This article addresses the integration of the efficiently, honestly and fairly (EHF) obligation into the risk assessment and breach reporting frameworks of financial institutions that hold an AFSL. Central to this exercise is the integration of the EHF obligation into operational processes, procedures, decision-making and, last but not least, organisational culture.

The role of fairness is particularly important in this last context. But at the same time, the efficiency element of the obligation also warrants close consideration.

EHF as a new standard of conduct

A central tenet of the approach suggested in this article is that the EHF obligation be treated as a primordial standard of conduct for AFSL holders, on a like footing to the role of the best (financial) interests duty for superannuation trustees.

We at HSF envisage that the evolution and primacy of this duty will mean that in key areas of client interface that involve a financial service (e.g. manufacturing, distribution, remediation), the EHF obligation will be a standing matter to be considered by management, to be elevated to the Board where appropriate, and to be the subject of genuine consideration and deliberation before the particular financial service involving a client interface is implemented.

EHF in operational, risk assessment and breach reporting contexts

The EHF obligation is rapidly becoming a crucial standard of conduct for financial institutions.

Since the Royal Commission, it is a vehicle for the “community expectations” phenomenon and is also emerging as an important element of “customer culture”, which the regulators and the courts are increasingly focussing on.

In a recent life insurance merger case, Allsop CJ observed during the course of the hearing that (in reference to claims handling):

And different companies have different approaches and different cultures, and I’m not suggesting any form of criticism in this, but I’m not sure how ultimately this is dealt with. Because the terms can remain the same, the underlying strength of the company can remain the same, but a very different claims handling approach can be manifested by policy, by which I mean company policy as opposed to policy terms, which can make a very big difference to policyholders.

The EHF obligation can therefore be an important element of the way a financial institution develops and implements its customer culture; that is, the way it deals with customers beyond the strict terms of the life insurance contract. This position is consistent with Allsop CJ’s observation in ASIC v Westpac that:

“The provision is part of the statute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to.[1]

Optimally, the obligation should be enshrined into an organisation’s key operational policies which deal with customer interactions. For example, claims handling has recently been elevated into a financial service under the Corporations Act and is therefore specifically subject to the EHF obligation. This has important implications for the fair treatment of policy holders generally and more specifically, the need to apply procedural fairness to claims in a more intense and concentrated way.

This need for integration of the EHF obligation into policies and procedures raises the need to more precisely map the legal requirements of the obligation, which this article undertakes in the following sections.

As far as breach reporting is concerned, under the new breach reporting regime, a breach of certain obligations is deemed to be a significant breach and therefore reportable. A key category in this regard is a breach of a civil penalty provision. The EHF obligation has recently been placed into this category of civil penalty provision. This means that if a breach occurs, one does not evaluate the extent and nature of the breach under the significance criteria but rather, such breach is automatically reportable. Hence it becomes very important to understand the legal dimensions of this obligation.

Relevant assessment criteria

Composite or singular obligations

The courts have been grappling with this issue in the context of the EHF obligation, the current state of play which can be summarised as follows:

  • the traditional position is that it is a collective or compendious obligation and on this basis, a breach would involve a breach of all 3 elements;
  • in ASIC v Westpac, the role of fairness and the possibility of singular obligations became a live issue;
  • in ASIC v AGM Markets, Beach J declined to adopt the singular approach;
  • in the 2 subsequent cases of MobiSuper and RI Advice Group,[2] the court flirted with the singular approach while keeping the compendious approach alive;
  • the courts have struggled with this approach recently and have in practice adopted a flexible approach of focussing on breaches of the individual components;
  • in this judicial process, the element of fairness has assumed more focus. To adopt the concept of equality articulated by George Orwell in Animal Farm, each of the 3 components are equal but some components are more equal than others. In the present discussion, the fairness component is more equal than the others. This was essentially the approach adopted by Allsop CJ and O’Bryan J in the ASIC v Westpac decision;[3] and
  • a difficulty with this approach is whether and when a breach of the efficiency component can constitute a breach of the overall obligation. We address this point below.

The Courts have said the collective obligation:

“connote[s] an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs.” [4]

Role of efficiency

One of the arguments against the obligation comprising individual singular obligations is that this would logically mean a breach of the efficiency component would mean there is a breach of the total obligation.

