The role of the ACCC in financial services
There has been a tendency to forget about the ACCC ever since the regulation of consumer protection in the financial services industry moved to ASIC in 2001. But as Grant Holley and Michelle Chasser explain, that is a dangerous way to think because the ACCC is still very relevant.
We know that the Australian Securities and Investments Commission (ASIC) is the regulator that administers the laws in relation to consumer protection and the conduct of licensed businesses in the financial services sector.
We know that the Australian Prudential Regulation Authority (APRA) watches the financial soundness of our financial institutions.
But what of that other active regulator, the Australian Competition and Consumer Commission (ACCC)? Is it relevant to us in the financial services sector?
Those who remember life before ASIC will know that the ACCC used to take action in cases of misleading and deceptive conduct and a range of other consumer protection provisions in the then Trade Practices Act 1974 (Cth), even if that conduct occurred in relation to financial services.
One outcome of moving the regulation of consumer protection in the financial services industry to ASIC in 2001 has been a tendency to forget about the ACCC or to dismiss it as irrelevant to our activities.
That is a dangerous way to think because the ACCC is still very relevant to us in financial services.
In what way is the ACCC still relevant to our activities?
The hint is in the first C of ACCC. Although the ‘consumer’ piece is now regulated by ASIC, the ‘competition’ piece is, as it always has been, squarely within the jurisdiction of the ACCC.
So what conduct might bring us to the attention of the ACCC?
Any conduct by which we are trying to reduce the impact of, or insulate ourselves from, competition should ring alarm bells.
Examples might be contracts, arrangements or understandings with a competing dealer group or a competing corporate authorised representative:
- Not to offer or market services to certain clients;
- Not to promote services in certain geographical areas;
- Relating to the fees we charge, or the discounts or rebates we give to clients;
- Not to deal with certain product providers or platform operators; or
- Not to deal with certain clients.
These types of collusive agreements between competitors are known as cartel conduct, and it may surprise you to know that this conduct has been criminal for some time, attracting possible jail terms for those that engage in the relevant conduct.
The financial penalties can also be very large, being the greater of $10 million, three times the benefit obtained from the conduct or, if that cannot be ascertained, 10 per cent of the offending company’s turnover (including the turnover of any of its subsidiaries) – ouch!
But cartel conduct is not where it stops. Other conduct includes boycotts, which occur when two people agree to shut somebody else out. For example:
- Bank 1 and Bank 2 agree not to deal with a certain customer;
- Dealer Group 1 and Dealer Group 2 agree not to appoint a particular authorised representative;
- Managed Fund 1 and Managed Fund 2 agree not to deal through a particular platform provider.
Note that it is the agreement to shut the third person out that is the problem. Banks, dealer groups and managed funds are perfectly entitled to make their own decisions about who they will deal with or authorise, as the case may be.
A further example of anti-competitive conduct is what is known as “third line forcing”.
This occurs when one party agrees to enter into a contract with another, only on condition that that other enters into a contract with a third party.
So, if I agree to be your financial adviser, but only on condition that you buy a contract of term insurance with Acme Life Limited, or establish a bank account with Acme Bank, that would be third line forcing.
Of course, I am able to make recommendations; what I cannot do is to make compulsory (or force) you to enter into that second contract with the other provider as a condition of you entering into the contract with me (to provide my product or service).
Some examples of third line forcing have included the cases of ACCC v Bill Express Limited & Others.
In that case Technology Business International and BXP engaged in third line forcing by offering to supply to merchants electronic products and services under a contract with BXP, on condition that the merchants acquired other goods and services from TBI, which was a company unrelated to BXP.
In ACCC v Link Solutions the allegation was that Telcos gave call credits on condition that the customers leased equipment from a third party finance company.
Distribution of travel insurance has been another area where third line forcing has been known to occur.
The travel agent will sell you a ticket, on condition that you use Company A for your travel insurance.
This article is not intended to provide a comprehensive list of all the conduct that may infringe the restrictive trade practice provisions of the Competition and Consumer Act 2010 (Cth), which replaced the Trade Practices Act 1974 (Cth).
It is intended to give you a flavour of the types of conduct that should give you pause, and perhaps even reason to seek advice. I will admit to some self-interest in that last remark.
