One of the general obligations under the Corporations Act 2001, is a requirement for financial services licensees to:
“Do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly”
Civil penalties for breach of this obligation can be as much as $11.1 million, three times the benefit obtained or 10% of annual turnover (whichever is greater). Additionally, this obligation is part of the breach reporting regime – significant breaches must be reported to the regulator within 30 days.
But what is required to comply with this requirement. On a plain reading, almost anything could be a breach. That’s not fair! Your systems are inefficient! That customer service rep was dishonest!
Guiding precepts for offering financial services
In his final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne suggests that the obligation embraces six norms of conduct, which should act as guiding precepts for those offering financial services:
- obey the law;
- do not mislead or deceive;
- act fairly;
- provide services that are fit for purpose;
- deliver services with reasonable care and skill; and
- when acting for another, act in the best interests of that other.
Helpful – yes. Capable of routine assessment and application – not always… However, the case law does provide some principles that are a little more helpful.
Principles – what we know
- The obligation is not a standard of perfection; rather it requires licensees to do “all things necessary” – this means taking reasonable compliance steps to ensure compliance not perfection.
- The words “efficiently, honestly and fairly” contain 3 separate but concurrent obligations.
- The obligations require a standard of competence in providing advice and complying with other statutory obligations.
- When it comes to customers the obligations require even handedness and sound ethical values and judgement.
- Inefficiency may be established by demonstrating that the performance of a licensees functions falls short of a reasonable standard of performance the public is entitled to expect.
- The word honesty means conduct which is not criminal but which is morally wrong in the commercial sense will be dishonest.
- Honestly and fairly gives the flavour of someone who is not only not dishonest but also ethically sound.
That is, you just have to take steps to ensure that you do…the right thing!
Examples are really the only way to consider how to apply this obligation to your specific business context.
The following conduct has been found to be (or ASIC – the regulator – has said it would be) are a breach of the obligation to “do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly”:
- not properly checking that any new staff they employ don’t have a history of negligence or dishonesty in providing financial services.
- only investigating insurance claims for misrepresentation or non-disclosure if there is a reasonable basis to test for these issues, without which an insurer may be fishing.
- providing financial planning advice without a reasonable basis.
- not having systems that accurately calculate and pay benefits under insurance claims.
- failing to keep proper records of buy and sell orders for trades on behalf of clients.
- authorised representatives conducting discretionary trading in breach of compliance guidelines.
- recommending investments to clients, whilst subject to a conflict of interest.
- failing to ensure that your governance and assurance arrangements for fees charged to members’ superannuation accounts are robust and you members are charged fairly.
- charging account holders fees, without a clear contractual basis.
- failing to adequately monitor the conduct of third party promoters of your financial services products.
- failing to manage cybersecurity risk and resilience.
Financial services regulation and licensing is complex and fraught. Not only are there many specific obligations for different financial services businesses, there is an overriding obligation to “do all things do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”. FinTech’s need to consider what they, do, how they are doing and why they are doing it. Otherwise they may fall foul of section 912A(1)(a).
Author: Temogen Hield, Consultant and General Counsel, Sydney, Payments Consulting Network
The Australian regulatory environment for Fintech and Payments Businesses is complex and fraught. Our Consultant and General Counsel, Temogen Hield brings his wealth of knowledge to help start-ups and scale-up fintechs have a proportionate response to ensure that you meet your regulatory obligations without handcuffing your business or giving up on innovation. Learn more here.
Temogen has a unique blend of legal, regulatory, innovation and strategy experience in payments and financial services. He was the driving force behind the establishment of eftpos as a domestic payments scheme in Australia and its early success, including its re-launch which grew its annual transaction volume by 175m. As a lawyer, Temogen has been a partner in an international law firm based in Hong Kong and drafted and negotiated the eftpos Scheme Rules with its foundation members and the RBA. Temogen is also a Consultant Responsible Manager for payments related AFSL holders.
If you found this article helpful and would be interested in reading similar articles, please subscribe to our newsletter.
Are you interested in reading articles on a particular payments topic, company, payments industry executive or author? Click the search icon, it’s that magnifying glass on the top right-hand side of the website, and type in the keywords that interest you. You will then be presented with a list of any articles that Published On: 16 March 2023Categories: Blog, Legal