Exetel’s CEO John Linton died yesterday, and CSP Central joins with the telco industry in acknowledging his contribution to the sector.

Opinionated, outspoken, uncompromising and unrelenting, Linton was never reticent in letting the rest of us know what he thought.  But love or hate some of his opinions, he built a successful telco (with a fiercely loyal staff and customer base) in remarkably quick time, contributed to debate at many levels, and was a major benefactor of Australia’s wildlife and environment through Exetel’s generous donations to community-based programs to protect endangered species and regenerate natural environments.

Exetel’s slogan … ‘Helping make a better world’ … would be corny in the mouths of most other telcos.  But Linton meant it and lived it.

Linton suffered a major stroke in the afternoon and passed away during the evening, surrounded by family.

Vale, JL.

The jungle drums are sending negative messages about the new TCP Code proposed by Communications Alliance.  

What’s it all about?
In a nutshell, the Australian Communications and Media Authority has been calling for stronger telco consumer protections since it completed its ‘Reconnecting the Customer’ enquiry last year. In response, Communications Alliance developed an upgraded version of the current Telecommunications Consumer Protections Code, hoping it would be accepted and registered by ACMA. (That’s how industry codes become ‘legal’.)
But signs are appearing that ACMA might reject the new draft Code as being too soft … despite the fact that it is by far the most demanding code of its type that the industry has ever faced.

ACCC has its say
First, the Australian Competition and Consumer Commission lodged its own submission during the public exposure stage of the code process. In a blunt assessment, ACCC rated the new draft as too little, too late. The regulator was highly sceptical that any consumer protection system based on industry self-regulation would cure the ills that, as far as it and ACMA are concerned, plague the retail telco sector.

A knowing wink from The Age
On 8 January 2012, The Age newspaper ran a piece that reeked of a little inside information from ACMA. Nothing improper, we hasten to say, but the journo clearly has a strong feeling that the proposed new code is doomed.

So what would happen instead?
If the draft TCP Code is binned by ACMA, the authority will draft its own set of rules, called an Industry Standard. Obviously, it would make them even tougher than the proposed code, and the Standard would have the force of law under section 128 of the Telecommunications Act. Apart from other enforcement options, the Federal Court can impose penalties of $250,000 per contravention of an Industry Standard.

Good news and bad news
For telcos and ISPs that were dreading the burdens of the proposed new TCP Code, a delay in the introduction of new rules will be welcome. And an Industry Standard might omit some elements of the draft TCP Code. But overall, we have to assume that it would be significantly tougher on telco retailers than the draft code.

Often you see such clauses quoted in support of an argument that a claim for misrepresentation cannot succeed where a contract contains this clause.

But that ain’t necessarily so.  In fact, it ain’t even normally so.

‘Entire agreement’ clauses

Typically they read something like this:

This document is the entire agreement between you and us and you acknowledge that we have made, and you rely on, no promise, representation or warranty to you that is not set out expressly in this document.

What they are supposed to achieve

In theory, an ‘entire agreement’ clause prevents you from claiming that you relied on something a salesperson told you, or otherwise sits outside the document.

But the law sidesteps them with ease

The law sees it this way:  If a person was told something misleading that caused them to decide to enter a contract, then their entry into the contract was obtained ‘on false pretences’.  That taints the contract from the moment of its inception.  It is, and always was, a contract obtained by misrepresentation.

So, when the law comes to the ‘entire agreement’ part of that tainted, flawed contract it reasons that it cannot operate as its black & white words suggest it does.  It simply won’t be enforced so as to wipe out the misrepresentation.

So are ‘entire agreement’ clauses irrelevant ?

No, they can have effect.

In deciding whether a person was induced into entering a contract by some external misrepresentation, the court must decide:

• what was actually said or otherwise represented
• whether it was true or false
• if it was false, whether the person would not have entered the contract has they known the truth.

This third element, often called the ‘reliance question’, is frequently overlooked by lay people.  They think that they can avoid a contract if they can show there was a misrepresentation leading up to it.  But they need to show more: they must show that they relied on the misrepresentation as a material factor in entering the contract.

