Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Nature of claims

Common causes of action

What are the most common causes of action brought against banks and other financial services providers by their customers?

The principal causes of action commonly relied upon by customers in litigation brought against banks and other financial services providers include:

  • breach of contract (see below and questions 4 and 6 to 8);
  • negligence (see question 2);
  • breach of fiduciary duties (see questions 2 and 5);
  • statutory claims for unconscionable conduct (see below); or
  • statutory claims for misleading or deceptive conduct (see below and question 3).

Breach of contract

The relationship between a financial services provider and its customer is principally one of contract. Claims for breach of contract may allege that a bank adviser or financial services provider has breached an express term of the contract. The major retail banks in Australia have also adopted the Australian Bankers’ Association Code of Banking Practice (Code), which prescribes ethical standards. The Code is regularly updated, requiring the banks to subscribe to updated versions of the Code and adopt changes. Some bank contracts incorporate the Code as an express term.

A customer may also contend that the bank adviser or financial services provider has breached an implied term of the contract requiring the exercise of reasonable care in advising the customer. A term of that nature can be implied into financial services contracts both by statute and at common law:

  • Under federal legalisation (the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)), each contract for the supply of financial services (which includes providing financial product advice) includes an implied warranty that services will be rendered with due care and skill.
  • At common law, an implied term to exercise reasonable care may either be implied at law, or otherwise in the circumstances of a particular case in order to ensure business efficacy to the contract.

Unconscionable conduct

A customer may bring an action against a bank or financial services provider for unconscionable conduct. A bank or financial services provider must not engage in conduct in relation to financial services if the conduct is unconscionable. Conduct will be considered unconscionable if it is something not done in good conscience. A feature of unconscionability is the demonstration of moral obloquy, being a higher standard than unfairness, unjustness or unreasonableness. A claim can also be made where an inequality or disability has been unconscientiously taken advantage of.

Misleading conduct or representations

There are statutory avenues for claims of misleading conduct or representations. Allegations of misleading or deceptive conduct in the provision of financial services are ordinarily grounded in the relevant provisions of the ASIC Act or the Corporations Act 2001 (Cth) (Corporations Act), but may also be made under the National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) and the National Credit Code in relation to credit contracts, as described in further detail in question 3.

The relevant conduct is assessed on an objective basis and will be considered to be misleading or deceptive if it induces or is capable of inducing error. It is not necessary to demonstrate a subjective intention to mislead or deceive.

Non-contractual duties

In claims for the misselling of financial products, what types of non-contractual duties have been recognised by the court? In particular is there scope to plead that duties owed by financial institutions to the relevant regulator in your jurisdiction are also owed directly by a financial institution to its customers?

When selling financial products, banks and financial services providers owe duties directly to the customer, as well as obligations to the regulators; in particular, the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority and the Australian Transaction Reports and Analysis Centre.

In respect of duties owed to customers, the courts have recognised duties of care in tort, as well as fiduciary duties.

A customer may bring a claim against a bank employee or financial services provider for breach of a duty of care when providing information or advice. To establish a duty of care:

  • the financial services provider must realise, or because of the circumstances ought to realise, that the customer intends to act on the information or advice in connection with some matter of business or serious consequence; and
  • the circumstances must be such that it is reasonable in all the circumstances for the customer to seek, or to accept, and to rely on the statements of the financial services provider.

A bank or other financial services provider will generally owe a duty of care to take reasonable measures so that any statements of fact are correct to the best of its knowledge and that any statements of fact or opinion are derived from the application of its experience and reflect honestly held opinions that were based on reasonable grounds.

In Australia, the relationship between a bank or a financial services provider and its customer is not automatically classified as a fiduciary relationship, however, a court may find that the institution owes fiduciary duties after assessment of the particular facts and circumstances of the relationship. Further information is set out in question 5.

Statutory liability regime

In claims for untrue or misleading statements or omissions in prospectuses, listing particulars and periodic financial disclosures, is there a statutory liability regime?

