Further to our previous update outlining the key elements of the ASIC Consultation Paper 247, it is timely to delve into some of the more important issues which may have a material impact on an advice remediation program.

Relevant compensation period

As flagged in our previous update, there are a number of legal factors which are relevant to this issue, chiefly mandatory record-holding periods and the application of statute of limitation periods.

ASIC appears to consider that the obligation to act honestly, efficiently and fairly requires an advice licensee to review advice as far back as the licensee has retained records. This includes where a licensee has retained records for longer than the minimum seven years.

We do not agree. ASIC’s interpretation:

  • fails to have regard to the fact that the limitation and record retention periods were established with goals of efficiency and fairness in mind,
  • would incentivise licensees to destroy records as soon as the seven year period has expired, and
  • could result in customers being treated differently, depending on whether their records happen to have been retained beyond the required period.

Basis of calculating compensation

There has been much industry discussion around this issue; in particular the basis on which earnings on the base compensation amount should be determined. Is interest at a specified rate is the most appropriate basis or should earnings be extrapolated from the historic performance of the relevant investment portfolio?

This issue may be heavily dependent on the facts, but as a general principle, we do not see the second basis (investment earnings) as necessarily the legally correct approach. It may be too speculative a basis of compensation.

Moreover, where compensation is made as part of a settlement, or on an ex-gratia basis, it may not be necessary or even possible to compensate using investment earnings.

Who is the appropriate provider of the compensation?

In circumstances where loss comes from advice or an adviser’s act or omission, it does not necessarily follow that the proper payer of compensation is the licensee. It may be that the appropriate payer is the issuer of the relevant financial product, particularly where the issuer may itself have the legal relationship with the licensee. In this instance, technically the licensee should pay the product issuer who in turn compensates the investor.

Where should the compensation be paid?

Again, when the loss occurs in a particular financial product (such as a trust) where relevant advice fees have been paid from that product, it may be that a decision has to be made as to whether compensation should be paid to the trust, or directly to the investor.

The answer to this issue may again well depend on the legal basis on which the compensation is being made. Where the trust is a superannuation trust, additional regulatory principles may apply.

Further advice remediation updates will deal in more detail with other crucial issues such as establishing the affected class of customer, customer contact and any customer engagement (opt-in), and disclosure.