A court can take an ‘entire agreement’ clause quite seriously as evidence that a person did not rely on some external representation.  It can say ‘We accept that a misrepresentation may have occurred, but in judging whether you relied on it we give weight to the fact that you signed a piece of paper saying that you didn’t.’

A high water mark example

Let’s say you sign a short contract after getting legal advice, and it contains a clear ‘entire agreement’ clause.  A court might well say:

• it’s a short contract
• the clause is clear
• you obtained legal advice
• you actually signed the document
• you must have very clearly considered the clause and chosen to assent to it -

so we are satisfied that you did not rely on the external representation you now complain about.  We accept that it was made, and that it was untrue.  But in all the circumstances including the ‘entire agreement’ clause, we don’t accept that you relied on it.

An example at the low water mark

At the other end of the scale, let’s say you sign up for a mobile phone service in store.  The provider uses a Standard Form of Agreement, which you don’t actually see before signing up.

Even if you did see it, it would be dozens of pages long and the ‘entire agreement’ clause is buried on page 24.

The only ‘advice’ you get about the deal is from the commission salesperson.

In those circumstances, if you can later point to a material misrepresentation, the court will sidestep the ‘entire agreement’ clause in a blink.  You did not carefully and consciously assent to the proposition that there was nothing more to the deal than what’s in black & white.

Section 18 of the Australian Consumer Law

This must be the most quoted piece of consumer law on CSP Central.

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

In virtually every section 18 claim that involves a contract, there is an ‘entire agreement’ clause.  If such clauses could lock out misrepresentation claims, there’d be very few contract cases based around section 18.  (You should be aware that, until 1 January 2011, a nearly identical provision appeared in the old Trade Practices Act 1974, which has since been upgraded and re-named the Competition and Consumer Act 2010.)

But just take a stroll through these cases and you’ll see how many there have in fact been.

Myth busted

‘Entire agreement’ clauses can be important and effective.  But especially in consumer situations where the deal moves fast, the contract is not focused on and there’s no independent advice, they are no sure defence to a misrepresentation or section 18 claim.

When legal advisers warn second and third tier telcos and ISPs about advertising content, the single most common retort is ‘Telstra gets away with it’ and ‘We saw an Optus ad like that’ and ‘But Voda says the same thing’.

It’s a pretty good argument.  If the giants can do it, why can’t we ?

No mistake, this is the biggest telco-truth-in-advertising hit ever landed by the national regulator.  Like all good commando raids, it seemed to come from nowhere.  Only yesterday morning did rumours start to circulate that ‘something big’ was coming out of Canberra in the next 24 hours.

If Tiers 2, 3 & 4 don’t get their act together now, they can’t complain they’re being picked on.  And ACCC has made sure that Telstra, Optus & Voda are motivated to keep their networks honest.

The Undertaking:  a summary

ACCC Chairman Graeme Samuel

Here’s what it says in a nutshell:

• The Trade Practices Act prohibits misleading advertising.
• It also prohibits advertising part of the price of a product, but not the whole price.
• ACCC thinks the comms industry in general has an advertising problem.
• ACCC thinks the industry in general has engaged in advertising that:
  • uses misleading headline pricing
  • misuses the word ‘unlimited’
  • misuses phrases like ‘no exceptions’
  • falsely uses words like ‘free’
  • misrepresents price per minute
  • features pricing that only applies in bundles
  • misrepresents data allowances
  • exaggerates broadband speeds
  • exaggerates coverage areas.
• ACCC thinks that Telstra / Optus / Voda are each guilty of one or more of the above.
• Everyone acknowledges that Telstra / Optus / Voda might have their own opinion about a particular instance, and it would be up to the court to decide.
• Because they’re market leaders and want to set a new standard for telco-truth-in-advertising, Telstra / Optus / Voda give an enforceable undertaking to ACCC.
• Telstra / Optus / Voda undertake to desist from any new advertising of the kind described above.
• Within 30 days, they’ll review current ads to see if any offend.
• Within a further 60 days, they’ll cease any that does offend.
• Within 60 days, they’ll confirm to ACCC that they have complaints systems that give redress to customers who are misled.
• Within 60 days, they’ll give redress to all customers with an unresolved complaint about misleading advertising (no more than 12 months old) by a customer who can show a good faith case.
• Within 60 days, they’ll review their trade practices compliance programs to ensure that the targeted advertising issues are under control.
• They’ll report to ACCC on advertising that has been dropped and consumer redress granted.
• They’ll make sure that future ads about headline prices, terms or representations accurately reflect the deal that most of the target audience can expect.
• They’ll make sure all their subsidiaries follow the same rules.
• The undertaking lasts for two years.