The publication of untrue or misleading statements relating to financial products, including prospectuses and periodic financial disclosures, or failing to disclose information where disclosure is required, is regulated by the Corporations Act, ASIC Act and Australian Securities Exchange Listing Rules. This combined statutory liability regime provides both criminal and civil penalties, while still allowing aggrieved parties who have suffered damage or loss to bring a civil claim against the company.

Certain categories of person (including company directors, any person named as making a statement in the prospectus and underwriters) are liable to an investor who suffers loss if an offer of securities is made under a prospectus in which there is a misleading or deceptive statement or omission (known as a defect). A list of those who can be liable for defects is set out the Corporations Act, and they can be held liable for any defect, whether or not they were involved in the defect.

The Corporations Act regulates misleading statements or omissions made in disclosable documents. A person must not make a statement or disseminate information if the statement or information is false or materially misleading and the statement or information is likely to induce a person to purchase or sell a financial product, and at the time of making the statement, the person did not have regard to whether the statement was true or false or knew or reasonably ought to have known that information was false or misleading. Both the company and individuals who made or authorised the misleading statement may be liable.

Listed entities are also required to immediately inform the Australian Securities Exchange (ASX) (Australia’s main securities exchange) of any information that a reasonable person would expect to have a material effect on the price or value of the institution’s securities (known as the continuous disclosure obligations under the ASX Listing Rules and the Corporations Act).

Duty of good faith

Is there an implied duty of good faith in contracts concluded between financial institutions and their customers? What is the effect of this duty on financial services litigation?

The obligation to act in good faith has been recognised as being implied in Australian commercial contracts, but Australian law does not state that a good faith obligation will be implied in every contract. If the term is implied, it imports at least an obligation for a party to act honestly and not to undermine the bargain entered or the substance of the contractual benefit.

The issue of whether a duty of good faith is implied into a contract for financial services between a bank or financial services provider and customer has had limited judicial consideration and remains unresolved. These types of allegations are, however, ordinarily wrapped up in claims for misrepresentation, misleading or deceptive conduct, unconscionable conduct and express breach of contract claims.

Where a term of good faith is implied, banks and financial services providers are required to recognise and have regard to the legitimate interests of the customer arising from the relevant terms of the contract. It is not necessary, however, for the bank or financial institution to subordinate its own interests to the interests of the customer.

Fiduciary duties

In what circumstances will a financial institution owe fiduciary duties to its customers? What is the effect of such duties on financial services litigation?

A financial institution does not automatically owe a fiduciary duty to its customers. The existence of a fiduciary relationship depends on an analysis of the relevant facts and circumstances of the relationship between the customer and the financial institution.

In the financial services context, fiduciary relationships have been found where:

  • a financial adviser informed the customer that it was an adviser on matters of investment and undertook a specific advisory role for that customer;
  • a bank occupied a position of investment adviser; and
  • a customer was unsophisticated and inadequately informed about the relevant transaction and reposed trust and confidence in the adviser in relation to the investment of the customer’s money.

It is not the relationship of the financial adviser to the customers that necessarily gives rise to a fiduciary relationship, but rather the particular circumstances of the relationship in question. Usually, the facts indicate that the financial adviser has stepped out of its usual role and has instead appeared to the customer to be advising in that customer’s interest.

If a fiduciary duty is found to exist, the bank or financial services provider must ensure that it does not place itself in a position of conflict or in a position whereby it may make a profit unauthorised by the customer.

The existence of a fiduciary relationship may be excluded or modified by an express clause in a banking or financial services contract. In determining whether a clause excluding a fiduciary relationship is effective, the ordinary rules of contractual interpretation apply (that is, the contract should be construed as a whole in light of the surrounding circumstances known to the parties when entering into the transaction).

Master agreements

How are standard form master agreements for particular financial transactions treated?

Standard form master agreements for financial transactions, including the International Swaps and Derivatives Associated (ISDA) Master Agreement, are accepted as valid contracts by Australian courts. The ISDA Master Agreement has been identified as the ‘culmination of the efforts of those experienced in the derivative transaction markets to provide a standard contract to govern their relationship’. There has, however, been limited judicial consideration of the provisions of such agreements.

