Banks make mistakes too – and that’s OK (sometimes)
A recent case involving ASIC and the Commonwealth Bank of Australia (“CBA”) has some important lessons for financial businesses. The case is Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1422 (“ASIC v CBA”). The judgment of Justice Downes in the Federal Court was delivered on 29 November 2022.
What were ASIC’s allegations?
ASIC v CBA was a case about monthly account fees (“MAFs”). CBA had charged MAFs to customers who were entitled to MAF waivers. ASIC started proceedings against CBA in March 2021. ASIC alleged a number of breaches of the law by the CBA.
Misleading and deceptive conduct: First, ASIC claimed that CBA had engaged in misleading and deceptive conduct. Every time a MAF had been charged, CBA was representing to the customer that it had a right to charge the MAF, which was not the case when a MAF waiver applied.
Misrepresentations: Second, ASIC claimed that CBA made misrepresentations to customers, because there was an implied representation that it had (and would have) adequate systems and processes to ensure that MAF waivers were applied, but the reality was that it did not have adequate systems.
Breach of conduct obligations: Third, ASIC alleged that CBA contravened the general conduct obligation of a financial services licensee under the Corporations Act to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. This was because the CBA systems and processes were not capable of ensuring compliance with obligations to customers, and because CBA had failed to undertake an appropriate review of the multiple systemic issues that contributed to the ongoing failure of CBA systems to apply MAF waivers.
What the court decided
Misleading and deceptive conduct
ASIC claimed that a reasonable customer would think that if a fee was charged to their account, the bank had a right to charge the fee. They said that was misleading in this case.
Justice Downes took different view of what a reasonable customer would expect:
The members of those classes of customers who entered a contract with CBA in relation to the relevant accounts are likely to be taking reasonable care of their own interests. They are also likely to have had their own personal experiences of, or otherwise be aware that there is at least some prospect of, computer systems malfunction, software design errors, and human error in relation to data input. They would be aware that CBA’s systems are computerised and that CBA’s processes involve human interaction with those systems. They would understand that customer account statements are generated by CBA’s computerised systems and, having regard to the size of CBA’s operations, are unlikely to have been reviewed by any of CBA’s personnel before being issued. They would also be aware that the systems and processes within large organisations such as banks are not and cannot be expected to be perfect all of the time; that all organisations (even banks), and the people within them, sometimes make mistakes and that, for a variety of reasons, a contractual promise by CBA to waive a fee otherwise payable in relation to their account might not translate into that fee being waived for reasons which may not involve any intentional conduct by CBA. (88)
She went on to find that:
While the customer expects that the bank will adhere to the terms of the contract, the ordinary and reasonable customer (as described above) does not expect perfection from a bank in the performance of its contract. (92)
Justice Downes observed that the account statements sent by CBA to customers contained a note on the first page requesting the customers to check that the entries on the statement were correct and to contact CBA immediately if there were any errors. The account terms and conditions also included a statement encouraging customers to check the transactions on their statement. These paragraphs proved to be an important factor in Her Honour’s conclusion that CBA had not engaged in misleading conduct. Financial institutions should consider whether they have warnings or statements of this kind in their product documentation, which might help protect them when things go wrong.
Misrepresentation
On the ASIC claim about misrepresentation, the Judge held that a promise in a contract will generally be an actionable implied misrepresentation only if the person making the promise had no intention or capability of carrying it out at the time that it was made. That was not the case here.
Only a month before the decision in ASIC v CBA, the decision in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [2022] FCA 1251 (“ASIC v ANZ”) was handed down. There were similarities with the facts of that case. It also involved a bank not providing a promised contractual benefit on certain customers. In ASIC v ANZ, ANZ agreed with ASIC’s claim that on each occasion that ANZ issued contractual documents, ANZ had made implied representations that it had, and would continue to have, adequate systems and processes in place to administer the particular benefits on relevant products in accordance with the contractual documents.
Justice Downes said that ASIC v ANZ was of no assistance in this case. One of the reasons she gave was that ASIC v ANZ proceeded on an agreed basis as to the facts, the legal characterisation of those agreed facts, and the statutory contraventions ultimately alleged by ASIC. In other words, ANZ basically agreed with everything that ASIC was alleging. Justice Downes warned against using cases of this kind as a precedent, citing the words of Justice Derrington in yet another recent case involving ASIC and a big bank, Australian Securities and Investments Commission v National Australia Bank Limited [2022] FCA 1324:
great care should be taken in relying on consent determinations, especially where the applicant is a regulator and any agreement as to statutory contravention might well have been motivated by extraneous factors.
This is an important statement not only for companies involved in court actions and the lawyers representing them. It’s also important for those of us watching these cases and trying to draw lessons from them on compliance requirements. The thing to understand is that ASIC sometimes wins cases because the defendants don’t contest the allegations against them. There may be many good reasons for doing that. Sometimes it is simply not worth having the argument with ASIC. But we should be wary of giving too much weight to cases where the bank has decided not to take on ASIC.
Breach of conduct obligations
The third claim by ASIC – that CBA had breached its general conduct obligations as a licensee – was also unsuccessful. Section 912A(1)(a) of the Corporations Act requires that a financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. Justice Downes found that this was not a standard of perfection:
… the obligation imposed by s 912A(1)(a) must accommodate the possibility of error; were the position otherwise, then s 912A(1)(a) would set a standard that demanded absolute perfection, rather than a reasonable standard of performance. (152)
The Judge was not impressed by ASIC’s argument that CBA’s systems and processes were not “adequate” or “capable” throughout the relevant period, simply because errors had occurred. ASIC did not provide any expert evidence or comparisons to back up this claim. That was not enough to prove its claim. The Judge held:
a failure to apply a waiver properly at one point in time (or even numerous points in time) does not tell you what it is about CBA’s systems and processes which is not “adequate” or “capable”, or whether that was the case, or when that was the case (including whether it was a continuing failure). All it tells you is that there has been a failure. A case of the kind brought by ASIC cannot be proved in this way, especially having regard to the need for ASIC to establish what CBA should have done, but failed to do. (158)
Conclusion
The key lessons from ASIC v CBA are:
Don’t promise perfection to your customers – telling them upfront that mistakes happen can help protect you when they do.
If you don’t do what your terms and conditions say, it doesn’t necessarily mean that you have misled your customers.
Banks do make mistakes, and perfect performance is impossible. Just because you make mistakes does not mean you are in breach of your licence obligation to act efficiently, honestly and fairly.
When a bank being sued by ASIC does not roll over and agree with ASIC’s allegations, the outcome can be very different to when ASIC and the bank agree.
Patrick Dwyer and Kathleen Harris
Legal Directors