Product safety: the need for a systematic approach to compliance
09 September 2005Following the Productivity Commission’s Review of the Australian Consumer Product Safety System (click here for more details), there is a greater need than ever to ensure that organisations have a systematic approach to compliance.
Although still only a draft at this stage, the Productivity Commission Review has suggested that foreseeable misuse of a product should be included as one of the criteria to be considered when deciding whether to ban or compulsorily recall a product. If the misuse is unforeseeable and unreasonable, it should not be a basis upon which to ban a product.
How can compliance programs be relevant to ensuring product safety?
In order to protect themselves against foreseeable misuse of a product, the Productivity Commission has suggested that businesses could take a number of measures including:
- informing themselves about the risks of harm associated with their products
- determining and taking precautions that are reasonable and practical
- undertaking research and testing of the product
- adequately warning consumers of residual risks, and
- if warranted, recalling unsafe products from the market.
Implementation of these measures requires a systematic approach in order to be successful. A compliance program which considers the risks, legal issues and how to manage them is an organisational imperative to ensure organisations meet their existing legal obligations, not just if the Productivity Commission’s recommendations are adopted. The measures identified by the Productivity Commission should already be part of an effective compliance system, and will go a long way towards reducing the risk of:
- negligence claims
- allegations that goods are ‘defective’ under the Trade Practices Act (TPA)
- claims of misleading and deceptive conduct or false representations
- breaches of statutory warranties, and
- obligations under other product specific laws.
Accordingly, it is vital for companies to be able to put measures in place to ensure compliance in this area. The most effective means for helping to ensure compliance is for a company to institute a program that is communicated and reinforced through the whole company.
What are the benefits of implementing a compliance program?
Compliance programs have become an indicator of good corporate governance. There are numerous benefits for a company implementing a compliance program, including:
- Preventing and, where necessary, identifying product safety breaches, and assisting with remedial action in the event of any breach. This in turn helps to prevent or reduce the negative market and customer reaction following publicity associated with any breach or alleged breach of consumer product safety laws.
- Control over the form of the compliance program, allowing the company to best integrate trade practices compliance into day-to-day operating systems.
- A compliance program that is put in place independently will be received more favourably by a company compared with one which is imposed by a regulator. Hence, proactively initiated compliance programs are more effectively promoting a culture of compliance within the organisation.
What are the risks of not implementing a compliance program?
If companies fail to implement a compliance system, or do not adequately invest in such an initiative, then in addition to the increased likelihood of breaches of the law, companies run the risk of:
- increased adverse consequences of such breaches (for example, more onerous fines and a higher likelihood of a regulator such as the ACCC requiring a section 87B undertaking—more details below)
- damage to corporate reputation, both in terms of consumer’s impression of the brand and in terms of trade relationships, and
- not complying with broader directors’ duties.
By way of example, in the event of a breach or potential breach of the TPA, it is not uncommon for the ACCC to accept enforceable undertakings which require a company to implement a trade practices compliance program so as to prevent future breaches. The ACCC has the power to accept these enforceable undertakings under section 87B of the TPA (the undertakings are known as section 87B undertakings).
If the section 87B undertaking is breached, the Federal Court may make orders enforcing the undertaking or compensatory orders. The terms of these undertakings are negotiated with the ACCC, and are a matter of public record. They are published on the ACCC website.
Section 87B undertakings are being used increasingly by the ACCC. This year, to date, 53 section 87B undertakings have been listed on the public register. This compares with 53 for the whole of 2004. These undertakings address a whole range of alleged TPA breaches, including breaches in relation to product liability; misleading statements made in the course of business dealings; future representations about products and resale price maintenance.
Compliance programs implemented as a result of a section 87B undertaking are often more costly than compliance programs independently and voluntarily introduced.
What is involved in implementing a compliance program?
The process for implementing a compliance program typically includes:
- communication of the business’s commitment to compliance. The message needs to be shared with the whole organisation and must be a sincere commitment, not ‘lip service’
- undertake a risk analysis of the laws that apply to the business and identify what needs to be done to ensure compliance occurs
- understand the rationale behind these laws so the business can anticipate how the laws might apply to new products or situations
- provide the necessary information to the relevant people in the business—what do they need to do and why? How should they go about it? While this will require some form of training programs, other methods of communication will also need to be considered
- having identified the required behaviour, steps must be taken to measure, monitor and report on actual behaviour to ensure that compliance is actually taking place
- consider whether there are any factors in the existing corporate culture which might hinder or inhibit compliance, and
- seek to continually improve the system by constantly reinforcing the commitment, identifying the lessons learned and implementing those lessons.
Compliance is only possible if the business knows about the laws with which it has to comply and the principles behind those laws. It is also important to reinforce that compliance is everyone's responsibility, not just something that needs to be looked at by one or two people within an organisation.
Freehills has considerable expertise and experience in assisting clients in relation to compliance programs and can assist you in working through the processes to design and implement a compliance program for your business.
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For more information please contact
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