In Australia, an ISDA Master Agreement will be interpreted according to its context.

The contracting parties to a standard form master agreement may choose the jurisdiction and governing law. Ordinarily such a decision is taken by the financial institution. If parties to a transaction submit to a non-exclusive jurisdiction clause, it will be treated in the normal manner and the court considering the jurisdiction will be required to determine whether it is the natural and appropriate forum for the determination of the dispute.

Limiting liability

Can a financial institution limit or exclude its liability? What statutory protections exist to protect the interests of consumers and private parties?

The rights of a regulator to impose penalties for a breach of relevant legislation cannot be displaced by private agreement. However, it is common for parties to seek to limit (or exclude) their exposure to liability through exclusion clauses in contracts.

For example, it has been accepted by the High Court of Australia that an implied term to act with reasonable care and skill can be excluded if the parties choose to limit or bargain away such a term. Further, it is accepted in Australian law that parties can contract to exclude or modify the operation of fiduciary duties. However, under the ASIC Act, the ‘due care and skill’ implied warranty in question 1 cannot be excluded, restricted or modified.

It is an offence to attempt to contract out of the provisions of the NCCP Act or the National Credit Code. Similarly, both the Corporations Act and the ASIC Act contain provisions voiding contractual clauses that attempt to contract out of certain legislative provisions. These express ‘no contracting out’ provisions do not apply to all legislative provisions and do not expressly apply to the misleading or deceptive conduct provisions of the Corporations Act and the ASIC Act. However, as a matter of public policy, courts will tend to construe exclusion clauses as ineffective to exclude liability for these statutory obligations. Disclaimers and purported exclusions will nevertheless be relevant to the court’s assessment of whether the conduct was, in fact, misleading.

As a form of limiting liability for defendants, there are statutory ‘proportionate liability’ regimes applicable where there are multiple wrongdoers. A defendant’s liability for certain contraventions of the Corporations Act or the ASIC Act is limited to the extent to which each defendant is liable for the plaintiff’s loss.

Freedom to contact

What other restrictions apply to the freedom of financial institutions to contract?

Banks and financial services providers must ensure that the terms contained in customer contracts do not constitute unfair contract terms under the ASIC Act. A term of a customer contract will be void if it is unfair, the contract is a standard form contract and it is for a financial product or financial services. Examples include a term that limits one party’s right to sue another party or a term that limits the evidence one party can adduce in proceedings relating to the contract. The Contracts Review Act 1980 (NSW) also allows a court to refuse to enforce a provision in a contract or to make an order declaring a whole contract void if a provision of the contract is considered to be unjust in the circumstances in which it was made.

More particularly, banks and financial services providers must also take care to ensure that fees contained in customer contracts do not constitute penalties, which are thereby unenforceable.

A fee will likely be considered a penalty if:

  • it is imposed to secure the performance of another contractual requirement (for example, late payment fees are payable to secure the timely repayment of debt); and
  • the fee is extravagant and unconscionable (that is, it is out of all proportion to the loss suffered or likely to be suffered).

In a class action concerning this issue, customers claimed that a number of fees charged by a major retail bank for credit card accounts, deposit accounts, commercial credit card accounts and business accounts constituted penalties and were therefore unenforceable. In that case, the High Court found that late payment fees were not out of all proportion with the possible damage to or interest of the bank charging the fees. In arriving at that decision, the Court found that the question is not what the bank could recover in an action for breach of contract, but rather whether the costs to it and the effects upon its financial interests may be taken into account. The Court held that it was possible to consider all of the bank’s interests that were impacted by the late payment; relevantly, operational costs, loss provisioning and increases in regulatory capital costs, and taking all of those interests into account, the late payment fees were not out of all proportion, such that they constituted a penalty.

Litigation remedies

What remedies are available in financial services litigation?

