A Guide To The Honestly And Fairly Obligation For Australian Financial Services Licence Holders Under The Corporations Act

Introduction

For Australian Financial Services Licence (AFSL) holders, a central requirement is the obligation under section 912A(1)(a) of the Corporations Act 2001 (Cth). This statutory duty mandates that an AFSL holder must do everything necessary to ensure that the financial services covered by their licence are provided efficiently, honestly and fairly (EHF).

This general obligation is a critical aspect of the regulatory framework, acting as a standalone requirement with significant implications, including a civil penalty provision. This guide offers practical insights for licensees navigating the complexities of the EHF obligation, aiming to clarify its scope, application, and the Australian Securities and Investments Commission (ASIC)’s expectations to help avoid a breach.

What is the Efficiently, Honestly and Fairly General Obligation for an Australian Financial Services Licence Holder

The Core Requirement Under Section 912A(1)(a)

The foundational obligation for AFSL holders stems directly from section 912A(1)(a) of the Corporations Act 2001 (Cth). This provision mandates that an AFSL holder must “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”. This requirement is commonly known as the “EHF obligation”.

This requirement, commonly known as the EHF obligation, is a cornerstone of the Australian financial services regulatory framework. The phrase “do all things necessary to ensure” imposes several significant duties on licensees:

• A proactive, forward-looking responsibility
• The implementation of adequate systems and policies
• The maintenance of appropriate procedures

These measures are designed to guarantee that financial services consistently meet the standards of efficiency, honesty, and fairness. This obligation is automatically triggered simply by holding an AFSL and applies to all financial services authorised under that licence.

A Standalone General Obligation

AFSL holders must recognise that the EHF obligation is a distinct and standalone statutory duty. This means it can be breached independently, even if no specific provisions of the Corporations Act 2001 (Cth) or other financial services laws have been contravened.

Furthermore, a breach of the EHF obligation can occur even without violating any contractual duties owed to clients. ASIC’s Regulatory Guide 104 (RG 104) confirms this interpretation, stating that the EHF obligation operates separately from other general obligations under section 912A.

Recent case law, such as actions involving Macquarie Bank and HSBC, demonstrates that ASIC can pursue enforcement action based solely on a breach of the EHF obligation. Its status as a civil penalty provision underscores its importance as a key regulatory standard, carrying the potential for substantial financial penalties upon contravention.

Scope and Reach of the Honestly and Fairly Obligation

Application Across the Provision of Financial Services

The EHF obligation under section 912A(1)(a) of the Corporations Act 2001 (Cth) has a comprehensive reach across a licensee’s operations. It applies to all financial services covered by the specific authorisations granted under an AFSL.

This broad application means the EHF standard permeates various facets of a licensee’s interactions and operational management. The scope encompasses a wide array of activities integral to providing financial services, including:

• Financial Product Advice: Covering both general and personal advice scenarios
• Dealing in Financial Products: Including activities like making a market, issuing products, and handling transactions in derivatives or foreign exchange contracts
• Claims Handling and Settling: This is now explicitly defined as a financial service and is subject to the EHF standard
• Operational Risk Management: This includes managing risks such as cybersecurity threats and responding appropriately to incidents
• Preventing Financial Crime: Implementing effective controls to protect consumers from scams, such as those involving impersonation of bank staff or unauthorised transactions
• Fee Practices: Ensuring fairness and honesty in charging fees, avoiding situations like ‘fees for no service’
• Remediation Activities: The process of remedying defective service provision, such as flawed advice or product issuance, is considered part of the financial service itself
• Distribution Activities: Certain distribution activities closely linked to the issue of a financial product may also fall under the EHF obligation

Extra-Territorial Application and Foreign Law Contravention

Geographical boundaries do not limit the EHF obligation. A significant clarification came from the Federal Court decision in ASIC v Union Standard International Group Pty Ltd (No 4) [2024] FCA 1481, which established the extraterritorial reach of this duty.

The court confirmed that the obligation applies to all financial services covered by the AFSL, regardless of where the clients are located or where the services are delivered. This means financial services provided to customers outside Australia are subject to the same EHF standards under Australian law. The obligation attaches to the licensee by virtue of holding the AFSL, irrespective of the client’s location.

ASIC v Union Standard International Group Pty Ltd (No 4) [2024] FCA 1481 also confirmed that providing financial services contravening a relevant foreign law can breach the EHF obligation under the Australian Corporations Act 2001 (Cth). If an AFSL holder offers services, including marketing, into overseas jurisdictions, they must comply with the applicable local financial services laws. Failure to meet these foreign legal requirements is considered conduct that fails the Australian standard of acting EHF.

