The Banking Litigation Law Review

13/01/2022

The Australian banking landscape has undergone extensive transformation in recent years, particularly following the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) and the subsequent introduction of a broad suite of related legislative forms, many of which have directly targeted the banking and financial services industry.

These developments have led to new trends in Australian banking disputes. Civil claims (including class actions), regulator investigations and regulator enforcement action against financial services entities and individuals have soared. There is enhanced oversight and scrutiny by better-funded regulators with more serious penalties at their disposal, increased emphasis on accountability for individuals (especially directors and senior executives) and a more active class action market.

Partners Richard Harris and Philippa Hofbrucker, and lawyers Kasia Dziadosz-Findlay, Dominic Eberl and Bradley Edwards detail key recent updates in Australian banking litigation in the fifth edition of the Banking Litigation Law Review.

Overview

Key recent updates in Australian banking litigation are detailed below.

Significant recent cases

Noteworthy cases commenced or determined in recent times are discussed below.

‘Fee for no service’ conduct

Over the past two years or so, the Australian Securities and Investments Commission (ASIC) has commenced proceedings against a number of financial institutions for ‘fee for no service’ conduct, being circumstances where a financial service provider is unable to determine if an advice service (e.g., an annual review) was provided (either because a record cannot be located or the service was not in fact provided). More recently, this also involved consideration of related customer disclosure requirements in terms of fee disclosure statements (FDSs) and renewal notices. As set out below, a number of those proceedings have now been resolved, although at least one further proceeding has been commenced.

ASIC v. NAB

In December 2019, ASIC commenced civil proceedings against the National Australia Bank (NAB) for alleged contraventions of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Corporations Act 2001 (Cth) (Corporations Act) for ‘fee for no service’ conduct and related disclosure failures.

NAB admitted to breaching the Corporations Act by failing to provide timely FDSs where required, inappropriately charging fees to certain clients after the arrangement terminated by operation of statute and by reason of those failures, and failing to comply with the ‘efficiently, honestly and fairly’ obligation. NAB also admitted to breaching the ASIC Act by engaging in misleading or deceptive conduct by misstating in FDSs fees paid or services provided to clients.

On 26 August 2021, the Federal Court delivered judgment and accepted these admissions and ordered NAB to pay a civil penalty in the amount of A$18.5 million (noting that ASIC submitted that a penalty of A$40 million was appropriate and NAB submitted that a penalty of A$15 million was appropriate). Of note, in assessing the penalty, the Court rejected the submission that an absence of pecuniary loss meant that there was no harm to customers. Davies J noted that customers can suffer harm in a loss of confidence in the reliability and accuracy of information provided to them.

ASIC v. BTFM and Asgard

On 21 August 2020, ASIC commenced civil proceedings against two Westpac Banking Corporation (Westpac) superannuation entities for charging adviser fees to customers for financial advice that was not provided in circumstances where customers had requested to remove their adviser from their account.

BT Funds Management Limited (BTFM) and Asgard admitted to breaches of the ASIC Act provisions relating to false or misleading representations as to the price of services and the Corporations Act and the ASIC Act provisions relating to misleading or deceptive conduct. Asgard also admitted to failing to comply with the ‘efficiently, honestly and fairly’ obligation. On 22 July 2021, the Federal Court delivered judgment. Of note, Wheelahan J rejected ASIC’s submission that the contraventions should be given more weight because they arose in the context of the provision of superannuation products. BTFM and Asgard were each ordered to pay a A$1.5 million civil penalty.

ASIC v. AMP

AMP’s alleged ‘fee for no service’ conduct was extensively examined in the Royal Commission. On 16 July 2021, ASIC announced that it had finalised its investigation into suspected criminal conduct in relation to those matters and, in consultation with the Commonwealth Director of Public Prosecutions (CDPP), had determined not to take any further action.

ASIC did, however, commence two civil proceedings against AMP entities arising from that alleged conduct. The first proceeding was commenced on 27 May 2021 in connection with advice fees and insurance premiums charged to deceased customers. The second proceeding was commenced on 30 July 2021 in relation to AMP entities charging adviser fees to superannuation members who could no longer receive service. Both matters are in their early stages.

