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A demanding business the risks of consumer debt collection

Feature Articles

Cite as: July 2012 86 (07) LIJ, p.34

Using misleading language or threatening unwarranted legal action on behalf of debt collector clients can expose lawyers to both investigation by regulators and civil action by consumers.

By Gerard Brody and Tom Willcox

While the vast majority of consumer debts are collected by debt collectors, mercantile agents and debt purchasers, many lawyers and law firms are involved with the collection of consumer debts in areas such as finance, utilities and other consumer services.

Consumer protection laws relating to debt collection are directed at ensuring that consumers are not subjected to unfair, misleading and harsh practices during the collection process. The decision of ACCC v Sampson1 provides a warning that consumer protection laws apply to lawyers, not just the clients they act for, and that a lawyer breaches such laws at his or her peril. “The scale and flagrant nature of this conduct, and the fact that it was engaged in by a lawyer is of great concern to the ACCC,” Australian Competition and Consumer Commission (ACCC) Chairman Rod Sims said on 19 October 2011.

This article provides a brief summary of ACCC v Sampson and an overview of some of the main laws, professional rules and regulatory guidelines that apply to the collection of consumer debts. It highlights some of the professional and risk management issues that affect law firms, law practices and lawyers involved in debt collection.

ACCC v Sampson

In 2010, the ACCC commenced proceedings in the Federal Court against Pippa Sampson, a partner of law firm Goddard Elliot, after a complaint was made by the Central Australian Aboriginal Legal Aid Service.

In an agreed set of facts, the Court heard that Sampson acted for a mercantile agent and on behalf of a number of video stores. It was agreed that Goddard Elliot had sent numerous letters and notices to debtors of video stores since at least April 2002, including approximately 20,000 letters and notices each month in the 12 months preceding the ACCC’s action.

The Federal Court declared that Sampson had acted in breach of s52 of the Trade Practices Act 1974 (Cth) (TPA) (now s18 of the Australian Consumer Law (ACL)). The conduct found to be misleading or deceptive included sending letters marked “urgent notice” which represented that:

  • the lawyer’s video rental client was necessarily entitled to recover lawyer’s costs of a certain amount; and
  • if legal action was taken to recover the outstanding amount then this would necessarily result in additional costs associated with legal proceedings, even though the video rental client would have no entitlement to recover legal costs if they were unsuccessful, and even if successful in its legal action, costs would not necessarily be ordered in a proceeding issued for the recovery of a small debt.

Other misleading or deceptive conduct included sending letters marked “notice of impending proceedings” which stated that:

  • a judgment against the debtor could be obtained by Goddard Elliott without an order from a court, unless the amount was paid in full or a proceeding was successfully defended, even though in truth judgment could not be entered until legal proceedings had commenced, and thereafter an order obtained from a court; and
  • Goddard Elliott could itself enforce any judgment obtained by a warrant, garnishee order and/or attachment of earnings – which it could not, the true position being that the video rental client needed to be successful in court proceedings, and then an enforcement order needed to be obtained.

The Court also found that a document headed “Notice of Intention to Commence Proceedings” which was similar in format to a court document, but in fact was not a court document, was misleading or deceptive.

In addition to making declarations, the Court made orders restraining Sampson from making the impugned representations in the future, requiring corrective advertising to be published in various newspapers and professional publications, and requiring compliance training to be undertaken on the ACL. In addition, Sampson was ordered to pay $30,000 of the ACCC's costs of the proceedings.

It is conceivable that some consumers may have paid amounts to Goddard Elliot that were not due, as a consequence of the misconduct. While no order for redress was made, the Court did make an order that the reasons for judgment may be used as prima facie evidence in further proceedings. Similar enforcement action in the future may benefit from the ACCC's new powers to seek orders on behalf of a class of non-party consumers under s239 of the ACL.