The remedies available against a financial services provider, depending on the cause of action, include:

  • damages or compensation;
  • injunctions;
  • declarations;
  • specific performance;
  • adverse publicity orders;
  • penalties or, in the case of an individual, fines or imprisonment; and
  • reopening a transaction or setting aside an agreement that has been made.

Limitation defences

Have any particular issues arisen in financial services cases in your jurisdiction in relation to limitation defences?

The limitation period for those causes of action that are commonly relied upon by customers in litigation brought against banks and other financial services providers is six years. The limitation period for common law causes of action is found in legislation in each state of Australia (eg, the Limitation Act 1969 (NSW)). The limitation period for statutory causes of action commonly relied upon by customers is contained in the relevant legislation, such as the Corporations Act or the ASIC Act.

The date of accrual of the cause of action (and the commencement of the limitation period) may differ depending on the nature of the claim. However, the requirement to demonstrate loss or damage is central to both statutory and common law actions. The cause of action will accrue, and the limitation period will start running, from the date that the customer suffers the first loss or damage. Any later loss or damage does not usually extend the limitation period.

Procedure

Specialist courts

Do you have a specialist court or other arrangements for the hearing of financial services disputes in your jurisdiction? Are there specialist judges for financial cases?

In Australia, there is no specialist court for the hearing of financial services disputes. Financial services disputes are generally heard in Australia by the Federal Court of Australia or the Federal Circuit Court of Australia, and the state Supreme, district, or county courts at the state level. In the Federal Court, financial services disputes are generally heard by a judge in the ‘Commercial and Corporations National Practice Area’. There are also specialist Commercial Lists within certain state Supreme Courts.

Procedural rules

Do any specific procedural rules apply to financial services litigation?

Similarly, there are no specific procedural rules that apply to financial services litigation in Australia. However, there are established procedures for case management within the specialist commercial lists of the state Supreme Courts; and in the Federal Court, there is now a Central Practice Note governing case management, in addition to a separate practice note dealing with arrangements for the management of cases within the Commercial and Corporations National Practice Area (see question 11).

Arbitration

May parties agree to submit financial services disputes to arbitration?

Parties are able to submit financial services disputes to arbitration for resolution. Arbitral awards are recognised and enforced by Australian courts. However, arbitration is not recognised by ASIC as an approved dispute resolution scheme; therefore, financial services disputes brought by ASIC must be heard before the court for judicial resolution.

Parties may also submit a complaint to the Financial Ombudsman Service in relation to a financial services dispute. This service is designed to offer independent and accessible dispute resolution for consumers who are unable to resolve complaints with member financial services providers, ranging from banks and insurers to financial advisers and planners, and debt collection agencies.

Out of court settlements

Must parties initially seek to settle out of court or refer financial services disputes for alternative dispute resolution?

Parties to a civil dispute in the Federal Court are required to take genuine steps to resolve the issues of the dispute before the matter is heard before a court and produce a statement specifying the steps taken to resolve the dispute or outlining the reasons as to why no such steps were taken.

A genuine steps statement is not required when the proceeding relates to an order imposing a pecuniary penalty for a contravention of a civil penalty provision, or if the proceedings are either brought by, or on behalf of, the Commonwealth or a Commonwealth authority for an order connected with a criminal offence or the contravention of a civil penalty provision. Accordingly, such a statement will not be required in proceedings brought by ASIC.

Almost all state courts have the ability to refer a matter for alternative dispute resolution. Indeed, in the commercial list of the NSW Supreme Court, it is expected that the legal representatives of the parties are in a position to advise the Court on whether the parties have previously attempted mediation and whether the parties are willing to proceed to mediation in the future. This framework is not specific to financial services litigation.

Pre-action considerations

Are there any pre-action considerations specific to financial services litigation that the parties should take into account in your jurisdiction?

In Australia, there are no pre-action considerations specific to financial services litigation. In many cases, financial services litigation will have been preceded by a regulatory investigation (eg, by ASIC) and it will be relevant to consider the avenues to obtain access to the regulator’s investigatory documents, such as through a request under Freedom of Information legislation or an application for preliminary discovery or subpoenas, once an action has commenced.