Civil penalties

ASIC v. CBA – overcharged interest

On 30 November 2020, ASIC commenced civil proceedings against the Commonwealth Bank of Australia (CBA) for allegedly charging interest on business overdraft accounts at rates substantially higher than what the customers had been advised. CBA admitted that it breached the ASIC Act by making false or misleading representations as to the price of services and engaging in misleading or deceptive conduct. CBA further admitted that it breached the Corporations Act by failing to comply with its general obligation to adhere to financial services laws.

On 6 March 2021, the Federal Court delivered judgment regarding the applicable penalty. The Court acknowledged that the root cause of the overcharging was not deliberate but rather an unfortunate error. However, a key aggravating factor was that CBA was aware of the error for a considerable period of time after it occurred and addressed it only after a customer made a complaint. CBA submitted that an appropriate penalty was between A$4 million to A$5 million while ASIC submitted that an appropriate penalty was A$7 million. On 6 April 2021, Lee J ordered CBA to pay a A$7 million civil penalty because the breaches were serious in nature and the number of false and misleading representations was significant, and to prevent similar conduct of this type and nature.

In relation to an adverse publicity notice, the parties provided evidence about the efficacy and impact of adverse effects on customers of such notices. The Federal Court accepted that, if a notice were to be published too broadly, it would be open to being misinterpreted, and may cause anxiety, confusion, distress, alarm or suspicion among customers. Lee J considered that it was appropriate to rethink the standard form of adverse publicity notices, including providing audiovisual notices. However, other recent decisions of the Federal Court have taken a more orthodox approach to adverse publicity notices, simply requiring the publication on an entity’s website.

Criminal prosecutions

ASIC has recently conducted several investigations into suspected criminal conduct by financial services institutions. While, as mentioned above, no further action was taken against AMP, this year the CDPP commenced criminal proceedings against two other major financial institutions following investigations and referrals by ASIC. This demonstrates how seriously the conduct of financial institutions continues to be scrutinised in Australia.

CDPP v. ME Bank

On 25 May 2021, the CDPP filed criminal charges against Members Equity Bank Limited (ME Bank) in relation to allegedly making false and misleading representations in letters to home loan customers and failing to provide written notice to customers about repayment amount and annual interest rate changes.

This is the first criminal prosecution under Section 12DB of the ASIC Act, which concerns making false and misleading representations to customers in respect of the price of services in connection to the supply of financial services. The case also concerns violations by ME Bank of the National Credit Code. The matter is next before the court on 3 November 2021.

ASIC alleges that this misconduct occurred due to failures in ME Bank’s systems and processes. This further highlights how critical it is for financial institutions to ensure that they have adequate compliance frameworks in place, and that those systems and processes are operating effectively.

CDPP v. CBA

On 16 September 2021, criminal charges were also brought against CBA alleging contraventions of Section 12DB of the ASIC Act in relation to the mis-selling of consumer credit insurance. The conduct relates to add-on insurance policies sold by CBA to customers who did not meet the employment eligibility criteria to claim certain benefits under those policies. CBA has pleaded guilty to the charges and the matter is listed for a sentencing hearing on 29 October 2021.

Best interest duty and personal advice

On 3 February 2021, the High Court of Australia delivered judgment in Westpac Securities Administration Ltd (WSAL) v. Australia Securities and Investments Commission on an appeal from the Full Court of the Federal Court relating to the duty to act in the best interests of clients and the provision of personal advice under the Corporations Act. The case concerned a telephone marketing campaign by Westpac entities to encourage existing customers to roll over superannuation funds into their Westpac account. ASIC argued that the telephone marketing campaign amounted to ‘personal advice’ under the Corporations Act, which the relevant entities were not permitted to provide under their relevant Australian financial services licences. Westpac’s position was that this was general advice.