Is that all there is ?

No, it isn’t.

ACCC is well aware that:

• hundreds (or thousands) of resellers resupply Telstra / Optus / Voda services, and
• Telstra / Optus / Voda have substantial practical control over how they behave.

So:

• Telstra / Optus / Voda must take reasonable steps to ensure that their resellers follow the telco-truth-in-advertising undertakings.
• Within 30 days, Telstra / Optus / Voda must write to them all to tell them all about it.

A purely voluntary offer by Telstra / Optus / Voda ?

Possibly, but we’d bet a lot more money on the Geelong Football Club winning Australian Idol singing ‘Nessun Dorma’ a capella in five part harmony.

In its media release, ACCC is very positive about the role of the Big Three, saying they are to be ‘applauded’.  We think that’s diplomacy.  Obtaining this undertaking from three massive telcos would have involved more than ACCC explaining the warm glow of good citizenship.  Plainly, the companies were convinced they were at risk of stronger action if they did not agree.

ACCC itself has said about enforceable undertakings:

The Commission stresses that it seeks to resolve matters under s. 87B only when it believes that a breach has occurred or is likely to occur and that an administrative resolution based on enforceable undertakings offers the best solution.

What does it mean ?

Lawyers for Telstra / Optus / Voda have been restricted to damage control.  There’s no two ways about it:  ACCC has convinced all three companies that it could ‘slot’ them for Trade Practices Act breaches, and the best way out was to roll over.

Watch out for Telstra / Optus / Voda spin that they reckon it’s all a good thing and were always deeply committed to the same principles.

Sure.

ACCC has a history of being gracious in victory in these situations, so we don’t expect them to taunt the losers.  But make no mistake, this is a complete capitulation by Telstra / Optus / Voda.

And what’s an ‘enforceable undertaking’ ?

It’s similar to being under a court injunction.

Under section 87B of the Trade Practices Act 1974:

• ACCC may accept a written undertaking given by a person in connection with a matter in relation to which ACCC has a power or function under the Act.
• If ACCC considers that the person who gave the undertaking has breached any of its terms, it may apply to the Federal Court for an order.
• If the Court is satisfied that the person has breached a term of the undertaking, the Court may make all or any of the following orders:
  • an order directing the person to comply with that term of the undertaking;
  • an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;
  • any order that the Court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;
  • any other order that the Court considers appropriate.

This undertaking builds in a short ‘please explain’ procedure, to give the telcos some opportunity to resolve issues early.

By the way, the wording of the TPA explains why the Undertaking has been ‘offered’ by the telcos and ‘accepted’ by ACCC.  You’ll see from above that this is the only way the TPA allows an Undertaking to be created.

The next part of the play

Telstra / Optus / Voda have rarely been the worst offenders in CSP advertising.  Resellers often far outdo them.  While the undertaking doesn’t bind the resellers, it sets up a two pronged attack against them.

• Telstra / Optus / Voda have undertaken to ‘take reasonable steps to ensure that the obligations outlined in paragraphs 32 and 33 of [the] Undertaking are applied’.
• ACCC will have its usual weapons available.

