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Financial Services Update: Advertising continues to be in ASIC’s surveillance spotlight

In this edition:

  • Advertising continues to be in ASIC’s surveillance spotlight;
  • ASIC releases consultation paper on retail client review and remediation programs and update to record-keeping requirements; and 
  • ASIC enforcement reminder: the importance of not deleting emails.


Advertising continues to be in ASIC’s surveillance spotlight – AFS Licensees beware!

Keen readers of ASIC publications will have noticed that ASIC is continuing its surveillance focus on potentially misleading or deceptive advertising and promotional material.  This focus includes wholesale as well as retail Australian financial services (AFS) licensees.

Two weeks ago, ASIC issued a Media Release about action taken against ACE Insurance Limited and Tiger Airways Australia Pty Limited to force the removal of misleading promotional statements on their websites concerning ACE Insurance travel insurance policies.

This Media Release also highlights 17 other similar cases over the last few years where ASIC has taken action against companies for misleading advertising. But this is not the full extent of ASIC’s recent surveillance of advertising and promotional materials. During the 2015 financial year, ASIC took action with 54 cases of potentially misleading or deceptive promotional material.

As distinct from some of ASIC’s more time-intensive surveillance activities, you can imagine that picking up potentially misleading or deceptive advertising and promotional material is a relatively low-cost, high impact exercise.

So, AFS licensees beware! If you don’t already have a robust advertising and marketing material policy, now would be a good time to establish one and ensure that your advertising and promotional materials are only issued after a thorough sign off process, taking into account your legal obligations under consumer protection laws. For guidance, ASIC has published Regulatory Guide 234dealing with advertising financial products and services.


ASIC releases consultation paper on retail client review and remediation programs and update to record-keeping requirements

Note: This ASIC proposal only affects AFS licensees who provide personal advice to retail clients and who may need to remediate clients who have suffered loss as a result of the decisions and behaviour of the licensee, or its advisers, in relation to that personal advice.

In December 2015, ASIC released Consultation Paper 247 (the Paper) which contains two key proposals. First, in order to ensure the quality and effectiveness of retail client review and remediation programs (CRRPs), ASIC is proposing to publish guidance that helps AFS licensees understand when a CRRP should be used and how it should be run. Second, the Paper outlines proposed amendments to record-keeping obligations of AFS licensees. ASIC is inviting stakeholders to provide submissions that address the proposals, with the view to publishing a regulatory guide and class order in May 2016.

What are retail client review and remediation programs?

CRRPs are a way of complying with the legal obligations of AFS licensees to operate their businesses efficiently, honestly and fairly. If a systemic issue has emerged with the decisions and behaviour of an AFS licensee who provides personal advice to retail clients, or an adviser that is a representative of the licensee, and the affected clients are likely to have suffered a loss, a CRRP is a project that may be set up to seek out affected clients, review the advice and remediate the clients where necessary. It can be a large scale program which involves hiring external staff and setting up a new team or it can be managed internally with existing resources.

Examples of CRRPs were implemented by National Australia Bank and Total Financial Solutions Australia, which were both announced in October 2015.

Guidance principles

ASIC has released the Paper as there is a growing trend towards AFS licensees using CRRPs proactively to address systemic issues. The design and management of these programs can involve ASIC and so guidance will help these programs to be effective, fair and transparent. In publishing the guidance, ASIC aims to:

  • improve outcomes for consumers;
  • provide a streamlined and well-understood framework; and
  • set out key principles against which an AFS licensee’s CRRP can be evaluated for efficiency, honesty and fairness.

The Paper proposes the following elements of a CRRP:

  • establishing a program: the Paper proposes definitions of key terms such as ‘systemic issue’ and outlines how ASIC envisages CRRPs will interact with the existing internal and external dispute resolution mechanisms available to the client. In addition, the implications of the AFS licensee’s legal obligations in relation to their duties to operate efficiently, honestly and fairly, to allocate adequate resources to the provision of services, to monitor and supervise representatives, to report breaches and to create compensation arrangements for retail clients are discussed in terms of CRRPs.
  • scope of the program: ASIC emphasises that first, the scope of the CRRP in terms of the class of affected retail clients should be precise yet flexible if further information comes to light through the program and second, that the burden should be placed on the licensee to invite possibly affected clients to participate.
  • design and implementation of the program: all CRRPs should be consumer-focused, free of charge, objective, unbiased and fair, have the support of senior management and should operate fairly, efficiently and honestly. The Paper sets out the standards for the processes a CRRP should comply with when reviewing advice, making a determination and calculating possible remediation. ASIC also highlights the importance of maintaining independent oversight and of keeping adequate records.
  • communicating with retail clients: as ASIC has emphasised that CRRPs should be consumer-focused, the timing and nature of communications is discussed in detail by the Paper. Generally, communication should be direct, straightforward and managed in such a way that the retail client has a clear understanding of what is required of them and their options moving forward.
  • external review of decisions: retail clients should have access to external review processes if they are dissatisfied with the decision of the CRRP. These processes should be clearly communicated to retail clients, and any settlement deeds that are created should not restrict the retail client’s ability to speak to a government agency such as ASIC, the adviser’s professional association or legal representation if they have concerns.

Changes to record-keeping requirements

ASIC has identified an issue with record-keeping obligations based on its regulatory role in overseeing CRRPs. Although AFS licensees are required to maintain records for a period of at least seven years, circumstances may arise where the records are maintained but the licensee has lost access to them. This can occur if a representative moves to a different licensee. This may prevent a CRRP or other scheme from operating effectively as the licensee cannot review the advice that may have been affected.

In order to clarify the obligations of licensees, ASIC is proposing to amend Class Order 14/923 to reflect that the licensee must have access to the records during the period in which they must be maintained.

Evaluating the impact of these changes

In order to fully appreciate the consequences of the new guidance and the amended class order, ASIC has included questions throughout the Paper. If you are interested in making a submission, you must submit your comments by 26 February 2016. For further details, see page 4 of the Paper.

In addition to public consultation, ASIC will also complete a Regulation Impact Statement and submit it to the Office of Best Practice Regulation for approval prior to making any final decision.


ASIC enforcement reminder: the importance of not deleting emails

In the latest development in an ASIC investigation that stretches back to 2009, a Sydney man has been charged with five counts of authorising a false or misleading statement to ASIC and one count of attempting to cause the concealment or destruction of records. These charges related to 17,000,000 shares in Northwest Resources Limited, which were held by Craigside Company Ltd until they were frozen by ASIC in December 2011, before ASIC obtained orders to cancel the shares in April 2014.

The breaches

ASIC alleges that between October 2009 and December 2011, in response to enquiries made by ASIC into the identities of parties who had an interest in the shares, the man authorised the making of false or misleading statements. This is a breach of section 1308(2) of the Corporations Act 2001 (Cth) which carries a maximum penalty of five years.

In addition, the man has been charged with destroying or concealing records where ASIC is investigating or is about to investigate. ASIC alleges that the man requested that a third party delete an email relating to the ASIC investigation, an offence under section 67(1)(a) of the Australian Securities and Investment Commission Act 2001 (Cth). The matter is listed for mention on 8 March 2016.

