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?

 

External funding

As a first step, it is necessary to consider whether any streams of external funding may be available to the entity:

Indemnification for superannuation trustees A superannuation trustee may be able to be indemnified out of fund assets in accordance with the governing rules of the fund and the general law indemnification rights of a trustee.

Access to indemnification will depend on the nature of the conduct that gave rise to the loss. For example, indemnification may be unavailable if the loss arises from a failure by the trustee to act honestly. The SIS Act also regulates this area.

Professional indemnity insurance cover  A financial services licensee or superannuation trustee may be eligible to fund all or part of a remediation program through its professional indemnity insurance cover.
Third party redress Where part or all of the loss can be attributed to a third party service provider, it may practicable to pursue a claim against the third party to recover the cost of remediating affected customers. This will depend on the scope of any indemnity provision and the strength of any other claim against the third party.
Shareholder funding In some circumstances, funding can be sourced from a parent or related entity (eg where the entity holds limited assets in its personal capacity), or for a parent or related entity to carry out the remediation.

There are some limits; for example, Treasury has proposed that indemnification through related parties
will be prohibited for breaches of the Financial Accountability Regime. Potential conflict of interest issues will also need to be carefully managed.

 

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.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Fiona Smedley
Fiona Smedley
Partner
+61 2 9225 5828
Charlotte Henry
Charlotte Henry
Partner
+61 2 9322 4444
Philip Hopley
Philip Hopley
Special Counsel
+61 2 9225 5988
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Lesley Symons
Lesley Symons
Executive Counsel
+61 7 3258 6704
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Shan-Verne Liew
Shan-Verne Liew
Solicitor
+61 2 9225 5210