Australian Securities and Investments Commission Expectations, Enforcement, and Contravention Consequences

Australian Securities and Investments Commission Guidance and Community Standards for Licensees

ASIC provides guidance on its expectations regarding the EHF obligation, primarily through RG 104. This guide clarifies ASIC’s view that the EHF obligation is a standalone requirement under section 912A(1)(a) of the Corporations Act 2001 (Cth).

ASIC expects AFSL holders to meet community standards regarding competence, ethical conduct, and consumer protection when assessing compliance. RG 104 notes that while failing to meet other general obligations under section 912A makes EHF compliance unlikely, the EHF duty operates separately. For example, breaching contractual obligations might not violate other specific duties, but could still constitute a failure to provide financial services efficiently, honestly, and fairly.

ASIC’s assessment often considers whether a licensee’s conduct aligns with prevailing social and commercial norms and standards of behaviour expected within the financial services industry. Furthermore, ASIC emphasises that licensees must consider community expectations, particularly regarding client treatment and consumer protection. This involves reflecting on whether services meet reasonable competence and commercial morality standards from a client’s perspective.

Common Efficiently, Honestly and Fairly Contraventions Identified by the Australian Securities and Investments Commission

ASIC has pursued enforcement action for various types of conduct that are considered breaches of the EHF obligation. These actions provide practical examples of activities that can attract regulatory scrutiny, including:

• Inadequate Systems and Controls: Failures in implementing effective compliance frameworks, risk management systems, or operational controls, leading to systemic issues. A key example involves inadequate cybersecurity risk management, as seen in ASIC v RI Advice Group Pty Ltd (No 2) [2021] FCA 877, where failures to manage cyber risks were deemed a breach.
• Systemic Failures: Widespread or recurring failures in processes such as advice provision, transaction processing, or compliance monitoring can cumulatively breach the EHF standard. This was evident in ASIC v AGM Markets Pty Ltd (in liquidation) (No 3) [2020] FCA 208, where numerous systemic deficiencies were viewed together.
• Ineffective Scam Prevention: Failing to establish adequate controls to detect and prevent scams that harm consumers, such as those involving impersonation of bank staff, has been alleged as an EHF breach.
• Fees for No Service: Charging clients ongoing fees for financial advice or services that were not provided represents a clear failure in honesty and fairness.
• Poor Claims Handling: Deficiencies in handling and settling insurance claims, such as undue delays, lack of transparency, or unfair treatment of claimants, can breach the EHF obligation, especially now that claims handling is a financial service.
• Misleading or Deceptive Conduct: While often pursued under specific provisions, misleading or deceptive conduct frequently forms the basis of an EHF breach allegation, reflecting a failure in honesty and fairness.
• Breaching Foreign Laws: Providing financial services or products (like Contracts for Difference) to overseas clients in contravention of the laws applicable in those clients’ jurisdictions constitutes a failure to act EHF under Australian law, as established in ASIC v Union Standard International Group Pty Ltd (No 4) [2024] FCA 1481.

Consequences of Contravention Penalties and Licence Implications

Breaching the EHF obligation under section 912A(1)(a) of the Corporations Act 2001 (Cth) can lead to severe repercussions for an AFSL holder. Since March 2019, the EHF obligation has been classified as a civil penalty provision, meaning courts can impose substantial financial penalties for contraventions.

For corporations, the maximum penalty can be the greater of:

• 50,000 penalty units (approximately $15.65 million as of 2025),
• three times the benefit derived or detriment avoided, or
• 10% of annual turnover capped at 2.5 million penalty units.

For individuals, penalties can reach 5,000 penalty units or three times the benefit gained. These significant penalties underscore the seriousness with which non-compliance is viewed.

Furthermore, because the EHF obligation is a civil penalty provision, any breach or likely breach automatically qualifies as a ‘reportable situation’ under the mandatory breach reporting regime. Licensees must report such situations to ASIC within 30 calendar days of becoming aware, regardless of any internal assessment of significance.

Beyond financial penalties and reporting duties, persistent or serious breaches can lead to ASIC taking administrative action, including suspending or cancelling the AFSL. Non-compliance also carries substantial reputational damage, potentially eroding client trust and harming the licensee’s market standing.

