Statutory unconscionability in the provision of financial services

In ASIC v Kobelt [2019] HCA 18, ASIC unsuccessfully sought civil penalties against an individual on the basis of unconscionable conduct.

The High Court by majority rejected ASIC's approach to the broad unconscionable conduct provision in section 12CB of the Australian Securities and Investments Commission Act, in relation to informal credit arrangements provided to residents of indigenous communities. This provision is often relied on in financial services regulatory and consumer litigation, and its scope has long been uncertain. Section 12CB(1), which is a civil penalty provision, relevantly provides that a person must not in trade or commerce, in connection with the supply or possible supply of financial services to a person, engage in conduct that is in all the circumstances unconscionable.

Whilst the facts are relatively specific, the decision is nevertheless an important guide as to:

• The application of statutory unconscionability, and in particular, whether it is wider in scope than equitable unconscionability and whether special disadvantage is still a requirement.

• The elements to be met to run a 'systems or pattern' case pursuant to section 12CB(4)(b).

• How a court may approach a case concerning financial services provided to remote indigenous communities (which is particularly important in light of the attention given to the topic during the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry).

What you need to know

• Statutory unconscionability pursuant to section 12CB goes further than equitable unconscionability. The extent of that expansion, and in particular whether it always requires taking unconscientious advantage of a person's special disadvantage, is not clear. Three justices said it was still a requirement. Two justices said that it was not. The remaining two justices appeared to accept that it was no longer a requirement, but nevertheless applied it to resolve the case.

• Where a case involves a group of people with its own norms, culture and circumstances that will need to be taken into account. Conduct which may be unconscionable to mainstream society may not be unconscionable when those differences are taken into account.
• The voluntary choice by a recipient to enter into an arrangement will be relevant, although how that choice came to be made will be important.
• Whereas in equity undue influence (focusing on the person who suffered loss) is separate and distinct from unconscionability (focusing on the defendant's conduct), it is a relevant factor for statutory unconscionability and a lack of undue influence supports a finding that that conduct was not unconscionable.
• Whilst conduct that gives rise to potential exploitation or abuse by a financier may be a relevant factor, if that potential is not realised then that may be sufficient to find that conduct was not unconscionable.

Background

The key facts were as follows:

• Mr Kobelt ran a store in which he sold, among other things, groceries and used vehicles.
• Mr Kobelt provided credit to residents of remote communities in the Anangu Pitjantjatjara Yankunytjatjara Lands through a "book up" system. The Anangu customers lacked financial literacy.
• Under the "book up" system, Mr Kobelt would defer payment of goods if the customer provided a keycard and PIN to him until the debt was repaid. Mr Kobelt would apply income received into the bank account to repayment of the debt and leave a limited amount (often half) for basic living expenses. No accounts or records were given to customers.
• Much of the debt under the "book up" system was from the sale of used vehicles. A vehicle sold to an Anangu customer through "book up" cost about $1,000 more than the cash price. That credit charge was held to be high.
• Mr Kobelt's Anangu customers could effectively cancel participation in the book up system by, for example, stopping using the particular account or keycard. Some customers did so.
• Anthropological evidence adduced by ASIC suggested that the Anangu people preferred and may have benefited from the use of the book up system.

The High Court found against ASIC (in a 4:3 majority), holding that Mr Kobelt had not engaged in unconscionable conduct in his dealings with the Anangu people.

The scope of statutory unconscionability as against equitable unconscionability

Section 12CB(4)(a) states: "It is the intention of Parliament that: (a) this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct". A key issue considered by the Court (to varying degrees in the different judgments given) was whether that section had the effect of expanding the scope of statutory unconscionability beyond unconscionability involving a special disadvantage being exploited unfairly.

Whilst there is no clear unifying principle addressing the issue, a majority of the Court seemed to accept that statutory unconscionability is broader in some way than the equitable concept, although the extent to which this is the case remains unclear. The Court concluded:

• Justice Gageler (majority) held that section 12CB operated independently of equity to prescribe a normative standard of conduct which the Court must administer in the totality of the circumstances. However he found that Parliament's appropriation of the term "unconscionability" served "to signify the gravity of the conduct necessary to be found by a court in order to be satisfied of a breach of that standard". He also said that exploitation of a special disadvantage was not a requirement under the section.

