ACTING EFFICIENTLY, HONESTLY & FAIRLY IN FINANCIAL SERVICES – SOME RECENT DEVELOPMENTS

Two recent cases have shed new light on the scope of the obligation on AFS licensees to do all things necessary to act efficiently, honestly and fairly in the provision of financial services (EHF obligation). The cases also give some illustration of how the EHF obligation can apply to product issuers. Both cases illustrate, in our view, a strong evolutionary trend towards the EHF obligation being seen as comprising separate concurrent obligations, rather than a single compendious obligation.

In ASIC v Mobisuper Pty Ltd [2021] FCA 855, the facts involved the conduct of the promoter of a superannuation offering, Mobisuper, through a superannuation fund of which Tidswell Financial Services Ltd was the trustee.

The relevant conduct by Mobisuper involved online advertising, and inbound and outbound telephone sales activity of interests in the fund through, primarily, the identification of lost superannuation and the invitation to consumers to consolidate any such amounts into the fund. This was achieved through the provision of financial advice designed to influence the consumer to dispose of their existing superannuation interests and apply the proceeds to an interest in the fund, including an insurance interest.

Tidswell was found to have failed to discharge a number of statutory obligations, including the proper monitoring of an outsourced activity (being relevant activities of Mobisuper, including the provision of financial advice).

It is discussion, however, of the EHF obligation which is central to this decision.

The Court found that the lack of oversight by Tidswell constituted a breach of the EHF obligation. More specifically:

• the EHF obligation applies to the provision of a financial service;
• a financial service includes the issue of a financial product;
• the EHF obligation is a stringent one; it is not an obligation to take reasonable steps or undertake reasonable endeavours but to do “all things necessary to ensure” that the relevant financial services are provided efficiently honestly and fairly; and
• the core mischief was described, interestingly, in quasi misleading or deceptive conduct terms:

"In short, there was a risk in the circumstances known to Tidswell that MobiSuper, through its CSOs, would create an impression that the natural outcome of locating and, perhaps, consolidating lost superannuation accounts was to roll those accounts and other existing accounts into the MobiSuper Fund, and that this impression would be created because it was in Mobi's interests, and would be given without proper regard to the interests of each individual consumer." (at [49])

A key take-out for our clients is that while Jackson J did not see the need to adjudicate on whether the EHF obligation was a compendious obligation or three separate obligations, his Honour described the breach, significantly, in terms of the fairness and honesty elements of the EHF obligation, following the approach taken by Allsop CJ in the ASIC v Westpac case:

"The issue of interests in the MobiSuper Fund in those circumstances would not have been provided 'efficiently, honestly and fairly', considered as a compendious term and (at least) not honestly and not fairly, considered as separate concepts...But his Honour's words do capture the essence of the lack of honesty, fairness and sound ethical dealing which would have occurred in the present case if the risks I have described had come to pass." (at [49])

It is noteworthy that even on the singular test, his Honour did not pay attention to the efficiency element of the obligation.

It is also noteworthy that Jackson J adopted a “hybrid” approach, by making an assessment of the EHF obligation both as a compendious obligation and as three separate obligations. This is in contrast to previous Federal Court decisions which have applied the case law precedent on the compendious obligation strictly.

In ASIC v RI Advice Group Pty Ltd (No 2) [2021] FCA 877, this same trend can be discerned.

The case involved an action brought by ASIC in relation to alleged non-compliance by the RI Advice Group to take reasonable steps to ensure that its representative, Mr Doyle, complied with sections 961B, 961G, 961H and 961J of the Corporations Act (the Best Interests Obligations), as well as, relevantly for this present discussion, the EHF obligation.

The broad outline of ASIC’s case involved the retention of Mr Doyle as an authorised representative when the RI Advice Group knew that there was a substantial risk that he would breach the Best Interests Obligations.

Moshinsky J in his judgment, again in similar vein to the Mobisuper case, commences his analysis of the EHF obligation by noting that it was unnecessary to resolve whether the EHF obligation was compendious or not. However, his Honour does note the broad scope of the EHF obligation:

"I adopt the statements of principle concerning s 912A(1)(a) in those passages and note that they emphasise the breadth of the expression “efficiently, honestly and fairly”. To the extent that different views have been expressed as to whether “efficiently, honestly and fairly” is a compendious expression, it is unnecessary to resolve that issue for present purposes. Insofar as RI submits that s 912A(1)(a) comprehends conduct of the licensee that is morally wrong in the commercial sense, I do not consider the provision to be limited to such conduct." (at [377])

Moshinsky J proceeded to find breaches of both the Best Interests Obligations and the EHF obligation on the basis that RI Advice did not have adequate compliance, monitoring and supervision frameworks in place to ensure financial advice was being provided appropriately.

In respect of the EHF obligation, the breach seems to be premised on a failure of the “efficiency” limb (due to the failure to implement adequate frameworks), rather than the “honesty” or “fairness” limbs (which are traditionally associated with the concept of morally culpable conduct).

The above developments are indicative of a judicial trend whereby the Federal Court is prepared to apply the EHF obligation in a malleable way to a variety of disparate circumstances, which is not limited by a compendious interpretation. While this trend is not yet widespread across the Federal Court, it is certainly gaining traction.