Following concerns that the current law has not prevented misconduct in the financial services industry or data and privacy issues in digital platforms, regulators and judges have suggested that the Australian Consumer Law (ACL) should include a general prohibition of unfair practices.
This change would give more discretion to courts and regulators and could make the law more flexible and responsive to evolving community expectations. But it would also reduce certainty and make it more difficult and costly for businesses to comply with the law – particularly under Australia’s enforcement framework, with its focus on court action seeking high penalties.
The United States and the United Kingdom both provide general protections against unfair practices, which may be useful in considering a comparable prohibition in Australia.
It may be even more useful to consider the enforcement framework in which these overseas protections operate. Recognising the inherent uncertainty of a general prohibition of unfair conduct, enforcement in these jurisdictions emphasises the identification, mitigation and discontinuation of concerning conduct, and generally only imposes penalties when that conduct is repeated.
If such a prohibition is introduced in Australia, a considered approach to enforcement will be necessary to achieve the benefits of a broader prohibition while reducing its costs. Such an approach would have better suited recent cases of concern, such as ASIC v Kobelt, and would provide more satisfactory results in the future.
Unconscionable conduct and Kobelt
Section 21 of the ACL currently prohibits conduct in connection with an actual or potential transaction “that is, in all the circumstances, unconscionable”. This is a moral standard based on community expectations, taking into account a number of non-exhaustive statutory factors set out in section 22 of the ACL.
The ACL has been amended a number of times to emphasise that this statutory prohibition should not be limited by the case law on the equitable doctrine of unconscionability. However, there is still a concern that the protection remains out of line with community expectations of the law.
These concerns were repeated recently in the High Court case of ASIC v Kobelt, which centred around the form of credit called “book-up” used in remote communities.
Book-up often involves a customer giving their debit card and PIN number to a storekeeper, who can withdraw money from the account as soon as wages or other payments are deposited, and use that money to pay down the customer’s debt and fund future purchases from the store. In Kobelt, the book-up system was also used to fund the purchase of used cars.
Book-up can provide benefits to customers who may not have access to other forms of credit, or who find it convenient to manage their money over the payment cycle. But it can prevent customers from spending their money anywhere else, and it can take away their control over repayments. Mr Kobelt’s system was poorly documented and the credit for cars was relatively expensive.
The primary judge and three members of the High Court found that Mr Kobelt’s system was, in all the circumstances, unconscionable. It took advantage of customers’ vulnerability to impose excessive credit costs and conditions that were not reasonably necessary to protect Mr Kobelt’s interests, tying them to Mr Kobelt’s store without justification.
The full bench of the Federal Court and the majority of the High Court found that the conduct was not unconscionable. Mr Kobelt’s customers understood the arrangement, entered into it voluntarily and were able to avoid or withdraw from it if they wanted to. The system was well suited to their cultural context and provided credit that was not otherwise available.
The High Court decision resulted in renewed calls for a more expansive prohibition, such as a prohibition against unfair conduct. Similar calls have been made over more than 20 years.
Calls for a prohibition on unfair conduct
In 1997, the Reid Committee’s report, Finding a Balance: Towards Fair Trading in Australia, recommended that the prohibition against unconscionable conduct should be replaced with a prohibition against unfair conduct, on the basis that:
The word ‘unfair’ has the strong advantage of being widely understood, being part of the everyday moral vocabulary of all Australians. Indeed, fairness is the social value central to the maintenance of social cohesion and the legitimacy of the social system.
That recommendation was not adopted, and instead the legislature continued to extend and clarify the existing concept of unconscionable conduct.
In 2017, the Australian Consumer Law Review (ACL Review) conducted by Consumer Affairs Australia and New Zealand (CAANZ) identified a number of persistent unfair practices, including overcharging or otherwise taking advantage of customers who do not adequately understand the transaction or do not have any alternative.
It noted that other jurisdictions had developed general protections against unfair trading practices, and committed to investigate whether a similar prohibition would provide additional protections in Australia – noting that Australia already has a number of general and specific provisions addressing misleading and deceptive, unconscionable and unfair practices.