Unilateral jurisdiction clauses

Does your jurisdiction recognise unilateral jurisdiction clauses?

Unilateral jurisdiction clauses, otherwise known as asymmetrical jurisdiction clauses, are not common practice in Australia and have not been judicially considered by Australian courts. Further, the Australian courts have not discussed the treatment of such clauses by the courts of other jurisdictions.

Disclosure

Disclosure obligations

What are the general disclosure obligations for litigants in your jurisdiction? Are banking secrecy, blocking statute or similar regimes applied in your jurisdiction? How does this affect financial services litigation?

Discovery (or disclosure) is a common process in all Australian jurisdictions, but the circumstances in which discovery is required and the extent of discovery required to be given varies from jurisdiction to jurisdiction.

In a Federal Court proceeding, a party may apply to the Court to seek an order for any other party to the proceedings to give discovery of documents. In other Australian jurisdictions, discovery may be required without court order.

This obligation is to discover not just documents that were in the party’s possession, custody or power at the time at which discovery is originally made but extends to discovering documents that subsequently come into the party’s possession, custody or power.

In Australia, there is no banking secrecy or blocking legislation that excuses a party from discovery. The only circumstances in which a party is excused from disclosing a document is if it is subject to a valid claim for privilege, although as set out in questions 18 and 19, orders may be sought protecting confidential documents.

Australian courts have considered the effect of banking secrecy and blocking statutes from other jurisdictions. For example, the Federal Court has held that a French statute preventing the enforcement of discovery orders does not have legal effect in Australian proceedings. Similarly, a state court found that although consideration should be given to the penalty for breach of a Kazakh blocking statute, ultimately, it is not sufficient to prevent the court from making an order that is otherwise within the law of the forum. The Federal Court has noted that in exercising the power to issue and serve a subpoena on a foreign entity, the Court must consider whether such subpoena might breach overseas banking secrecy laws or would be an affront to international comity.

Protecting confidentiality

Must financial institutions disclose confidential client documents during court proceedings? What procedural devices can be used to protect such documents?

It is an implied contractual term between a banker and customer that the banker will not divulge to third parties information about the customer’s account or information about the customer acquired through the keeping of the account, unless the banker is compelled to do so by order of a court. This general principle is also reflected in the Australian Privacy Principles, set out in Schedule 1 to the Privacy Act 1988 (Cth). This principle is also sometimes an express term of the bank-customer contract.

In order to protect personal information, when documents are filed and served, a suppression or non-publication order can be sought if necessary, to prevent prejudice to the proper administration of justice. Redaction may also be ordered by the court to remove confidential, sensitive or otherwise protected information, particularly where that information is not relevant to the proceeding.

There is an obligation imposed by law that documents obtained during the course of proceedings will only be used for the purpose of the proceedings. Parties are released from the obligation once, and in respect of, any documents tendered into evidence.

Disclosure of personal data

May private parties request disclosure of personal data held by financial services institutions?

Generally, standard discovery is restricted to those documents that are directly relevant to the issues raised in the proceedings. If the personal data is directly relevant to the issues in the pleadings, then it will be prima facie disclosable through discovery orders or by subpoena. The various procedural devices noted above, particularly the use of suppression or non-publication orders, should be noted as a possible means of restricting the potential for misuse of any personal data disclosed.

Data protection

What data governance issues are of particular importance to financial disputes in your jurisdiction? What case management techniques have evolved to deal with data issues?

Australian courts have identified that electronic documents are forming an increasing proportion of the documents in proceedings.

In response to this observation, electronic discovery and electronic trials may be ordered in certain Australian proceedings. For example, in Federal Court proceedings, electronic discovery may be ordered where there is a significant number of relevant documents (200 or more) stored in electronic format and where the use of technology ‘will help facilitate the quick, inexpensive and efficient resolution of the matter’.

Interaction with regulatory regime

Authority powers

What powers do regulatory authorities have to bring court proceedings in your jurisdiction? In particular, what remedies may they seek?

