised the required bar of moral disapprobation. In particular, statutory unconscionability permits consideration of, but no longer requires, (i) special disadvantage, or (ii) any taking advantage of that special disadvantage. Like other open-textured criteria, such as "unfair" or "unjust", there is no clear baseline moral standard for what constitutes "unconscionable" conduct within s 12CB of the ASIC Act. Nevertheless, the history of development of that statutory proscription demonstrates a clear legislative intention that the bar over which conduct will be unconscionable must be lower than that developed in equity even if the bar might not have been lowered to the “unreasonableness” and “unfairness” assessments in the various categories in nineteenth century equity.”[23]

As discussed above, Edelman J considered that equitable unconscionability has a higher bar of moral disapprobation than statutory unconscionability, whereas Nettle and Gordon JJ considered that the descriptor of a “high level of moral obloquy” is unhelpful as a legal standard, and Gageler J squarely rejected the term.  However, all four judges considered that statutory unconscionability must be assessed by reference to the values embodied in the statute, not the values established by courts of equity.

WHERE TO FROM HERE?

Following ASIC v Kobelt, it remains unclear whether the courts will adopt a more fluid conception of unconscionability, and whether specific requirements such as moral obloquy and special disadvantage will be applied with rigidity. What is clear, however, is that the threshold for establishing unconscionability remains a high, albeit evolving, one. In the context of enforcement activity in financial services, this means that unconscionable conduct may not always be fit for purpose as a cause of action for the spectrum of misconduct pursued by ASIC as part of its “Why Not Litigate?” strategy. However, the uncertainties raised in ASIC v Kobelt provide ASIC with a degree of ammunition to continue to push the boundaries of unconscionable conduct.

Recently, the ACCC filed an appeal to the Full Federal Court in relation to its proceedings against Quantum Housing Group which concerns allegations of statutory unconscionable conduct.  In particular, the case will concern whether statutory unconscionable conduct under the Australian Consumer Law requires the targets of the conduct to be under a special disadvantage.

Unconscionable conduct under the Australian Consumer Law is couched in essentially the same terms as under the ASIC Act.  The case will therefore provide an opportunity for the Full Federal Court to consider the issues and variations of approach raised by the High Court in Kobelt.

As always, reach out to the HSF FSR Team if you have any questions relating to unconscionable conduct or ASIC's approach to it.

[1] [2019] HCA 18 (‘Kobelt’).

[2] (2017) 91 ALJR 1260 at [38] (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ).

[3] (1983) 151 CLR 447.

[4] (2015) 236 FCR 199.

[5] (2015) 236 FCR 199 at 265–6.

[6] (2016) 333 ALR 569 at 633.

[7]  (2013) 250 CLR 392.

[8] (2013) 250 CLR 392 at 439–40.

[9] Kobelt [118] (Keane J).

[10] Kobelt [295] (Edelman J).

[11] Kobelt [91]-[92] (Gageler J).

[12] Kobelt [152] (Nettle and Gordon JJ).

[13] Kobelt [48] (Kiefel CJ and Bell J), citing [2018] HCATrans 252 at 1940-1945.

[14] Kobelt [49] (Kiefel CJ and Bell J).

[15] Kobelt [14]-[15] (Kiefel CJ and Bell J).

[16] Kobelt [60] (Kiefel CJ and Bell J).

[17] Kobelt [118] (Keane J).

[18] Kobelt [83] (Gageler J).

[19] Kobelt [93] (Gageler J).

[20] Kobelt [119] (Keane J).

[21] Kobelt [120] (Keane J).

[22] Kobelt [234] (Nettle and Gordon JJ).

[23] Kobelt [295] (Edelman J).