Frankly, we’re not sure which resellers need be more alarmed about:  ACCC with its potent TPA weaponry or Telstra / Optus / Voda with their brutal, arbitrary reseller contracts.  If Telstra / Optus / Voda really want to clean up the reseller channels, they can do it in weeks.  They lord it over their channels.  They can rapidly assert their will over them.

And who are the ‘resellers’ ?

The undertaking doesn’t actually refer to ‘resellers’.  It refers to ‘any party with whom [Telstra / Optus / Voda] has a commercial agreement that allows it to control the advertising and promotion of goods and services by that party’.

Now, Telstra / Optus / Voda have been on a power trip for years.  Their contracts routinely give them every power known to woman, man or beast.  The lawyers have basically been instructed ‘Make them sell us their souls’.

So in many cases, parties that fall under the description ‘any party with whom [Telstra / Optus / Voda] has a commercial agreement that allows it to control the advertising and promotion of goods and services by that party’ will include large scale wholesale customers.  And for all such customers, Telstra / Optus / Voda are assuming responsibility to ‘take reasonable steps to ensure that the obligations outlined in paragraphs 32 and 33 of [the] Undertaking are applied’.

What an ACCC coup.  Telstra / Optus / Voda forced to use the powers they have forced on other companies, for ACCC purposes.

But for once, the regulator hasn’t shot the messenger

For too long, regulators have ignored the reality of the Australian communications industry:  that combo retailer / wholesalers effectively force downstream operators into dodgy practices.  How can TinyTel, as a Telstra / Optus / Voda reseller, conduct itself squeaky clean if Telstra / Optus / Voda doesn’t ?

What next ?

ACCC Chairman Graeme Samuel has already said that second tier operators can expect to be contacted soon, with a request to commit to the principles of the principles of the advertising undertaking.

“The ACCC recognises there is more to do. The ACCC will now contact the next tier of operators who will be encouraged to adhere to the principles set out in the undertaking. When taken together with the three major carriers, this would then account for almost 90 per cent of the market for telecommunications goods and services in Australia.”

And FunnyTel has the last laugh

As always, Australia’s rising telco star FunnyTel was miles ahead of the industry on the truth-in-advertising push.  The company’s new FAT plan announcement is sure to score a big elephant stamp from ACCC.

Chad Blake, Manager (Legal Affairs & Hospitality) at Funnytel, told CSP Central:

We’ve never really worried about Telstra, Optus or Vodafone.  ‘Don’t sweat the small stuff’, says our CEO Steve.  We confidently expect to acquire all three of them within the next 18 months, as FunnyTel’s stellar growth continues, and Steve works out a way to buy millions of instant scratchies using BarterCard.

The Senate Standing Committee on Economics has received, and noted, strong submissions that part of the proposed new unfair contracts law can’t be right. 

But so what ?  The Committee majority finds no fault with the reasoning of law Professor Frank Zumbo, or the Consumer Action Law Centre … but it has still rubber stamped the Bill, virtually guaranteeing its passage into law.

And yes, the problem wording is the part we described as the Bill’s ‘bonkers bit’ back in June 2009.  It’s disappointing that the Senate Committee system hasn’t been able to deliver a sensible outcome.

The problem

We described it at length in an earlier post.  But in a nutshell, it’s this:

The new law will say that a contract term is unfair if it creates imbalanced rights or obligations without good reason.  And it goes on to say that in assessing that, the court must consider how ‘transparent’ (i.e. clear and obvious) the term is.

So the exact same imbalanced term, effectively forced by the exact same dominant supplier on the exact same customer with the exact same minimal bargaining power might be (a) unfair, if it is on page 21 of the contract in ordinary print but (b) fair, if it is on page 1 in bold type.

How does the page, or font size, affect whether a term creates imbalanced rights ?  How do they affect whether there’s a good reason for including an imbalanced right ?  It is, as they say in the classics, a non sequitur.  Transparency forms no part of the definition of ‘unfairness’ offered by the Bill.  So how can it be a factor in deciding if a certain case falls within the definition ?