The importance of being honest

These charges demonstrate the high importance placed on honesty and openness during ASIC investigations. Although the shares themselves were cancelled nearly two years ago, ASIC has continued its investigation into the conduct of the different parties involved. Deleting an email may seem like an administrative necessity if done legally, but if the intention behind its deletion is illegal, it may constitute a serious offence and could lead to five years imprisonment or a $36,000 fine. ASIC takes actions such as this very seriously, which should serve as a reminder to all financial service providers that information should not be destroyed unless the individual is certain that there is not legislative requirement to maintain it as a record.

21 December: Workplace Relations Update for Executives On-the-Go

In this edition:

  • Australia Post liable after ‘no real follow-up’ on discriminatory behaviour in the workplace;
  • Fair Work Commission publishes Annual Report 2014/2015: 352% rise in anti-bullying applications; and
  • Worker’s dismissal was harsh and unjust despite failing a breathalyser at work.

Australia Post liable after “no real follow-up” on discriminatory behaviour in the workplace

Australia Post has been found vicariously liable for the discriminatory behaviour of one of their employees. The Federal Circuit Court in Murugesu v Australia Postal Corporation & Anor found that the actions of Mr B, a supervisor at Australia Post, violated the Racial Discrimination Act 1975 (Cth) and that Australia Post failed to take reasonable steps to address the racial abuse which occurred in the workplace.

Discriminatory language

The applicant Mr Murugesu worked for Australia Post between 2007 and 2011 as a truck driver. Mr Murugesu was born in Sri Lanka and migrated to Australia in 1983.

During this period, Mr B worked as the afternoon supervisor who organised the loading of the trucks. Mr Murugesu claimed that during this period, Mr B regularly called him or referred to him as a “black bastard”, and suggested that he should do “slave jobs”. On other occasions, he was told to “go back to Sri Lanka” and to “go back by boat”. On a hot day when Mr Murugesu was sitting in an air-conditioned room, it was alleged that Mr B said “why the f*ck are you sitting here? You should be able to stand the heat, get out of this place”.

Mr Murugesu stated that he had complained to a number of senior employees of Australia Post relating to the racial abuse, but that no changes had been made. He claimed that he lost a contract shortly after complaining, and that he was told by senior employee to “shut up and keep working”, and warned that he would lose further contracts if he continued to complain.

Australia Post and Mr B both denied that these events and complaints occurred. Australia Post also submitted that it had taken all reasonable steps to prevent discrimination in the workplace through employee training and the effective communication of its policies.

The Court’s findings

It was held that, although the racial abuse did not occur with the frequency or in the precise terms suggested by Mr Murugesu, he had been subject to racial discrimination by Mr B. There was therefore a breach of the Racial Discrimination Act as the applicant was discriminated against based on his race, colour, national or ethnic origin. Mr Murugesu was also denied equal enjoyment of his right to participate in the workplace without discrimination.

In addition, there was evidence to suggest that Australia Post was aware of a problem with racial discrimination based on emails sent in 2010. Although their training system and discrimination policies were described as “exemplary” by the Court, their failure to enforce these policies in a meaningful way led to a finding of vicarious liability. The judge held that, by failing to look into or address the complaints, Australia Post did not take all reasonable steps to prevent the harm from occurring.

Vicariously liable: when are procedures not enough?

Australia Post’s official position towards racism was held to be excellent and clearly demonstrated that the organisation was opposed to discrimination. The training regime, which involved leaflets being distributed along with pay slips, followed up with ‘toolbox talks’ of around half an hour, was described as exemplary. The reason why Australia Post was held vicariously liable is because it failed to effectively enforce its policies. The Court found that the organisation’s response to the incidents said “all the right things…(when) in fact, the matter withered”. The lack of any follow-up on these complaints meant that Australia Post could not rely on the defence of having taken all reasonable steps to prevent the event from occurring.

‘Banter in the workplace’

The judge, in making his findings relating to the verbal racial abuse, discussed the evidence given by Mr B. It was noted that Mr B appeared to sincerely believe that he did not racially abuse the applicant, and made references to a workplace culture where ‘banter’ occurred. The judge made the point that what Mr B might consider to be harmless banter could be perceived as discriminatory behaviour.

The workplace should be a safe environment which does not facilitate exclusion and harassment. Whilst words and actions can be dismissed by the perpetrator as banter or jokes, they can contribute in a real way to an exclusionary culture. Thoughtless or insensitive comments that make employees feel unsafe should not be tolerated, and appropriate training should occur to help workers understand what is acceptable.


This case should act as a cautionary tale for all organisations that believe that just having excellent policies relating to issues such as discrimination, workplace safety or other sensitive areas is enough to shield themselves from liability. Courts do not just look to the official stance of the organisation, but rather to the extent to which this stance is reflected in the actions of the officers employees of the organisation. If policies are not implemented in an effective way, organisations may find themselves liable for the very incidents that their policies contemplate and are designed to prevent.

Fair Work Commission publishes Annual Report 2014/2015: 352% rise in anti-bullying applications

The Fair Work Commission (FWC) has published its Annual Report (Report) discussing its activity over the financial year ending 30 June 2015. The Report indicates that the FWC has made significant progress in meeting its key performance indicators (KPIs) through increased efficiency in processing applications.

The FWC website acts as a resource for employees and employers regarding their respective rights and obligations and provides information about dispute resolution.  The Report notes the level of interest with webpage views in key areas including:

  • 120,535 unfair dismissal eligibility quiz views;
  • 48,242 anti-bullying eligibility quiz views; and
  • 26,158 general protections eligibility quiz views.

In addition to this, the FWC received 207,729 telephone calls in this period,

Breakdown of the decisions made by the FWC

Overall, the case load for the FWC fell by 7.9% in the 2014/2015 financial year when compared to 2013/2014. The majority of sittings in this period were for unfair dismissal claims, the majority of which were resolved through conciliation. When the matter proceeded to arbitration, 58% of the cases were dismissed because of jurisdictional issues.

Where an unfair dismissal case was decided in favour of the dismissed employee, the most common remedy was compensation, with remedies such as reinstatement used comparatively rarely. Only 14% of cases were resolved through reinstatement of the dismissed employee.

Over the year, a notable trend was individual applications under the general protections of the FWA ( also known as adverse action). 879 applications were made during this period in relation to disputes that did not involve dismissal.

Increased use of the anti-bullying processes

One of the most significant areas of change for the FWC is the anti-bullying dispute resolution process. The anti-bullying provisions of the Fair Work Act (2009) commenced on 1 January 2014. This Report contains the statistics from the first full year these provisions have been in effect. During this period, 694 anti-bullying applications were processed. Even thought this number represents a huge 352% increase from the previous financial year, note that the bullying jurisdiction was only available from January 2014.

