New ASIC Remediation Guidelines – a practical adviser framework
How to design and run effective remediation processes through the lens of regulatory compliance and consumer protection.
Remediation is big news
In March 2023, ASIC published what it said would be its last update on the large-scale remediation of financial advice clients by major financial institutions[1].
These remediation programs, which largely relate to issues of ‘fees for no service’, and non-compliant advice, were first undertaken several years ago, on behalf of advice licensees who were then owned by the big four banks plus Macquarie and AMP. These licensees included some of the biggest and best-known groups, such as Millennium 3, RI Advice, Securitor, Count Financial, and Godfrey Pembroke.
The institutions have paid or offered a total of $4.7 billion in compensation, as of 31 December 2022, to customers who suffered advice-related loss or detriment[2].
This includes $1.1 billion paid or offered by the institutions between 1 July and 31 December 2022.
But while most of these large institutions have now divested themselves of their advice arms, and settled with clients, remediation still looms large as a part of the advice landscape. No matter how robust a licensee’s advice and compliance systems are, it is almost inevitable that at some stage, almost every advice firm will need to remediate at least one client. Having a framework in place for equitable and timely is thus a must for all licensees, not just from a compliance perspective, but from a reputational perspective also.
Putting the topic of remediation even more front and centre at the moment is the release – in late 2022 – of new ASIC guidelines on remediation, RG 277 Consumer Remediation[3].
This article will provide advisers with a comprehensive overview of advice remediation, exploring the background and current context, examining the updated ASIC Guidelines, and then providing a practical field guide on how to design and run effective remediation processes.
What is remediation?
For consumers to interact with financial services providers with trust and confidence, licensees that engage in misconduct or other failures when providing financial services or credit activities, and cause consumer loss as a result, must initiate remediation.
In simple terms, remediation is compensating clients who have suffered detriment because of that misconduct or failure.
There are many challenges when remediating clients, including:
- the volume, or lack of, records
- the significant dollar value of client portfolios under advice
- the potentially significant quantum of detriment experienced by clients
- potentially large time gaps between when advice was provided and when remediation occurs.
The two main types of remediation are monetary compensation and rectification.
Monetary compensation
Providing monetary compensation to clients is the most obvious remedy, and can also be the easiest and quickest to implement. It can also be the most visible from a media perspective (which can be good and bad).
One of the challenges with monetary compensation is calculating the appropriate amount. It is not always easy to quantify the financial loss suffered by the client as a result of poor advice, because the range of issues that can require remedy is so large, from inadequate disclosure of fees to inappropriate risk profiling and associated investment losses. Whether interest should be paid is also a key question.
Rectification
Rectification is in essence, correcting an error and can take a number of different forms. It could for example involve providing the client with updated advice. If a client initially received inappropriate advice but has become comfortable relying on that advice over time, the client may choose to retain the original advice received, and rectification could simply involve a confirmation they want to retain the (originally) inappropriate advice.
Many cases will involve both types of remediation.
Deciding if/when a client needs to be remediated
The decision to remediate a client, and the initiation of processes to do so, can be an outcome of several processes:
- the licensee’s own compliance and monitoring processes identify some sort of breach or misconduct, resulting in the licensee proactively commencing remediation of affected clients
- a client complaint is managed within the licensee’s internal dispute resolution (IDR) process, resulting in an admission of fault and remediation, or
- if a client complaint is not satisfactorily resolved through the firm’s IDR process, the client may take that complaint to AFCA, who may determine that remediation is required.
ASIC guidance on remediation
Since 2016, adviser obligations around client remediation were codified in ASIC Regulatory Guide RG 256.
However, in 2020, after observing licensees using remediation practices “not aligned with their stated values about the treatment of consumers”, ASIC released Consultation Paper 350 ahead of a comprehensive review of their guidelines.
At the time of releasing CP 350, ASIC noted that:
“Some licensees view remediations as a distraction from their core business, while others take a legalistic approach that neglects consumer interests or fails to prioritise or resource remediations”.[4]
The headline change proposed in CP 350 was an amendment to the relevant period for remediation from the current seven years to “the date a licensee reasonably suspects the failure first caused loss to a consumer”, effectively requiring licensees to go back further than seven years when reviewing remediation issues.
After reviewing responses to CP 350 and working with stakeholders across the sector, an updated guidance, RG 277, was released in September 2022.
At the time of releasing the 94-page Guide, along with a supporting document ‘Making it right: How to run a consumer-centred remediation’, ASIC said the guidance put the onus on the industry to pursue equitable and timely remediations[5].
“To date, ASIC has needed to oversee large-scale remediations to ensure affected consumers were treated fairly and received the compensation they were entitled to,” Chester said[6].
RG 277 in detail
RG 277 provides comprehensive guidance on client remediation, covering topics such as:
- when remediation must be initiated
- scoping the misconduct or failure
- determining an appropriate outcome
- communicating with customers
- payments and settlement deeds (including how to prioritise, and how to deal with small ‘residual’ payment amounts
- resourcing and governance of remediation processes, and
- engaging with external organisations such as AFCA, APRA, and the ATO.
Importantly, Under RG 277, remediation procedures must be initiated as soon as a licensee becomes aware of an instance of misconduct or failure, rather than await a customer complaint. And that misconduct or failure can include the ‘decisions, omissions, or behaviours of a licensee, as well as those of a current or former authorised representative, any third-party service providers and consultants engaged by the licensee, and any related entities.