The Zumbo view

Associate Professor Frank Zumbo submitted to the Committee:

… That the bill’s reference to whether or not a contract term is transparent in section 3(3) should be deleted. As with the ‘detriment’ provision, he argued that the test for transparency should be distinct from whether or not the contract term is unfair. Indeed, he argued that a contract term may be transparent but drafted by the larger party in a way that represents a significant imbalance in contractual rights of that party and which goes beyond what is reasonably necessary to protect its legitimate interests.

Consumer Action Law Centre view

Consumer Action Law Centre submitted:

… That the transparency clause is ‘the only part of the Bill’s definition of ‘unfair’ that was not in the MCCA-agreed model for UCT provisions and was not foreshadowed in the consultation information paper of February 2009′. The two other matters in subsection 3(2) of the bill – detriment and the contract as a whole – are both ‘reasonable and in accord with the MCCA model’.

The Centre explained that the unfair contract laws are a negotiation problem (a substantive issue), not a disclosure problem (a procedural issue). In this context, the availability, legibility and presentation of contract terms is irrelevant: the key obstacle is the inability of consumers to negotiate the terms of standard form contracts proposed by suppliers.

The Centre feared that despite the government’s good intentions in introducing the ‘transparency’ test, the test may substantially undermine the operation of the provisions. It could mean that the courts will regard a term as:

…’less unfair’, and thus possibly not unfair at all, if it has been clearly typed out in the contract, regardless of whether it is realistic to expect the consumer to have read, understood or negotiated over that contract term, and regardless of the extent of the unfairness of the content and effect of that term. Despite the EM’s statements, the provision is not drafted in terms of a court being required to take into account the extent to which a term is not transparent but the extent to which it is.

The majority Committee position

Professor Zumbo and Consumer Action Law Centre are plainly correct on the transparency question.  The Committee majority didn’t find otherwise.

But some Senate Committees have a real brief to critique, while others seem to consider themselves a rubber stamp.  In this case, the majority simply approved the Bill, including this obvious mistake.

The minority Committee position

Senators Alan Eggleston and Barnaby Joyce made some separate comments of a rather confused kind:

In relation to … whether a term is ‘transparent’ in the context of matters to which a court must have regard in deciding whether a term is unfair, Coalition senators are attracted to the arguments of the Consumer Action Law Centre and Professor Frank Zumbo that the “transparent” element is superfluous in this clause and should be removed.

Coalition senators recognise that difficulty and unease these concepts have caused from the evidence of a number of witnesses. We are however satisfied, based on the UK and Victorian experience and Treasury and other evidence, that these elements, in their context of “matters to which a court must have regard,” are not impassable.

Coalition senators note with satisfaction that the experience in the UK is that the key role in enforcement of the UK Regulations has been with the regulator and not the courts.

As far as we can tell, they ended up in support of the majority position, although if the final paragraph means what it seems to (that Parliament needn’t worry so much about how an Act directs courts if it considers that there won’t be many court cases, because a regulator will sort most things out), the Senators need their mouths washed out.

One logical and strong position

It was up to independent Senator Nick Xenophon to stand up for logic in legislation:

Courts’ consideration of … ‘transparency’

As it stands, courts have the discretion to consider all aspects of cases before them, and should not be constrained to focus on ‘transparency’ and ‘detriment’ specifically when it comes to determining whether or not a contract is unfair. The mandatory requirement for the Court to focus on transparency and detriment will require the court to address these specific questions and will effectively turn these mandatory requirements into tests in themselves and in a manner that negatively impacts on the consumer.

National Legal Aid argues that the concept of ‘transparency’ implies that consumers are able to make informed choices about contract terms, however it stated in its submission that their case work would suggest the opposite.

… because most consumers do not read contracts – most rely on a notion that traders will act in a fair and reasonable way when it comes to enforcing their rights. Even when they read contracts, consumers do not often understand how a particular clause will operate in practice. And, even when a contract is read and understood, standard clause contracts are nonnegotiable – it is a falsity to think that consumers can somehow bargain their way through amending or deleting a clause in a contract that is unfair but transparent.

