False and Misleading Statements – Potential to attract criminal and civil penalties

7 March 2024
Scott Couper, Partner, Brisbane

On 19 January 2024, in Walker v Members Equity Pty Ltd (formerly Members Equity Bank Ltd) (ME) [2024] FCA 15, the Court imposed sentences against ME for false and misleading representations and failing to provide written notices. In the first criminal prosecution of its kind, ME was fined $820,000. The Court recognised a requirement to impose a sentence “that is of a severity appropriate in all the circumstances”.


The Commonwealth Director of Public Prosecutions (CDPP) conducted proceedings on the charges laid by an officer of the Australian Securities and Investments Commission (ASIC), in respect of ME’s alleged contraventions of:

  1. sections 12DB(1)(g) and 12GB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), for making false and misleading representations in letters to its home loan customers; and
  2. sections 64(1) and 65(1) of the National Credit Code (Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth)) (National Credit Code), for failing to provide written notice about annual interest rate and repayment amount changes.

The four charges concerned multiple contraventions being:

  1. that ME sent letters to customers between 25 May 2018 and 3 September 2018, that misstated the minimum amount for their repayments following expiry of the fixed-rate or interest-only period of their home loan; and
  2. failures by ME, between 23 September 2017 and 23 February 2018, 28 December 2016 and 27 June 2017, and 4 July 2017 and 12 February 2018, to send letters to customers whose repayment arrangements were due to expire and who were therefore not advised of the resultant changes to their interest rates and minimum repayment amounts.

ME admitted the offending early in the proceedings, having compulsorily self-reported, and formally pleaded guilty at the sentence hearing.

Observations of the Court concerning the charges

The offending under the ASIC Act, attracted a maximum penalty of $2.1 million (10,000 penalty units at the time). The contraventions under the National Credit Code, attracted a maximum penalty of 500 penalty units (albeit the unit rate was increased from 1 July 2017).

Three observations were made by the Court at the outset of the judgment:

  1. due to an overlap in the conduct involved in the second and fourth charge, the sentences imposed ought to take into account “totality”, so the sentence imposed for the multiple offences is not, taken as a whole, disproportionate to the overall offending;
  2. ME’s guilty plea allowed for the “rolling-up” of the individual offences. In doing so, this enabled finality, in circumstances where the offending, although numerous, tended to be repetitive in nature; and
  3. the third and fourth charges would have been a single rolled up charge for a failure to give the necessary notice, but for the penalty unit increase from $180 to $210 from 1 July 2017.

Sentencing issues in dispute

The Court is required by section 16A(1) of the Crimes Act 1914 (Cth) to impose a sentence for a federal offence that is of a “severity appropriate in all the circumstances”. For this purpose, section 16A(2) provides what the Court described as “a non-exhaustive shopping list of matters for consideration” to the extent they are relevant and known. In particular, “general deterrence” is now explicitly required to be taken into account.

In dispute were:

  1. the characterisation of the conduct and its seriousness;
  2. the extent of the need for general deterrence; and
  3. the quantum of the fines to be imposed to address that need, including the extent that consideration was tempered by proportionality and totality.

The CDPP contended a substantial penalty was appropriate because of the need for deterrence. ME contended that in all the circumstances a modest financial penalty was adequate and appropriate.

Facts supporting sentences

The Court considered the main discrepancy between the parties’ relevant positions was correctly summarised by the CDPP as follows:

  1. ME characterised its conduct as having been caused by a technical issue, and accordingly of less seriousness. The CDPP contended that a technical issue could still be serious and the two concepts are not mutually exclusive.
  2. ME characterised the consequences of its conduct as minor, as the financial loss incurred to customers was not substantial and had been fully rectified. The CDPP acknowledged that losses were minor,but pressed the importance of the asymmetry of knowledge between customers and the bank, given the power disposition between a bank and customer, the importance of the banking system to social and commercial life, and a customer’s entitlement to rely on a bank for accurate information. The customer’s perspective was important in assessing the seriousness.
  3. ME considered its response to a November 2015 audit was reasonable. Whereas the CDPP considered this audit should have put ME on notice of the severe risk of further unknown defects in their systems.
  4. ME contended that significance should be given to the fact that the offending conduct occurred in the course of repayment and not at the point of purchase. However, the Court accepted the CDPP’s contrary argument that the conduct was serious, in that representations related to the financial management of customer’s loans, with interest rates being highly relevant to customers’ financial decisions.

Court’s sentencing

In view of the above, the Court notably observed the appropriate question to be asked where automated systems are in place is:

what and where are the inevitable defects in such complex systems, and what is being done to find them and eliminate them, noting that changes in software are likely to create new defects from time to time. It is almost counsel of perfection, because that is what is required. Prevention is everything, and the sanctioning response must reflect this in order to ensure this is what takes place. Temptation in favour of any lesser response must be deterred.”

While there were factors weighing in ME’s favour when considering totality (i.e., no lasting harm, cooperation with ASIC, actively remedying the error), on balance, the Court could not accept that the need for general deterrence was relatively minor, nor that a modest financial penalty was adequate and appropriate. Rather, the continued need for deterrence had to be addressed. The first charge, though concerning a shorter duration, was more serious, as it involved a failure to provide information that was required and the provision of false and misleading information. Thus, the Court ordered ME pay $750,000 in respect of the first charge under the ASIC Act, and a total of $70,000 in respect of the remaining charges under the National Credit Code.

Key takeaway

The decision is a useful signpost for the way in which the Courts will approach sentencing for similar conduct in the future. When automated systems are used, very high levels of diligence are required. The Courts have recognised that “prevention is everything and the sanctioning response must reflect this in order to assure that is what takes place”. Whilst proportionality remains important, in similar cases the Court’s focus is likely to be on deterring “inadequate or complacent levels of diligence”.

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Authored by:

Scott Couper, Partner
Carma Holland, Solicitor

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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