National law

Lawyers will be aware of the proscriptions against misleading or deceptive conduct (s18), physical force, undue harassment and coercion (s50), and unconscionable conduct (ss20-22) which are contained in the Australian Consumer Law (ACL) (Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA)) and which are replicated in the Australian Securities and Investments Commission Act 2001 (Cth) in relation to financial services. The equivalent provision in the TPA and the Fair Trading Act 1999 (Vic) (FTA) were used with some success to curtail the behaviour of debt collectors, debt purchasers and mercantile agents – including in the landmark case of ACCC v McCaskey,2 in which, inter alia, orders were made in relation to conduct which amounted to undue harassment and coercion, and Collection House v Taylor,3 in which it was found that demanding payment of statute-barred debts may amount to unconscionable conduct.4

Section 2(1) of the ACL broadens the definition of “trade or commerce” from that contained in the TPA to include reference to “any business or professional activity”. On the face of it, this extended definition appears to reduce the uncertainty surrounding when these laws will apply to lawyers and law practices.5 The ACCC’s publication Professions and the Competition and Consumer Act indicates its view that the conduct of lawyers will generally occur within the scope of the ACL.

The ACL has also been enacted into Victorian law, by virtue of s9 of the FTA, and thus the constitutional limitations of the Commonwealth ACL are of little practical significance when considering the application of the Commonwealth ACL to individual lawyers. Nonetheless, it is worth noting that, as with the TPA, the CCA provides for the widest possible application of the ACL as a law of the Commonwealth. For example, s2(3) of the CCA extends its application beyond the conduct of corporations to conduct involving the use of postal, telegraphic or telephonic services. Therefore, it is arguable that the correspondence of an individual lawyer, such as a letter of demand, could be caught by the ACL as a law of the Commonwealth, and thus be open to enforcement by the ACCC and not just the state regulator, Consumer Affairs Victoria.6 In the case of ACCC v Sampson, proceedings were issued against a lawyer personally.

Victorian law

In addition to the ACL, lawyers should be aware of the relatively new debt collection provisions which are contained in the FTA, which have since 1 January 2011 prohibited a wide range of debt collection practices in relation to a “consumer debt”. The Australian Consumer Law and Fair Trading Act 2012 (Vic), if it comes into operation without amendment, will repeal the FTA and reintroduce these debt collection provisions without substantive amendment.7

The FTA replicates the prohibition in the ACL against “using physical force or undue harassment or coercion” and supplements it with a number of other prohibitions, which range from a prohibition on entering or threatening to enter a private residence without lawful authority to a proscription against communicating with a person in a manner that is unreasonable in its frequency, nature or content.8 One provision that is particularly relevant to the conduct of lawyers is s93M(2)(m) (to be Australian Consumer Law and Fair Trading Act 2012, s45(2)(m)), which prohibits contacting a person about a debt after the person advises in writing that no further communication should be made about that debt – unless the contact is by way of an action issued through a court or tribunal, or is the threat of an action that the person to whom the debt is owed is entitled to issue and which the person intends to take. A threat of impending legal proceedings would only be protected under this provision if the creditor actually intends to issue proceedings.

Professional responsibility of lawyers

In addition to consumer protection laws, lawyers need to be aware of the obligations arising from the Legal Profession Act 2004 (Vic) and the Professional Conduct and Practice Rules 2005 (the Rules).

The Rules include a general prohibition against statements calculated to mislead or intimidate (r28.2). Rule 29 further provides that a lawyer must not allow their “business name or stationery to be used by a debt collection, or mercantile agent in a manner that is likely to mislead the public”. Consumer complaints to the Consumer Action Law Centre demonstrate evidence of letters being printed on a law firm’s letterhead that have been prepared by a mercantile agent, sometimes with a lack of any legal supervision. Rule 29.2.1 requires lawyers acting for a debt collector or mercantile agent to ensure that “their relationship to the agent is fully disclosed to the client”. Correspondence that is printed on a legal practitioner’s or law firm’s letterhead containing the telephone number of a debt collection agency may be misleading and in contravention of this rule.

The Legal Services Commissioner has published a fact sheet that provides guidance to lawyers about their professional responsibilities with respect to debt collection.9 Unlawful debt collection practices might also be indicative of unsatisfactory professional conduct or professional misconduct, or may result in a law practice compliance audit being directed by the Legal Services Commissioner.10

LIV Letters of Demand Guidelines

In 2007, the Law Institute of Victoria’s Ethics Committee and the Council of the Law Institute released an updated Letters of Demand Guidelines.11 The Guidelines warn lawyers to use simple language for debtors who are unlikely to have any legal background or limited English, and recommend referring to the availability of interpreting services in the case of the latter. The Guidelines also warn against use of language that implies judgment is inevitable, accompanying a letter of demand with unissued initiating process, and threatening to institute legal proceedings if legal costs are not paid within a certain time.

