On 17 November 2021, ASIC released draft updated guidance on consumer remediation for all AFS licensees, Australian credit licensees and retirement savings account providers. The draft guidance is attached to Consultation Paper 350 Consumer remediation: Further consultation (CP 350).
This article considers the key features of the draft guidance with a particular focus on significant points of departure from ASIC Regulatory Guide 256: Client review and remediation by advice licensees (RG 256), as well as some key implications and gaps – particularly for the superannuation and insurance industries.
ASIC remediation guidance to date
Currently, ASIC’s views on designing and implementing customer remediation programs are set out RG 256. RG 256 is narrow in focus, being aimed at AFS licensees who provide personal advice to retail clients. Despite this, ASIC has encouraged licensees to apply this guidance to other remediation contexts. However, as we have noted previously, there are situations in which RG 256 principles do not apply or are not appropriate.
One of ASIC’s key objectives in updating the guidance in RG 256 is to ensure that “all licensees are empowered to take a consistent, efficient, honest and fair approach to remediating consumers”. This is indicative of ASIC’s strong focus on the obligation to provide financial services efficiently, honestly and fairly, and its use of this wide-ranging obligation to derive remediation (and other) outcomes.
The release of CP 350 follows ASIC’s earlier consultation through Consultation Paper 335 Consumer remediation: Update to RG 256 (CP 335). ASIC received 7 confidential and 31 non-confidential responses to CP 335, including submissions from the Insurance Council of Australia, AFCA, the Consumer Action Legal Centre, the Financial Services Council, and three of the “big 4 banks” (Westpac, ANZ and NAB). ASIC also held 20 informal workshops with AFS licensees, credit licensees, professional service industry associations, the ATO and APRA. The draft guidance is said to have been directly informed by the issues raised by stakeholders during first round consultation process.
Changing the game plan: Key features and departures from RG 256
A consolidated list of key remediation principles
The draft guidance sets out nine remediation principles which ASIC says licensees should take into account when conducting a remediation:
- Return affected customers to the position they would have otherwise been in.
- Understand the nature, extent and impact of the misconduct or failure.
- Give consumers the benefit of any doubt when making assumptions, and minimise the risk of under-compensation.
- Ensure key decisions are documented and justified.
- Apply reasonable endeavours when making remediation payments.
- Be timely without sacrificing quality consumer outcomes.
- Make it easy for consumers.
- Do not profit from the misconduct or other failure.
- Ensure the remediation has adequate resourcing, governance and accountability.
Most of these principles already exist within various parts of RG 256. For example, RG 256.19 currently states that “[t]he aim of review and remediation is generally to place affected clients in the position they would have been in if the misconduct or other compliance failure had not occurred”. RG 256.27 states that “[t]he process of review and remediation should be comprehensive, timely, fair, and transparent”.
However, some concepts, such as the application of “reasonable endeavours” when making remediation payments, are new. This principle is discussed further below.
Approach to initiating remediation
The revised guidance from ASIC is consistent with the fundamental legal premise of remediation, which is to rectify loss arising from a breach of legal duty/obligation. To carry on the theme of the efficiently, honestly and fairly obligation however, it is like that where there is no clear source of legal obligation to remediate, presumably in relation to financial services, the source could be the efficiently, honestly and fairly licence condition.
The review period
This change is intended to address what ASIC describes as the “unfair” practice of some licensees to limit the scope of remediation to seven years even if they hold relevant records. However, ASIC accepts that records may be destroyed in good faith as a result of record-keeping obligations or privacy requirements. In these circumstances, if it is not appropriate to apply assumptions to fill gaps, the review period may be limited to no longer than seven years.
Calculating foregone returns or interest
In our experience with remediation programs across the financial services industry, particularly with respect to superannuation and insurance, it is often the case that remediation can be implemented in a more timely and cost effective manner when assumptions are made around rates of return – and so, this is often a preference and ASIC’s guidance on this issue is welcome. However, where this becomes particularly complex is in the superannuation context, where remediation amounts paid above the actual loss incurred by a member are likely to be treated as superannuation contributions. Accordingly, the appropriateness of using of assumptions (particularly beneficial assumptions) needs to be considered in all the relevant circumstances.
Making remediation payments
The payment of residual amounts to a charity or not-for-profit organisation has long been a last resort practice for the industry, designed to ensure that the licensee does not obtain any windfall benefit from misconduct in circumstances where remediation payments cannot be made to customers. While this is a useful avenue for licensees, it is important to note that such a payment will not extinguish legal liability à la the customer.