The High Court affirmed that the relevant test was an objective test based on what a reasonable person might expect and concluded that the Westpac entities provided personal advice when they conducted the telephone marketing campaigns as it would be reasonable for each customer to have expected Westpac to have considered their objectives, financial situation or needs when recommending the rollover (thereby forming personal advice). Westpac’s appeal was dismissed, and it was held that the entities breached financial services laws, including the requirement to act in their clients’ best interests and the requirement to act honestly, efficiently and fairly. The matter was remitted to the Federal Court for hearing, and judgment was delivered in September 2021, ordering WSAL to pay a penalty of A$7.5 million and BTFM to pay a penalty of A$3 million.

In clarifying the distinction between general and personal advice, the High Court’s decision provides guidance for financial institutions that develop financial product sales campaigns that involve direct approaches to retail clients.

Unfair contract terms

ASIC v. BOQ

On 12 August 2021, the Federal Court delivered judgment in Australia Securities and Investigation Commission v. Bank of Queensland Limited, dealing with unfair contract terms and their application to financial agreements. Relevantly, this regime only began to apply to insurance contracts that commenced on or after 5 April 2021.

The case concerned a number of the Bank of Queensland’s (BOQ) small business contracts that contained the following terms:

unilateral variation clauses that allowed BOQ to vary the price of the contract, the services provided and other terms of the contract;
conclusive evidence clauses that allowed BOQ to issue a certificate stating that an amount was owed by a customer and it would be assumed that the certificate was correct unless the customer could prove otherwise;
default clauses that allowed BOQ to unilaterally determine whether an event of default had occurred regardless of whether there was any material change in credit risk for BOQ; and
indemnification clauses that allowed BOQ to make a claim against customers for losses caused by BOQ’s mistake, error or negligence.

BOQ admitted, and the Federal Court accepted, that the relevant terms contained in the small business contracts contravened the unfair contract terms regime. The Federal Court declared the relevant unfair terms void from the formation of the contracts and ordered that they be replaced with fair terms agreed between the parties.

Class actions

The Royal Commission and increased regulatory action against financial services institutions has also fuelled the Australian class action market, with a number of class actions being commenced against financial services institutions by shareholders or customers alleging that they suffered loss and damage arising from the same conduct examined in those other forums. Some key legal developments in the booming Australian class action sphere are discussed below.

Recent legislative developments

Key legislation post the Royal Commission

Six reforms arising out of recommendations from the Royal Commission and other inquiries commenced in early October 2021. The reforms impose more onerous obligations on financial services providers in several areas and include reforms relating to:

reference checking and information sharing requirements: Australian financial services licencees are now required to take reasonable steps to obtain references when recruiting individuals as financial advisers or mortgage brokers. These requirements include obtaining references from previous employers who are Australian financial services or credit licensees;
anti-hawking: legislation has introduced further reforms in relation to anti-hawking provisions of the Corporations Act. The reforms were designed to give consumers greater control over the way in which they are offered products and to prevent consumers from being approached with unwanted products on cold-calls or through other unsolicited contacts; and
a deferred sales model for add-on insurance products: the new deferred sales model introduces a mandatory four-day pause between the sale of a principal product or service and the sale of add-on insurance.

Breach reporting

One of the most significant legislative reforms relates to breach reporting. In December 2020, the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (the Act) received Royal Assent and came into effect on 1 October 2021. The Act introduced new, onerous and wide-ranging obligations on both Australian financial services and credit licensees in relation to breach reporting to ASIC.

There are three key changes:

significantly broadening the scope of what is reportable: previously, the reporting regime required that a licensee undertake a significance assessment before reporting a breach or likely breach. Under the new regime, that assessment is only required in some cases. There are three categories that are automatically reportable:
- contraventions of civil penalty provisions, misleading and deceptive conduct provisions in the Corporations Act and ASIC Act, contraventions that will result, or likely result, in material loss or damage to clients, or an offence punishable by a penalty greater than three months (relating to dishonesty) or 12 months in all other cases;
- where an investigation into whether there has been a significant breach (or likely significant breach) continues for more than 30 days, a licensee must report that investigation and the result of that investigation; and
- additional reportable situations, which include gross negligence, and serious fraud;
changing the time to report breaches: reports to ASIC need to be provided within 30 days of the licensee first knowing that there are reasonable grounds to believe the reportable situation has arisen. Time will start running when a person with actual or apparent authority to determine whether there is a reportable situation knows that reasonable grounds exist; and
including credit licensees: previously, credit licensees were excluded from the reporting regime but are now included.