Licensee processes for remediation must be ‘efficient, honest and fair’, and consider the following nine principles:
The seven-year record-keeping rule and complying with RG 277
As first flagged in CP 350, the seven-year rule applying under the now superseded RG 256 was scrapped, meaning any misconduct occurring outside this timeframe are now in scope, and licensees are therefore obliged to look back much further than seven years if circumstances demand it. (Note: RG 256 still applies for remediation already underway at the time RG 277 was released).
This of course has a practical implication in that record-keeping obligations are still based on seven years, and it is possible that licensees may have – in good faith – destroyed records relating to the case at hand.
RG 277 addresses this issue with a criticism thinly disguised as an observation:
“If licenses have adequate systems and processes in place to identify misconduct promptly, then the remediation review period should rarely exceed any record-retention requirements”.
In the event the remediation period IS outside the seven years, licensees need to consider whether it is possible and reasonable to apply assumptions that are beneficial to consumers to fill in the necessary gaps.
These beneficial refund assumptions should “err on the side of overcompensation rather than under-compensation”.
The provided example of such an assumption relates to the refund of historical life insurance premiums. In the absence of the destroyed client records, and rather than waiting for the life insurer to provide several years of detailed premium data, the licensee simply rationalised that the most recent premium would likely have been the highest (because of age-related increases) and used that as the basis for the other years (filling in the gaps).
(ASIC also provides an example of when such an assumption was not beneficial to clients.)
A practical framework for remediation
Like all effective processes, the approach to remediation should be systemised to ensure efficiency and consistency. This in turn can ensure remediation processes are compliant and customer-centric.
A practical framework for building such a systematic approach – which is aligned with the nine principles articulated in RG 277 – might include the following:
- Understand what happened (and prevent it from happening again)
Work out the root cause of the problem, underlying drivers, and how to stop it from happening again. Look at which products, services, systems, processes, and people are involved and affected – identify any common, underlying threads. If there are systemic issues, make appropriate changes in your business to ensure they don’t recur. - Understand which clients are affected
Once you have identified the issue, assess which clients may have been affected, and the extent of their potential loss. Cast the net widely. - Customer journey mapping
To ensure your remediation is client-centred, use data and insights to truly understand your clients, the journey they take with your organisation, and how this issue may have impacted them. Segmenting clients may be necessary, and can help with triaging. Remediation doesn’t take place in a vacuum – their lives may have changed since you last had contact with them so bear this in mind. - Decide remediation outcomes
Determine whether consumers have suffered loss and what remedies (monetary and/or non-monetary) are appropriate. Consider your knowledge gaps and appropriate assumptions to fill those gaps. Calculation methodologies can be found in RG 277. A good rule of thumb is whether you would be happy if the remedies were made public and became known to your other clients. - Communications planning and execution
An overarching communication plan should set out the recipients, timings and frequency of communication, the messages, communication channels, and metrics used to judge the effectiveness of that communication. Drafting communication may require expert help, to write the communications and ensure it is both clear, client-focused, and legally compliant. Clear calls to action and your own contact details are also essential. - Testing and learning
Testing the effectiveness of your remediation. This may mean trialling the approach with a subset of the larger client group. What you learn can be applied to finetuning and improving your remediation approach. - Monitoring and documenting outcomes
Monitor progress and outcomes. Decide key metrics to use (for example, response rates to communication, how many clients agree with the proposed remediation, and the appropriateness of assumptions used). Track and record the metrics. Document the outcomes and key learnings.
Specific issues to consider – contacting clients and dealing with unclaimed monies
Two specific issues to consider, because of their importance, and frequency of occurrence, are contacting clients and dealing with unclaimed remediation payments.
Contacting clients
To make reasonable endeavours to contact consumers, licensees should use more than one channel of communication to contact consumers, focusing first on the key preferred channel for the customer. A mix of email, telephone calls, app notifications or SMS may be suitable. While licensees are not required to receive a response from consumers after making reasonable attempts to contact them, their remediation plan must demonstrate that they have made those attempts.
Unclaimed monies
Licensees are not able to keep unclaimed remediation payments, even after making reasonable albeit unsuccessful attempts to contact the client. Instead, licensees must either lodge the money with an unclaimed money regime or donate the money to a charity or not-for-profit that is registered with the Australian Charities and Not-for-profit Commission.
Licensees must assess whether relevant state, territory and/or Commonwealth unclaimed money regimes apply to their remediation payments as well as whether minimum thresholds apply.
Amounts of $5 or less to former clients, where no payment information exists on file, can automatically be treated as a residual payment, and automatically donated to a charity.
The remediation ripple effect
As mentioned at the start of this article, remediation is a vitally important issue, impacting the way consumers feel about the financial advice profession and the reputation of individual advisers and licensees.
The way remediation is dealt has other associated impacts, such as the involvement of AFCA, the way licensees funds the Compensation Scheme of Last Resort, and even Professional Indemnity insurance premiums. Done properly, it is a resource-intensive process, and as such needs to be factored into decisions across the value chain, including choice of licensee structure, adoption of appropriate technology, process design and staffing.
Conclusion
No matter how robust a licensee’s advice and compliance systems are, it is almost inevitable that at some stage, almost every advice firm will need to remediate at least one client.
ASIC has recently updated its strict guidance around client remediation. The cost of not remediating clients in a fair and timely manner can be sky high, ranging from criminal penalties to the licensee, brand damage for the adviser and their practice, all the way to a loss of consumer trust in the entire financial advice profession.
A robust and sustainable approach to remediation is one that is aligned with the nine underlying principles articulated in RG 277 and is systemised to ensure efficiency and consistency. This in turn will help ensure remediation processes are both compliant and client-centric.
