Unconscionability in Provision of Financial Services
Unconscionability in Provision of Financial Services

The recent Federal Court of Australia decision in Australia Securities and Investments Commission v Westpac Banking Corporation (Omnibus) [2022] SCA 515, in which Westpac was penalised an amount in excess of $113M, was informative in respect of the way that the Court will proceed in assessing the conduct of financial service providers.

This article is not intended to traverse all the matters considered in that case, but will instead discuss the way the Federal Court approaches issues of unconscionability in the provision of financial services and products, in light of the principles in section 12CC of the Australian Securities and Investments Commissions Act 2001 (‘the ASIC Act’). 

Legislative Background

Section 12CB of the ASIC Act is a contravening section, prohibiting a financial services provider in trade or commerce, or in connection with the possible supply of a financial service, or possible acquisition of a financial service, from engaging in conduct which is in all its circumstances unconscionable.

Section 12CC sets out circumstances in which conduct of the financial services provider might be regarded as unconscionable. 

Subsections (1)(a) to (l) set out in a statutory context the matters which the Court may have regard to in determining whether conduct has been unconscionable, and whether there has been a contravention of Section 12CB.

These issues include:

  1. bargaining position;
  2. unnecessary conditions;
  3. complexity of documents;
  4. undue influence;
  5. alternatives available;
  6. consistency of service with other recipients of services;
  7.  industry codes;
  8. the requirements of any code of any other industry;
  9. any failure to disclose material;
  10. the terms of the contract and the willingness to negotiate;
  11. the ability to vary any contract; and
  12. the extent of good faith between the parties. 

Judicial Consideration

Beach J spent some time elaborating on thirteen categories in which conduct might be considered unconscionable.  Those thirteen categories, and his Honours comments, are as follows:

His Honour said that in evaluating this conduct, the following concepts apply:

  1. The standard to be applied when assessing the conduct is a statutory standard, and not one limited by equitable doctrines.  The first resort is to be had to the wording of the legislation;
  2. There must be a close consideration of all the relevant facts.  This requires a fact-finding process which should not be closed or narrowed;
  3. The statutory concept of unconscionability is not aligned with the equitable principles of good conscience. The statutory obligation is a broader concept.  This will involve an analysis of the position of the recipient of the conduct, and the values of the provider and the recipient;
  4. The idea of conscience is a construct of values and standards against which the conduct of all providers, not only the defendants, is to be judged.  It is a construct of values and standards informed by the explicit and implicit values and shown in the context and purpose of the ASIC Act and Corporations Act;
  5. There should be no gloss on these statutory terms such as morality or goodness.  The wording of the legislation should be used, and rather than terms of “morality” or “goodness”, words such as “unjust” or “unfairness” should be used;
  6. In determining these underlying values and conceptions, principles of fairness and equality set out in Section 12CC underline the criteria in subsections a, b, d, e, f, i, j and k, which relate to power and balance between the parties, knowledge and ignorance of a party and risk and value of a transaction. Good faith comes in by subsection l;
  7. Unfair conduct of and in itself is not unconscionable conduct.  However, establishing unfair contact will go a long way to showing unconscionable conduct if it amounts to an illegitimate exploitation of a person’s vulnerability, and therefore amount to unjustified pursuit of self interest;
  8. The statutory unconscionability does not require only focusing on the alleged wrongdoers’ state of mind or that of its officers or employees; it is a broader objective evaluated across the sector;
  9. What is happening in the industry and practiced generally is applicable in determining the state of mind on an objective basis of the contravener;
  10. Other statutory regimes could be considered when assessing this unconscionability;
  11. It is not necessary to show that a person is under a particular disadvantage or has been disadvantaged; to prove unconscionability, it is not necessary to show some pre-existing disability, vulnerability or disadvantage which was taken advantage of.  On the same token, the mere existence of disparity and bargaining power does not establish that the party which enjoys the superior power has acted unconscionability;
  12. Each of the matters listed in 12CC must be considered and weighed up, and it is inappropriate to focus on a few or only one or two;
  13. And lastly, if conduct is considered to amount to a breach of the legislation, then a pecuniary penalty ought to be imposed as a starting point without further submission. 

Matters to be taken away and considered

The concept of unconscionability in transactions is something which ought not to pervade the provision of financial services.  Of course, every single individual is different, and there is an attempt to align the concepts of unconscionability with values-based conduct.

It can be difficult for financial services providers to establish systems which apply to all people they deal with.  The concept of acting in good faith, however, should be an underlying principle applicable together with the concept of being able to negotiate, and to deal with any unusual circumstances raised by an individual.

This legislation, together with the unfair contracts legislation contained in the ASIC Act and the Australian Consumer Law, go a long way to demonstrate to financial services providers how and in what way they can establish systems and procedures in order to protect the vulnerable in our community.

There is also a sting in the tail – if the steps taken by the financial services provider are judged to be inadequate, then prima facie, a penalty should be imposed.

We are able to help you manage claims, and also to develop and manage your compliance programs.  If you have a query relating to any of the information in this article, or you would like to discuss a matter of your own, please don’t hesitate to get in touch with Banking and Finance Partner Nick Maley today

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