A stronger focus by the courts on consumer protection is the clear takeaway of the recent Full Federal Court decision that explored the divide between general and personal advice where a marketing campaign was used to encourage existing customers to consolidate their super accounts into a retail super fund.
The decision follows the Royal Commission recommendations and recent law reforms, all of which are designed to significantly strengthen financial services laws in favour of consumers and will require the industry to revisit customer acquisition and engagement strategies.
The case involved the use of a "general advice model" to get existing customers in a retail super fund to consolidate their other super accounts into the retail fund. This was done through a combination of sending letters and outbound call centres staffed by the employees of the financial services licensee.
The callers were trained, scripted and supervised to ensure they understood the difference between general and personal advice and to ensure that they did not take into account a customer's personal circumstances in their efforts to get them to consolidate their super into the retail super fund.
While the Federal Court judges accepted that the callers were just sticking to the script (and did not actively consider a customer's personal circumstances), they were found to have crossed the line into personal advice because of the following circumstances:
In those circumstances, the judges concluded that a reasonable person in a customer's position might expect that:
The presence of the above features in the case lead to the conclusion that the callers gave personal advice. As the callers were not authorised to give personal advice and did not comply with the protective personal advice obligations in doing so, the licensee and their representatives were held to be in breach of those financial services laws.
The Full Federal Court decision also gives us insights into what it means to act fairly as part of the broader obligation to act efficiently, honestly and fairly that applies to all financial services licensees.
The court held that you can breach the fairness obligation in relation to individual campaigns (i.e. the obligation was not limited to an assessment of the robustness of your overall business operations) and the scope of this fairness obligation is not limited by the requirements of other sections of the Act (i.e. you can still breach it even if you comply with other obligations such as giving the general advice disclaimer). Rather, the court held that it is a general overarching obligation to ensure all conduct in the provision of financial services is fair to your customers. That is, it’s an outcomes-based obligation to "do the right thing" by your customers.
The court held that the licensee was in breach of the obligation to act fairly because the licensee:
The Court decision also needs to be considered in light of the proposed ban on hawking of superannuation and insurance products that was recommended by the Hayne Royal Commission, which will see the end of many of the current customer engagement strategies that use general advice models.
The impact of the Full Federal Court decision also needs to be considered together with the broader Royal Commission recommendations, recent law reforms and the more intrusive and aggressive approach of ASIC and APRA. A different approach is needed.
The key learning from the decision is that a trusted brand comes with responsibility to "do the right thing" by your customers but the good news is that it also provides helpful guidance on how to redesign marketing and customer engagement strategies.
The decision draws some clear lines in the sand between general and personal advice that have significant implications for interactions with customers through:
It is safe to say that the court decision and the proposed anti-hawking ban will see the end of many of the current customer acquisition strategies using general advice models.
Our prediction is that the fairness obligation will become a powerful regulatory tool that ASIC will seek to use to test your overall business arrangements as well as individual campaigns (as in this case). It would therefore be prudent to take that into account in the reviews of your existing policies, procedures, systems and controls, as well as in the design and implementation of new customer engagement campaigns and initiatives.
We also anticipate that the fairness obligation will be used together with ASIC's new DDO and PIP regime to test product design and distribution, with fairness being the overarching consideration that ASIC is looking to implement.
Every win will likely strengthen a regulator’s position, and following this Full Federal Court decision ASIC has already commenced proceedings against the licensees and trustee of the Tidswell Master Super Fund in relation to their use of a general advice model as part of a customer acquisition strategy.
We anticipate that ASIC will take more regulatory enforcement action in relation to general advice models and require the remediation of customer detriment resulting from them. This may also see the reopening of past remediation programs and action taken under previous enforceable undertakings that preceded this court decision.
In this new era of stronger consumer protection, it is important to revisit and redesign customer engagement strategies through a new lens of doing the right thing by your customers. KPMG can help you build that trust and grow – while you better serve your customers.