Practical Compliance Strategies for Australian Financial Services Licence Holders

Building a Robust Compliance Framework for Your Licence

AFSL holders must implement a comprehensive compliance framework to meet the EHF obligation under section 912A(1)(a) of the Corporations Act 2001 (Cth). This EHF obligation is separate, making it insufficient to rely solely on compliance with other specific legal provisions. Your framework should incorporate proactive measures and be fully integrated into your business operations to be effective.

A robust EHF compliance framework includes these key elements:

• Clear Policies and Documented Procedures: Establish formal policies that articulate your commitment to EHF principles, alongside detailed procedures for key operational areas such as:
  • Client onboarding
  • Advice and dealing
  • Complaints handling
  • Cybersecurity
  • Risk management
  • Oversight of overseas activities
• Staff Training and Competence: Conduct regular, comprehensive training for staff on:
  • EHF obligations
  • Internal policies
  • Ethical conduct
  • Maintaining the necessary competence for representatives
• Monitoring, Auditing, and Supervision: Implement ongoing monitoring through:
  • Regular checks and audits
  • Data analysis
  • Review of authorised representatives’ activities to ensure appropriate service delivery
• Defined Accountability: Establish clear roles, responsibilities, and accountability structures for EHF compliance throughout your organisation, from frontline staff to senior management and the board.
• Adequate Systems and Resources: Maintain sufficient technological, operational, financial, and human resources to support:
  • Compliant service delivery
  • Risk management (including conflicts of interest)
  • Effective complaints handling
  • Comprehensive record-keeping

Assessing Potential Contraventions, Materiality, and Systemic Issues

Determining whether a specific failure constitutes a breach of the EHF obligation presents a challenge, particularly regarding efficiency. This difficulty stems from the lack of a defined materiality threshold in the Corporations Act 2001 (Cth) and case law.

While the standard is not perfect, licensees must assess potential breaches carefully, as confirmed EHF breaches automatically require reporting to ASIC. Isolated, trivial errors that are promptly rectified may not breach the obligation; however, systemic issues or incidents causing significant client harm likely will.

When evaluating potential EHF contraventions, consider these important factors:

• Systemic vs. Isolated Nature: Determine if the failure is a one-off incident (such as human error) or indicates underlying weaknesses in systems, processes, or training. Repeated similar errors typically suggest a systemic problem.
• Avoidability and Preventability: Assess whether the incident was reasonably foreseeable and could have been prevented with better controls or procedures. Remember that the obligation requires taking “all necessary steps.”
• Scale and Client Impact: Consider the number of affected clients and the severity of harm caused. Even if only a few clients are affected, a significant impact can still be material.
• Duration: Evaluate how long the issue persisted before identification and rectification.
• Remediation Efforts: Assess whether prompt and effective steps were taken to:
  • Rectify the error
  • Compensate affected clients
  • Implement preventative measures

Integrating Honestly and Fairly Principles into Organisational Culture

Sustainable compliance with the EHF obligation requires embedding its principles into your organisational culture. This approach goes beyond mere policies and procedures, fostering an environment where acting EHF becomes the expected norm. Such integration aligns with a positive customer culture prioritising fair treatment and outcomes.

Key aspects of culturally integrating EHF principles include:

• Leadership Commitment (“Tone from the Top”): Senior management and the board must actively champion EHF values through their actions and communications, demonstrating a clear commitment to ethical conduct and compliance.
• Fostering Ethical Decision-Making: Create an environment where staff feel empowered and expected to make ethically sound decisions that consider client interests and align with community expectations.
• Prioritising Customer Outcomes: Embed a focus on achieving fair outcomes for clients by:
  • Considering the client perspective
  • Aligning services with community standards of competence
  • Maintaining commercial morality
• Aligning Incentives: Review remuneration and incentive structures to ensure they:
  • Align with client interests and compliance requirements
  • Reward behaviours consistent with EHF principles
  • Discourage practices that could lead to breaches

Conclusion

The obligation for AFSL holders to provide financial services EHF under section 912A(1)(a) of the Corporations Act 2001 (Cth) is a fundamental, standalone general obligation with broad scope, including extraterritorial application and significant consequences for breaches. Meeting this requirement demands proactive compliance through robust frameworks, diligent assessment of potential contraventions, and embedding these principles into the organisational culture.

To ensure your business effectively navigates the complexities of the obligation to operate EHF, contact AFSL House today. Our experts provide specialised services and tailored compliance frameworks, helping you turn regulatory challenges into strategic opportunities and achieve peace of mind.

Frequently Asked Questions