This efficiency element has not received a lot of attention. In the early influential case of Story, Young J first raised the conundrum of the difficulty the role of efficiency would play if the test were singular:[5]

“Thus I turn to the phrase “efficiently, honestly and fairly”. In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be the most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, tying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words “efficiently, honest and fairly” must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honestly and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.”[6]

“The “efficiently, honestly and fairly” standard applies as a single, composite concept, rather than three discrete behavioural norms.”[7]

“The word ‘efficient’ refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect.”[8]

Recently, despite adopting the composite, collective interpretation of the duty, the Court in the case of Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2)[9] seemingly focussed heavily on the efficiency component when it found that a licensee had breached the EHF obligation by failing to have in place adequate compliance, monitoring and supervision frameworks and to take reasonable steps to ensure that the relevant adviser did not breach the best interest obligations owed to clients.

It appears therefore that a breach of the efficiency component may be sufficient to establish a breach of the EHF obligation but it is strongly suggested that a qualification be adopted as follows:

  • the efficiency breach must be of such an extent that it leads to unfairness to customers; or
  • it is sufficient magnitude that it can be characterised as systemic or results in material loss to customers.

Role of fairness

The concept of fairness can capture both substantive fairness as well as procedural fairness. As R P Austin stated extracurially, the concept of fairness can capture:[10]

at least four potential criteria, which could be seen as cumulative or alternative:

    • the substantive fairness or justice of the conduct (substantive fairness);
    • impartiality/lack of bias of those engaged in the conduct (impartiality);
    • the legitimacy of their participation in the conduct (legitimacy); and
    • the procedural fairness concerning how they engaged in conduct (for example, whether they gave relevant parties the opportunity to be heard) (procedural fairness).”

The concept is well understood as designating an outcome vis-à-vis customers which damages, detracts from or dilutes their rights or otherwise prejudices them.

The recent Mobisuper decision, like the earlier ASIC v Westpac decision, also canvassed superannuation consolidation and importantly implicated the trustee in conduct which was unfair in terms of the issue of the product through the trustee’s failure to adequately monitor how the product was distributed. This last point is very significant as the financial service of issuing interests was seen to extend to the distribution activity of advisers who were seen as delegates of the trustee.

Other instances of unfairness can be considered in the context of case law examples canvassed below.

Role of honesty

The role of honesty is the least contentious. Its purview is not confined to concepts of criminal liability but also extends to unethical conduct “which is not criminal but which is morally wrong in the commercial sense”;[11] it also adopts an objective standard.[12]

Specific guidelines and guardrails

Case law examples

The courts have held that the following conduct breached the EHF obligation:

  • a misrepresentation that there was another active bidder for a company when there was not;[13]
  • acting carelessly on advice from another director that the defendant could give investment advice in relation securities of an associated company despite not being authorised to do so;[14]
  • inducing clients to trade in options to secure brokerage commissions;[15]
  • permitting inappropriate advice to be given to investors;[16]
  • offending the related party dealings prohibitions under Part 5C.7 of the Corporations Act;[17]
  • an adviser disclaiming that they cannot give advice about a dealing of a particular kind and referring the client to an entity that is likely to promote those types of dealings without being licenced to do so;[18] and
  • a financial institution providing general advice about a superannuation rollover service where the provider did not know and did not seek to know all matters that were relevant to whether the rollover recommendation was in the customers’ best interests nor did it know whether customers were aware of all of the relevant issues or had considered them.[19]

Fairness as a benchmark obligation and conduct regulator

This has been touched upon earlier. The contemporaneous challenge for financial services institutions in the face of these recent developments is to integrate fairness as a standard of conduct in its operations, procedures, processes, customer interfaces and decision-making.

Integration of EHF into decision-making and risk assessment

A suggested approach based on a balance of efficiency and outcome would be to leverage the EHF obligation into existing, similarly client-centric general law and statutory obligations.

For example, in the life insurance context, this approach would involve building on the existing obligations of utmost good faith under the Insurance Contracts Act and duty of priority under the Life Act.

The utmost good faith obligation is essentially one which currently regulates interactions with customers in relation to key areas such as disclosure and claims.

The priority obligation is a wider one relating to the investment, administration and management of the assets of a statutory fund.

To best integrate fairness as a standard of conduct into interfaces with customers, the following measures are suggested:

  • it be factored into the key areas of product development, product manufacturing and product distribution (including advice);
  • it also be factored into claims handling and other after-sales interactions such as complaints handling and internal dispute resolution; and
  • it be factored into management conduct and decision-making, such that when proposals from management reach the Board, the role of fairness will have been required to be articulated by management in the Board submission for consideration by the Board.

This will manifest itself in a standing agenda item of consideration of EHF for Board meetings where a product manufacturing, distribution, or other customer interface situations are being proposed or discussed.

To implement this suggestion, a sub-committee of the Board could be appointed to work with management on the implementation of this process.