Of these applications, 46% were resolved through processes such as mediation. Common outcomes that emerged from these processes included:

  • undertakings about future behaviour;
  • clarification of roles, responsibilities and reporting relationships;
  • employer to establish or review anti-bullying policies;
  • provision of information, additional support and training to workers;
  • worker to return to work on agreed conditions; and
  • agreed relocation of the individual named and/or the applicant worker.

If these earlier processes are unsuccessful in resolving the problem, the matter can proceed to a determinative process like arbitration. The FWC resolved 60 matters in the 2014/2015 year by a decision, with only one resulting in an order. This is partially due to the limited circumstances in which a bullying order can be issued (there must be a risk that the bullying behaviour could continue) but can also be attributed to the uncertainty surrounding this area of law.

There is evidence that, likely due to precedents now established, there is now greater certainty in this area. The statistics for the July-September 2015 quarter demonstrated that, although the number of applications is largely consistent with the 2014/2015 levels, there have already been 3 orders issued. As this area of law matures, applications with a small likelihood of success should theoretically decrease as the limits of the law are tested.

Wage and award reviews

The Annual Wage Review was completed in June 2015 following a consultative process with government, industry and other interest groups. The Review recommended that:

  • all modern award pay rates and most transitional instrument wages be increased by 2.5%;
  • the minimum wage should be $17.29 per hour or $656.90 per week; and
  • special minimum wages should be established for employees with a disability and for award and agreement-free junior employees, trainees and apprentices.

The Award Review is ongoing, having commenced in February 2014, and is anticipated to finish in late 2016. It is split into the common issues stage and the award stage. As part of its work in the 2014/2015 financial year, the Review issued 40 statements or decisions and conducted 107 Full Bench hearings.

Worker’s summary dismissal was harsh and unjust despite failing a breathalyser at work

A maintenance worker in Victoria has successfully claimed that the termination of his employment without notice, following a failed blood alcohol test, was harsh and unjust.

The Fair Work Commission (FWC) found that while he had breached the organisation’s drug and alcohol policy, his termination was based on an unwarranted ‘first and final warning’ for a previous infringement, and that the circumstances of the failed blood alcohol test were insufficient to justify a termination without notice.

The facts

The maintenance worker, who had committed a number of relatively minor health and safety infringements was given a “first and final warning” for failing to isolate faulty machinery in the workplace. The significance of the “first and final warning” was that if there was another breach of company policy, the employee would be terminated. Subsequently, the employee underwent a blood alcohol test at 6:37am at a pre-start meeting at work and the test returned a result of a blood alcohol content (BAC) of 0.013%. The worker was instructed to wait 30 minutes, which was the company’s policy, and then a second test was carried out. The worker’s BAC was 0.006%, a relatively tiny amount, but still in breach of the company policy.

The worker was stood down and sent home for the day as per the organisation’s drug and alcohol policy. His employment was terminated four days later, the company citing serious misconduct as a result of breaching the company’s drug and alcohol policy as the reason for the dismissal without notice or pay in lieu of notice.

The worker applied to the FWC seeking compensation and reinstatement. The FWC found that the decision to terminate the worker’s employment without notice or pay in lieu was harsh and unjust and he was therefore unfairly dismissed.

The FWC considered compensation to be a more appropriate remedy than reinstatement, as requested by the employer. The FWC calculated the compensation based on the period it estimated the worker would have remained in employment at the company. Given the deteriorating state of the employment relationship,  the compensation was therefore based on 12 weeks work.


The employer listed a litany of health and safety breaches committed by the worker as additional justification for the termination without notice. The worker’s raised blood alcohol level on the job was not the only matter that the FWC considered during the hearing. The worker had, on a number of occasions, ignored workplace health and safety directions from supervisors, including that the worker:

  • failed to isolate faulty machinery (the basis of a “first and final warning”)
  • failed to wear the required personal protective equipment when operating machinery;
  • failed to ‘get on board’ with the company’s vision for safety;
  • had ‘unfavourable’ safety interactions with managers in the workplace;
  • as a qualified tradesman, was a poor role model for the company’s other employees, particularly young apprentices;
  • was apathetic and prideful leading to a dangerous work environment; and
  • had a clear tendency for resisting change because he thought his way was best.

The organisation also submitted that it would have been a breach of their duty of care to both the worker himself, and others, to allow him to continue work given his continuous demonstration of an inability to comply with the organisation’s safety standards.

The reasons behind the FWC’s decision

To determine that a person has been unfairly dismissed, section 385 of the Fair Work Act 2009 (Cth) (the Act) states that the FWC must be satisfied that the dismissal was harsh, unjust or unreasonable. Usually there are two essential aspects to consider in determining whether a dismissal was harsh, unjust or unreasonable:

  • whether there was a valid reason for the dismissal relating to the person’s capacity or conduct (including its effect on the safety and welfare of other employees); and
  • whether the procedural fairness elements were complied with.

However in this case there was an additional matter: even if there was a valid reason for a dismissal with notice, was it of sufficient seriousness to warrant dismissal without notice?

Taking the issues separately, the FWC was satisfied that a breach of the drug and alcohol policy could be a valid reason for the dismissal,  however there were a number of other matters to take into account. The FWC found that the very low level of alcohol detected and absence of putting anyone at risk, as the employee had not yet started work, along with the fact that the policy envisaged that the employee would have been sent home for that shift rather than terminated, meant that it did not by itself justify termination.  However, if the “first and final warning” had been valid, this could justify the subsequent termination based on the low-level drug and alcohol policy infringement.

The FWC reviewed the circumstances of the first incident to determine whether that was sufficiently serious to warrant a “first and final warning”. It found that it was not. This then meant that the termination was harsh and unfair. The FWC noted that having looked at the history of the case “final warning”  meant that while would have been a valid reason for a dismissal, it was not enough to justify a dismissal without notice.

Finally, and because the employer had relied on the “first and final warning” as a precursor to deciding to dismiss for the drug & alcohol policy infringement, the FWC found that the employer should have put this to the employee when notifying him of the reasons for considering termination.

While it could be argued that it did the opposite, the FWC made a point of saying that the decision should not be seen to condone the worker’s conduct, and the employer should be commended for their efforts to safeguard the safety and welfare of others.

A warning for employers

This case study demonstrates that the dismissal without notice of a worker for serious misconduct must be very serious misconduct indeed.  The high jump bar for dismissal with notice is lower. And once again, notwithstanding the validity of the reason for dismissal, the procedural fairness elements must also be met.  While the Commission in this case appeared to be pedantic, the employee should be advised of all of the reasons why termination is being considered.

Financial Services Update: ASIC accepts enforceable undertaking from J.P. Morgan regarding failure to comply with disclosure requirements

In this edition:

  • ASIC accepts enforceable undertaking from J. P. Morgan regarding failure to comply with disclosure requirements; and
  • Misleading and deceptive conduct targeted by ASIC.

