Australians are now the beneficiaries of a new national consumer law, which has swept through the myriad of Federal and State laws to put in place one single, national consumer law regime. Reducing complexity and confusion arising from duplication under the previous regime can only be a positive thing, or can it?
Coinciding with the national law, new provisions relating to unfair contracts have been inserted into the Australian Securities and Investments Commission Act 2001 Cth (ASIC Act). These provisions apply to standard form consumer contracts entered into or varied after 1 July 2010 for the supply of financial products and services if a party to the contract is an individual acquiring the product or service for personal use.
Home loans, credit cards and client or broker agreements are some examples of standard form contracts to which the new unfair contract laws apply. However the new laws do not apply to insurance contracts regulated under the Insurance Contracts Act, nor to constitutions of companies and managed investment schemes.
An interesting question arises in the wealth management industry of how the new unfair contracts laws sit with existing investor protections already contained in the Corporations Act 2001 (Cth) and ASIC Act. Arguably, the industry was already pretty well regulated, and certainly financial services have not been Minister Emerson’s public focus for his new laws, which seemed to target suppliers of pay TV, gym memberships, car hire
and mobile phones.
However, regardless of whether this additional level of protection was necessary, with the new consumer laws in place, it is time to consider how the laws will work in practice. For example, how do the new unfair contract laws apply to a product disclosure statement (PDS) and its application form?
Going back to first principles, a PDS, combined with an application form, can create a standard form consumer contract being a contract for the supply of a financial product. The PDS is produced by one party – the issuer – and is offered on a take it or leave it basis. Accordingly, the new unfair contract laws can apply to contractual terms in a PDS.
However, analysing just how the new unfair contract laws apply to a PDS is not necessarily a simple task. Let’s take for example, a PDS for a managed investment scheme (MIS). As mentioned above, the new unfair contract laws can apply to contractual terms in the PDS for the MIS but do not apply to the contractual terms in the constitution of the MIS.
Accordingly, does this mean that contractual terms in the PDS that are expressly permitted by the MIS constitution are subject to or excluded from the new unfair contract laws? If the new unfair contract laws apply and a term in a PDS is considered unfair and struck out, what does this mean practically?
Here are a couple of case studies to consider.
Cast study 1 – unilateral changes in ongoing management fees
A MIS constitution may allow for a maximum ongoing management fee that can be charged by an issuer, but the issuer may not seek to recover it in full. Often, when the costs of managing a MIS rise, so do the fees. These fee increases are determined unilaterally by the issuer, up to the maximum permitted by the MIS constitution. So, if a PDS states that the issuer may vary the ongoing management fees applying to an investment in the MIS could this be considered an unfair term of a consumer contract?
The new laws provide that a contractual term that permits, or has the effect of permitting, one party – but not another party – to vary the terms of the contract, may be considered unfair. However, a unilateral variation clause may be more likely to be acceptable if: the circumstances in which a variation can occur are clearly expressed in the contract; the clause is reasonably necessary to protect the legitimate interests of the party using the term; and if the consumer has a right to cancel the contract without penalty if the change is detrimental to them.
Determining whether the new unfair contract laws could apply to an issuer’s right to unilaterally vary ongoing management fees requires careful consideration of the applicable MIS constitution and PDS.
If the applicable MIS constitution provides that the ongoing management fee will be as set out in the PDS (subject to the maximum prescribed in the constitution) and the PDS states that the fee will be a specified percentage unless otherwise determined by the issuer, it is possible that the new unfair contract provisions could apply.In this case, the issuer will need to ensure that adequate disclosure is made in the PDS in relation to when and how this right to unilaterally vary the ongoing management fee may be exercised. In addition, on exercise of the right to increase fees, the issuer will need to consider whether the exercise of the right is reasonably necessary in order to protect the legitimate interests of the issuer.
Interestingly, if the applicable MIS constitution provides that the ongoing management fee will be as determined by the issuer from time to time, subject to the maximum prescribed in the constitution and the PDS simply states the current ongoing management fee as determined by the issuer, it is arguable that the unfair contract provisions will not apply due to the exclusion of the terms of the MIS constitution from the new unfair consumer contract laws.
Case study 2 – redeeming out low balances
A right to redeem low balances out of an MIS is a means by which an issuer can protect itself and the scheme investors generally from the costs associated with administering small holdings, which would otherwise be borne either by the issuer or the investors as a whole.
Generally, an issuer has the right to redeem low balances on a unilateral basis as permitted by the MIS constitution. The right of the issuer to do so is also required to be disclosed in the PDS.
A term that permits one party – but not another party – to terminate a contract may be considered unfair unless it is reasonably necessary to protect the business’ legitimate interests.
For the reasons touched on above, a right to redeem out low balances fully enshrined in the MIS constitution will fall outside the scope of the new unfair contract laws. This will be the case even if this right is disclosed in the PDS.
However, it is not unusual for a MIS constitution to provide that the monetary limit that triggers the right of the issuer to redeem out low balances will be as set out in the PDS for the scheme or will be as determined by the issuer from time to time.
If the monetary or other limit is set out as a contractual term in the PDS, that contractual term could be open to challenge as unfair if it can be argued by the investor that the limit has not been set at a fair level. For example, setting a monetary limit for redemption of low balances at $20,000 when $5,000 would be reasonable to protect the issuer’s business and the interests of the remaining investors in the scheme.
However, similarly to the fees example above, if the applicable MIS constitution provides that the monetary limit for the redemption of low balances will be as determined by the issuer from time to time and the PDS simply states the current monetary limit as determined by the issuer, it is arguable that the unfair contract provisions will not apply.