This article is a part of our Remediation Round-Up series which explores potential issues for financial services licensees when conducting remediation and ways to optimise the design of remediation programs.
Issues to consider
- Are any third parties liable for the loss to customers, and if so what is the practicality of recovering compensation from the third party and what legal obligations exist, if any, to consider/pursue recovery from any such third parties?
- Is the loss covered by a professional indemnity insurance policy?
- Has a deadline been established for remediating customers, and if so then how does this affect whether an external source of funding should be pursued?
As a first step, it is necessary to consider whether any streams of external funding may be available to the entity:
If an external source of funding may be available, a licensee should consider whether that source should be pursued, having regard to factors such as:
- the likelihood that funding can be obtained, and the difficulty, cost and time required to obtain that funding;
- the impact on professional indemnity insurance premiums, if an insurance claim is pursued;
- the effect on relationships with customers, third parties and regulators;
- any statutory or regulatory hurdles, such as under the Corporations Act (section 208) which restricts the giving of financial benefits by public companies to related parties (subject to certain exemptions).
Particular regard may need to be had to whether the funding will need to be obtained in order to fund the remediation program, or whether the entity has sufficient resources to fund the remediation now and then recover the cost of remediation at a later stage. Where professional indemnity insurance is sought to be relied on, early steps are critical as such policies usually require advance notice to the insurer.
Ultimately, the use of external funding should not affect the scope of compensation to customers. This is because even where external funding is used, often the financial services licensee or superannuation trustee will remain ultimately accountable for ensuring customers are adequately compensated.
Customer access to funding
In some instances, affected customers can access compensation directly from a compensation scheme if they are unable to recover loss from the relevant financial service provider. This includes:
- the Financial Claims Scheme (FCS), which provides customers in the event that an ADI, building society, credit union or general insurer fails;
- the National Guarantee Fund (NGF), which covers investors trading on the ASX who incur losses as a result of specified events such as an unauthorised transfer of securities; and
- an industry-funded Compensation Scheme of Last Resort (CSLR), which the Government has committed to establish by the end of 2020 in response to recommendations by the Royal Commission. The Government has announced that the CSLR will cover unpaid determinations made under AFCA’s Rules from 1 November 2018, and will extend beyond failures in personal advice.