The ACCC is calling for a new ban on unfair trading practices in business – why, and what it would mean

The ACCC has advocated for a new general provision prohibiting unfair trading practices, citing gaps in the current laws protecting consumers and small business, and contending that such a reform would bring Australia in line with other jurisdictions, such as the EU and US.

We consider below the reasons put forward by the ACCC and discuss whether the ACCC's proposal might be beneficial – or whether it would go further than comparable laws in other jurisdictions and give rise to many uncertainties and costs.

The ACCC has called for the Australian Consumer Law (ACL) to be amended to include a general provision against unfair trading practices. The main reasons for this are:

• a perceived gap in the law and cases in which the regulator failed to convince the courts that a particular business has acted unconscionably towards consumers, although its conduct was considered unfair;
• drawing on the existing requirements in financial services and credit licensing that licensees must act "honestly efficiently and fairly";
• to align Australia to other jurisdictions, which have laws prohibiting unfair trading practices;
• concerns that various codes of conduct, designed to protect small business suppliers in dealings with the major grocery chains, continue to fail to address conduct of concern; and
• to give regulators more tools to address the practices of major digital platforms in their use of consumers data.

A perceived gap in the law

Recently the ACCC has raised concerns over gaps in the law, as failures to establish "unconscionable conduct” in cases such as ACCC v Medibank and ASIC v Kobelt show that more is needed to protect consumers.

More controversially the ACCC may not want any new law to be limited by a precise definition on "unfair trading", according to its Report on Perishable Goods. While certain practices might be held out as examples, the scope of the new law would not be confined to those and could evolve generally over time, according to the ACCC.

The ACCC argues that:

• A new law would establish a generalised norm of behaviour that would be better able to apply across different sets of circumstances, and for all participants in markets. This would allow it to focus its prohibition on behaviour that was causing significant harm, instead of prohibiting particular practices that may or may not cause harm, depending on the circumstances.
• This norm of behaviour would be able to keep up with evolving commercial practices in a way that more rigid regulation, like an industry code, would not.
• Large penalties should be available for unfair practices.

What does this mean for business?

A generic law prohibiting unfair practices, the meaning of which will evolve over time, will be uncertain in scope and therefore businesses will face a challenge to comply – to either "take the risk" or adopt a cautious approach, which in some situations may be too cautious – adding to their costs.

Secondly, the risks of litigation over such an uncertain law will favour those with deep pockets whilst others will face pressure to settle cases because of the costs and uncertainty of predicting the outcome.

Have the unconscionable conduct laws failed?

In ACCC v Medibank, the ACCC alleged Medibank engaged in "statutory" unconscionable conduct by failing to notify its members of changes to its health cover (to limit benefits for pathology and radiology services in hospitals), which meant that members were likely to incur more out of pocket expenses. The Court agreed that Medibank had acted "unfairly" in not informing members, but held this was short of establishing statutory unconscionable conduct.

Similarly, in ASIC v Kobelt, the ASIC claim went all the way to the High Court, with different judges divided in their views. Mr Kobelt was a store owner in remote South Australia who sold groceries, fuel and second-hand cars. He allowed his customers (mostly Indigenous Australians) to purchase goods by using a "book-up" system, which allowed to defer payment by taking possession of customer's account information to take money from these accounts later on, until their debts were paid off. Mr Kobelt failed to keep proper records of the amounts owed to him by his customers; required them to only shop at his store; and charged them a high-interest rate.

The 4-3 majority in the High Court determined that Mr Kobelt's actions did not amount to statutory unconscionable conduct, as there was a failure to establish that Mr Kobelt gained any particular advantage. Justice Gageler highlighted the difficulty of applying the concept of unconscionable conduct because it must be "conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience."

The failure of both these cases have generated significant debate by ASIC and the ACCC and led to calls for reform. However given the elusive test of "unconscionable conduct" being far outside accepted norms of conduct, it is not surprising that some of these cases may fall short; the concept of unconscionable dealings requires a complex evaluation of all the circumstances. Both cases involved lengthy judgments and highlight the costs and uncertainty in predicting the outcomes. Any law prohibiting "unfair practices" is likely to further add to these uncertainties and costs.

A general provision against unfair trading practices: aligning Australia to key overseas jurisdictions?

Underpinning the push for a general provision is the ACCC's argument that equivalent legislation exists in similar foreign jurisdictions: the European Union and the United States.

In the EU, this is article 5(1) of the Directive on Unfair Commercial Practices (Directive 2005/29/EC) which prohibits "unfair commercial practices". Significantly, Annex 1 to the EU Directive lists 31 specific practices which are deemed in all circumstances to be "unfair". These specific practices are not exhaustive illustrations, rather they provide guidance on the meaning of the EU Directive.

We have considered the list of 31 specific practices under Annex 1 of the EU Directive against provisions in the ACL which can be used to capture the specific unfair practice. Our analysis shows that most (if not all) of the specific practices on that list can already be regulated using an existing ACL provision.

In the US, section 5 of the Federal Trade Commission Act prohibits entities from engaging in "unfair or deceptive acts or practices in interstate commerce".

Most cases brought in the US by the Federal Trade Commission under that section 5 relate to misrepresentations, specific unfair practices (which are part 3-1 of the ACL) or unfair contract terms, all of which can already be brought under the current provisions of the ACL.

Therefore, the EU and FTC general provisions against unfair trading practices largely apply to conduct already covered by existing provisions in the ACL. We question whether they provide a precedent to regulate "unfair" conduct not already prohibited by the ACL.

Are there other prohibitions of unfair conduct?

The ACCC reform proponents also point to section 912A(1)(a) of the Corporations Act which requires a financial services licensee to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. Similarly, section 47 of the National Credit Act requires the holder of a credit licence to do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly.

While the established view is that this phrase has to be applied compendiously, and does not prohibit conduct that is merely "unfair", there have been recent suggestions these requirements can be separately applied, to prohibit conduct that is merely "unfair", even if it was "efficient or honest".

If that view is adopted more widely, these provisions would stand as precedents for a more general law covering "unfair trading".

The meaning of "unfair" is the critical issue for any new law proposal

In ASIC v Westpac, the courts noted that words such as “efficiently”, “honestly” and “fairly” and the composite expression such as “efficiently, honestly and fairly” cannot be comprehensively defined, although listing instances or examples of conduct failing to satisfy the phrase might be helpful and of guidance.

The Macquarie Dictionary defines the word “fair” in its adjectival form, as directed to conduct, which is “free from bias, dishonesty, or injustice; that which is legitimately sought, pursued, done, given etc.; proper under the rules”.

How this proposed change would affect Australian business

It is hard to assess what shape this proposal may take.

We expect the ACL to be amended to expand the scope of the laws about unfair contract terms and introduce penalties before these latest proposals are adopted. We also expect the ACCC would press for large penalties to be available consistent with its public views that consumer laws are ineffective without substantial penalties.

So far, suggestions seem to point towards either a standalone general provision prohibiting unfair trading conduct, which is to be guided by a "black list" of specific unfair practices (similar to the EU Directive), or the word "unfair" being added (or used as a replacement) in the unconscionability provision of the ACL.

It is expected that, if and when a proposal is made there will be an open debate informing the ACCC's thinking. Therefore, businesses should start considering how this change may affect them now, which will provide them with time to make submissions when these are sought.

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