This article provides a high-level summary of the ALRC’s latest Background Paper on unconscionable and misleading or deceptive conduct provisions in financial services legislation. The ALRC proposes a consolidation of such provisions, to improve the expressive power of the law, and to reduce the burden of compliance and enforcement.
Starting in around 300 BC, the Roman Republic began constructing an extensive road network, connecting its many provinces, with the city of Rome at the centre. This is the origin of the common expression, ‘all roads lead to Rome’. In much the same way, over the past several decades lawmakers in Australia have enacted a plethora of provisions that proscribe misleading, deceptive or unconscionable conduct in financial services legislation. This has resulted in a sprawling regime that, at its heart, is targeted at essentially the same kinds of conduct.
In a new Background Paper released today — ‘All Roads lead to Rome: unconscionable and misleading or deceptive conduct in financial services law’ — the ALRC argues that the proliferation of legislative ‘roads to Rome’ contributes to unnecessary complexity in the law, and increases compliance and other costs. The proposed solution is to strengthen some of the key legislative ‘highways’ (the core provisions), and to remove the relatively unused and more complex back streets and alleyways (the lesser used provisions). This is likely to result in a smoother and more efficient passage through the legislative landscape.
The doctrine of unconscionable conduct concerns unconscientious advantage being taken of persons who suffer from some special disadvantage. Courts have long provided relief for those who are subject to such conduct, including the setting aside of otherwise legally binding transactions.
Limitations to the doctrine at general law motivated the development of complementary statutory provisions. In the context of financial services legislation, these provisions include ss 991A of the Corporations Act 2001 (Cth), and 12CA and 12CB (complemented by 12CC) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Compared to the general law doctrine, these provisions allow access to a broader range of remedies, and regulator enforcement by the Australian Securities and Investments Commission (ASIC). While s 991A and s 12CA are essentially statutory incantations of the general law doctrine with these additional benefits, s 12CB seeks to proscribe an even broader range of conduct.
In the ALRC’s view, the inclusion of several statutory provisions aimed at essentially the same conduct adds unnecessary complexity to the law. This is undesirable for a number of reasons, including that:
- The expressive power of the prohibition against unconscionable conduct may be reduced on account of unnecessary proliferation and complexity. There are expressive benefits in having a single, powerful and broad prohibition, rather than several variations which may serve to cloud or obscure what is intended to be achieved.
- The existence of several statutory prohibitions, rather than one, may unnecessarily invite or require parties to consider, and potentially plead, more than one provision. This adds costs for all stakeholders, including litigants, regulators, and courts.
- More generally, a more complex statute — on account of unnecessary proliferation and overlapping provisions — is simply more difficult to comprehend and apply. This makes it less likely that the law is complied with, or effectively enforced.
The current proliferation of unconscionable conduct provisions gives rise to these detriments without any countervailing consumer protection (or other) benefits. There does not appear to be a sound rationale for the current state of proliferation and overlap.
The ALRC considers that a suitable path out of the current legislative tangle would involve the repeal of unconscionability provisions other than s 12CB of the ASIC Act (accompanied by s 12CC). This is possible because s 12CB:
- prohibits ‘unconscionable conduct’ in the broadest sense of all of the provisions (not being limited to the meaning of that concept in equity);
- applies to the broadest class of persons and in the broadest set of circumstances; and
- provides access to the broadest range of statutory remedies. Most importantly, it enables regulator action to secure a civil penalty.
Currently, the myriad provisions proscribing unconscionable conduct require a user of legislation to muster the Stoic strength of Marcus Aurelius. But there is no need for users to peruse a statutory regime as sprawling as the Roman Empire at its height in 100AD, when the same regulatory outcomes could be achieved more simply through reliance on a single core provision, rather than three.
Misleading or deceptive conduct
A prohibition on misleading or deceptive conduct in matters of trade or commerce was inaugurated in Australian law by s 52 of the Trade Practices Act 1974 (Cth). Since then, however, things have degenerated. Like a legislative Mount Vesuvius, Parliament has spewed forth an enormous array of provisions addressing essentially the same conduct. In the context of financial services legislation, this includes ss 1041E, 1041F and 1041H Corporations Act, and ss 12DA, 12DB, 12DC and 12DF ASIC Act.
The current suite of statutory provisions range from the principled (e.g. s 12DA ASIC Act) to the painfully prescriptive (e.g. 1041F Corporations Act). The result is a great deal of overlap, and provisions so impenetrable they might as well be written in Latin. For example, s 12DA ASIC Act provides simply that ‘[a] person must not, in trade or commerce engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive’. Despite this, s 12DC goes on to proscribe misleading or deceptive conduct in far more specific circumstances, namely where the product ‘consists of, or includes, an interest in land’.
The parlous state of the law in this area undermines its effectiveness in guiding conduct, and increases costs for consumers, regulated entities, the regulator, and courts. The proliferation and overlap has even led to judicial exasperation. Notably, in Wingecarribiee Shire Council v Lehman Brothers Australia (in liq) (2012) 301 ALR 1, Rares J referred to the misleading or deceptive conduct provisions in financial services legislation as:
‘a plethora of pointlessly technical and befuddling statutory provisions scattered over many Acts in defined situations. The repealed, simple and comprehensive s 52 of the Trade Practices Act 1974 (Cth) … has been done away with by a morass of dense, difficult to understand legislation.’
The ALRC considers that a pathway out of the current quagmire would involve a return to the core, principled provision in s 12DA ASIC Act, and repeal of the other provisions. Greater reliance on s 12DA is possible because it:
- is the broadest, principle-based expression of the core requirement not to engage in misleading or deceptive conduct. It appears to capture all, or almost all, of the conduct caught by the other provisions;
- operates in the broadest set of circumstances and applies to the broadest range of persons; and
- enables access to the broadest range of statutory remedies — including, but extending beyond, those available for a contravention of the Corporations Act
However, contravention of s 12DA is not presently an offence, and does not give rise to civil penalty liability. In the ALRC’s view, to ensure the achievement of the current regulatory objectives, a sensible approach would be to amend s 12DA to make it a civil penalty provision, and to introduce a new offence provision, otherwise identical to s 12DA, but applying only where the conduct is dishonest, intentional, or reckless (so as to justify criminal liability).
One theory about why the Roman Empire declined is that it simply became too large and scattered to be successfully governed. Similarly, the current proliferation of provisions concerning unconscionable and misleading or deceptive conduct in corporations and financial services legislation is too diffuse to efficiently administer. The current state of the law imposes an undue burden on regulated entities, consumers, regulators, and the courts.
Although simplifying the law may appear to be a Herculean task, the problem is only likely to increase if it is not tackled now. If implemented, the consolidation and amendments proposed by the ALRC’s new Background Paper would promote a more efficient passage through the key legislative ‘highways’, and thereby more effectively implement the underlying policy objectives of the existing law. While the statutory provisions discussed in this article (and Background Paper) may all ‘lead to Rome’, through consolidation and amendment they can get there by way of a less arduous journey.
Read the full background paper: All roads lead to Rome: unconscionable and misleading or deceptive conduct in financial services law