Systems and processes – adequate not perfect

By Selina Nutley and Kate Dart

ASIC brought a proceeding against the Commonwealth Bank of Australia (CBA), alleging CBA violated the ASIC Act and Corporations Act by erroneously charging monthly account fees to customers in circumstances where the fee should have been waived. ASIC asserted CBA did not have adequate systems and processes. The court dismissed the proceeding and rejected ASIC’s argument that systems and processes need to have a zero percent mistake or failure rate to be adequate.

Detail

Between between 1 June 2010 and 11 September 2019 CBA erroneously charged a monthly account fee to almost one million CBA bank account holders who were entitled to a fee waiver. In total, CBA incorrectly charged more than $55 million. As of September 2021, CBA had paid around $64 million in remediation to affected account holders.

In 2021, ASIC commenced proceedings against CBA, alleging, amongst other things, CBA-

• contravened its general obligations as an AFSL holder to do all things necessary to ensure financial services are provided efficiently, honestly, and fairly by having adequate systems and processes, and
• made false or misleading representations.
• Adequate systems and processes
• ASIC contended CBA-
• failed to establish and maintain adequate systems and processes to ensure it could apply the fee waiver without failure
• that failure constituted a breach of AFSL holders’ general obligations to provide services efficiently, honestly, and fairly.

The court rejected this argument. Justice Downes said the financial services laws require a high standard of commercial morality and ethics, however “if the legislature had required perfection from licensees, the legislation would have stated this”.

While the court did not provide a test for what would constitute adequate processes and systems, it did detail various factors it considered showed CBA had adequate systems and processes:

• CBA introduced new and additional systems and processes during the relevant period. This demonstrated a proactive approach to improving systems and processes over time.
• The instances of incorrect charging only represented one percent of the fee waiver CBA was contractually required to apply. Therefore, the relative failure rate was low.
• Upon detection of each fee waiver issue, CBA took steps to investigate the cause of the error, rectify it, and remediate the affected customers.

False or misleading representations

ASIC contended each time CBA entered into a contract with a customer which included a fee waiver as a term, CBA made the implied representation it would have ‘adequate’ systems and processes to ensure the fee was waived without fail.

The court did not accept such an implied representation was made.  However, it went on to say even if it was, CBA’s customers would not have been misled or deceived because they would know systems and processes within large organisations are complicated and cannot be expected to be perfect.

Key points

• While licensees are held to a high burden of commercial morality and ethics, the financial services laws do not require them to be perfect.
• An ordinary and reasonable customer would not expect large organisations which rely on humans working with complicated computer systems to be perfect.
• Although the court did not consider in detail what constitutes ‘adequate’ systems and processes, it found the extent of the failure and what was done to rectify it was relevant to whether CBA’s systems and processes were adequate, as well as whether it periodically reviewed and introduced new processes and controls.

Takeaways

Systems and processes cannot be viewed as a ‘set and forget’ exercise. Happily, the court found licensees do not need to be perfect, but proactivity in improving systems and processes may be all important. And, as always in a post-Hayne world, if licensees catch wind of an error, they need to act quickly to investigate, resolve, and remediate those affected.