By: Cain Jackson and Samantha Younane

ASIC v Union Standard International Group Pty Ltd (No 4) [2024] FCA 1481

At a glance

• The Federal Court has determined that the obligation to act efficiently, honestly and fairly extends to services provided to clients outside Australia.
• The decision highlights risks for AFSLs providing products like CFDs to overseas customers, as flagged by ASIC, particularly where these products breach local laws.
• AFSLs should review their overseas activities to ensure compliance with foreign financial services laws and avoid potential sanctions in Australia.

Introduction

Just before Christmas, the Federal Court handed down a judgment which was dubbed “the first of its kind” by ASIC. Among other things, that judgment found that the obligation of Australian financial services licensees to act “honestly fairly and efficiently” extends to financial services which are provided to clients outside Australia.

This article looks at why the Court reached this conclusion and the implications for AFSL holders and their insurers.

What was the case about?

This case concerned allegations that a (now insolvent) CFD issuer (USG) and its corporate authorised representatives (TradeFed and Europe FX) engaged in unconscionable conduct, misleading or deceptive conduct and unauthorised personal financial advice in contravention of the relevant provisions of the Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Commission Act (Cth). Critically, it was also alleged that USG specifically contravened the obligation to act efficiently, honestly and fairly in contravention of s912A(1)(a).

USG held an Australian Financial Services Licence (AFSL) which authorised it to provide general advice about, to deal in, and to make a market for derivatives and foreign exchange contracts and in respect of both retail and wholesale clients. USG marketed (via local “introducing brokers”) its FX margin and CFD contracts in China, where almost half of USG’s customer base was located, but was not authorised by the Chinese securities regulator to issue those products. Customer losses were in the order of $83 million.

While most of the judgment was concentrated on the key causes of action, this article focusses on the Court’s examination of the extra territorial application of the obligation to act efficiently, honestly and fairly. While a comparatively shorter aspect of the judgment, it has important consequences for AFSL holders who conduct business abroad.

A quick recap – the obligation to act efficiently, honestly and fairly

In short, the obligation arises as a result of holding an AFSL.¹

An AFSL is required where a person conducts a “financial services business” in “this jurisdiction” (which essentially means Australia’s states and territories unless a further specified external territory is specified in the regulations). An AFSL is not required where the person can rely upon an exemption or is an authorised representative under another AFSL.

A “financial service” includes:

• providing financial product advice
• dealing in a financial product
• making a market for a financial product
• providing a claims handling and settling service
• providing a superannuation trustee service.²

An AFSL holder is required to comply with the general obligations set out in s912A which includes the requirement to “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly” (EHF Obligation). The National Consumer Credit Protection Act 2009 (Cth) also contains an analogous EHF Obligation which applies to holders of Australian Credit Licences.³

There are several Federal Court authorities which have considered the expression “efficiently honestly and fairly”. However – and as the judge in this case pointed out – “the boundaries and content of the expression are incapable of clear or exhaustive definition”.⁴ Ultimately, the EHF Obligation applies to “an infinite variety of corporate delinquency and self-interested commerciality”.⁵

This means that conduct of varying types can constitute an alleged breach of the EHF Obligation. The breadth of the conduct which has formed the basis of proceedings issued by ASIC has included:

• failing to put in effective controls to prevent scammers from impersonating bank staff⁶
• failing to manage cyber security risks and failing to implement cyber security measures in a timely manner following a cyber incident⁷
• failures and delays in the claims handling process of death benefits and TPD insurance⁸
• charging fees for no service,⁹ and
• providing financial advice which is contrary to the best interest of the customer.¹⁰

It is not uncommon for breach of the EFH Obligations to be coupled with other contraventions such as misleading or deceptive conduct. However, the EHF Obligation can be contravened even if there is no contravention of another existing duty or obligation.

Legislation introduced after the Banking Royal Commission¹¹ saw a contravention of the EHF Obligation elevated to a civil penalty provision.¹² The same package of reforms significantly increased the prescribed maximum civil penalties and at the time of writing, the maximum civil penalty for a breach of the EHF Obligation by a body corporate is the highest of $16.5m, 3 times the amount of the benefit derived/detriment avoided due to the contravention, or 10% the company’s turnover in the 12months prior to the contravention, capped at $825 million.¹³

What the Court said about the extra territorial application of the EHF Obligation

It is worth noting at this point that the USG and TradeFed were wound up prior to the trial of the proceedings, with EuropeFX actively defending the allegations against it. The allegation relating to breach of the EHF Obligation was made against USG only (it being the licence holder). As USG did not defend the proceedings against it, the Court appointed amicus curiae (a “friend of the court”) to make submissions specifically on the jurisdictional issues. ASIC also made submissions.

The two key jurisdictional questions were as follows:

• Does providing financial services to customers who reside in a foreign jurisdiction found a basis of a breach of the EHF Obligation?
• Can the provision of financial services in contravention of a foreign law result in a contravention of the EHF Obligation?

In the course of examining these questions, the Court considered the evidence about the illegality of the Margin FX and CFD contracts under Chinese law. There were sub issues underpinning this question – the first was whether it was illegal for the licence holder itself to provide those services to Chinese customers.

The licence holder had received limited legal advice which, among other things, pointed to statements made about those products and services being unlawful in China and recommending that jurisdiction-specific advice should be sought. The Court was ultimately satisfied, based on unchallenged evidence from an expert in Chinese domestic law, that USG’s actions in soliciting and providing Margin FX contracts and CFDs was unlawful under Chinese law. ASIC had also put USG on notice (and issued a wider media release)¹⁴ that its actions were likely to be unlawful.

