Not so super(annuation): the Full Court of the Federal Court on financial product advice and fairness
In 2014 and 2015, Westpac ran a campaign to encourage existing customers with multiple superannuation accounts to consolidate their funds into a single Westpac account. The campaign involved sending letters to customers and making telephone calls to them.
The Westpac employees who made those calls received training that warned against providing personal advice to customers. However, they were also required to follow a structure called the “QM Framework”. This structure involved asking the customers questions about their requirements, relating features of Westpac’s products to those requirements, using psychological techniques such as “social proofing” (telling the customers that other customers shared their concerns), and trying to get the customer to commit by the end of the call. More than 95,000 customers were contacted, and Westpac’s funds under management increased by over $646 million in respect of those customers.
At first instance ( FCA 2078), Gleeson J held that Westpac had provided general financial product advice, but not personal financial product advice. However, her Honour also found that it had failed to do all things necessary to ensure that the financial services had been provided “efficiently, honestly and fairly” in breach of s 912A(1)(a) of the Corporations Act 2001 (Cth).
Before the Full Court of the Federal Court, ASIC argued that Westpac had provided personal financial product advice during the campaign, while Westpac argued it had not provided financial product advice at all (even general) and had not breached s 912A(1).
In separate judgments, Allsop CJ, Jagot J and O’Bryan J allowed the appeal and dismissed the cross-appeal, holding that Westpac had provided personal advice and had breached the general duty to ensure financial services were provided “efficiently, honestly and fairly”.
Personal or general advice?
A key issue for the Full Court was whether Westpac had provided personal advice, as opposed to general advice. Section 766B(3) defines personal advice as:
financial product advice that is given or directed to a person […] in circumstances where:
(a) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs […]; or
(b) a reasonable person might expect the provider to have considered one or more of those matters.
To answer this question, all three judgments considered the overall impression created by the calls. Indeed, Allsop CJ held that the question of whether a communication is personal or general advice is “not to be answered by picking over individual and decontextualized parts of a whole communication or exchange”: .
Overturning the primary judge, the Court unanimously held that the campaign did involve Westpac providing personal advice. Factors relevant to that conclusion included that:
- The call was framed as an attempt to help the customer;
- customers had been specifically asked about their requirements, which were then linked to the features of the product;
- the structure and framing of the call constituted an implied recommendation;
- the calls were about a serious and important decision (consolidating the customers’ superannuation);
- the calls were made to existing customers (as opposed to “cold calls” to new customers); and
- the customer was encouraged to make the decision about consolidation on the call (the “closing”).
Each member of the Court held that in those circumstances a reasonable person in the position of the customer might expect that the Westpac employee was taking into account their personal objectives, financial circumstances or needs.
Although the general advice warning under s 949A was given at the start of each call, Jagot J and O’Bryan J held that that did not change their conclusion. Justice Jagot characterised it (at ) as a “formulaic” warning which was “immediately followed by a more substantive discussion”, while O’Bryan J observed (at ) that a recipient could “lose sight” of the warning during the call. Similarly, a submission by Westpac that customers would have known the calls were mere marketing, not advice, was rejected. Both Allsop CJ and Jagot J held that there was no clear conceptual distinction between “advice” and “marketing”, and that in any event a reasonable customer would have believed that the purpose of the calls was to assist them.
Every financial services provider operating on a general advice licence should take note. The decision demonstrates that the courts will consider a range of factors – including the significance of the subject matter and whether the engagement carries through to a final decision or sale – in determining whether the second limb of s 766B is satisfied. It shows that a financial services provider can easily slip into providing personal advice, despite carefully crafted procedures to avoid doing so.
Honestly, efficiently and fairly?
The Full Court unanimously upheld Gleeson J’s finding that Westpac had breached s 912A(1). Section 912A(1) provides for the general obligations of financial services licensees, including:
A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly […]
In essence, the Court held that the general advice model was fundamentally inappropriate when it came to consolidating superannuation. As Allsop CJ put it, that decision is one that “requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer”: at .
Indeed, all three judges were sharply critical of the campaign. For example:
- Chief Justice Allsop held that “there was a degree of calculated sharpness” about the campaign (at ), and that “the whole approach of Westpac was to obtain an advantage for itself without engaging with the personal circumstances of the customers so as to avoid the consequences of the responsibilities of providing personal advice”: .
- Justice Jagot held that “no reasonable customer would have expected that when Westpac said it was calling to help the customer, in fact, it was doing no more than helping itself to the customer’s superannuation irrespective of the customer’s best interests”: .
- Justice O’Bryan held that Westpac’s conduct was “unfair” and that it had “pursued its own self-interest and disregarded the best interests of its customers”: .
These findings, which echo the findings of the Financial Services Royal Commission around “hawking”, make clear that sales campaigns based on a general advice model are likely to come with significant risks.
More broadly, both Allsop CJ and O’Bryan J raised the prospect of departing from the traditional view that “efficiently, honestly and fairly” is a compendious phrase. Justice O’Bryan held that the phrase involved three concurrent obligations, and emphasised that Westpac’s conduct was “unfair”. Similarly Allsop CJ, although reserving the question for another day, noted that it may be sufficient if the conduct could be characterised as “unfair”.
After some recent disappointing results for regulators, this is a significant win for ASIC. It marks a significant — if not unexpected — shift in the distinction between general and personal advice. In particular, the Court’s emphasis on the conduct being “unfair” is consistent with a broader trend towards fairness, and is likely to strengthen ASIC’s emphasis on what it calls “the fairness imperative”. It further shows that courts and regulators will not tolerate sharp practices that disadvantage consumers, even where they might previously have been acceptable.