Consumer protections: who is responsible?

Unless boards and senior management step up to protect consumers against unfair business practices in these volatile times, pressure will continue to mount for tighter regulation, warns Professor Pamela Hanrahan.

Two years on from the Hayne Royal Commission into misconduct in the banking, superannuation and financial services industries, treating customers fairly remains a key area of focus for boards, regulators and policymakers within and beyond the financial sector. Over the summer break, chair of the Australian Competition and Consumer Commission (ACCC) Rod Sims doubled down on his calls for a general law to prohibit unfair business practices — albeit narrowly framed to capture conduct outside the business’ normal practices that causes substantial detriment to a consumer or small business, but that falls short of the statutory notion of unconscionability (unconscionable dealing/conduct).

Of course, Australia already has a comprehensive set of consumer protection laws administered by the ACCC and state fair trading offices and, for the financial sector, the Australian Securities and Investments Commission (ASIC). While arguably not part of its DNA as a securities and markets regulator, ASIC has now been the sole consumer protection regulator for the financial sector for more than 20 years.

Regulatory powers and penalties in this area increased substantially in 2018 and 2019. The Australian standards, contained in the Australian Consumer Law and the ASIC Act 2001, reflect the accepted global norms of consumer protection captured in the 2015 United Nations Guidelines for Consumer Protection. Like the UN guidelines, they address the fair and equitable treatment of consumers; illegal, unethical, discriminatory or deceptive commercial practice; disclosure and transparency; consumer education and access to advice and assistance; protection of privacy; and effective handling of consumer complaints and disputes.

So why legislate further against unfairness? For some directors, legislation based on open-textured standards such as “unfair” or “unconscionable” can seem difficult to put into operation. Regulated firms have a right to know in advance what the law requires of them and what they need to do to comply, but what is “unfair” often depends on the circumstances. Like US Supreme Court Justice Potter Stewart in 1964, who declined to define pornography, but said, “I know it when I see it”, the outer limits of such concepts must be found on a case-by-case basis. However, this does not mean fairness is subjective, or a matter of individual judicial or public opinion.

As Chief Justice Allsop of the Federal Court recently said in ASIC v ANZ Bank (No 3) [2020] FCA 1421, in relation to unconscionable conduct, the law does not rest on “an idiosyncratic personal view… Parliament has identified in the statute and by its provisions a standard of an Australian business conscience. It is to be assessed by reference to the factors which one draws from the statute, set against the common law and equity in which the statutory framework was passed.”

Protecting consumers is particularly challenging when they are buying services rather than physical goods. With what Theodore Levitt at the Harvard Business School called “intangible products” — ranging from insurance to professional and personal services to education and healthcare — it takes some time after purchase to know whether the product is fit for the customer’s purpose and performs as required. Investment products are even more challenging because the investor is being paid to assume an investment risk they may not adequately understand or correctly price, and that may not materialise for many years.

Ethical selling

Whether legislated for or not, all businesses should care about treating their customers fairly. At a minimum, this includes helping the customer understand what they are buying, and then ensuring the product or service delivers on its promise, or dealing quickly with problems when it does not. Trickier issues arise where the business knows, or ought to know, that the product or service is not what the customer needs or would benefit from, but sells it to them anyway.

This risk of this kind of mis-selling has become even more pronounced during the pandemic, with normal sales and service delivery channels disrupted. In December, an International Organization of Securities Commissions (IOSCO) taskforce on consumer protection in financial markets, co-chaired by ASIC, observed that, “While misconduct relating to complex products that are highly susceptible to market volatility continues to be prevalent — for example, those involving retail OTC (over the counter) leveraged products such as binary options, CFDs, and retail spot forex — the increase in online general share trading and the surge of retail investor interest in the share market during periods of lockdown has been notable. In various jurisdictions, remote working has affected risk management arrangements in firms (for example, internal surveillance procedures to monitor staff conduct as well as operational, cyber and outsourcing risks), and consequently regulators’ supervision and surveillance functions.”

The IOSCO taskforce concluded: “In essence, the environment noted in case studies was informed by high market volatility, pressures created by reduced profitability for many firms, heightened financial and psychological pressures on firms and investors, combined with constraints posed by remote working on firms and regulators.”

Widespread risk

These risks are not confined to the financial sector. There have been significant reforms to consumer protection laws for the financial sector in recent years, including the imposition of new civil penalties for financial services licensees failing to “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”. The legislative tide is currently running in the direction of more regulation and we can expect that to expand to other parts of the economy if unfair treatment of consumers and small businesses is uncovered elsewhere.

Hayne identified four factors that had contributed to unfair treatment of customers: the presence of remuneration structures and incentives that prioritised sales over customers; the “marked imbalance of power and knowledge between those providing the product or service and those acquiring it”; the participation of conflicted intermediaries in the sector; and inadequate enforcement of the law by regulators.

The changes to sales channels and service delivery models brought about by the pandemic are unlikely ever to be reversed. Everyone needs to rethink what fair treatment of customers means in this environment, and whether the risk factors for mis-selling identified by Hayne are present in their own operations. This is where directors have a significant role to play.

As Hayne observed, “It is the board and senior management… who are responsible for, and have the greatest degree of control over, whether the entity has a culture that encourages good customer outcomes and the sound management of risk — a culture in which employees ask, ‘what should I do?’ instead of ‘what can I do?’ and feel comfortable speaking up when they see that something is not right.”

Unless boards and senior management are able to embrace that responsibility, calls for stricter laws to protect consumers are unlikely to go away.