FSR GPS: The efficiency limb of the EHF obligation

This is the third edition in our “FSR GPS” (Guidelines, Principles and Strategies) series relating to the efficiently, honestly and fairly (EHF) obligation in financial services law.

In this third edition, we examine the very specific issue of when a financial service might breach the EHF obligation on the grounds of the service not being provided efficiently.

In our previous editions on EHF (available here and here), we have observed that:

• the Courts have swung back to treating the EHF obligation as a compendious obligation;
• of the three compendious elements, fairness is, in our opinion, the most weighty;
• by the same token, the efficiency element is the least weighty;
• there is some severity of conduct which will usually activate a breach of the EHF obligation;
• there is also likely to be some materiality element that is required in relation to a breach; and
• there is some connectivity between the three elements of efficiency, honesty and fairness in the compendious text; in other words, shortfalls in conduct from an efficiency perspective are likely to require an element of fairness and lack of honesty.

It is this last observation that we propose to scrutinise in this edition.

Spotlight on efficiency

Many of our clients understand how a breach might occur through a fairness deficiency but are less clear about when a lack of efficiency might trigger an EHF breach.

The link between the three elements of the EHF obligation was expressed early on in the peace when Young J noted that the obligation required a person to perform their duties “efficiently having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty”.[1]

In the case where Young J made this pronouncement, there was in fact a breach discerned based on a shortfall in efficiency of performance of the relevant financial service. In that case, the concept of efficiency was equated to conduct which falls short of the reasonable standard of performance that the public is entitled to expect.[2]

Anderson, in his article “Duties of Efficiency, Honesty and Fairness Post-Westpac: A New Beginning for Financial Services Licensees and the Courts”[3] identifies three types of inefficiency which have been seized on by the Courts:

• the first is inefficiency in the area of advice; illustrative is the case discussed of Re Campbell[4] where the relevant conduct fell within a general rubric of incompetence (e.g. failure to ensure clients were sufficiently briefed in relation to the instant advice);
• the second is an adviser’s lack of knowledge of the law (citing AAT decision in Kippe v Australian Securities Commission[5]); and
• the third is described as the “incompetent administration of a licensee’s business and the management of its internal affairs.”

Inefficiency in practice

The real issue is whether inefficiency, in and of itself, will be enough to ground a breach of the EHF obligation.

One difficulty in this context is that many of the examples that have been examined by the Courts, or which one can hypothesise about, often also have an element of unfairness. So pure inefficiency may not be sufficient to ground a breach, particularly where the adverse consequences are “mild” in relation to consumers.

It is possible, therefore, that inefficiency as a foundation for an EHF breach might depend on the magnitude of the inefficiency, or the consequences of the inefficiency. An example we cited previously is in the provision of Statements of Advice or periodic statements, where out of a large volume prepared, only a small number suffered from the relevant inefficiency. However, here, it is relevant to consider the impact of the relevant inefficiency, particularly on consumers.

Another lens that could be adopted is to look at the inefficiency in the context of the totality of the financial services provided under the relevant AFSL. As we know, section 912A(1)(a) of the Corporations Act, which houses the EHF obligation, refers to the provision of financial services in the plural. This phrase has not been interpreted literally but one wonders when it comes to the efficiency criterion, whether a more expansive judicial view could be taken; possibly even by just according less weight to this element.

If such a mitigated approach is not taken, then a wide range of cases of inefficiency could end up in a breach of the EHF. Of course, Young J’s observation links the efficiency element to the other two elements, which is an appropriate mitigation in the context of a compendious obligation.

Some tentative conclusions

It is suggested that:

1. efficiency is a lesser coefficient of the EHF obligation;
2. there ought to be some ability to look to the seriousness or magnitude of the conduct in relation to the efficiency element;
3. there ought to be some ability to link the efficiency element to the honesty and fairness elements; and
4. despite 1 – 3 above, or perhaps due to it, the greater the inefficiency, the greater the prospect that the conduct will be considered unfair or have fairness implications.

[1] Story v National Companies And Securities Commission (1988) 13 NSWLR 661 at [672].

[2] Story v National Companies And Securities Commission (1988) 13 NSWLR 661 at [672].

[3] (2020) 37 C&SLJ 450.

[4] Campbell v Australian Securities and Investments Commission (2001) 37 ACSR 238; [2001] AATA 205.

[5] Kippe v Australian Securities Commission (1998) 16 ACLC 190.