The principal regulator in respect of financial services in Australia is ASIC, established under and governed by the ASIC Act. ASIC is responsible for supervision and enforcement of the securities market.

ASIC has a broad range of powers in order to administer the law under the ASIC Act, Corporations Act and other legislation. These powers include administrative powers as well as extensive powers in respect of civil and criminal enforcement.

At the most serious end, ASIC can commence a criminal prosecution or refer a matter to the Commonwealth Director of Public Prosecutions to commence a criminal prosecution. ASIC will consider criminal action for serious conduct that is dishonest, intentional or highly reckless.

ASIC also has the power to commence civil proceedings seeking a pecuniary penalty or compensation order. It is common for ASIC to take enforcement action by way of ‘civil penalty proceedings’. This is a way of enforcing the law and imposing a pecuniary penalty without pursuing criminal action. These proceedings are only subject to a civil burden of proof and the Federal Court of Australia has confirmed that ASIC does not have to prove criminal intent in any such action.

ASIC may also:

  • apply to the court for non-pecuniary remedies, such as a declaration of contravention of financial services laws, an injunction or any other order the court considers appropriate; or
  • intervene in other civil proceedings brought by private litigants, if ASIC considers that intervention is appropriate.

For less serious matters, ASIC may take a range of administrative actions, including:

  • issuing an infringement notice;
  • suspending, cancelling or varying an Australian financial services licence;
  • creating a banning order against an individual; or
  • reaching a negotiated outcome reflected in an enforceable undertaking.

Disclosure restrictions on communications

Are communications between financial institutions and regulators and other regulatory materials subject to any disclosure restrictions or claims of privilege?

ASIC is required to take all reasonable measures to protect from unauthorised use or disclosure information given to it in confidence or in connection with the performance of its functions. However, certain uses and disclosures of confidential information are taken to be authorised under the ASIC Act, such as for ASIC to perform its functions, including in connection with ASIC investigations or court proceedings; or for disclosure to other Australian and overseas regulators or other government agencies. Similar obligations of confidence are imposed on the Australian Competition and Consumer Commission (ACCC) in relation to documents produced to it through its investigatory power and in relation to documents produced to the Australian Prudential Regulation Authority (APRA).

As a matter of policy and practice, ASIC and the ACCC will give notice before disclosing confidential material so that the owner of the confidential information can take whatever action may be necessary to protect their interests.

The regulator may also give the owner of the confidential information the opportunity to make submissions before it decides whether or not to disclose the information.

Generally, a regulator cannot compel the production of communications or documents that are subject to a claim of legal professional privilege. For example, if a financial services provider is in communication with ASIC (as part of a formal investigation, a court proceeding or otherwise), ASIC cannot compel the financial services provider to disclose any privileged communications or documents. While ASIC accepts that this is so, it may still request that a financial services provider disclose privileged information. ASIC’s publicly stated position is that there may be a public benefit in accepting privileged documents (or documents claimed to be privileged). ASIC’s policy and practice is that it will be prepared to accept such documents pursuant to a published standard form written agreement that the documents are provided on a confidential basis and for a limited purpose, known in Australia as a ‘limited waiver’.

Australian case law generally recognises that a limited, confidential disclosure of privileged documents to a regulator will not necessarily give rise to a general waiver of privilege over those documents and this principle has been endorsed in the Federal Court. ASIC’s standard form agreement has not been tested by the courts and the position is not settled as to whether a ‘limited waiver’ to ASIC or any other regulator will be effective to avoid a general waiver.

Private claims

May private parties bring court proceedings against financial institutions directly for breaches of regulations?

A private party (whether an individual person or a company) who has suffered loss by virtue of a breach of financial services laws will generally have a right to seek damages or seek an injunction, as described above. In fact, it is not uncommon for private litigation (in particular, shareholder class actions or other actions supported by a litigation funder) to commence following an investigation by ASIC and shareholder class actions can also be run in parallel with an action by ASIC.

