Why compliance with the Australian Consumer Law is vital for direct sellers
On 31 October 2019, the Federal Court ordered Unique International College Pty Ltd (Unique) to pay penalties of $4.165 million for various breaches of the Australian Consumer Law (ACL), namely:
- engaging in unconscionable conduct;
- making false and misleading representations; and
- breaching the unsolicited consumer agreement (UCA) provisions.
In awarding such a high penalty, the Federal Court considered the deliberate nature of Unique’s conduct and the involvement of Unique’s senior management in the contravening conduct, including its exploitation of vulnerable people in selling its courses and the losses suffered by the Commonwealth.
The case is a timely reminder to direct selling companies to ensure that their salesforce is aware of their obligations if a sale is unsolicited and that the sales agreement complies with the very prescriptive requirements for UCAs contained in the ACL.
Unique was a private education college which offered Diploma courses costing from $10,000 to $25,000 per course. The courses were approved courses under the VET FEE-HELP scheme. Under this scheme, the Commonwealth pays the tuition for approved courses in full to the course provider, and treats this payment as a loan to the student. In obtaining the loan, the student incurs a debt to the Commonwealth which accrues interest. The loan becomes repayable once the student earns a yearly income of at least $53,345.
In the 2014-15 financial year, Unique enrolled 3,600 students to its courses and was paid approximately $57 million by the Commonwealth in tuition fees.
Unique sold these courses using face-to-face marketing, including door-to-door sales where they attended consumers’ homes. Unique marketed its courses to consumers in remote and low-socio economic areas, including indigenous communities, across Victoria, New South Wales and Queensland. Both senior management and staff performed the door-to-door sales. Unique gave students who enrolled in their courses a free iPad or laptop as incentives to sign up.
The proceedings concerned Unique’s enrolment of six consumers from remote or rural communities, five of whom were indigenous Australians. By enrolling in a course, each consumer incurred a debt of $26,400 to the Commonwealth.
In making the door-to-door sales, the Federal Court found:
- Unique made false and misleading representations to consumers.
- Unique’s staff told consumers that its courses were free or free until they began earning a certain level of income; and
- Unique’s staff failed to inform consumers that they were enrolling in a course.
- Unique failed to inform consumers of both the cost of the course and that the consumers would incur a significant debt to the Commonwealth. This debt comprised the course fee, along with a 20% loan fee, with the debt increasing yearly in accordance with the Consumer Price Index.
- Unique did not provide the information prescribed under the UCA provisions of the ACL to consumers at the time of signing them up to the courses, in particular, no information was provided to consumers during the home visit about:
- the consumers’ rights to terminate the agreement during the 10 business day cooling-off period; and
- the way the agreement can be terminated,
both of which are required under section 76 of the ACL.
- Unique did not provide the consumers with a written copy of the agreement as required by section 78 of the ACL. Accordingly, Unique also did not comply with section 79, which sets out in considerable detail all the information which must be included in a UCA. (UCAs must, for example, conspicuously and prominently inform consumers of their right to terminate the UCA and include a prescribed form which can be used to terminate the UCA.)
The Court found that in one instance a Unique staff member signed up a consumer to a course which was clearly not suitable for them. The Court noted that it would have been obvious to the Unique staff member that the consumer, who had a learning disability, was “totally unable” to understand what she was doing. The Court noted this was the “exploitation of an obviously vulnerable person for financial gain. It is difficult to imagine unconscionable conduct which could be worse”.
Accordingly, the Court held that Unique had engaged in unconscionable conduct, made false and misleading representations and breached the UCA provisions of the ACL.
Size of the Penalty
Under s 224(3) of the ACL, the maximum penalty per contravention for unconscionable conduct or for making false and misleading representations has recently increased to be the greater of:
- $10 million;
- three times the value of the benefit obtained which is attributable to the contravening conduct; and
- if the value of the benefit is unable to be determined, 10% of the company’s annual turnover in the preceding 12 months.
However, at the time of Unique’s contravening conduct, the maximum penalty was $1.1 million for these contraventions. The maximum penalty for a contravention of the prescribed information requirements for UCAs remains unchanged and is $50,000.
The Federal Court was in no doubt as to the seriousness of Unique’s misconduct. Unique’s conduct was exploitative and targeted consumers from low socio-economic backgrounds by incentivising them to sign up to the courses in exchange for free laptops and iPads.
Relevant matters to consider when determining the penalty amount include:
- The nature and extent of the conduct. The Court found Unique’s conduct was serious and deliberate.
- The loss or damage suffered as a result of the contravening conduct. The consumers suffered significant debts when they incurred a loan to the Commonwealth.
- The circumstances in which the contravening conduct took place.
- The size of the company and its financial position. While the Court was unable to determine positively this matter, it was satisfied that “a great deal of money” had passed to Unique and had been paid to its shareholders in dividends.
- Whether there is a culture of corporate compliance. The Court found Unique did not have a corporate culture which promoted compliance with the ACL. It did not train staff as to ACL provisions and its code of conduct did not refer to the ACL.
The Court considered other matters in determining the amount of the penalty including the deliberate nature of the conduct and the involvement of senior management in the door-to-door sales. The Federal Court noted that the penalty of $4.165 million “adequately reflects the wrongdoing and is proportionate overall”, given the maximum penalties which could be imposed totalled $13.95 million.
Take Home Points
This judgment is a reminder for direct selling companies to ensure they have an ACL compliance program in place which involves training staff and their independent salesforce about ACL compliance, including the requirements for negotiating and entering into UCAs. Sales staff engaged by direct selling companies must be aware of the disclosure requirements in respect of UCAs and, where required, must only use sales agreements which adhere to the UCA requirements contained in the ACL. Sales strategies which involve targeting vulnerable or disadvantaged people must always be avoided.
Companies are strongly recommended to consider whether ACL compliance training is overdue and, if so, to arrange for appropriate training to be provided.
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