Associate Professor Frank Zumbo also argued in his submission that a term can be considered ‘transparent’ but may still be ‘unfair’.

…on the simple, but objective basis that the larger party’s bargaining power allows the larger party to draft and impose a contract term in such a way as to (i) represent a significant imbalance in the contractual rights and obligations in the larger party’s favour; and (ii) in a manner that goes beyond what is reasonably necessary in order to protect the legitimate interest of the larger party.

Our take on it

It seems to us that this was an extreme case of law making gone wrong. 

• The transparency ‘test’ forms no logical part of the definition it is supposed to test for.
• That problem was clearly pointed out to the Committee.
• So were its practical consequences.

But somehow, it was all OK by everyone except Senator Xenophon.

The ERR is used to determine each carrier’s proportionate liability to contribute to funding the Universal Service Obligation, and one late return holds up the whole exercise.

As ACMA Chairman Chris Chapman said at the time:

‘This court decision highlights that ACMA is comfortable with taking action in appropriate circumstances against carriers that fail to meet their regulatory responsibilities.’

CSP Central has previously backgrounded the return and its requirements.

By publishing broadband provider comments about legal advice they may have obtained, the mag could have led them to waive the right to keep the details secret.

It’s vital for CSPs to understand the risk they may create if they publicly refer to legal advice they have received.

The problem

Normally, legal advice obtained by a company is ‘privileged’.  That means that nobody … particularly somebody who is suing it … can demand to see a copy.

But the courts have ruled that by publicly referring to legal advice in certain ways, the company may waive that privilege.  In other words, in a legal case, the other side may be entitled to say, ‘Great.  You claim to have taken legal advice and it says you’re in the clear.  Fine.  Give us a copy.’

Potential disaster

Because lawyers write legal advice for their clients’ eyes only, it often contains material that would do damage if it leaked.  For instance, they might talk about serious weaknesses in their client’s position.  Or they might discuss facts that would not be known to the company’s enemies.

Disclosure could be a first class disaster.

When is privilege waived ?

It’s complicated.  Normally, merely stating that you have obtained legal advice isn’t a problem.  And sometimes it could even be safe to go a little further and indicate the general thrust of the advice.  Or say, ‘We have taken the advice carefully into account in our actions.’

But it is easy to step over the line and waive privilege on all or part of the private advice.

Sound advice from the Victorian Government Solicitor

The Victorian Government Solicitor’s office offers good advice on the subject. 

Making public statements about legal advice

[The] manner in which legal advice is disclosed in public can lead to a waiver of [privilege].

It is less likely that [privilege] will be waived where reference is made only to the fact that legal advice has been obtained. Revealing the substance of that advice should generally be avoided. This includes summarising or describing the conclusion of legal advice, or giving the ‘gist’ of what it says.

If maintenance of the confidentiality of a particular legal advice is important …, advice should be obtained prior to publicly commenting on that legal advice to ensure there is no inadvertent waiver of [privilege].

While the VGS made these remarks in the context of advising Government, they stand true for private companies as well.

A case in point:  iiNet comments

We’ll be interested to see whether iiNet’s nemesis AFACT will try to use a public statement by iiNet to gain access to a copy of advice received from its lawyers about compliance with the copyright ‘safe harbour’ rules. 

iiNet may have obtained legal opinion on the effect of its public statement, and be confident that it does no harm.  Otherwise, it was extremely dangerous ground for the company to be treading on.

What if your company is asked about legal advice ?

What’s in it for you to take any risk ?  Unless there’s a special factor that makes it worth your while, just say that it is company policy not to comment on legal advice that may or may not have been received.

You might still make some general comments on whatever issue is at stake, but nothing that infers that you hold advice, or what its contents or effect may be.

Web Ace is the trading name of Jason Kenneth McKay of Perth, WA.  ACMA says that McKay has been extracting payments from customer credit cards without authority, and failing to refund.