Regulatory guidelines

The ACCC, the Australian Securities and Investments Commission (ASIC) and Consumer Affairs Victoria have all placed significant emphasis on ensuring that consumers are not subject to inappropriate debt collection.12 The ASIC/ACCC Debt Collection Guidelines, first published in 2005, are currently under review following the introduction of the ACL.

The Guidelines give guidance on what creditors and collectors should and should not do if they wish to minimise the risk of breaching consumer laws relating to debt collection and give those involved in debt collection, including lawyers and law firms, a useful insight into some of the issues that might affect their practice. Some industry codes, such as the Code of Banking Practice, specify that signatories will comply with the Guidelines and that such an obligation forms part of the contract between a consumer and signatory. External dispute resolution schemes, such as the Financial Ombudsman Service, may also look to regulatory guidelines when considering what constitutes good industry practice.

In 2009, the Legal Practitioners’ Liability Committee encouraged practitioners to read the Guidelines to limit the risk of breaching consumer protection laws.13

Penalties and redress

Failure to comply with any of the unfair practices provisions of the ACL may attract a civil and/or criminal penalty of up to a maximum of $1.1 million for corporations and $220,000 for individuals. As in the Sampson case, the ACCC may also take action against a business and seek orders from the court, or it may use its own enforcement powers and issue infringement and/or public warning notices.

Consumers may also choose to take private action seeking redress. Significantly, the FTA expressly provides for damages to be awarded where a consumer has experienced distress or humiliation due to a course of conduct in contravention of the prohibited debt collection provisions (s93N; to be Australian Consumer Law and Fair Trading Act 2012, s46). The Wrongs Act 1958 (Vic) is excluded from application to such a claim, meaning that a consumer will not need to prove a “significant injury” or undergo an assessment of impairment.

As the then Minister for Consumer Affairs commented in his second reading speech:

“Allowing access to emotional distress damages for poor debt collection practices is not novel. Such damages have been commonplace in the United States for many years. Similarly, the United Kingdom has recognised damages for anxiety including distress arising from harassment by creditors and debt collectors . . . Such damages help to ensure that the costs of consumer detriment, so far as money can do it, are borne by those people who, through the use of unfair debt collection practices, cause the detriment.”14

Conclusion

Lawyers and law firms that collect consumer debts or work closely with debt collectors and mercantile agents need to be aware that the laws and regulations that apply to the collection of consumer debts may also apply to lawyers involved in the collection process. Poor debt collection conduct – such as inappropriate use of form letters, threats for payment of costs where this is not appropriate, and threatening to list debts on credit reports where no right to list exists – not only reflects poorly on the legal profession, but also leaves lawyers and law practices open to the risk of enforcement action by a regulator or an action for redress by a consumer.

GERARD BRODY is the Director, Policy & Campaigns and TOM WILLCOX is the Director, Legal Practice at the Consumer Action Law Centre.

  1. [2011] FCA 1165 (17 October 2011).
  2. [2000] FCA 1037.
  3. [2004] VSC 49.
  4. Jerome Martin, “When the collection clock ticks”, Law Institute Journal, April 2010, pp34-36.
  5. Simon Cleary, “Consumer law and the legal profession”, Australian Lawyers Alliance, conference presentation, 22 October 2011.
  6. Cleary, note 5 above.
  7. The Australian Consumer Law and Fair Trading Act 2012 (Vic) received Royal Assent on 8 May 2012 and will come into operation on 1 December 2012, if proclamation does not take place before this date. The relevant debt collection provisions will be renumbered under the new legislation.
  8. Section 93M(a)–(p), Fair Trading Act 1999 (Vic).
  9. Legal Services Commissioner, Fact Sheet: Issues in complaints about debt collection, June 2010, available at: http://tinyurl.com/7r6cflu.
  10. Section 670, Legal Profession Act 2004 (Cth).
  11. The Guidelines are available online at: http://tinyurl.com/7r5ynbc.
  12. For example, ACCC and ASIC have undertaken significant community consultation – see: www.accc.gov.au/content/index.phtml/itemId/872259.
  13. Legal Practitioners’ Liability Committee, In Check, issue 43, June 2009, available at: http://tinyurl.com/7pq43xl.
  14. Hon Tony Robinson MLA, “Second reading speech: Consumer Affairs Legislation Amendment (Reform) Bill”, Victorian Parliament Assembly, Hansard, 28 July 2010.

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