4 January, 2016
What you need to know
- There has recently been significant focus on remediation programs, particularly in light of a number of prominent well publicised remediation programs in the financial advice sector. Earlier this year ASIC foreshadowed the publication of guidance on its expectations in relation to remediation programs.
- On 16 December 2015, ASIC released Consultation Paper 247 Client review and remediation programs and update to record-keeping obligations, which sets out proposed guidance on the use, design and implementation of client review and remediation programs. The proposed guidance focuses on Australian financial services licensees who provide personal advice to retail clients, but has implications for all licensees.
- The consultation paper proposes a number of principles or considerations applicable to all remediation programs – whether for thousands of clients or only a small number. The key features are summarised in a table below.
What you need to do
- If you wish to make submissions in response to the consultation paper, these are due by 26 February 2016.
- If you are designing a remediation program between now and the publication of ASIC's Regulatory Guide (expected to be in May 2016), you should consider the principles outlined in the consultation paper.
ASIC consultation paper on client review and remediation programs
When a licensee identifies systemic issues in relation to the provision of advice which impacts a number of its clients, ASIC expects the licensee to conduct a review and remediation program (remediation program) rather than dealing only with clients who complain or commence legal proceedings. Typically, programs involve a review of the advice given to clients potentially affected by the issue, and remediation being offered to clients who have suffered loss.
Precisely what licensees are required to do in order to operate an effective program is, however, uncertain. The consultation paper sets out ASIC's proposed guidance. Responses are due by 26 February 2016, with the final guidance (in the form of a new Regulatory Guide) expected in May 2016.
The consultation paper sets out principles for developing and implementing remediation programs, including that licensees should adopt a consumer-focused approach and programs should be objective and equitable and implemented efficiently, honestly and fairly. It also offers guidance on how, based on those principles, licensees should decide whether they need a remediation program and on the specific features it should include.
When is a remediation program required?
The proposed guidance applies where a licensee (described as an "Advice Licensee" in the paper) discovers a systemic issue relating to personal advice given to retail clients. "Systemic issues" are those which may have implications beyond the immediate parties, or that may have implications for more than one client. Issues affecting only a very small number of clients could therefore require a formal remediation program – although ASIC accepts that, for example, if all clients have already complained to the licensee then a remediation program may be unnecessary.
Aspects of the proposed guidance may also affect ASIC's approach to remediation programs in connection with areas other than personal advice (eg following administrative errors and misconduct that does not relate to personal advice) so all licensees need to carefully consider how the consultation paper affects their business.
ASIC's views on key features of remediation programs
What is ASIC's role? |
Systemic issues will normally also be significant breaches which must be reported to ASIC. Where ASIC is aware of a systemic issue from any source, ASIC may review the design and implementation of the remediation program. |
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What is the scope of the review? |
Whilst the review will focus on the identified systemic issue, the licensee must analyse the conduct of the advisers involved and ensure that the review examines all the issues arising from their conduct. For example, the review cannot be limited to non-compliant insurance advice if, on analysis, the same advisers were also providing inappropriate superannuation advice. It may be necessary to test a random selection of advice to confirm that the scope (including the period of time considered in the review) is appropriate. The scope may need to be expanded if further issues are identified as the program progresses. |
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Which client files should be reviewed? |
Licensees must identify current and past clients potentially affected by the systemic issue (including clients advised by other entities within a multi-licensee group). In considering scope, licensees should also consider all client records available (even if they would now be permitted to destroy them due to the passage of time). All clients within the scope of the program must be proactively approached, regardless of whether they have made a complaint. In some cases (for example where client records are missing so their position is unclear) it may also be necessary to write to other clients inviting them to participate if the clients believe that they fall within the scope of the program. |
Who can conduct the review? |
Provided conflicts of interest are avoided, programs can utilise internal resources. A licensee may also outsource all or parts of the program to external consultants, but remains ultimately responsible for the conduct of the review. The reviewers should be appropriately qualified and meet the training and competence requirements to provide personal advice in the relevant product area. |
What supervision is required? |
