We are all familiar with the current list of great modern excuses, including: “The cheque is in the post”, or: “We’re installing new software”, and a personal favourite: “I’m leaving politics to spend more time with the family.” An increasingly common addition to the list is: “There seems to have been a computer error.”
Trouble is, it’s often true. But legally, of course, while computer error may be an explanation, it is no excuse, where it causes financial detriment or other damage. One well-known provider of super and investment products found recently that what was described as a “computer system calculation error” had caused it to issue annual statements and withdrawal letters to policy holders and beneficiaries which misstated the policy holders’ and beneficiaries’ entitlements to redemption or withdrawal benefits. This in turn led the provider to pay incorrect amounts of redemption and withdrawal benefits — some were too little and some too much. The errors apparently went back as far as 1993.
Everyone agreed that the mistakes were inadvertent. Nonetheless, the provider found itself before the Federal Court, which found the provider to have engaged in misleading and deceptive conduct under both the Trade Practices Act (in relation to conduct between 1993 and 1998) and the Australian Securities and Investments Commission Act (in relation to conduct from 1998 onwards) — a serious matter by any measure.
What happened?
The facts in the case, according to the evidence before the court, were simple enough. From 1993 through to at least the end of 2000, thousands of the provider’s policy holders and beneficiaries were given incorrect information in annual statements and withdrawal letters as to the early termination benefits payable under the policies. The evidence suggested that the errors were attributable to a computer systems fault. A report prepared by independent actuaries estimated the cost of rectifying the understated surrender value payments to be $600,000. (Some policy holders and beneficiaries received overpayments as the result of the same systems error, but the provider did not seek to recover the overpayments.)
The law
Super fund trustees and providers naturally tend to focus most of their attention on their legal responsibilities under the SIS Act and Regulations, and taxation law. Most of their dealings with government are through APRA and the Tax Office, the lead regulators. But it can never be forgotten that trade practices and consumer protection law still can play a part.
Prior to July 1, 1998, if a corporation was found to have engaged in misleading or deceptive conduct, that would have meant contravention of the Trade Practices Act, which would have drawn the attention of the ACCC. With effect from that date, the main “misleading or deceptive conduct” rule, in relation to the provision of “financial services”, was shifted into the ASIC Act, which in turn brought ASIC into the picture as regulator. It was ASIC which prosecuted this particular case and took it to the Federal Court.
The rule now says simply: “A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.”
There is a large body of law about what amounts to misleading or deceptive conduct, much too large to attempt a summary here. It’s enough to say that the parties agreed that the provider had engaged in misleading and deceptive conduct, albeit inadvertently. The court was prepared to infer that many of the policy holders and beneficiaries would have been misled by the incorrect information with which they were provided.
In fact, to the provider’s credit, it did not attempt to defend the action. It seems to have readily agreed that what had happened was within the meaning of misleading or deceptive conduct for purposes both of the Trade Practices Act and the ASIC Act. ASIC and the provider consented to orders to be made by the court.
Those orders involved, in the first place, a declaration that the provider had contravened the relevant laws. Then the provider was obliged to send notices to policy holders and beneficiaries, the form of which would vary depending upon whether the policy holder or beneficiary had or had not fully redeemed or fully withdrawn the benefits in respect of the relevant policies. The notices were to explain that a computer system calculation error had caused incorrect calculations for some withdrawal values and that the provider was working towards recalculating those values by a specified date. The provider also accepted an enforceable undertaking which, in essence, required it to try to make the correct payments of redemption or withdrawal amounts (plus interest) by a specified date. The provider was also required to adjust its records to reflect the correct calculations for any other policy holders or beneficiaries who had been affected by the errors. Finally, the provider had to pay ASIC’s costs in the proceedings. Clearly, it was a very expensive computer error.
Aside from the obvious caveats about monitoring one’s computer and other systems to ensure they are both accurate and up-to-date, perhaps the principal lessons to be learned from this case are that rules derived from trade practices law can have a profound and direct effect on superannuation providers, that it is possible to engage in misleading or deceptive conduct without meaning to, and that ASIC is looking over your shoulder along with all the other government regulators.
— Brian Egan is a freelance commentator on superannuation , tax and corporations law matters and a principal of Sirius Information Services. Email: eganeb@ozemail.com.au
