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
- Treat a remediation program like any other project. Start planning early, divide responsibilities between business units and have a clear project owner.
- Designing and implementing a remediation program is a balancing act between what is desirable in theory, and what is possible in practice. Client benefits such as making timely payments to clients need to be balanced against practical factors such as taking the time to ensure those payments are accurate.
- Resolving the practical issues above involves making judgment calls and agreeing on approaches. Document decisions and take legal advice on these decisions where appropriate. Keeping records of decisions will allow a licensee to justify why it chose an approach if it is ever questioned.
Designing a remediation program
ASIC Regulatory Guide 256
ASIC’s initial views on designing and implementing a remediation program are set out in ASIC Regulatory Guide 256: Client review and remediation by advice licensees (RG 256). RG 256 is a useful guide of ASIC’s expectations, but it should be followed only when it is appropriate to do so.
RG 256 is focused narrowly, being aimed at remediation by advice licensees for issues with personal advice. While the principles may also be relevant in other remediation contexts outside of personal advice, there will also be situations where RG 256 will not apply or will not be appropriate. In this chapter we have given a general outline of design and implementation issues as a whole, and not specific to personal advice.
The initial breach
The initial trigger for a remediation program is often a licensee identifying and potentially reporting a breach of relevant law. The first step in any remediation program is to scope the initial breach and ensure that this breach will not occur for new customer.
If a licensee has a defective process which is producing inappropriate advice, that process will need to be scrutinised and additional controls will need to be put in place to ensure that appropriate advice is provided going forward, before designing a remediation program
Scoping and resolving the initial breach creates an effective end date for which clients may need to be remediated up to. Once the initial breach is resolved and is no longer occurring, remediation of clients is no longer required for clients beyond that point.
Scoping and resourcing the program
A remediation program is unique, but is also in some ways like any other significant legal project which a financial services business may undertake. Clear parameters around how the program will be developed, with clear ownership, appropriate separation from other business areas, and set responsibilities at the outset ensures that the remediation is managed effectively across its life cycle. Confirming third party providers, internal resources, and indicative timelines all at the outset are also all valuable to manage the program.
Identifying affected members
The first substantive step of a remediation program is to determine which clients have been affected and are potentially in scope. The initial breach which triggered the program is an indicative guide of which clients will be in scope (e.g. all clients in a specific product, or clients who received advice from an adviser). But this initial scope is not always definitive. A wider scope may be required if the breach related to an underlying, widespread issue .
In the case of financial advice remediation, it may be relevant to consider whether the breach was a result of inappropriate conduct by an adviser in a scenario, or was a result of a wider issue of inappropriate adviser training on how to handle that scenario?
There is an inherent tension between scoping a remediation program too narrowly and potentially missing affected clients, and potentially scoping too wide and delaying a remediation program.
In our experience, remediation programs which initially start with a wide initial scope have some advantages, as they are able to determine for a wider cohort of clients that no remediation action is required. The scope can then be subsequently narrowed. In contrast, with a narrow initial scope, clients are excluded at the outset, and their status is never formally determined. Keeping clients in scope at the start gives certainty to the outcomes of the remediation, and helps ensure that all potentially relevant clients are considered, avoiding the potential for surprises at a later date.
The extent to which clients are in scope is also informed by how far back in terms of timing the remediation program needs to extend. There is no definitive position on how far back in time a remediation program should reach. Statutes of limitation, ASIC guidance, potentially equitable principles, and a client-centric approach all factor in to this decision (see Chapter 3).
Records and documentation
What clients will be in scope will also be at least partially informed by what client records the licensee has. If there are no records for any clients before a specific date, this can be an indicator that the remediation program could (at least practically) be limited in scope to that date (although it is difficult to offer a definitive view on this topic as much will depend on individual circumstances). If a licensee is confident that it has accurate records going back for the entire period, easy access to records may be a factor justifying a potentially longer remediation scoping period.
Identifying the quantum of remediation for each client
After identifying all the potentially affected clients, the next step is to determine what action is required for each customer. Our experience has demonstrated that it is not possible to set out in this chapter a process for every potential permutation of a remediation program.
ASIC’s formulation of the extent of remediation required as a high level statement in the context of financial advice is set out in RG 256:
“The aim is generally to place the client in the position they would have been in if the misconduct or other compliance failure had not occurred.”
This is a sound theoretical basis, but putting this in to practice immediately runs into practical issues that will need to be resolved when designing the program.
For example, when does an entity determine the client’s position; is it at the date of the remediation program, is at the earlier date they stopped holding the relevant product, or is it a future date where you may need to forecast potential fees and returns in the future? Or what type compensation is required, is it purely monetary compensation or does the client require fresh advice as well?
All these questions need to be resolved on a case by case basis.
Designing and implementing the process
A number of practical issues all come in to play in translating a potential legal obligation to remediate into a real world remediation program in practice. All of these issues involve judgment calls and stakeholders making decisions. Documenting these decisions, the rationales for these decisions, and supporting legal advice, is a key part of the remediation program. Some of these key practical issues set out in the table below:
|Balancing timely payments against accurate payments||A recent industry trend has been to focus on making timely compensation payments to clients. In some scenarios an approach is adopted to use an estimate of the payment required, instead of a detailed analysis. This approach has been viewed as potentially more client centric customer-centric, as clients receive compensation faster. This benefit to clients needs to be balanced against taking the time to make accurate calculations and being confident that correct amounts are paid.|
|Conflicts between group entities||The entity engaged in the initial legal breach may have limited resources on its own account, but may be part of a wider group. For example, a superannuation trustee with limited corporate moneys but which receives services from group members. The superannuation trustee has the obligation to remediate, but may depend on group members for the operational and financial resources to meet that legal obligation. This raises a range of conflicts issues which need to be considered as part of any program.|
|Having adequate resources to remediate||Remediation programs often requires specialist operational skills in a business. An advice remediation might require a large number of skilled advisers to provide new advice. There is a balancing act between carrying out a timely and effective remediation, and managing the resourcing burden of having sufficient skilled staff to put the program into practice.|
|Opt-in remediation||ASIC has a strong preference against opt-in remediation programs as they can be viewed as not client centric, placing a burden on a client for a licensee’s own breach. But there may be certain circumstances where opt-in is appropriate. For example, in widespread general advice disclosure issue across tens of thousands customers, it may not be appropriate to individually remediate every client as a starting point.|
|Governance and ownership||Different businesses might have different business units with responsibility for remediation. Remediation might be a responsibility of the legal team, it may sit within a broader risk team, or there might be an entirely independent remediation unit. When decisions eventually need to be made about an issue clearly delineated responsibilities allows those decisions to be made confidently, and clearly documented.
The new BEAR/FAR accountability regime may be relevant in this regard as it will require a single accountable person to be appointed in respect of financial product management.
|Role of external providers||ASIC has stated that external review can be valuable to a remediation program. See an external review is required for every remediation program. See in Chapter 5.|
|Contacting the customer||Contacting the customer to let them know the outcome of the program, and obtaining details for payment, often takes significant operational resources. The first contact may rarely be effective and repeated engagement can be necessary. See Chapter 4.|
|Engaging with the regulator||Our experience has shown that engaging with the regulator early and keeping them up to date is an effective approach. While it is not a regulator’s role to “approve” a remediation program, making sure that the regulator is aware of the approach reduces the potential for later disagreement.|