Senior management involvement is critical. There must also be independent oversight of the program – frequently from an independent expert, but in some cases an independent person within the organisation (such as within the internal audit function) may be acceptable. Peer review and other methods to ensure a consistent approach may also be required. |
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How should the reviewers decide whether to offer remediation? |
The approach taken in the review should be the same as that taken in the relevant external dispute resolution scheme – the Financial Ombudsman Service (FOS) or Credit and Investments Ombudsman (CIO) – so the rules of evidence are not to be applied and the test is what is fair in all the circumstances, having regard to industry practice as well as legal requirements. That is so regardless of whether the potential remediation exceeds the monetary limits on what the Ombudsmen can award as compensation. |
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How should licensees communicate with clients about the review? |
Communications with clients should be clear and easy to understand, having regard to behavioural science insights into how clients respond to such communications. As part of that, the review process itself needs to be designed in a way which enables it to be clearly explained to clients. It may also be necessary to "test" client communications with experts. Requests to clients for additional information should not be onerous. The client's failure to respond within set timeframes should not be a bar to remediation. |
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How long should the review process take? |
Licensees should generally make a decision about whether to remediate a client within 90 days of notifying the client that they are within the scope of the program. This will be a challenging timeframe in cases involving the review of a large number of client files, and has implications for the resources which will need to be devoted to reviews. |
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What rights of review should be made available? |
Licensees should facilitate clients seeking external review by the FOS or CIO, including considering waiving monetary limits and time limits for the schemes, and providing financial assistance or information to clients about opportunities to seek legal advice. |
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Publicity |
Licensees should consider reporting publicly on the program and its progress – in significant programs this is likely to be required. |
Record keeping obligations
ASIC also proposes to clarify the law so that licensees providing personal advice must ensure that they can access records in relation to that advice during the period in which they must be retained (typically 7 years). This is to avoid the situation where former authorised representatives hold the records and they cannot practically be accessed.
Key questions
In practice, ASIC's Regulatory Guide will set a benchmark for licensees confronted by systemic issues, irrespective of whether the guidance strictly follows from the obligation on licensees under s 912A(1)(a) of the Corporations Act 2001 (Cth) to conduct their businesses efficiently, honestly and fairly or other legal obligations. All licensees should therefore consider the implications of the consultation paper for their business.
Some key issues to consider may include:
Do the principles outlined in the consultation paper provide sufficient guidance on how to tailor programs for the wide range of systemic issues which can arise? Would it be helpful, in the interests of certainty and predictability, for there to be clearer statements or separate guidance about what is acceptable in particular types of case (for example, smaller issues affecting only a limited number of clients and very large remediation programs)? ASIC has specifically asked whether there are areas on which licensees would like additional guidance.
How does the proposed guidance interact with the ability of a licensee to make claims under its professional indemnity insurance (a question ASIC itself raises in the consultation paper)?
How would the principles for designing a remediation program operate in practice, and are there ways to clarify those requirements to make program design more efficient?
Is the 90 day timeframe from notifying a client to taking a decision on remediation an appropriate benchmark guideline? ASIC has specifically sought comment on that issue.
Whether the guidance strikes the right balance between fairness and certainty where clients do not respond to communications within the timeframe set or even before the remediation program concludes.
What role should the courts have on issues which are genuinely doubtful as a matter of law?
How the design of a remediation program may address risks arising from potential litigation (including class action risk)?
ASIC's guidance has the potential to be helpful for the industry given the uncertainty about precisely what constitutes an adequate remediation program – an issue which until now has essentially been determined on a case by case basis in discussion with ASIC, including through the negotiation of enforceable undertakings or licence conditions. Of course, the guidance also needs to be carefully considered given the potential cost, time and complexity involved in remediation programs, and the risks to licensees if they do not produce durable resolutions to systemic issues. The consultation provides an important opportunity to address those issues. 
For further information, please contact:
Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com