A private action against a financial institution may take the form of a shareholder class action; a derivative action (where an individual shareholder brings an action on behalf of the company), which generally involves proceedings against one or more directors; or an individual private action.

In a claim by a private party against a financial institution, must the institution disclose complaints made against it by other private parties?

It is common for private parties commencing proceedings against a financial institution to subpoena regulators, including ASIC, for documents obtained in connection with an investigation of the financial institution. In the past, courts have accepted that, where relevant and not protected by public interest immunity, such documents must be produced.

In addition, the financial institution would ordinarily have to disclose any of its own documents that are relevant to the proceeding, pursuant to the usual obligations to give discovery.

Whether or not ASIC would produce or a financial institution would have to discover complaints made against it by other private parties, will entirely depend on the allegations made by the private party in the proceeding. For example, if the allegations involve general complaints about the financial institution’s treatment of its customers (eg, in an unconscionable conduct case), the plaintiff may allege that other complaints are relevant because they may demonstrate that the financial institution has taken advantage of its position in the market or continued to operate in an allegedly harsh or oppressive manner notwithstanding customer complaints.

Enforcement

Where a financial institution has agreed with a regulator to conduct a business review or redress exercise, may private parties directly enforce the terms of that review or exercise?

As an alternative to court enforcement action, ASIC may accept an enforceable undertaking from a financial institution, which gives effect to a negotiated settlement. Enforceable undertakings are a flexible enforcement tool, and generally include:

  • a description of the misconduct;
  • the steps the financial institution will take to address the misconduct and, generally, to prevent future misconduct. This may include a requirement for independent expert review of the financial institution’s compliance systems; and
  • details of any compensation payable to third parties affected by the misconduct or other rectification action. Examples of other rectification action include funding an education programme or paying money to a charity or community organisation.

ASIC monitors compliance with enforceable undertakings and may contact third parties to determine whether the financial institution has complied with its promise to compensate third parties. If it has not complied with its compensation obligations, ASIC may take action for breach of the undertaking. Only ASIC can bring proceedings to enforce the undertaking.

The existence of an enforceable undertaking will not preclude a private litigant from initiating a law suit, and in fact, there are examples where a major class action has followed an enforceable undertaking despite the compensation provisions of the enforceable undertaking. In those circumstances, any admissions made in the enforceable undertaking could be used by a private litigant against the financial institution. Some Australian statutes provide private parties with a mechanism to rely, in subsequent civil proceedings, on findings of fact made by a court in prior regulatory proceedings. Such provisions assist private parties in seeking their own recourse through separate follow-on proceedings.

Changes to the landscape

Have changes to the regulatory landscape following the financial crisis impacted financial services litigation?

ASIC has publicly stated that its view is that the global financial crisis had less of an impact on Australian securities and investments markets than in the United States and the United Kingdom, and a prominent reason why the financial crisis had less impact on Australian markets was the ‘architecture of the financial regulatory regime and oversight role played in those markets by ASIC’: Tony D’Aloisio, ‘Responding to the Global Financial Crisis: the ASIC Story’ (Trans-Tasman Business Circle, 30 November 2010).

In the immediate aftermath of the global financial crisis, ASIC used its powers under this existing regulatory regime to commence 323 new investigations relating to the financial crisis. Its civil penalty proceedings against four major retail banks, alleging misconduct in relation to Australia’s key benchmark interest rate was concluded (with three banks settling and the fourth proceeding to final trial with mixed results). ASIC’s new incoming Chairman, James Shipton, has announced his intention to continue as an advocate for cultural reform in financial markets and institutions. This continues ASIC’s focus on prosecuting poor culture that threatens market integrity, with a particular focus on remuneration and incentives that undermine good governance and risk management systems. APRA has also investigated and published findings and practices in relation to governance, culture and accountability within one of Australia’s major retail banks.

The Australian government has announced reforms to strengthen ASIC’s powers and funding to better enable it to combat misconduct in Australia’s financial services industry. To ensure adequate resourcing, ASIC is now partially funded by industry participants pursuant to a new industry funded model, which took effect in July 2017. Regulatory reforms have equipped ASIC with stronger powers and funding to enhance its surveillance capabilities. This includes the ability for ASIC’s regulatory costs to be recovered from industry participants through annual levies.

