Faulty systems and processes have serious legal consequences
If you promise benefits to customers and do not deliver them because your systems and processes are inadequate, customer complaints are not your only concern: you could be breaching the law.
This was brought home in the recent case of Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [2022] FCA 1251.
ASIC sued ANZ Bank over its Breakfree package loan. Like most package loans, customers paid an annual fee and were supposed to receive fee waivers and interest rate discounts on eligible ANZ products. Customers with offset accounts were entitled to interest rate reductions on eligible home and commercial loans linked to an ANZ offset account.
ANZ failed to apply some of these benefits over a long period – stretching back to the mid-1990s for some customers.
In his decision handed down on 26 October 2022, Justice O’Callaghan of the Federal Court ordered that ANZ pay a penalty of $25 million and publish an adverse publicity notice.
ANZ issued terms and conditions for its Breakfree product which promised benefits that were not received. By doing this, ANZ made “implied representations that it had, and would continue to have, adequate systems and processes in place” to administer those benefits, when all the while it did not have adequate systems and processes, and did not have reasonable grounds for saying so. These representations to customers were found to be misleading or deceptive conduct, or conduct that was likely to mislead or deceive, and also found to be false or misleading representations concerning the benefits of services.
The false or misleading representations finding was the basis of the $25 million penalty. Section 12DB(1)(e) of the Australian Securities and Investments Commission Act 2001 (Cth) (the “ASIC Act”) states that a person must not make a false or misleading representation that financial services have sponsorship, approval, performance characteristics, uses or benefits.
The breaches of the ASIC Act led to a finding by the court that ANZ had breached its obligations as an Australian financial services licence holder and as an Australian credit licence holder to comply with the financial services laws and credit legislation respectively.
The misleading and deceptive conduct breaches would now be reportable under the new breach reporting obligations.
But the effects of the breaches went even further. ANZ’s failure to maintain adequate systems and processes to apply the Breakfree benefits, and its failure to conduct adequate monitoring or analysis of its systems and processes to identify the issues, were held to be a breach of its licence obligations to do all things necessary to ensure that its financial services and credit activities were engaged in efficiently, honestly and fairly.
ANZ admitted to the contraventions and has been remediating customers.
Last week, ASIC was successful against another big bank in a case that also involved misleading and deceptive conduct and false or misleading representations. In Australian Securities and Investments Commission v National Australia Bank Limited [2022] FCA 1324, Justice Derrington of the Federal Court ruled that National Australia Bank (“NAB”) had continued to charge periodic payment fees to customers when it knew that it was not entitled to charge these fees under its contracts with customers. This conduct was not only misleading and deceptive: NAB’s knowledge of the overcharging led the judge to find that NAB’s conduct was unconscionable, in breach of section 12CB(1) of the ASIC Act.
And because the conduct was unconscionable, NAB had not done all things necessary to provide financial services to its overcharged customers efficiently, honestly and fairly. Once NAB became aware of the overcharged fees, “it was neither competent nor ethical to continue to charge them and to fail to inform [clients] or advise them to review their accounts. Neither could it be said to be fair or honest. Compliance would require suitable remedial action to be undertaken with appropriate urgency once aware of the wrong it had done”.
A further hearing will be held to determine any penalties against NAB.
The lesson from the NAB case is that once an overcharging issue has been identified, it needs to be fixed ASAP and properly disclosed to customers. It’s not acceptable to sit on the problem.
Patrick Dwyer and Kathleen Harris
Legal Directors