One test question to ask yourself is, “Is what I am proposing to do insulating me from the effects of competition?”
If the answer to that question is yes, it is likely to need careful consideration.
The good news is that if you have an arrangement that you believe is in the best interest of the public and you can mount a reasonable argument to the ACCC, the ACCC can permit you, through either the authorisation or notification processes, to engage in the conduct.
Also, it is often possible to achieve what you want to achieve in a lawful way.
Consumer protection
The provisions relating to consumer protection in financial services have been administered by ASIC since 2001.
They are virtually a word for word copy of the provisions in the Competition and Consumer Act, but apply to ‘a person...and in relation to financial services’ instead of to ‘a corporation’.
They include:
- Not engaging in conduct that is misleading or deceptive or likely to mislead or deceive;
- Not making misrepresentations about products or services or testimonials or sponsorship relating to products or services; and
- Statutory guarantees that services will be rendered with due care and skill, and that products will be reasonably fit for their purposes.
These provisions are easy to breach. It is not necessary for a plaintiff, or for ASIC, to show:
- That the conduct was intentional;
- That anyone was actually misled; or
- That any actual damage resulted.
When you think of all the ways we communicate and project ourselves to the public, it is easy to envisage scenarios where we could breach these provisions.
Everything we say, everything we print, everything that’s on our website must be accurate.
In a recent case, testimonials on a company’s Facebook page were held to constitute misleading and deceptive conduct.
The company did not even post the testimonials, but it knew of them and did nothing about them and the Court said that was enough.
Most misleading and deceptive conduct is quite unintentional. If a misrepresentation is a deliberate falsehood, criminal consequences can follow. Ouch!
The best way to mitigate the risk of inadvertently misleading and deceptive conduct is to have robust processes.
Staff training on what to say and how to handle questions when staff don’t know the answers; sign-off procedures for marketing material; and keeping websites and marketing brochures up to date all play a part in reducing the risk of misleading and deceptive conduct.
By the way, the courts have said that the word ‘deceptive’ doesn’t add anything to the word ‘misleading’. We lawyers just like our words, and why use one when two will do?
There are a few tricks for the unwary when comparing certain definitions in the Corporations Act and in the ASIC Act.
For example, although the definitions of ‘financial service’ and ‘financial product’ appear very similar, the definition of financial product in the ASIC Act includes ‘a credit facility’, and the definition of financial services includes ‘provide a service that is otherwise supplied in relation to financial products’.
The definitions in Chapter 7 of the Corporations Act exclude credit, and services related to credit, from being financial services or products.
However, the definition of ‘the financial services laws’ in Chapter 7 includes the provisions of the ASIC Act relating to misleading and deceptive conduct.
Therefore, misleading and deceptive conduct relating to credit will be the breach of a financial services law and need to be considered for breach reporting under section 912D of the Corporations Act.
This could be an issue for those with both AFSL and ACL licences.
Unfair contract provisions
The ‘unfair contract’ provisions are relatively new. They apply to contracts entered into, renewed or varied after
1 July 2010. These were inserted into both the Competition and Consumer Act 2010 and the ASIC Act in 2010. They allow the court to ignore unfair terms in standard form consumer contracts.
Your contract will be a ‘consumer contract’ where one of the people getting the financial service or the financial product is an individual and they are getting it wholly or predominantly for personal, domestic or household use or consumption.
It will be a ‘standard form contract’ if they haven’t had a chance to negotiate the terms of the contract.
A term will be unfair if it’s not reasonably necessary to protect the interests of the party relying on it, causes detriment to the consumer and causes a significant imbalance in the rights of the parties to the contract.
Typical examples of standard form contracts would be “take it or leave it” terms and conditions attached to loans and credit cards.
Takeouts
There is so much regulation specific to the financial services sector that demands our focus.
A consequent danger is that we can be diverted from other potentially expensive and damaging issues, like competition and consumer law.
Our compliance arrangements need to address these issues. Boards and senior management need to be mindful of competition law issues.
The risk management framework should be used as a tool to help manage these and other regulatory risks.
Grant Holley is partner and Michelle Chasser is a lawyer at Holley Nethercote Commercial Lawyers.
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