• Justice Keane (majority) said that whilst the section was "not limited to conduct that has been held to be "unconscionable" under the general law, … it does not operate to give the term "unconscionable" a meaning different from its ordinary meaning". This included the exploitation or unconscientious taking advantage of a special disadvantage.
• Justice Nettle and Justice Gordon (minority) held that the non-exhaustive list of factors in section 12CC "necessarily implies that the statutory conception of unconscionability is more broad-ranging than that of the unwritten law" but that nevertheless the "unwritten law has a significant part to play in ascribing meaning to the term 'unconscionable' ". Later in their judgment they appear to dismiss the concept of ascribing fixed elements or rules to unconscionability. Nevertheless, their subsequent analysis of the case appears to have been conducted through the prism of the Anangu people suffering a special disadvantage.
• Justice Edelman (minority) held that there was "a clear legislative intention that the bar over which conduct will be unconscionable must be lower than that developed in equity even if the bar might not have been lowered to the "unreasonableness" and "unfairness" assessments in the various categories in nineteenth century equity". In particular, he held that statutory unconscionability permits consideration of, but no longer requires, a special disadvantage or the taking advantage of that special disadvantage.

Chief Justice Kiefel and Justice Bell (majority) did not address in detail the scope of statutory unconscionability as it was not an issue that was squarely raised and argued in the appeal, although they did emphasise that Parliament had adopted the term "unconscionability" and the relevance of certainty in the conduct of commercial transactions. They expressly noted there was scope for the concept, and in particular, a "lowering the bar", to be considered further. However the ultimate effect of their judgment seems to be that until that time arrives, special disadvantage is still a requirement.

Overall, the outcome shows that in an appropriate case the High Court may be inclined to reconsider and potentially expand the content of the concept of unconscionability in s 12CB, which may dispense with a requirement that there be some special disadvantage. Until that time we are left in a situation where three justices required special disadvantage, two that didn't and two who appeared to accept in theory that it was not required but who nevertheless analysed the facts through that prism.

Proof required in a 'systems' or 'pattern' case

The case run by ASIC in the High Court relied on section 12CB(4)(b) which states: "It is the intention of Parliament that: … (b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour".

Chief Justice Kiefel and Justice Bell (majority) described a system case as: "a system or pattern of conduct by a trader could constitute unconscionable conduct without the necessity to identify the circumstances of, or the effect upon, any particular consumer". Justice Nettle and Justice Gordon (minority) provided guidance as to the meaning of 'system' and 'pattern', describing the former as "an internal method of working" and the latter as "the external observation of events".

There was a divide between Justice Keane (majority) on the one hand, and Justice Nettle and Justice Gordon (minority) on the other as to the role of special disadvantage in a 'system' or 'pattern' case. Justice Keane held that a party must prove "a calculated taking advantage of a weakness or vulnerability on the part of victims of the conduct in order to obtain for the stronger party a benefit not otherwise obtainable" but that the extent of the disadvantage did not need to be proven. Justice Nettle and Justice Gordon held that it was not necessary to identify that an individual had a special disadvantage.

Unconscionability in financial services to remote indigenous communities

Any assessment of whether particular conduct is unconscionable will be heavily dependent on the specific facts of the case. Although the Court's judgment leaves many questions about the general concept unanswered, it is useful to consider how the Court approached the following key topics:

• Differing cultures, norms and circumstances than mainstream society may lead to different outcomes: In considering the particular cultures, norms and circumstances of the Anangu people, the majority adopted a neutral approach to consider these matters as part of "all of the circumstances" (Kiefel CJ and Bell J) or as an implicit acceptance of a separate community entitled to due respect for their own choices and their ability to make them (Gageler J). However, the minority considered the Anangu people's differences led to their vulnerability and special disadvantages which emphasised rather than excused the alleged unconscionability.

• A recipient's choice to voluntarily enter into an arrangement will be relevant: Both the majority and the minority considered this a relevant factor, and for the majority it appears to have been a key factor. The issue for the minority was "how that willingness or intention was produced". In that regard, the minority appeared to form the view (contrary to the majority) that the Anangu people's choice was tainted by vulnerability and special disadvantage such that it was given little to no weight.

• The lack of any undue influence, undue pressure or unfair tactics will favour a finding of no unconscionability: Both the majority and the minority acknowledged that in equity undue influence differed from unconscionability, the former being "concerned with the quality of consent of the weaker party" whereas the latter was "concerned with the conduct of the stronger party in taking advantage of the vulnerability of the weaker party". However, in considering statutory unconscionability, by virtue of s12CC(1)(d) the Court is invited to consider whether there was any undue influence, undue pressure or unfair tactics.

• The mere potential for exploitation and abuse may not be sufficient to find unconscionability: The majority and the minority equally recognised that Mr Kobelt's credit arrangements had the potential to be exploited or abused by him to the disadvantage of his customers, and this was a matter that could support a finding of unconscionability. The minority found there was exploitation, and there are some indications that the possibility of exploitation or abuse was in and of itself sufficient. However, the majority's view was that whilst there was potential, Mr Kobelt did not in fact exploit or abuse the arrangement (except on one particular occasion), and that customers were able to, and did, extricate themselves from the arrangement with relative ease. Those factors appear to have been sufficient for the majority to find that there was no unconscionability.

Authors: Andrew Carter, Partner; and Matt Youssef, Senior Associate.