Failures to report to ASIC under the new regime may result in civil and criminal penalties.

Other key legislative developments

On 9 December 2020, the government introduced the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (Cth) to wind back responsible lending laws, following the Federal Court’s dismissal of ASIC’s appeal in the Westpac responsible lending case referred to in our previous update, and to stimulate economic growth, following the covid-19 pandemic. The bill is currently before the Senate.

Separately, legislation was also introduced in 2021 to make the handling and settlement of insurance claims a ‘financial service’ under the Corporations Act, further broadening the reach of that legislation.

The proposed Financial Accountability Regime

On 12 July 2021, the Australian government released the draft Financial Accountability Regime Bill 2021 for consultation. The regime is intended to replace the current Banking Executive Accountability Regime (BEAR) and, if implemented as proposed, would extend BEAR-like accountability obligations to additional Australian Prudential Regulation Authority (APRA) regulated entities and their directors and senior executives, including authorised deposit-taking institutions and their non-operating holding companies followed by insurers and registrable superannuation entity licensees.

Submissions on the proposed bill have now closed.

Product intervention orders

From April 2019, ASIC has had the power to make product intervention orders in relation to financial products. In June 2021, amendments were made to ASIC’s product intervention powers to remove ambiguities and ensure that ASIC could intervene in relation to the costs of financial and credit products.

The power triggers when ASIC is satisfied that the product has resulted in, or is likely to result in, significant detriment to retail clients. Once triggered, there are a number of steps that ASIC can take, including banning orders, orders to amend or restrict certain marketing, or orders limiting the offering of products.

ASIC has not provided much guidance on what constitutes significant consumer detriment. However, a decision of the Full Federal Court in June 2021 (Cigno v. ASIC [2021] FCAFC 115) has clarified the scope of the factors that can be considered by ASIC when making a decision to make a product intervention order, including that ASIC is entitled to consider the characteristics of not only the relevant product, but also the particular circumstances in which it is supplied.

Litigation funding reform

On 21 December 2020, the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) released its Litigation Funding and the Regulation of the Class Action Industry Report, following consultation with industry, government and other participants. The report details 31 recommendations. In particular, the committee was critical of the regulation of litigation funding in Australia. The recommendations of the committee seek to restore balance between litigation funders and group members.

In September 2021, the government released a draft exposure bill that seeks to apply additional regulations to litigation funding, in particular the fees charged by lawyers and commissions collected by funders. Under the proposed legislation, in determining whether distributions to litigation funders are fair and reasonable, the court is required to presume that a distribution that provides for less than 70 per cent of the gross claim proceeds to be paid to group members is not fair and reasonable. The draft bill also sets out a list of factors that the court is required to consider when determining distribution amounts.

ALRC review of the Legislative Framework for Corporations and Financial Services Regulation

In September 2020, and following from the Royal Commission, the Australian Law Reform Commission (ALRC) commenced an inquiry into the potential simplification of the laws that regulate financial services in Australia. The focus of the inquiry is not on policy changes regarding the content of the current obligations on financial services. Instead, the ALRC is considering how to facilitate a more adaptive, efficient and navigable framework of legislation. The ALRC will deliver its report in multiple stages. The first report will focus on the use of definitions in corporations and financial services legislation and is due by 30 November 2021. Further reports are due in 2022 and 2023.

Changes to court procedure

Contingency fees

In June 2020, the Victorian Parliament passed legislation legalising group costs orders (GCOs) or contingency fees, such that a plaintiff can seek a court order that its legal costs be shared among all group members if the court is satisfied that it is appropriate or necessary to achieve justice. Victoria is the first Australian jurisdiction to do so.