To enhance ASIC’s capabilities in enforcement action, Mr Daniel Crennan QC has been nominated by the government as an additional ASIC Commissioner and Deputy Chair for enforcement. These measures are likely to shape the nature and volume of ASIC’s enforcement activity.

Complaints procedure

Is there an independent complaints procedure that customers can use to complain about financial services firms without bringing court claims?

Financial services licensees are required under the Corporations Act to have their own internal dispute resolution procedure and also be members of, and therefore, subject to, an ASIC-approved external dispute resolution procedure. One such procedure is the Financial Ombudsman Service (FOS), to whom customers may submit a complaint regarding a financial services firm.

The FOS accepts claims of up to A$500,000 and the maximum compensation that can be awarded to customers is A$309,000. In May 2017, the government announced plans to establish the Australian Financial Complaints Authority (AFCA), a new single external dispute resolution body for all financial disputes (including superannuation disputes). The new authority will consolidate the FOS, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal into a single industry ombudsman scheme to reduce gaps and overlaps in the three schemes. The new authority will award compensation of up to A$500,000 for consumer disputes and A$1 million for small business disputes. The AFCA is expected to commence in November 2018.

Another common procedure is for customers to lodge complaints with regulatory bodies such as ASIC or APRA, who can then commence enforcement action in respect of the complaint. ASIC also has the power to commence and carry on civil proceedings in the name of a person if, as a result of an investigation, it appears to ASIC that it is in the public interest that such proceedings be brought. This power has the benefit of ensuring that individuals who lack resources to commence litigation against companies can nevertheless obtain a remedy to redress any loss or harm suffered.

Recovery of assets

Is there an extrajudicial process for private individuals to recover lost assets from insolvent financial services firms? What is the limit of compensation that can be awarded without bringing court claims?

Australia has a financial claims’ scheme (FCS), which is an Australian government scheme that protects depositors of authorised deposit-taking institutions (banks, building societies and credit unions) and policyholders of general insurance companies from potential loss owing to the failure of these institutions. The FCS can only come into effect if it is activated by the Australian government when an institution fails. Once activated, the FCS will be administered by APRA.

Under the FCS, deposits are protected up to a limit of A$250,000 for each account holder at each bank, building society and credit union that is incorporated in Australia and authorised by APRA. If the FCS is activated by the Australian government, most claims made against a general insurer by their policyholders or people with valid claims against the insurer are covered up to A$5,000. Claims above A$5,000 are also covered under the FCS for eligible policyholders and certain third parties.

Separately, where individuals have lost assets as a result of dealing with stock-market participants (such as securities, futures and derivative brokers) that have become insolvent, the National Guarantee Fund allows them to recover compensation up to a limit of A$11.4 million.

Updates & Trends

UPDATE & TRENDS

Updates & Trends

Updates and trends

A key trend, and consequential challenge for financial service litigants, is increased regulatory activity. In the financial sector, there have been improvements in the regulators’ ability to conduct surveillance with a focus on gathering larger volumes of data in surveillance, enforcement activities and gathering evidentiary cases against market participants. Higher penalties have been foreshadowed for some time. The ASIC Enforcement Review Taskforce has, this year, put forward recommendations to increase the variety of, and penalties to, misconduct, acting as a credible deterrent. The recently proposed settlement amount of A$700million for one of Australia’s major banks in proceedings brought by AUSTRAC, Australia’s anti-money laundering authority, could, if accepted, lay the foundation for larger penalties being sought by regulators in financial services litigation.

Relevantly, the ‘Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’ was established in December 2017 and a series of public hearings have been held since March 2018. In February 2019, the Commissioner (the Honorable Kenneth Hayne AC QC), is due to publish a final report comprising recommendations following the public hearings. The recommendations and comments as to misconduct may encourage and bolster litigants (both regulators and class action plaintiffs) to take court action against financial services participants.