Then in 2019, in both the Digital Platforms Inquiry report and the draft report into Customer Loyalty Schemes, the ACCC identified additional unfair practices, such as collecting and disclosing consumer data without sufficiently informed consent, failing to protect consumer data, and unilaterally changing terms or conditions without notice or redress.
To address these practices, the ACCC recommended a new prohibition against “certain unfair trading practices”. In doing so, it noted that overseas prohibitions “are not unrestrained, and have boundaries that are codified in law”. Similarly, in Australia:
The scope of such a prohibition should be carefully developed such that it is sufficiently defined and targeted, with appropriate legal safeguards and guidance.
The reports also acknowledged the work being done under the ACL Review and noted that the ACCC would progress its support for the recommendation through the CAANZ forum.
Shortly after the High Court decision in Kobelt, Justice Chris Maxwell gave a speech to the Victoria Law Foundation about the role of ethics in law, judges as moral arbiters, and concepts such as unfairness, injustice and unconscionability in the courts.
Justice Maxwell noted Justice Edelman’s dissenting judgment in Kobelt, which considered that the continued use of the term “unconscionable” could be limiting the potential of the statutory prohibition, and that:
[A]ny “lowering of the bar” … may only be possible if “unconscionable” is replaced with “unjust” or “unfair”.
Justice Maxwell gave some support to this proposal, saying that:
[I]t would certainly promote better understanding by all concerned – and, it might be hoped, higher standards of conduct – if we had a prohibition on conduct which was “in all the circumstances, unfair”.
It’s up to the legislature to be clear about what they mean, and if what they mean is unfairness, which I think they do, then we should change the test to that.
We do not understand their Honours or the ACCC to be proposing a simple replacement of the word “unconscionable” with “unfair” in the legislation without further definition or guidance. The CAANZ process is still underway, and its conclusions about the need for, and the form of, any unfair practices prohibition are not yet known.
It is not yet clear whether any new prohibition would supplement or replace the existing provisions relating to unconscionable conduct. Would it be further defined or limited by legislation, or illustrated by non-exhaustive factors or administrative guidance? Would it refer to objective elements such as consumer harm, or to more subjective moral or ethical standards? Would it be limited to consumer or small business transactions? Will it be subject to the same penalties as other breaches of the ACL?
As well as the threshold question of whether there is a need for an additional general prohibition of unfair conduct, these questions must be carefully considered before any decision is made. In doing so, it will be useful to consider the approach of other major jurisdictions that address unfair practices.
Other jurisdictions will be instructive not only for the definition of unfair conduct, but also for the way that compliance is encouraged or enforced, recognising that a general prohibition against unfair conduct will result in some increase in uncertainty.
In the US, section 5 of the Fair Trade Commission Act prohibits unfair or deceptive acts or practices. An act or practice may be unfair if it causes substantial consumer injury that the consumers themselves could not reasonably have avoided and that is not outweighed by countervailing benefits to consumers or competition. This is an objective standard that deliberately avoids moral or ethical considerations such as community expectations of acceptable business conduct.
Breach of section 5 does not directly result in penalties. Instead, the Fair Trade Commission (FTC) can issue or threaten a complaint against a company, which will often reach a settlement including undertakings. These then have legal force and a breach can give rise to penalties – with a separate violation potentially arising in relation to each affected user on each day of non-compliance.
For example, the FTC’s record $5 billion settlement with Facebook in 2019 was based on Facebook’s alleged breaches of a 2012 consent order in which it had agreed to establish better privacy disclosures and protections. This process allowed the FTC and Facebook to identify conduct that was unfair and deceptive in the circumstances and address any departure from that agreed definition. It resulted in very substantial penalties, but only after the broad concept of unfairness had effectively been narrowed and made specific to the context of Facebook’s conduct.