The issue was first publicised on Whirlpool, the Australian internet users’ town square.  In May 2008, Whirlpool user ‘yabbitboy’ posted:

I am signed up to webace’s email only plan ( $60 a year ), I get unauthorized billings by webace 4 times already, 4*$60. I had contacted them by email – never got replied and also tried contacting them by phone – I do speak to them by person to person but they said they are ‘busy’ and say they will call me back which is *******.

ACMA has now used its power to direct McKay not to extract payments without issuing a bill and in accordance with customer authorisation.

Effect of an ACMA direction

We’ve explained before what an ACMA code compliance direction means.  Any further breaches by McKay could cost him $50,000 each.

So will McKay comply ?

As late as last Saturday, Whirlpool user ‘tudorose’ reported another unauthorised debit.  We’ll watch with interest to see whether the customers’ nightmare is really over.

Two separate groups of telco companies promoted the notorious telco equipment / finance / servces bundling scam that has cheated businesses of millions of dollars, saddling them with massive debt for goods and services never supplied.  One of these groups has been taken to court by ACCC, which is determined to smash its illegal conduct.

Watching on the sidelines are the financiers of the other group.  It doesn’t take much to figure out that they won’t be able to recover their dodgy debts after the Federal Court case against the first group is over.  So the finance companies are grabbing as much cash from innocent business operators as they can before the ACCC shuts the gate.

And Bank of Queensland’s equipment finance subsidiary is one of the players.  Yes, that’e the same Bank of Queensland that denies all responsibility for the outrageous lending practices of failed Storm Financial.

Elements of the scam

The scam typically depended on three elements.

First, a finance company stuffed to the gills with lending cash during a boom, needing to push out loans to keep profits high.

Second, a dodgy telco, willing to tell potential customers anything to get their signature on paper.  Even willing to forge signatures if the prospect was unhelpful and didn’t sign enough documents.

Third, a middleman to connect the two.  A finance broker with links to the finance company and the dodgy telco.

The broker has the credibility with the finance company to access a stream of funds.  Behind the curtain, it makes the funding source available to the dodgy telco.  The telco sends out sales staff out to do deals at any cost (to the customer).

We’ve explained previously what happened next.  It makes chilling reading.

Two players in the game

There were two major players in the game:  one group of companies featuring Axis Telecoms Pty Ltd, and a separate one starring Komtel Pty Ltd.

They had to be caught and they were

Frankly, ACCC could have picked either group of companies to sue in the Federal Court.  But they chose the Axis Telecoms companies and look as though they are slowly steamrolling them into defeat.

That leaves the Komtel group of companies watching on the sidelines.  Actually, Komtel was allowed to go into liquidation as one of the orchestrated steps in the scam.

Also on the sidelines are the finance companies.

The position of the financiers

You’d weep (with laughter, sometimes) if you hear the line the ultimate financiers are pushing.

“We aren’t guilty.  We totally trusted the middleman.  So how can we be guilty ?  It’s the customer’s fault for being ripped off.”

The argument is that because the finance companies were careless about everything their broker representatives did, and because their broker representatives appointed dishonest telco companies to do the face-to-face selling, they (the financiers) are the innocent parties.  PLEASE !!!

So the finance companies find themselves:

• ripped off by Komtel and companies like it (but no point chasing Komtel … it’s being liquidated, remember ?)
• facing the prospect of a Federal Court decision in a few months that will blow the lid off this type of scam - making any further recoveries from ripped off customers very difficult
• with a window of opportunity to collect as much as possible from the ripped off customers.

So what are they doing ?  Demanding, demanding, demanding.  Suing, suing, suing.

The position of the ripped off customers

They’re in small business.  They know they’ve been scammed, but they couldn’t explain the legalities.  They’re being chased for $30k or $50k or $60k and they can’t afford big legal fees to fight it.  So when they get a chance to settle for two thirds, they take it.

That’s two thirds of a false claim against them.  Not two thirds of anything they really owe.

