FSR GPS: When Is An Incorrect Misstatement Not Misleading Or Deceptive?

• Published date: 12 July 2023
• Law Firm: Herbert Smith Freehills
• Author: Mr Michael Vrisakis, Fiona Smedley, Tamanna Islam, David Kim, Shan-Verne Liew and Anna Sutherland

In this edition of the FSR GPS, we highlight some key principles that can help AFS licensees identify when an immaterial misstatement may:

• not constitute misleading or deceptive conduct; and
• therefore, not automatically be reportable as a significant breach to ASIC under section 912DAA of the Corporations Act 2001 (Cth) (Corporations Act).

As with our previous primer on the need to assess fault elements, the aim of this article is to highlight scenarios where licensees may be over-reporting incidents that may not give rise to an actual contravention of financial services law.

Regulatory cost of over-reporting misstatements

Immaterial misstatements have become an immense regulatory burden for AFS licensees, as the ASIC breach reporting regime now treats misleading or deceptive conduct contraventions as automatically reportable. This has led many licensees to either:

• individually breach report immaterial errors or misstatements to ASIC, at significant administrative cost to the licensee in the context of no corresponding consumer harm; or
• assess that an immaterial error or misstatement is not misleading or deceptive on 'common sense' or 'commercial' grounds, or by building a legally tenuous argument that a misstatement is 'confusing' and therefore not sufficient to constitute misleading or deceptive conduct.

Below, we highlight when the application of the established principles for misleading or deceptive conduct can yield a legally sound conclusion that an immaterial misstatement is not misleading or deceptive. These points are particularly salient following recent decisions in which the Federal Court found that particular conduct did not result in misleading or deceptive conduct.

Does a materiality threshold exist for misleading or deceptive conduct?

Potentially. As the courts have repeatedly emphasised, the applicable legal principles for misleading or deceptive conduct are well known. The test is whether the conduct has a sufficient tendency (i.e. a real and not remote probability) to lead the relevant person or persons into error.

This has been described as 'a quintessential question of fact'.¹

Although there is no specific legal principle that an immaterial misstatement is not misleading, we consider that a rigorous application of the established legal doctrine can result in a factual conclusion that an immaterial misstatement is not misleading, where the circumstances of the communication, when considered as a whole, will be such that there is...