In September 2021, judgment was handed down for the first GCO applications in two class actions against three major Australian banks. In those matters, Justice Nichols of the Supreme Court of Victoria denied the GCO applications on the basis that Her Honour was not satisfied that the statutory test of ‘necessary or appropriate to ensure justice is done’ had been satisfied on the evidence. Her Honour relevantly found that:

‘appropriate or necessary’ requires a ‘broad evaluative assessment’ in which the group members’ interests have primacy. While the ‘price’ (i.e., the return under a GCO relative to the alternative) to group members is a relevant consideration, it is not the sole one;
although the evidence suggested that in one of the group proceedings, group members would be better off or no worse off under a GCO than otherwise, that modelling was ‘riven with significant uncertainty’. In the other, the evidence did not even go so far as to demonstrate that group members would be better off under a GCO, even putting aside the uncertainty attending the relevant variables; and
while in general a GCO might be considered to offer group members ‘insurance’ against ‘low or poor outcomes’ (by relieving them of a costs burden that may exceed a small award or settlement), that was not sufficient since regard ought to be had to the consequences of group members trading away the prospect of a better return in a large recovery.

The decision offers useful guidance on the relevant test and underscores the need for persuasive evidence that the order would be in (absent) group members’ interests.

Privilege and professional secrecy

Kayler-Thomson v. Colonial First State

In October 2018, Mr Kayler-Thomson commenced representative proceedings against Colonial First State alleging that Colonial’s conduct breached its obligations as trustee of two superannuation funds. Colonial claimed privilege over a large number of documents produced in discovery. Mr Kayler-Thomson made an application for access to some of that material on the basis that some of the advice concerned the ‘administration or management’ of the trust, and therefore any privilege was jointly held between the trustee and the beneficiaries of the trust, including Mr Kayler-Thomson.

Judgment was delivered in July 2021. Colvin J held that there were a number of circumstances where the trustee could claim sole privilege, including seeking advice in relation to the trustee’s personal rights or liabilities in connection with an alleged breach of trust or threatened legal proceedings against the trustee personally, or advice in connection with an actual dispute between the trustee and a beneficiary or class of beneficiaries.

In the context of representative proceedings, Colvin J also held that to make out the claim for joint privilege, the lead applicant must demonstrate that they had an interest in the management and administration of the trust at the time the privilege communication was made. The fact that the lead applicant was representing the class was irrelevant, and the lead applicant must have had an interest at the time the communications were made, otherwise the joint interest did not arise.

Sources of litigation

Regulatory enforcement actions

Following the recommendations made in the Royal Commission, key Australian regulators adopted a renewed approach to enforcement. Of these, ASIC’s ‘why not litigate?’ mandate perhaps attracted the greatest attention. ASIC commenced a large number of investigations into case studies raised in the Royal Commission and subsequently took enforcement action against numerous financial institutions. ASIC has indicated that they intend to finalise all investigations relating to matters raised in the Royal Commission by the end of 2021.

In August 2021, following a change in ASIC’s leadership and also having regard to the economic impacts of the covid-19 pandemic, ASIC released its revised corporate plan. In that plan, ASIC indicated that it would be moving away from its ‘why not litigate?’ approach to more targeted enforcement where it considers that it will have the most impact on matters involving the greatest detriment to the community. ASIC said that it intends to use its full suite of regulatory tools – including enforceable undertakings and infringement notices – in a ‘targeted and proportionate way, to identify and reduce the risk of misconduct’, which represents a shift from the hard-line approach adopted following the Royal Commission.

Outlook and conclusions

In recent years, the Australian financial services industry has been the subject of an unprecedented level of enforcement activity, public inquiries, litigation (including criminal prosecutions and class actions), legislative reforms and general public scrutiny. Looking forward, we expect that ASIC’s new corporate plan and leadership team – both of which only commenced recently – will further impact the Australian banking litigation landscape, although precisely how remains to be seen.

Despite this intense period of change, we are continuing to observe new civil and class action proceedings and enforcement actions, as well as regulatory investigations, being commenced against numerous financial services entities in high numbers. Two criminal prosecutions were also recently commenced against financial services institutions in relation to a previously untested area of law. This, together with the ongoing impacts of the Royal Commission and associated legislative reforms, suggests that the Australian banking litigation landscape will continue to remain robust over the coming years and that Australian banking case law is likely to significantly evolve as further untested areas and recently introduced legislation come before the courts.