And that suits the finance companies, too.  Two thirds of a false claim is a fantastic result.  Especially when it will all come to a screaming halt when the Federal Court deals with the ACCC case.

But we’re ‘innocent’ bleat the finance companies

Did they actually know what the telcos were doing ?  Probably not.

Did they take reasonable steps to prevent their money from financing dodgy telco schemes ?  No.

That’s not ‘innocent’.

An interesting parallel

There’s an interesting parallel with the allegations against the Bank of Queensland in relation to Storm Financial.

Commonwealth Bank has admitted that it allowed Storm to sign up borrowers without due care.  As The Australian reported on 18 June 2009:

CBA chief executive Ralph Norris, who initially played down the bank’s role in the collapse of Storm in January, said yesterday it had identified “shortcomings” concerning loans it made to Storm clients. The issue is understood to involve some customers being granted loans they were unable to repay.

“We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers,” Mr Norris said yesterday. “Our customers can be assured that where we have done wrong, we will put it right.”

Contrast that with Bank of Queensland’s irresponsible position on the same issue:

Statement from Bank of Queensland regarding Storm Financial

Thursday, 25 June 2009

Given the significant misinformation in the media recently regarding Bank of Queensland’s dealings with Storm Financial and treatment of Storm Financial customer accounts, the Bank would like to take the opportunity to clarify key facts.

Based on the Bank’s knowledge and enquiries to date:

• There is no evidence of improper or dishonest practices or conduct by the Bank in connection with Storm clients; and
• There is no evidence that the Bank has engaged in any misleading and deceptive conduct or unconscionable conduct in relation to its lending to Storm clients.

Translation:  ‘We didn’t do it.  Those people that we allowed to represent us in the market place did it.  What has that to do with us ???’

More than a parallel

Actually, the gross lack of safeguards and responsibility that characterise the Bank of Queensland / Storm Financial case are not a mere parallel with the telco scam.  They are history repeating itself.

The Bank of Queensland’s equipment finance arm, Bank of Queensland Equipment Finance Ltd, was just as slack in managing its representative relationships during the economic boom.

Yes, it appointed a middleman finance broker but didn’t have processes in place to effectively monitor what the broker did,  And yes the broker engaged with the scammer Komtel, which took Bank of Queensland finance into the streets and misled small businesses into signing dodgy deals.

And yes Bank of Queensland Equipment Finance Ltd is using the window of opportunity to try and ‘recover debt’ from a small business that really doesn’t owe them a penny.

And yes, when we wrote (months ago) about a major lender that flatly denied that it had ever been involved with telco bundles, that was Bank of Queensland Equipment Finance Limited.

Time for ACCC to step up

Finance companies like Bank of Queensland Equipment Finance Ltd are no doubt working on the assumption that any ‘settlements’ they achieve are money in the bank.  If ACCC put them on notice that each and every past ‘settlement’ will be liable to be re-opened and repaid (with an allowance for legal costs) if ACCC is forced to take formal action, we bet the financiers would get of the backs of Australia’s small businesses in an instant.

Because they know that they allowed the wrong thing to happen.

CommBank has had the guts to admit it, re Storm Financial.  If BoQEF hasn’t got the decency to do the same thing, ACCC should help it see the error of its ways.  Otherwise ACCC’s Federal Court action will be a blessing for some victims but leave others at the mercy of powerful finance companies that want little guys to pay for the companies’ mistakes.

Five of the respondents to the Federal Court action have failed to take necessary procedural steps, and the Court has agreed to ACMA’s application for default judgments.  After hearing evidence about the defaults and the original conduct, the Court has ordered:

• that parties including Mobilegate Ltd, Winning Bid Pty Ltd, Simon Anthony Owen, Tarek Andreas Salcedo and Glenn Christopher Maughan have breached the Spam Act and / or Trade Practices Act in various ways;
• that they be restrained from certain conduct, of the kind involved in the scam, for seven years; and
• the matter be re-listed for directions in relation to any penalty hearing as the above respondents on 18 September 2009.

The case against other respondents, who have defended the case, continues.