The second issue was whether it was illegal for the customers themselves to trade in those products. This question was indirectly dealt with in the legal advices, but ultimately the Court was satisfied, again based on unchallenged evidence, that trading those products exposed its customers located in China to potential civil or criminal liability under Chinese law.

That left the question as to whether – even if it is accepted that the conduct of USG contravened, and caused its clients to contravene, Chinese law – the EHF Obligation is capable of applying outside of Australia.

Jurisdictional question 1: does the EHF Obligation apply extra territorially?

The position of amicus curiae was as follows:

• The Corporations Act does not specify the territorial reach of s912A(1)(a) – that being case, the legislative purpose or “hinge” needs to be determined in order to identify its territorial connection.
• The statutory “hinge” is the provision of financial services by a financial services licensee.
• There are several textual and contextual indicators in the Corporations Act that suggest the territorial scope of the “hinge” is that the services must be provided to customers in Australia (pointing to four different examples).
• Even if the statutory hinge cannot be identified:
  • the presumption against extraterritoriality should apply, and
  • Section 21(b) of the Acts Interpretation Act 1901 (Cth) means that “financial services” should be interpreted to mean financial services provided to customers in Australia.¹⁵

The Court disagreed, finding instead that:

• The provision in the Corporations Act dealing with the territorial application of the Corporations Act also contains sub-sections which state that the Corporations Act applies, “according to its tenor”:
  • in relation to acts and omissions outside the jurisdiction (section 5(4) of the Corporations Act)
  • natural persons whether resident in this jurisdiction or not (section 5(7) of the Corporations Act).
• “According to its tenor” means that that those sub-sections will apply to the EHF Obligation unless there is something in the words of that provision that suggests otherwise.
• There are no such words that limit the provision in that way. The legislative intent appears to be that once an AFSL has been granted, the EHF Obligation applies to the services under that licence “wherever, or to whomever, they are provided”.
• There are other provisions in the Corporations Act which limit its territorial operation, which reinforces the position that the EHF Obligation operates more widely.
• Even if the Court had to consider the so-called “statutory hinge”, the hinge is not subject to the territorial limits of Australia. The fact that an AFSL is required where a person carries on a business “in this jurisdiction” does not mean that a person outside Australia cannot trade in the product or market made by that business.
• In any event, even if the “hinge” did have a territorial limit, the relevant financial services (dealing in a financial product and making a market) were still provided in or from Australia, even though there were ultimately customers who secured those services in China.

Jurisdictional question 2: can the provision of financial services in contravention of a foreign law result in a contravention of the EHF Obligation?

This question was more confined but ultimately formed the basis of the broader finding that USG failed to act efficiently, honestly and fairly. The Court’s findings on this question seemed to turn on the unchallenged evidence that trading those products exposed its customers located in China to potential civil or criminal liability under Chinese law.

The central submission of amicus curiae was that the content of the EHF Obligation under Australian law cannot be informed by the content of a foreign law (and in this case, Chinese law).

The Court disagreed, finding instead that:

• While Chinese law is not incorporated into Australian law nor informs of the EHF obligation, an AFS licensee can still breach the EHF Obligation if it is aware (or should be aware) that providing the relevant services under its AFSL to customers located in another jurisdiction would breach the laws of that jurisdiction, and would therefore expose its customers to civil or criminal liability under that law.
• This is especially true if the licensee failed to warn the foreign customers that it could expose them to a civil or criminal question in that jurisdiction (even if they wouldn’t be found liable under Australian law).
• The fact that ASIC could not point to authority on point is “neither here or there”, because whether a person has breached the EHF Obligation is ultimately a question of fact and applies to a variety of conduct.

Put simply, the exposure to the civil or criminal penalty and in particular, the failure to warn its customers that they could be exposed to a contravention of Chinese law could found a basis for a breach of the EHF Obligation.

Implications for licence holders and their insurers who do business overseas

Pending any appeal, we now have Federal Court authority to the effect that as a matter of statutory interpretation, the EHF Obligation applies extra territorially. That said, any exposure in respect of the EHF Obligation only arises where the services provided run the risk of contravening laws in the countries in which those services are being solicited or provided and the AFSL is on notice (or constructive notice) of that possibility.

The decision is particularly relevant to products and services being provided by AFSLs to overseas customers which have already been flagged by ASIC. For example, a media release issued by ASIC in 2019 titled “Some AFS licensees may be breaking overseas laws”¹⁶ was specifically focused on OTC derivatives (that is, a financial contract that is not traded via an exchange – such as a CFD). It outlined the unlawfulness and restrictions on those products in China and Europe and expressed a concern that some product issuers are soliciting or marketing to clients overseas to open accounts with AFS licensees to circumvent restrictions in the client’s local jurisdiction.

More broadly, it warrants a review by AFSLs of their overseas activities to ensure compliance with foreign financial services laws given the potential exposure to sanction in Australia for any contraventions in foreign jurisdictions.

Key Financial Services contacts

If you would like to discuss anything in more detail or around our financial services offering, please reach out to one of our partners below.

• Andrew Moore (Sydney)
• Dean Pinto (Sydney)
• Suzanne Craig (Sydney)
• Thomas Cavanagh (Sydney)
• Edward O’Brien (Melbourne)
• Yen Seah (Melbourne)
• Raisa Conchin (Brisbane)
• Luke Vincent (Perth)
• Bill Conor (Adelaide)