Engaging with external organisations and complying with licensing obligations and other laws
The updated draft guidance acknowledges that licensees may need to engage with AFCA, the ATO, APRA and/or their PI insurer in relation to their remediation. For example:Engaging with external organisations and complying with licensing obligations and other laws
- if a consumer complains about a matter that is subject to an existing remediation or the remediation itself, the licensee’s IDR requirements will apply and if a consumer is not satisfied with the licensee’s IDR response, they will have the further right to complain to AFCA;
- licensees may need to engage with the ATO in relation to the taxation impacts on consumers when remediation payments are made;
- all APRA-regulated institutions must comply with their breach notification requirements in relation to remediation; and
- licensees must have arrangements for compensating consumers for loss suffered as a result of a breach by the licensee or its representatives of their obligations under Chapter 7 of the Corporations Act.
Finally, licensees must be conscious of conducting remediation in a manner that is consistent with their general licensing and other obligations, including their obligations to provide services efficiently, honestly and fairly, to have adequate resources available to provide the services authorised by their license (which will include having adequate resources to conduct remediation), and in relation to record-keeping.
Superannuation trustees and fund managers in particular are subject to general law and statutory duties which they must consider and balance when applying ASIC’s guidance on remediation, especially when dealing with trust or scheme property. For example, the draft guidance recognises that trustees and fund managers may have obligations to pursue remediation payments from third-party licensees, to “get in” trust or scheme property and ensure a member’s account is made whole.
Some further (unaddressed) issues
While the draft is helpful in many ways, there are still issues that vex the industry in many cases or at least are the subject of confusion in other cases.
One such issue is the proper destination of superannuation remediation payments.
The ATO has provided useful guidance on the taxation treatment of remediation payments in superannuation, which is directly linked to who has the right of compensation in a particular scenario. However, ASIC’s guidance in CP 335 does not address the specific issues facing superannuation trustees in undertaking or facilitating remediation of superannuation fund members (either by the trustee itself or a third party), and where these remediation payments should be made.
We have been at the forefront of advising the industry that generally, remediation payments should be paid to the trustee of the relevant fund for the benefit for fund members on the basis that, typically, the trustee is the entity that has suffered the direct loss (as legal title holder). An ancillary reason is that the payment to the superannuation trustee also deals with any issues of preservation of benefits and impermissible early access to superannuation benefits by members.
There are some cases however, as an exception, where remediation of unrestricted, non-preserved amounts can be paid to the relevant member directly (outside of the superannuation fund).
In our experience, a number of areas in the insurance space should also be clarified. These include:
- in relation to life insurance and general insurance, whether there are any circumstances in which a product issuer should be legally required to remediate for the actions of an unrelated distributor. This raises issues around the relevant financial service which is the subject of the remediation, and whether that financial service was conducted by, for or on behalf of the insurer. If the conduct forms part of the issuing of insurance, then breaches involving this activity would likely be part of a remediation ambit. However, conduct by another entity, such as in the provision of general advice in the distribution of insurance, is prima facie a separate activity, and whether such distribution is part of the financial service of issuing the relevant financial product is by no means clear;
- in relation to life insurance, the inability of the insurer to unilaterally cancel cover has been a challenge for remediation program designs where termination and a full refund of the entire premium paid (plus interest) is the desired outcome;
- with the recent transformation of claims handling and settling services into a financial service, we expect this will be a large area of focus – particularly given the application of the efficiently, honestly and fairly obligation to claims handling and settling services. In our view, the area of procedural fairness is one that should be considered by both life and general insurers;
- in relation to life and general insurance, the quantification of the appropriate amount to be remediated (that is, refunded) is a challenge, particularly in circumstances where partial (or complete) cover was afforded under the policy to the relevant customer cohort. In these scenarios, it can be difficult to determine whether a customer would prefer to keep the relevant insurance cover, or have the cover cancelled and refunded. For this reason, sometimes the insurance industry has developed remediation programs based on an “opt-in” methodology – to provide customers with the choice. However, ASIC’s position on the appropriateness of such opt-in programs is unclear.
ASIC is inviting comments on the draft guidance up until 11 February 2022. It has said that the draft is “only an indication of the approach [it] may take and is not [its] final policy”.
However, the final guidance, when released, will apply immediately to remediations initiated on or after the date of issue. ASIC has decided not to provide a transition period because “[t]he guidance does not introduce any new legal requirements” but “provides licensees with greater clarity about [ASIC’s] expectations and what actions they can take to achieve fair and timely outcomes in line with their existing licensing obligations”.
ASIC “understands that many licensees are already applying the principles and much of the updated guidance already” and is “encouraging licensees to consider the final guidance when conducting remediations that they began before [ASIC] issued the final guidance”.
This makes it important for licensees to be across the draft guidance and suggests that ASIC expects many of the provisions to remain in the final version, despite its comments about the draft providing an indication of the proposed approach only.