Breach assessment and reporting

It is beyond the purview of this article to canvass the full dimensions of the new breach reporting regime. Rather for present purposes, an approach is suggested to formulate a proposal for:

  • how the EHF obligation can be integrated into operations and decision-making (as described above) so that as far as possible, breaches of the EHF obligation will not occur; however
  • if slippage occurs, how we can best evaluate whether there has been a breach.

In this regard, due to the complex and evolving legal nature of the EHF obligation, where a potential EHF breach is identified, the following protocols could be applied:

  • in accordance with ASIC recent guidance on breach reporting, knowledge of the potential breach will arise when Compliance is aware of the potential breach (although it would also arise in other circumstances, such as knowledge of the Legal or Risk teams);
  • while a breach of the EHF obligation is a deemed significant breach, it will still be necessary to consider whether a breach of the EHF obligation has occurred (as this may or may not be readily ascertainable);
  • due to the complexity of the issue, Legal and Compliance will work together to produce a set of assessment/evaluation guidelines for management, the breach reporting committee and the Board;
  • bespoke criteria should be adopted in relation to breach reporting committee; in particular, a legal opinion from Legal should be a pre-requisite to a determination by the breach reporting committee that a breach of the EHF obligation exists; in part this flows from the fact that there is no need/opportunity to consider significance. If a breach of EHF is determined, then legal consequences of a significant breach flow automatically, requiring an initial careful consideration by Compliance and Legal; and
  • due to the new breach reporting obligations also being triggered by an investigation being conducted for longer than 30 days, the actual initiation of an investigation into a breach of EHF should also be subject to notification to, and consensus of, Legal and Compliance.

Integration into culture

Relevant for present purposes are the concepts of “customer culture” and “community culture”. What Allsop CJ was discussing was really the way the actions and decisions of a life insurer impact on customer (and community) outcomes,[20] often in ways which organisations might not traditionally measure, or which organisations might not be aware of or commonly register and place value on. The EHF obligation is one way an organisation can be conscious of, and take steps to enshrine, customer outcomes into the organisation’s culture.

This is not just an important initiative to pre-empt what is clearly a legal reality but which is also turning into an increased focus on the cultural scorecard of an organisation by regulators, including representing a potential extension of directors’ duties. It is also entirely consistent with the duties of directors to act in the best interests of the company, as this type of focus on the 2 external aspects of culture mentioned earlier, namely customer culture and community culture, should result in better business volumes and retention, not to mention an enhancement to the reputation of the organisation more holistically.

If you are interested in the current landscape on the EHF obligation and how to build this obligation into existing governance frameworks, get in touch with one of our experts below.


[1] Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187, 174.

[2] Australian Securities and Investments Commission v MobiSuper Pty Ltd [2021] FCA 855; Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877.

[3] Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187.

[4] Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (In Liq) [2012] FCA 414; (2012) 88 ACSR 206 at [69]-[70].

[5] Ibid, [69]–[70]. See also Australian Securities and Investments Commission v Avestra Asset Management Ltd (In Liq) (2017) 348 ALR 525, 561.

[6] Story v National Companies & Securities Commission (1988) 13 NSWLR 661, 672 (Young J).

[7] Australia Securities and Investments Commission v Avestra Asset Management Ltd (In Liq) (2017) 348 ALR 525, 561 (Beach J).

[8] Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209, 338 (Edelman J) citing Story v National Companies & Securities Commission (1988) 13 NSWLR 661, 672 and 679. See also general discussion of the obligation as cited above in footnote 3.

[9] [2021] FCA 877.

[10] R P Austin, The Concept and Role of Fairness in Superannuation Law (2016), 11-12.

[11] Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (In Liq) [2012] FCA 414; (2012) 88 ACSR 206 at [69]-[70].

[12] R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) [1989] SASC 1941; (1989) 1 ACSR 93.

[13] Story v National Companies and Securities Commission (1988) 13 NSWLR 661 and Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (In Liq) [2012] FCA 414; (2012) 88 ACSR 206.

[14] R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) [1989] SASC 1941; (1989) 1 ACSR 93.

[15] Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (In Liq) [2012] FCA 414; (2012) 88 ACSR 206.

[16] Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209.

[17] Australian Securities and Investments Commission v Avestra Asset Management Limited (In Liq) [2017] FCA 497.

[18] Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124.

[19] Australian Securities and Investments Commission v Westpac Securities Administration Limited, in the matter of Westpac Securities Administration Limited [2018] FCA 2078.

[20] See section 2 above.


Michael Vrisakis
Michael Vrisakis
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Shan-Verne Liew
Shan-Verne Liew
+61 2 9225 5210