Charging dead clients is dishonest. Really? Who knew

The news that Australia’s financial services regulator will take five AMP group companies to court over them charging life insurance and advice fees to dead people is a wake-up call to corporations.

It shows that pleading ignorance or mistake when bad things happen may not be enough to protect the entity from action by the regulator, if the fault is systemic.

This scandal was highlighted in 2018 during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

In pursuing AMP, the Australian Securities and Investments Commission (ASIC) is clearly continuing to heed the Royal Commission’s call for a tougher regulatory stance to deter powerful financial corporations from engaging in clearly wrongful, but highly profitable, behaviour.

In this case, ASIC alleges that for more than four years – from 2015 to 2019 – AMP (incredibly) charged dead people life insurance fees and fees for financial advice when (unsurprisingly) it had no right to do so.

ASIC says that, through this behaviour, AMP contravened its statutory obligations to act “efficiently, honestly and fairly”, failed to manage conflicts of interest and engaged in unconscionable “systems of conduct and patterns of behaviour”.

These are all very serious allegations and will be taken very seriously by AMP, its investors and clients alike.

ASIC is seeking civil penalties, “adverse publicity orders” and court declarations that AMP has breached the law through its conduct. This is significant because AMP has already paid back or “remediated” the money.

By launching these proceedings, ASIC is broadcasting that long gone is the time when ASIC was happy to accept “undertakings to remediate” from companies engaged in egregious misconduct of this type.

Civil penalties, adverse publicity orders and declarations are all designed to deter and condemn; to express community outrage and to ensure that corporate wrongdoers understand that such behaviour will not be tolerated.

Given that there seems little doubt that this misconduct occurred, what possibly can AMP say in its defence?

AMP’s statement released in response to ASIC’s action gives a clue: “When we discovered the issues, we immediately moved to change our processes and systems and took action to ensure the beneficiaries of customers impacted were fully remediated. AMP apologises to all customers and beneficiaries who were impacted by this matter.”

In other words: we didn’t realise we were doing this, when we found out we fixed it, and we are sorry.

But repeated unlawful conduct by powerful corporations needs strong specific and general deterrence, whether it was intentional or not. And, in any event, the more longstanding an unlawful practice becomes, the more difficult it becomes to say it was just a series of unfortunate events.

It starts to smack of systemic wrongdoing.

As Royal Commissioner Kenneth Hayne explained in his report when discussing the fees-for-no-services cases: “The amounts of money that just ‘fell into the pocket’ of so many large and sophisticated financial entities, the number of times it happened, and the many years over which it happened, show that it cannot be swept aside as no more than bumbling incompetence or the product of poor computer systems.”

Indeed, Commissioner Hayne thought such behaviour could be assessed as dishonest.

Our research suggests that the law is also moving to identify better ways of understanding how corporate states of mind work, which support Commissioner Hayne’s view.

On this analysis, corporations’ minds are not solely found in their ‘directing minds and wills’ (directors and senior executives). So it is no longer enough for a corporation to plead ignorance or mistake by saying that its directors didn’t individually know about the problem, or intend themselves to take the money.

Rather, we argue that legal theory, law reforms and, increasingly courts’ decisions, in practice all show how corporations manifest or demonstrate their true state of mind through the systems they adopt and implement.

Corporate systems (as opposed to ad hoc practices or coincidental patterns of behaviour) are inherently purposive – they are designed to produce certain outcomes.

And the features of those systems reveal what a corporation knows.

We show that this model of corporate systems ‘intentionality’ is strongly supported by a series of recent Federal Court decisions on the meaning of the law’s prohibitions of “unconscionable systems of conduct and patterns of behaviour”.

ASIC is drawing on precisely that body of law for its case against AMP.

So, how does AMP’s conduct look from this perspective of systems intentionality?

Paraphrasing ASIC’s Concise Statement, AMP was charging insurance and advice fees for human clients. Humans’ circumstances change over time. AMP must be taken to know this. That is, after all, why clients take up life insurance and periodically require new financial advice.

And clients die. When they do, AMP would clearly have no right to charge insurance premiums or for advice that could never be received. Again, AMP must be taken to understand this. It is, after all, an expert in the field with decades of experience behind it.

What is worse, as ASIC notes, AMP’s dead clients could hardly complain and their representatives would likely be suffering from distress as they tried to untangle the deceased person’s affairs.

So they were wholly reliant on AMP having some “monitoring policy or system in place to prevent and/or monitor deductions of premiums and advice fees from deceased members’ accounts”.

At the very least, AMP could have been expected to have some sort of system in place to fix the inevitable errors when they arose. Again, AMP must be taken to understand this. Yet it took five years and many complaints for AMP to respond to the problem.

Tellingly, when these issues were first raised, AMP didn’t simply immediately stop deducting fees completely until the problem was fixed.

That would have been the honest thing to do, given the absolute certainty that unlawful fees were being extracted from dead clients’ accounts and, apparently, there was no system in place to stop those unlawful takings.

Rather, AMP continued to operate the systems, and take unlawful profits, until 2019.

As designed, these systems were guaranteed to result in unlawful fee deductions. And AMP continued to operate them long after their evident problems were exposed.

From the perspective of ‘systems intentionality’, this conduct is clearly open to characterisation as both dishonest and unconscionable. ASIC, we think, is right to seek its denunciation in the strongest terms.

Corporate Australia is on notice.

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