ASIC accepts enforceable undertaking from J. P. Morgan regarding failure to comply with disclosure requirements

Three J.P. Morgan foreign financial service providers have together proposed an enforceable undertaking (EU) which has been accepted by ASIC. This follows the companies’ admissions that there had been breaches of their disclosure requirements that involved up to 884 wholesale clients. The EU includes obligations to appoint an Independent Expert who will conduct reviews into the systems in place at the J.P. Morgan entities and to make any reasonable changes to their systems to ensure compliance. EUs are not an admission that a company has contravened the relevant legislation (the Corporations Act 2001), but where an alleged breach has occurred, they are an alternative remedy to civil or administrative action by ASIC.

The breaches

The EU relates to the conduct of three entities that are part of the J.P. Morgan group:

  • J.P. Morgan Securities plc (incorporated under the laws of the United Kingdom);
  • J.P. Morgan Securities (Asia Pacific) Ltd (incorporated under the laws of Hong Kong); and
  • J.P. Morgan Securities LLC (incorporated under the laws of the United States).

They will collectively be referred to as “J.P. Morgan” for the purposes of this article.

Financial service providers regulated in an overseas jurisdiction are exempt from the requirement to hold an Australian Financial Services Licence (AFSL) for the provision of financial services to wholesale clients in Australia. However, there are still numerous obligations that such entities must meet, including a disclosure requirement. Regarding this exemption, ASIC Commissioner Cathie Armour said that “it is fundamental to the class order relief granted to foreign financial service providers to disclose to clients that they are exempt from holding an AFSL and that they are regulated by the relevant overseas regulatory authority”.

The three entities all reported breaches of their disclosure requirements between 2005-2008. Each company reported additional breaches in 2014.

The Enforceable Undertaking

As there were previous breaches in every case, ASIC considered that the breaches reported in 2014 demonstrated a ‘material and systemic weakness’ in the controls that were developed by J.P. Morgan to comply with their disclosure requirements. As such, their non-compliance was treated as serious. J.P. Morgan acknowledged that ASIC’s concerns were reasonable and that remedial steps were necessary.

J.P. Morgan proposed an EU that set out remedial steps that would ensure compliance. These included appointing an ASIC-approved Independent Expert, establishing a remediation plan and subsequently undertaking a ‘hindsight review’. ASIC accepted this proposal, acknowledging that J.P. Morgan had been co-operative and had worked constructively with ASIC to address the issues of non-compliance. It is important to highlight the fact that the breaches were all self-reported.

In accepting the EU, ASIC agreed not to commence civil proceedings or take administrative action such as any action to exclude J.P. Morgan from the exemption from holding an AFSL. However, this agreement is contingent on full compliance with the EU.

Role of the Independent Expert

The EU requires J.P. Morgan to appoint an Independent Expert who has the authority to access all documents (subject to legal professional privilege), interview present employees and consult with ASIC. The Independent Expert will conduct two reviews and publish two reports. These must be responded to by J.P. Morgan within one month. J.P. Morgan is required to produce a Remedial Action Plan following each report, which puts into place the recommendations within three months of the creation of the action plan. The two reports will consist of the following:

  • the first report: will deliver any findings related to J.P. Morgan’s policies, procedures, practices, training and monitoring implemented to comply with the disclosure requirement; and
  • the second report: will deliver any findings related to the effectiveness of any remedial actions implemented by J.P. Morgan as part of the First Remedial Action Plan, consider any remaining gaps in internal control measures and deliver any further recommendations.

Lessons for other licensees

This matter demonstrates that even if a breach does not seem to be serious in isolation, repeated violations of the requirements can be treated very seriously by ASIC. J.P. Morgan, after identifying earlier breaches, failed to repair their systems to ensure subsequent violations didn’t occur. When faced with potentially serious consequences, J.P. Morgan self-reported these breaches and worked collaboratively with ASIC to create an enforceable solution that aims to ensure future compliance. Its co-operation and the fact it took steps to bring the breaches to ASIC’s attention led to ASIC agreeing to an EU, as opposed to a fine or other action that could have damaged J.P. Morgan’s ability to continue as a financial service provider.

J.P. Morgan’s EU and other recent breaches involving high profile entities such as Macquarie Equities Limited, are reminders that large companies, irrespective of their extensive global presence, still have the same disclosure and compliance obligations as other Australian financial entities. Although J.P. Morgan’s compliance breaches have resulted in publicity and reputational damage in this case, the burden of complying with the EU is still a better alternative to the other serious penalties which may have been imposed.


Misleading and deceptive conduct targeted by ASIC

ASIC has cracked down on financial service providers engaging in misleading and deceptive conduct as part of its broader strategy to protect consumers. Fines of $25,000 and $30,600 and permanent disqualifications have been among the penalties issued in November alone. This is in line with ASIC’s broad strategic aim of narrowing the gap between consumer understanding of how the products operate and the reality of the products’ operation, as discussed in our earlier article on the ASIC Corporate Plan.

What is misleading and deceptive conduct?

Sections 12DA and 12DB of the Australian Securities and Investment Commission Act 2001 (Cth) respectively prohibit misleading and deceptive conduct and false and misleading representations. Section 12BB also prohibits misleading representations with respect to future matters. Financial service providers often provide complex or difficult to understand products to consumers, and so the potential for consumers to be easily misled or confused by deceptive conduct is high.

If ASIC finds that a financial service provider has breached its obligations, ASIC has the power to order a person to pay pecuniary penalties, to remove its licence or to compel them to change their conduct so it ceases to be misleading or deceptive. In addition, ASIC will often make a public statement relating to the actions they have taken.

ASIC’s focus on consumer protections

There have been various recent cases of ASIC administering a penalty related to misleading or deceptive conduct. We will look at one of the most recent cases, involving the $30,600 fine imposed on O.C.M. Online Capital Markets Pty Ltd (OCM).

OCM’s conduct was misleading and deceptive as it led clients to falsely believe that the high-risk and volatile products that it advertised would lead to a consistent and reliable profit. There were three individual instances of misleading conduct in its advertising material, which gave false impressions of the products and only provided disclaimers in fine print that were ineffective in correcting the dominant message created by the headline claims. Each breach led to a fine of $10,200 contained in an infringement notice. It is important to note that payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.

Other ASIC actions have related to deceptive conduct, but did not specifically involve the relevant sections of the ASIC Act or were subject to less harsh consequences. For example, there were three instances of permanent bans issued to service providers who had produced fraudulent documents that were misleading in relation to their client’s financial position. In all of these circumstances, the ban was issued on the grounds that the person was not a fit and proper person or was not of good faith and character.

ASIC also has the option of not issuing a fine, but requiring any misleading or deceptive statement or omission to be rectified. This power was exercised on a number of occasions in November, such as an agreement of six insurers to better highlight the automatic renewal provisions when informing their customers of the different policies available. Other companies were required to remove statements or implications that intended to give the impression that they were authorised to provide financial services when this was not the case.

Avoiding misleading and deceptive conduct

Given the level of attention ASIC is devoting to misleading and deceptive conduct, it is important for service providers to review their advertising materials and other communications to consumers to ensure that they accurately reflect the services and types of products being offered.