In Europe, Article 5 of the Unfair Commercial Practices Directive (UCPD) defines an unfair practice as one that is contrary to the requirements of professional diligence – the standard of care that a supplier is reasonably expected to exercise – and that materially distorts the economic behaviour of consumers by impairing their ability to make an informed decision.
This definition includes both a moral element, referable to community expectations, and an objective impact on consumers – combining the approaches of unconscionable conduct in Australia and unfair conduct in the United States. It also treats misleading or deceptive conduct as a category of unfair conduct, rather than as a separate form of conduct as in the United States and Australia.
Implementation and enforcement of the UCPD is left to each individual member state. The United Kingdom has implemented it effectively verbatim. It offers a range of enforcement options from advice on compliance, warning letters, undertakings or enforcement orders through to criminal prosecution.
In practice, enforcement in the UK is consistent with the enforcement of the FTC Act in the US. For example, the Competition and Markets Authority (CMA) action against secondary ticketing websites began with letters requiring operators to change their practices, followed by an enforcement order against one of the companies, Viagogo. The CMA then threatened contempt proceedings against Viagogo for breach of the order, which were withdrawn when Viagogo complied.
The usual processes in both jurisdictions are more iterative and consultative than the typical enforcement of unconscionable conduct in Australia, which has more often led directly to court action seeking high penalties. This contrast has implications for any changes to the ACL.
It is unclear whether the Kobelt case would have been decided differently if there were a prohibition against unfair conduct, whether defined according to the United States or European standards or simply by replacing “unconscionable” with “unfair” in the Australian law.
None of the judges who found that Mr Kobelt’s system was not unconscionable expressed any discomfort with their decision or gave any indication that the law had led to an unjust result. They recognised that there were imperfections in Mr Kobelt’s book-up system but considered that there were also benefits and that most of his customers sufficiently understood them. Given this characterisation of the conduct, those judges could well have decided the case in the same way.
Even if a different provision might have resulted in a split decision narrowly in favour of ASIC – instead of narrowly against it – the case serves to illustrate, rather than resolve, the problems with enforcing any uncertain general prohibition through winner-take-all court action.
In many cases it would be more effective to adopt a more collaborative and iterative approach, which sought to define the parameters of fair conduct through consultation and corrective measures such as undertakings, and imposed penalties only where those clear boundaries were breached.
ASIC identified the risks and benefits of book-up credit as early as 2002 and published consumer guides in 2005 and 2012. It interviewed Mr Kobelt in November 2011 and took action against him in May 2014, before publishing its most definitive report into book-up in October 2015.
It is not clear whether ASIC or Mr Kobelt were open to avoiding legal action by improving Mr Kobelt’s book-up system. But in hindsight it may well have been preferable if they been able to reach agreement on a reformed system that preserved its benefits and mitigated its detriments.
This would depart from the usual enforcement approach in Australia, which has relied heavily on deterrence based on high penalties. In arguing for civil penalties for unfair contract terms, the ACCC has expressed frustration that it is must act as a “compliance officer” for businesses and that its engagements lead to negotiations and administrative outcomes rather than litigation.
However, while high penalties provide strong deterrence against clearly defined conduct such as a cartel offence or a specific unfair practice, they will be less effective where prohibitions refer to moral or ethical standards. It is difficult to predict how these standards will be applied to a particular form of conduct, as was amply illustrated by the opposing judgments in the Kobelt case. The difficulties in relation to unconscionability may well be amplified rather than reduced in the context of the broader concept of unfair conduct, depending on how that concept is defined and targeted.
This not an argument against civil penalties or litigation, but for an intermediate stage to identify and define the conduct, as is common in the major jurisdictions with an unfair practices prohibition.
Any introduction of a prohibition against unfair practices should carefully consider its scope and the compliance framework in which it is to operate, both in assessing the relevance of international examples and in maximising the effectiveness of Australia’s approach in identifying and addressing unfair practices. The more general and subjective the prohibition is, the more likely it is that an iterative and consultative approach will be needed. This may require changes on the part of enforcement agencies as well as businesses.