personal finance

Not fair? why judges have been accused of failing Australian consumers


When a judge says a bank’s borrowers could afford its loans if they cut down on Wagyu beef and fine shiraz, the accusation that the judiciary is out of touch is not a hard one to make.

That was the case last month, when the federal court judge Nye Perram threw out a case brought by the Australian Securities and Investments Commission alleging irresponsible home lending by Westpac.

Consumer groups exploded, and the ruling went down badly with a regulator that had been told by the banking royal commissioner, Kenneth Hayne – himself a former high court judge – to be quicker to resort to the courts.

But it was only one of a series of cases over the past few years, dealing with everything from door-to-door vacuum cleaner salesman to health insurance, in which judges have frustrated attempts by regulators to use existing laws to protect consumers.

Now Australia’s consumer regulator has called for the law to be changed to bar companies acting unfairly towards customers, after a series of court rulings that have raised concerns judges are out of touch with community expectations.

Rod Sims, the chairman of the Australian Competition and Consumer Commission, told the Guardian a new “unfair conduct” provision should apply across the economy and replace current provisions outlawing “unconscionable conduct” – a phrase rooted in the ancient law of equity that has been criticised because it brings with it connotations of deliberate wrongdoing.

His call adds weight to similar demands from regulators, judges and consumer groups who say the way the courts interpret the existing law is too narrow.

Even when regulators do win under current laws banning unfair contracts, as the ACCC did on Wednesday in a case against the hair clinic Ashley & Martin, the most that can happen is that the arrangement in question is set aside – judges cannot levy fines for breaches.

The Kobelt case

Frustration with judges among regulators came to a head in June, when Asic lost a high court case in which it alleged a man named Lindsay Kobelt engaged in unconscionable conduct in the way he gave credit to customers of a store he ran in an Aboriginal community in remote South Australia.

The facts of the way the “book-up” scheme operated, as found by the court, seem shocking: Kobelt advanced credit to his customers in return for custody of their bank keycards and their PINs.

Most of the credit was advanced to buy cars that had often done more than 200,000 kilometres – vehicles for which Kobelt charged a hefty mark-up in return for the loan.

When the customer’s wages or Centrelink payments arrived, Kobelt or one of his employees drained the account of all or nearly all of the money.

His records of who owed what were cramped, chaotic and barely legible – so badly kept that customers would have had considerable difficulty understanding the entries.

The case divided the court four to three, with the majority ruling that it suited Kobelt’s customers to allow him to drain their bank accounts and he did not exploit them or take advantage of their lack of financial literacy.

It was as if the judges thought buying a car through book-up was “the same as buying a tub of olives at South Melbourne market”, one experienced regulator told Guardian Australia.

Consumer groups also heavily criticised the decision, with the Consumer Action Law Centre saying it showed the law was not working to protect customers and calling for the rules to be changed.

One of Victoria’s most senior judges, the president of the court of appeal, Chris Maxwell, also took aim at the decision last month, saying he would have decided the case differently.

In a speech to the legal community, Maxwell traced the history of unconscionable conduct all the way back to the courts of equity set up in the 15th century and pointed out that proving it generally relied on showing “that the stronger party had knowledge, or at least exhibited wilful ignorance, of the weaker party’s disability”.

And he drew from the dissent written by one of the three judges in the minority in the Kobelt case, James Edelman, to point out that over the past few decades parliament had repeatedly tried to expand the definition of unconscionable conduct “in continued efforts to require courts to take a less restrictive approach”.

He asked: “Are the courts still being too restrictive? Or is the problem with the standard?

“It would certainly promote better understanding by all concerned – and, it might be hoped, higher standards of conduct – if we had a prohibition on conduct which was ‘in all the circumstances unfair’,” he said.

‘Change the test’

Sims says Maxwell’s speech and Edelman’s dissent “have helped clarify my personal thinking and I think the thinking of other people in the ACCC.

“I don’t think this is a matter of criticising judges at all, I think it’s a matter of now we’ve clearly got an issue,” he says. “It’s up to the legislature to be clear about what they mean, and if what they mean is unfairness, which I think they do, then we should change the test to that.”

Federal court judge Nye Perram threw out a case brought by the Australian Securities and Investments Commission alleging irresponsible home lending by Westpac.



Federal court judge Nye Perram threw out a case brought by the Australian Securities and Investments Commission alleging irresponsible home lending by Westpac. Photograph: Joel Carrett/AAP

He says he has also considered the problem in light of efforts to make banks behave better following the Hayne royal commission. “If you want to make banks act fairly, why not just make that the law,” he says.

While Sims is careful not to criticise the judiciary, others are more forthright.

In an article published this month in the Journal of Equity, three legal academics – Melbourne law school professors Jeannie Marie Paterson and Elise Bant, with student Matthew Clare – said the majority in Kobelt took an “unduly narrow” view of the law and their ruling would make it more difficult to pursue companies over business practices that hurt consumers.

The majority failed to consider that Kobelt’s book-up system broke credit laws or “squarely investigate the community or cultural values that were said to justify the business model operating in a remote Indigenous community,” the academics said.

The former Asic deputy chairman Peter Kell, who appeared before the royal commission while at the financial regulator, supports Sims’s call for a new law against unfair conduct.

“I think we now have enough cases on the books that we can safely say the unconscionable conduct provision sets the bar too high when it comes to bad market conduct,” he says.

“In particular, it sets the bar too high when it comes to conduct that harms the most vulnerable members of our community.”

The Consumer Action Law Centre has used its submission to a treasury review of the ACCC’s digital platforms inquiry to call for an economy-wide law against unfair conduct.

“The operation of the free market in Australia has failed to deliver fair outcomes,” the centre said in the submission.

Peter Kell



Time for a rethink: former Asic deputy chairman Peter Kell. Photograph: Mick Tsikas/AAP

It criticised the high court majority in Kobelt for failing to heed parliament’s attempts to broaden the concept of unconscionable conduct and for focusing on the conduct of Kobelt, rather than the effect on his customers.

“Not only is it a problem that the courts have read the existing provision too narrowly, it is a problem of the term ‘unconscionable’ itself,” the centre said. “Replacing it with fairness will encourage businesses to consider the impact of their conduct on consumers and can thus play a role in contributing to cultural change in Australian industry.”

While it was an Asic case that has crystallised the new push for laws against unfair conduct, the current Asic commissioner responsible for enforcement, Daniel Crennan QC, will not be drawn on whether he supports the move, saying it is a matter for the government.

However, he points out that the courts will have to consider the idea of fairness more often anyway because of a change to the law designed to crack down on bad behaviour in the finance sector.

Courts can now fine licensed finance companies if they fail to act “fairly, honestly and efficiently” towards customers.

“Fairness will be tested by us, the regulators, in the courts in coming years,” he says. “That may well be helpful to the debate.”



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.