Study shows financial sustainability remains key issue for not-for-profit directors

The Australian Institute of Company Directors (AICD) has published its 2015 NFP Governance and Performance Study (Study), which contains numerous interesting insights into the operation of boards in the NFP sector. The study was based on the findings of a survey which received over 2,750 responses from current non-executive directors of NFPs. The study also involved ten focus groups located in six different cities that discussed contemporary challenges faced by NFPs.

Key findings

The study focused on the demographics, priorities and concerns of board directors. The key findings included:

  • financial sustainability is the core issue;
  • directors want a more collaborative relationship with government;
  • NFP boards are leading on diversity – in both implementation and awareness;
  • the quality of board governance is perceived to be improving; and
  • federated organisations carry additional complexities for board members.

Financial sustainability: Efficiency is a concern

Four of the directors’ six top priorities were directly related to the financial health of their organisation. Concerns included cost management and diversifying income streams. The focus on financial sustainability is closely related to the idea of efficiency within the organisation.

The Productivity Commission stated in 2010 that productivity was an alien concept to many NFPs and that some eschew all ideas of efficiency and effectiveness. The AICD pointed out that these claims were not substantiated with any evidence comparing NFPs to for-profit organisations, but the Commission’s view persists. The Study provided evidence of directors’ opinions regarding efficiency of both their organisation and the sector as a whole. 70% of NFP directors rated their organisation as mostly or highly efficient but only 38% of respondents gave a similar rating to the sector as a whole. The AICD argued that this formed an attitude that ‘my organisation is efficient, but others are not.

Although these findings would suggest that most organisations are confident in their efficiency, deep concerns about sustainability are reflected in the fact that 8% of directors reported that their board had discussed closure of the NFP. The inability of NFPs to attract sufficient financial support can mean that the closure of the NFP is the only sensible option.

Another measure being considered by a third of all directors is a merger with a similar organisation. 7% of directors reported that a merger had been completed in the past year, with an additional 7% stating that they were currently undertaking a merger. Although mergers can be a way of reducing costs, they must not be treated as a ‘fix-all’. Finding a good cultural fit is crucial, as the anticipated savings from increased efficiency often fail to eventuate.

As an alternative to a merger, some NFPs have increased collaboration as a way of drawing on the expertise of other NFPs. 70% of directors reported that their organisations were collaborating in order to advocate for the sector or for beneficiaries.

A large factor in the financial concerns of many organisations is the sharp decline in government funding to the NFP sector.

Unsatisfactory relationship with Government

There is general dissatisfaction with the Government’s understanding of NFPs, with half of all respondents giving the Government 4 or less out of 10 in this regard. Given that the Government plays a central role in the sector, its management of issues such as funding and regulation can have a large impact on the sustainability and efficiency of organisations. Directors flagged the procurement practices of the Government as being in need of particular reform, and have called for reduced red tape and harmonised legislation.

Diversity in boards

Although there are some areas in need of improvement, NFP boards are ‘leading the conversation on the role and benefit of diversity in the boardroom’. In particular, 60% of the directors surveyed were confident that their board composition reflected the gender balance of stakeholders. 38% of directors participating in the survey were women, which would indicate a greater general diversity in NFP boards than in the for-profit sector. Directors were conscious that there were areas that they could do better in attracting greater diversity in relation to cultural backgrounds and youth, such as creating youth boards.

Role of board members

13% of board members are paid, with the remainder donating their time to the organisation. Director pay, when awarded, was on average $25,700, with the highest paid director receiving $200,000. The larger the NFP, the more likely the directors are paid. The hours contributed by directors remains significant, with directors spending on average 24 hours per month per directorship, and the respondents having on average 1.6 directorships.

In addition, 39% of directors also reported making a donation to the organisation. The median donation was $1000, with higher rates of donation to organisations with lower incomes.

Federated organisations

Additional complexities exist if an organisation is part of a larger federated structure, as is the case for organisations such as Alzheimer’s Australia. Federations are complex and rely on managing a range of different relationships. The Study gave several tips for federated structures:

  • ensure that the missions of the member organisations are aligned;
  • clearly define the roles of member organisations and the peak body;
  • take a formal approach to planning and implementing conflict resolution;
  • identify the areas in which economies of scale can be achieved, and for other areas encourage specialisation;
  • decentralise decisions to encourage accountability in member organisations; and
  • build skill through collaboration.

Board governance 

It is interesting to note that when the ratings for ‘high priorities’ were ranked, the lowest priority for directors going into 2016 was improving board governance, and ensuring compliance with regulations was the third lowest priority. Whilst this may demonstrate satisfaction with these areas, it may also indicate that board members are choosing to focus on pressing issues such as financial viability at the expense of how, as a board, they go about doing that.

84% of respondents believed that their organisation’s governance had improved over the past three years, with directors rating their efforts an average of 7 out of 10. Interestingly, 33% of directors believed that the board required greater knowledge of governance and duties, although they considered the greatest priorities for additional skills were in the areas of strategic planning and oversight of strategy implementation.


Financial viability is clearly a key concern for directors, with uncertainties relating to government funding, as well as red tape and further regulation relating to procurement causing additional concerns. However, the obvious focus on efficiency within organisations, and looking outside by considering mergers and collaboration with appropriate partners, indicates that boards are very aware of their challenges and working towards meeting them.


30 October: Workplace Relations Update for Executives On-the-Go

In this edition:

  • Fair Work Commission finds defriending on Facebook can contribute to workplace bullying;
  • More than $20,000 in penalties awarded for an employee’s $181 loss; and
  • Gender pay gap measure proposed for Fair Work Act.

Fair Work Commission finds defriending on Facebook can contribute to workplace bullying

While defriending a colleague on Facebook won’t alone satisfy the threshold of ‘bullying’ under the Act, a recent decision by the Fair Work Commission (FWC) makes it clear that in addition to other, repeated unreasonable behaviour, it may contribute to a finding that bullying has occurred at work.

In this case an application for a ‘stop bullying order’ under the Fair Work Act 2009, was made by RR, a real estate agent who alleged to have been repeatedly bullied by two superiors in her workplace, culminating in the ‘defriending’ of RR after a heated dispute between herself and the co-director.

The allegations

RR alleged 18 separate instances of unreasonable bullying behaviour experienced at work from November 2013 to January 2015.

The FWC found that eight of these allegations were substantiated. They included:

  • RR felt belittled and humiliated when she attempted to sign for a package at the workplace and the co-director aggressively said that RR was not to sign for parcels;
  • the co-director’s deliberate and unreasonable delay in performing administrative work for RR’s property listings;
  • the co-director was rude and hostile towards RR in reply to her verbal offer to answer the telephone after being told that she was not to answer the phone when the co-director was in the office;
  • the co-director acted unreasonably to damage the reputation of RR with one of RR’s clients by directly going against an agreement to afford a special dispensation to one of RR’s clients;
  • RR was consistently ignored in the morning when she entered the office and treated differently to other employees in this respect;
  • the principal made inappropriate comments about a possible same-sex relationship between RR and a client that caused RR embarrassment and were found to be unreasonable;
  • the co-director had a belittling attitude towards RR and made unreasonable comments to RR during the final confrontation between the two women before RR left the workplace – the co-director accused RR of being a ‘naughty little school girl running to teacher’ when RR went over the co-director’s head to the principal; and
  • the co-director had acted in a belittling and aggressive way towards RR by defriending RR on Facebook immediately after that final confrontation.

