As recently recognised by our financial services partner Michael Vrisakis, understanding the Corporations law is much like unpacking Russian dolls. Put simply, complying with the Corporations law is more difficult than it needs to be. But we don’t need to tell you that.

In its first (interim) Financial Services Legislation Report published yesterday, the ALRC recognises the consensus among industry around the drafting of Chapter 7 that has created a proliferation of overlapping provisions and a labyrinth of definitions giving rise to unnecessary complexity. The ALRC, rather than having one or more top-level dolls concealing other dolls, is attempting to lay them all out on the table.

The ALRC proposed to clarify the “efficiently, honestly and fairly” cornerstone obligation for AFS licensees under section 912A(1)(a) of the Corporations Act. In particular, they recommend that the legislation:

  1. make clear that the constituent terms are standalone obligations by separating them into individual paragraphs, which is currently the subject of some uncertainty;
  2. replace the word “efficiently” with “professionally”, in accordance with the meaning established by the case law; and
  3. insert a note containing examples of conduct that would fail to satisfy the “fairly” standard.[1]

Standalone obligations

The team at HSF have been closely following and commenting on the uncertainty around the phrase “efficiently, honestly and fairly”, in particular, whether the phrase is to be read compendiously or as standalone obligations. We have also commented on the recent judicial trend towards interpreting the three components of the phase as standalone obligations.

The ALRC is proposing to clarify this uncertainty in favour of the views expressed by Allsop CJ and and O’Bryan J in ASIC v Westpac Securities Administration Limited[2]. In this case, O’Bryan J firmly rejected the compendious view of section 912A(1)(a) in favour of the terms being standalone obligations, as was upheld by Allsop CJ in Paciocco:[3]

It seems to me that the concepts of efficiently, honestly and fairly are not inherently in conflict with each other and that the ordinary meaning of the words used in s 912A(1)(a) is to impose three concurrent obligations on the financial services licensee: to ensure that the financial services are provided efficiently, and are provided honestly, and are provided fairly.[4]

Competence: It’s justice. It’s law. It’s the vibe.

The ALRC proposes that an alternative term to “efficiently” be used that corresponds with the meaning attributed to “efficiently” by the courts. They submit that the best fit is “professionally.” However, we suggest the best replacement is “competent.”

The ALRC suggests that “professionally” or “professionalism” as referred to in section 760A(b) (“fairly, honestly and professionally”) and the general objects of Chapter 7 should be adopted in section 912A instead of “efficiently.”

However, when you delve deeper, “professionally” does not appear to be aligned with the ordinary meaning of “efficiently” as intended in section 912A(1)(a). Indeed, Professor Latimer, as referenced in the ALRC Report, argues that the “tone” of efficient, or “the vibe of the thing”, is in the sense of being “adequately qualified or capable.”[5] And we agree.

If we are arguing that the replacement should be in accordance with the meaning established by the case law, then this should be competence. Indeed, the courts have held “efficient” to mean a person who performs their duties efficiently, meaning the person produces the desired effect, and is capable and competent. At a licensee level, “inefficiency” may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance objectively expected of them.[6]

Further, as held by O’Bryan J in ASIC v Westpac[7] “one of the meanings of the word “efficiently”, and the meaning well adapted to the statutory provision, is competent, capable and having and using the requisite knowledge, skill and industry.”

Indeed, if you look at section 912A more broadly, “professional” is not referenced at all, but “competence” is referenced in the other general obligations of a licensee to ensure that its representatives have, and maintain, the necessary knowledge and skills to competently provide those services.

Competency would also be a better fit in the sense that section 912A(1)(a) is sliding scale that would vary according to the nature, scale and complexity of the licensee.[8]

Finally, using a “competency” yardstick would mean that a breach must involve conduct that is incompetent, which seems to be a reasonable basis for invoking and justifying a civil penalty provision. In other words, we are not talking about a trivial dereliction of duty, but something more serious. The term also houses sufficient fluidity to afford a court some degree of discretion to treat lower level dereliction as something less than incompetency. This, in combination, should avoid the central problematic aspect of “efficiency” as a yardstick; namely, as a standalone obligation, any inefficient conduct could mean a breach of a civil penalty provision.

What’s on your Christmas wish list?

The Report includes dozens of submissions to simplify and improve the Corporations law and we have only touched on one area. Now is your time to have your say on these potential areas of reform and submit your “Christmas wish lists”, due to the ALRC by 25 February 2022. The HSF team has extensive experience in assisting licensees to understand their cornerstone obligations and how to best put them into practice. Get in touch with one of our experts below.

 

[1] ALRC Report, p19.

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

[3] Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 at [296].

[4] (2019) 373 ALR 455, 549 [426].

[5] Paul Latimer, ‘Providing Financial Services “Efficiently, Honestly and Fairly”’ (2006) 24(6) Company and Securities Law Journal 362, 373.

[6] Story v National Companies and Securities Commission (1988) 13 NSWLR 661, 672 and 679.

[7] (2019) 373 ALR 455.

[8] See for example ASIC’s commentary in Regulatory Guide 104 AFS licensing: Meeting the general obligations.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Abby Sutherland
Abby Sutherland
Solicitor
+61 2 9225 5312