Following the final confrontation between the co-director and RR, RR left the workplace immediately and took two weeks’ sick leave.

RR provided a medical certificate stating that she was ‘unfit for work’, noted that she had prescriptions for medication from her GP and was receiving treatment from a psychologist for an inability to sleep, depression and high anxiety resulting from the bullying behaviour.

A recap on anti-bullying legislation

The FWC has the power to make anti-bullying orders if the FWC is satisfied that:

    • the worker has been repeatedly bullied at work by an individual or a group of individuals;
    • there is a risk that the worker will continue to be bullied at work by the individual or group; and
    • the behaviour creates a risk to health and safety.

If an application has met this criteria, the FWC may make an order it considers appropriate to prevent the worker from being bullied at work.

As previous FWC decisions have shown, it is not always easy to establish that ‘bullying’ has occurred, and is likely to continue.

The FWC’s decision

Deputy President Wells of the FWC was satisfied that the behaviour carried out by the co-director constituted bullying at work.

Counsel for the employer contended that because an anti-bullying policy and manual had been established since RR had left work, there was no risk of bullying behaviour occurring at work in the future. The FWC disagreed.

Deputy President Wells stated that ‘a lack of understanding as to the nature of the behaviour displayed at work has the proclivity to see the behaviour repeated in the future by the co-director’ and concluded that a stop bullying at work order should be made.

Having an anti-bulling policy and training are crucial 

In this case, the failure of RR’s employer (being her bullying superiors) to have an anti-bullying policy in place before the bullying occurred meant that it had failed to meet its WHS compliance requirements.

Further, the employer’s inability to recognise behaviours as ‘bullying’ emphasises the need for all workers, at all levels of an organisation, to be aware of what conduct will constitute unreasonable bullying behaviour for the purposes of the anti-bullying legislation.

In its decision, the FWC cited a list from a previous case that identified the types of behaviour that could be considered unreasonable for the purposes of the Act, these include: intimidation, coercion, threats, humiliation, shouting, sarcasm, victimisation, terrorising, singling-out, malicious pranks, physical abuse, verbal abuse, emotional abuse, belittling, bad faith, harassment, conspiracy to harm, ganging-up, isolation, freezing-out, ostracism, innuendo, rumour-mongering, disrespect, mobbing, mocking, victim-blaming and discrimination.

Do your anti-bullying policy and staff training procedures recognise these behaviours?

More than $20,000 in penalties awarded for an employee’s $181 loss

The Federal Circuit Court has fined a human resources manager $1020 for failing to provide an employee with five weeks’ notice of termination, or pay in lieu thereof, in breach of the National Employment Standards. The employee was given two days less notice than he should have been by his employer – representing the equivalent of $181.66 in losses to the terminated employee.

The employer also received a penalty of $20,400 from the Court.

This case is a reminder that even those people within the organisations who may not necessarily have ultimate decision making authority, such as an HR manager, can still be found liable for contraventions of the Act. Section 550 states that a person who has been ‘involved in’ a contravention can be taken to have contravened the Act themselves. ‘Involved in’ can mean aiding, abetting, counselling, procuring, inducing or being knowingly concerned in the offending act.

The decision to terminate with two days less notice was deemed ‘bizarre’ by the Court especially since the HR manager admitted to being aware of the requirements under the Act.

In his decision which was clearly designed to act as a deterrent to others, Justice Simpson pointed out that the loss to the employee ($181.66) paled into insignificance compared to the time and expense of litigation not only for the parties involved but also to the public purse stating ‘without knowing the industrial tactics of this dispute, from the court’s point of view, it would seem to be a storm in a tea cup that should have been resolved at a very early stage.’

Gender pay equality measure proposed for Fair Work Act 

The Greens have introduced a Bill into Federal Parliament seeking to remove prohibitions on workers discussing their own pay with colleagues and others. Many employment agreements include clauses prohibiting such discussions.The Greens, who introduced the Bill, see wage transparency as being an important measure in exposing gender pay inequality, and hence to reducing its incidence.

The Bill would make sure that workers are allowed to tell their colleagues what they are paid if they wish to, without fear of retaliation from their employer. Pay secrecy can help hide discrimination, unconscious bias and bad decision making such as where two people are paid differently for doing the same job without obvious justification. Of course there can also be good reasons for pay differences for performing the same work, and pay secrecy has been known to give HR managers some small measure of peace from people complaining about unfair remuneration.

A new section 333B would be added to the Act under this proposed Bill to render any term of a modern award, enterprise agreement or contract of employment ineffectual if it:

  • prohibits an employee from disclosing the amount of, or information about, the employee’s pay or earnings; or
  • permits, or has the effect of permitting, an employer to take adverse action against an employee if the employee discloses the information about their pay or earnings.

The explanatory memorandum for the Bill states that this new section is to be read broadly and is intended to remove restrictions on employees’ rights in terms of pay or earnings disclosures. The memo also dictates that ‘pay and earnings’ will extend to entitlements such as bonuses, superannuation, share allocations, paid parental lease, allowance, professional memberships, paid overtime, and company cars or parking spaces.

Queensland Greens Senator Larissa Waters who sponsored the Bill has said that while gender inequality can seem like an all-encompassing problem, outlawing these gag clauses is a practical step to take to reduce the gender pay gap.


Resilience, efficiency, innovation and fairness: The Federal Government responds to the Murray Report

The Federal Government has issued its response to the final report of the Financial System Inquiry led by David Murray, which was published in December 2014 (the Report).

The Government has accepted all but one of the Report’s recommendations and has created a timeline for the enforcement of key goals. The only recommendation rejected by the Government was the recommendation to prohibit limited recourse borrowing arrangements by superannuation funds.

In addition to agreeing to the majority of the Inquiry’s recommendations, the Government’s response sets out an agenda for improving the financial system to achieve its commitment to the recommendations.

Common features of its response and how to achieve change include:

  • an increase in legislation across various sectors of the industry to enhance confidence and resilience including introducing a professional standards regime for advisers;
  • revised mandates for regulators including expanding ASIC’s mandate to include competition in the financial sector; and
  • multiple projects for the Productivity Commission.

An increase in legislation, including the introduction of a professional standards framework for financial advisers will be beneficial to consumers but it will also increase the legal and compliance obligations of financial services entities.

Five key priorities for its agenda

The Government’s improvement agenda identifies five key priorities to achieve:

  • the resilience of the financial system;
  • the efficiency of the superannuation system;
  • innovation in the financial system;
  • fairness in the treatment of consumers of financial products; and
  • regulatory capabilities and accountability.

In the press conference to present the response, Prime Minister Malcolm Turnbull, Treasurer Scott Morrison and Assistant Treasurer Kelly O’Dwyer highlighted the changes to superannuation regulations and the crackdown on credit card fees as key Government priorities.


Although the Government acknowledged that our current financial system is strong when compared to other similar economies, we cannot be complacent in light of certain features which are vulnerabilities. For example, the concentration of risk resulting from the large proportion of domestic lending that is made up of home mortgages.

The specific measures proposed by the Government to improve resilience in the financial system are:

  • the development of legislation to facilitate the participation of Australian entities in international derivative markets;
  • consultation on measures needed by regulators to manage a financial crisis; and
  • APRA taking additional steps to ensure that banks have strong capital ratios, total loss-absorbing capacity and leverage ratios in place.

The Government plans to begin developing legislation on these matters by the end of 2015. It has already announced a review of the Cyber Security Strategy which was one of the Report’s recommendations.

Improving confidence in superannuation

Superannuation is the second largest part of the financial sector in Australia, representing $2 trillion in assets, and as such it must be competitive, transparent and efficient.

The response criticises the current system, stating that it is “fragmented, costly, complex and suffers from a lack of member engagement”. There is ample room for improvement across the board to improve governance of the system to better enable people to understand and engage with the superannuation system.

The key proposals relating to superannuation are to:

  • develop legislation to improve governance and transparency;
  • progress the Retirement Income Streams Review;
  • task the Productivity Commission to develop and release criteria to assess the efficiency and competitiveness of the system and to develop alternative models for a formal competitive process for allocating default fund members to products;
  • enshrine the objectives of the superannuation system in legislation;
  • consult on legislation to facilitate the provision of pre-selected comprehensive income products for retirement;
  • create legislation to introduce director penalties;
  • consult on legislation to improve member engagement; and
  • monitor leverage and risk in the industry.

The development of improved governance and transparency legislation is projected to begin by the end of 2015. Other measures are to be implemented by 2016 “and beyond”.

Innovation: capitalising on technology is imperative

Technology and the increase in cross-border interaction have led to increased opportunities for innovation in the financial sector and the Government wants to capitalise on these trends. The Government aims to increase efficiency and clarity in areas such as credit card surcharges, and decrease regulatory burdens on companies through technology-neutral laws and regulations.

The measures aimed to promote innovation include:

  • consultation on legislation to support crowd-sourced equity funding and consult on crowd-sourced debt-financing;
  • tasking the Productivity Commission to review access to and use of data;
  • developing legislation to ban excessive card surcharges, to better protect consumers using electronic payment systems and to reduce disclosure requirements for issuers of ‘simple’ corporate bonds;
  • establishing the Innovation Collaboration Committee which will be linked with ASIC’s Digital Finance Advisory Committee;
  • giving legal effect to the Asian Region Funds Passport Initiative;
  • considering technology neutrality in financial sector regulation; and
  • facilitating the rationalisation of life insurance and managed investment scheme legacy products.

A Trusted Digital Identity Framework will also be developed to support the Government’s Digital Transformation Agenda. To date the Government has passed legislation to extend the period before unclaimed monies in the banking and insurance sector are captured from three to seven years, and plans to begin consultations on legislation to support crowd-sourced equity funding by the end of 2015.

Consumer outcomes: protection is key

The Government’s aim is to ensure that consumers are treated fairly. As there has been recent evidence of financial products and advice that are defective, the Government aims to lift the overall standard within the system to ensure that consumers are adequately protected.

The response identifies the commercial interests of advisers and distributors as a barrier to fairness and consumer protection, and extensive consultation will be carried out by the Government to develop a balance between these competing interests. The Government has raised the possibility of giving ASIC the power to amend or remove harmful products from the market if it is deemed necessary.

The actions proposed by the Government include:

  • developing measures to address the misalignment of incentives in life insurance;
  • developing legislation to provide a professional standards framework for financial advisers requiring them to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year;
  • consulting on development of accountabilities for issuers and developers of financial products and ASIC product intervention powers;
  • giving ASIC the power to ban individuals from managing financial firms;
  • consulting on strengthening ASIC’s enforcement tools in relation to financial service and credit licencing schemes;
  • mandating ASIC review of remuneration arrangements in the mortgage broking industry and of stockbroking remuneration arrangements; and
  • consulting on legislation to enable innovative disclosure for financial products and to improve the regulation of managed investment schemes.

The Government plans to put the first of these actions into motion by the end of 2015 continuing throughout 2016.

Regulatory regime: needs to improve costly compliance

The Government has identified the growing compliance costs for businesses as they struggle to adjust to increased and complex regulatory changes in the industry.

In response, the Government has stated that it will work with APRA, ASIC and the Payments System Board to ensure that businesses have adequate time to adjust to changes.

A capability review of ASIC is currently being conducted and the Government will wait for the conclusion of this review before making any further recommendations regarding ASIC’s capability.

Other specific measures proposed are:

  • consulting on industry funding arrangements for regulatory activities undertaken by ASIC;
  • appointing new members and reviewing the Terms of Reference of the Financial Sector Advisory Council;
  • updating the Statement of Expectations for APRA, ASIC and the Payments System Board to give guidance regarding the Government’s expectations and to improve accountability;
  • considering the ASIC capability review and introduce changes as needed;
  • introducing competition into ASIC’s mandate;
  • reviewing ASIC’s enforcement regime; and
  • tasking the Productivity Commission to review the state of competition in the financial system.

The capability review of ASIC is set to be completed by the end of 2015 and the update of the Statement of Expectations for APRA, ASIC and the Payments System Board is to be completed by mid-2016 to allow competition to be introduced to ASIC’s mandate by the end of 2016.

Timing of changes

Generally, the Government aims to implement changes from 2015 (or what remains of it!) through 2016. Changes will also occur ‘beyond 2016’. In some cases the Government has already reacted to the recommendations in the Report by:

  • announcing a review of the Cyber Security Strategy;
  • passing legislation to extend the period before unclaimed monies in the banking and insurance sector are captured from three to seven years; and
  • APRA releasing an international capital comparison study.

What do these changes mean?

These changes are broadly in line with the shift towards competition, innovation and an efficient economic regulatory regime that have been the focus of the Federal Government under Prime Minister Turnbull.

The new Treasurer and Assistant Treasurer have a broad agenda to achieve change over the next two years and the wheels are in motion as steps have already been taken in furtherance of the Government’s resilience and innovation priorities.

There is a focus on increased accountability of all parties, from the financial advisers to the regulators, which aligns with the broad trend of regulation in this area following evidence of systematic issues with the financial advice being given by major banks.

The decision of the Government to increase capital ratios was not surprising, given the Murray Review was published over a year ago. Nevertheless, the speculation will increase on the extent to which this will lead to a burden on consumers.

Volkswagen’s diesel crisis: Are you prepared for a business disruption-related risk event?

As the Volkswagen ‘diesel scandal’ continues to unfold, taking corporate scalps as it goes, its consequences starkly demonstrate the old adage that an organisation’s reputation can take decades to build but a moment to destroy.

While Volkswagen’s crisis management response has been praised by some as a ‘textbook’ response, this praise is in the context of another scandal suffered by the company two years ago when its response was less satisfactory. The fact that Volkswagen has had two global crises in three years is a statistic that no organisation would like to be able to claim. And despite Volkswagen’s non-disastrous handling of the recent crisis, there is a consensus that significant reputational damage has already occurred and will continue to plague the company for years to come.

The organisation’s handling of this ongoing global crisis is a reminder to all organisations to test their own Business Continuity Management (BCM) plans or, if they don’t have a Plan, develop and implement one as a matter of risk-management priority.

The crisis

In what some have called the ‘diesel dupe’ Volkswagen has admitted to cheating the emissions tests for 11 million of their diesel cars across the world. The German car giant developed and installed devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve emission results and bypass compliance standards.

While full details about how the device worked have not been provided yet, the Environmental Protection Agency (EPA) in the US, where almost half a million cars are fitted with the device, has said that the engines had computer software that could sense when test scenarios were being carried out by monitoring speed, engine operation and air pressure.

Essentially, the device, upon sensing that the car was under test conditions, switched to a safety mode in which the engine ran below normal power and performance and switched back to full power when the car was back on the road.

The result of this software programming is that Volkswagen diesel engines are emitting up to 40 times more pollutants than allowed by the US emission standards. Assistant Administrator for the EPA’s Office of Enforcement and Compliance Assurance Cynthia Giles has said ‘using a defeat device in cars to evade clean air standards is illegal and a threat to public health’. The device has left Volkswagen open to multi-billion dollar fines, reputational damage and class action lawsuits from consumers around the world, including Australia.

Volkswagen’s crisis management: it’s happened before

Just two years ago Volkswagen was forced to recall 34,000 cars that had defective direct-shift gearboxes.

In 2013, despite hundreds of complaints and an investigation by Fairfax newspapers, Volkswagen initially denied that there was any problem with the gearboxes. This is the number one ‘do not’ in crisis management. At the time Senior Lecture in Branding and Marketing at Deakin University Dr Paul Harrison said that after the poor handling of the 2013 crisis, it would ‘definitely be used as a case study of how not to do it’. He commented that ‘if Volkswagen had said ‘we got it wrong, we’re recalling our cars now’, it would have had an effect on the brand but it would have given people resolve – it would have put trust in the brand.’

In comparison, Associate Professor Mark Ritson of the Melbourne Business School has commended Volkswagen on its 2015 crisis management of the ‘diesel dupe’, saying that it has followed the three simple rules of crisis management: act fast, take responsibility and declare the crisis over by taking action to rebuild trust and brand equity as quickly as possible. Mr Ritson has said that while this latest crisis for Volkswagen, despite effective management, will likely have significant legal and reputational repercussions for the company, it has given them an opportunity to manage this crisis more effectively than the last.

Volkswagen managed to get ahead of the scandal this time around. Within 48 hours of news breaking that the company had installed ‘defeat devices’ in 500,000 American diesel cars, Volkswagen released a statement from CEO Mark Winterkon in which he admitted the use of the devices, took full responsibility, apologised and promised action. Within the week, Mr Winterkon resigned, announcing that ‘Volkswagen needs a fresh start – also in terms of personnel’.

Since then Volkswagen Australia has confirmed that approximately 90,000 Australian vehicles feature the defeat software and have launched an online tool via which owners can determine whether their cars are affected. VW Australia assured consumers that all vehicles remain technically safe and driveable and are not being recalled at this stage. The car manufacturer has advised that they will contact the car owners when a corporate strategy for recall is confirmed.

Denial of the problem, delayed reactions and keeping consumers in the dark were the nails in Volkswagen’s crisis coffin back in 2013. The management of this year’s diesel engine crisis has been praised as a comparatively better approach.

That said, two crises in three years should be seen as two ‘too many’ for any organisation that cares about its consumers and its reputation.

Patties Pies and VW Cars: a bad year for berry and diesel lovers

The Volkswagen crisis is the second major consumer related product crisis to impact Australian consumers so far this year. At least in the Volkswagon crisis, the health of its consumers was not directly at stake.

In February this year, Patties Foods recalled various varieties of frozen berries because of known cases of Hepatitis A contamination. The Patties Chief Executive went on Sydney radio in the days following the announcement to discuss the problem, however little was communicated by the company after that. As a consumer driven brand, Patties employed the use of its social media accounts to communicate the warning and recall, and to answer consumer inquiries.According to Stuart White of the Public Relations Institute of Australia, this strategy was poorly executed.

Patties share price plummeted on the day of the recall and has not recovered since. Marketing industry leaders pointed to poor communication with the public as the sole reason for long term damage. Social media and digital communications specialist, Venessa Paech said ‘it seemed as though the company had no social media strategy, no social media staff, no professional moderators and no crisis management plan.’

Patties’ initial media releases lacked sufficient detail, and the combination of a poor response on social media and a lack of communication from the company’s executives revealed a poor crisis management plan, which in turn has left Patties Foods still suffering from lower sales and a battered share price.

Lessons in BCM – A Risk Perspective

We’ve previously written blogs explaining the importance of pre-planning in the BCM process to improve the chances that an organisation will survive a major business disruption event.

For those new to BCM the concept is pretty simple. By anticipating what types of disruptions may occur (e.g. office fire, flood or major product recall) a BCM Plan can be developed to ensure that, as far as possible, the likelihood of the disruption event happening is reduced, and if it does occur, critical functions can be maintained or restored in a timely fashion, thus minimising the operational, financial, legal, reputational and other consequences arising from the disruption.

The Australian Business Continuity Standard AS/NZS 5050:2010 provides useful guidance for organisations that have already taken steps to implement an enterprise risk management framework based on ISO 31000, or its precedessor AS/NZ 4360.

The ‘risk based’ focus of AS/NZS 5050:2010 is an approach also adopted by subsequent standards, including the recently introduced compliance standard AS/ISO 19600:2015 (AS/ISO 19600).

We believe that AS/NZS 5050 provides a good roadmap for effectively integrating business continuity management practices into existing corporate governance infrastructure.

So if your organisation is in the mindset that ‘the Volkswagen/Patties scandal couldn’t or wouldn’t happen to us’ and glosses over how it could learn from Volkswagen’s experiences, your governance, risk and compliance approach and culture could do with a rethink.

Importantly, your BCM plan should not be left languishing on a shelf or in an isolated folder on a hard drive – it should be tested regularly and  be accessible to key personnel in the BCM program.

How Can CompliSpace Help?

CompliSpace combines specialist governance, risk and compliance (GRC) consulting services with practical, technology-enabled solutions. Our BCM module has been built in-line with AS/NZS 5050:2010 to ensure that clients are provided with a best practice solution.

If you have any questions about topics raised in this blog, or if you would like to find out how CompliSpace can assist you to streamline your existing governance, risk or compliance programs and make them more relevant to your organisation please feel free to contact us on 02 9299 6105 or email contactus@complispace.com.au.


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