Remediation Round-Up: The role of independent experts

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

  • Does the remediation team have immediate access to advisors who can provide input on each stage of the remediation process, if an urgent problem or question arises?
  • Which aspects of a remediation program could pose the greatest risks to the business, which may benefit from independent assurance?
  • Which aspects of a remediation program are most likely to give rise to conflicts of interest if handled by internal staff?

 

Commentary

Historically, ASIC has favoured the use of independent experts to provide input on remediation by financial services licensees. RG 256 states:

In some situations, it may be appropriate for a firm or person external to your business and any related entities, who has expertise in overseeing review and remediation, to be engaged to provide assurance about the governance, design and operation of your review and remediation.

An independent expert can be used for only limited purposes, or to assist with nearly any aspect of a remediation program, including:

ASIC has stated that it is more likely to consider the engagement of an independent expert to be appropriate where a remediation is complex, likely to involve public reporting, or in situations where the licensee may have more limited experience or independent staff to assist with the remediation.

However, an independent expert can provide input on complicated issues that frequently arise throughout a remediation process, such as:

  • Remediation design – whether the compensation amount will be sufficient to meet potential future claims, and is likely to meet regulator expectations;
  • Customer communication – whether the communication presents an accurate view of the licensee’s legal position; and
  • Post-remediation conduct – whether changes to business practices will be sufficient to meet regulatory obligations.

An independent legal expert can be particularly valuable to provide an independent sign-off on:

  • controls to address the issues that gave rise to the remediation;
  • the proposed formula for identifying customers within the scope of the remediation;
  • the proposed formula for calculating the quantum of compensation to each relevant customer;
  • the content of customer communications;
  • a regulatory engagement strategy; or
  • dealing with intra-group, related party transactions in order to demonstrate adequate dealing with conflicts or potential conflicts of interests.

 

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
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Shan-Verne Liew
Shan-Verne Liew
Solicitor
+61 2 9225 5210

Remediation Round-Up: Dealing with the client

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

  • Clarity and transparency is key when communicating with clients.
  • Licensees should tailor communication strategies to the client’s technical and financial literacy.
  • Settlement deeds should balance risk management and the client’s rights.

 

Introduction

Effective communication is key to ensuring that clients can understand the remediation and how it will affect them. It is also integral to ensuring that a remediation program can be implemented effectively, with minimal questions and complaints.

This Chapter covers:

  • how client communications should be designed and implemented; and
  • how and when licensees can obtain comfort that the misconduct which is the subject of remediation will not lead to any further disputes or claims through the use of settlement

 

 

Step 1: Timing of client communication

The timing of client communication will vary depending on the nature of the remediation, its scale and anticipated timeframe.

In particular, the appropriate timing of client communications will differ depending on the nature of the licensee’s client base, the progress of the review and remediation program, the expected timelines for the review and remediation, what is expected of clients at each stage, and the type of misconduct or other compliance failure.

For example, it would be important to ensure that clients are informed as soon as possible if the client is able to mitigate potential losses if they are aware of the misconduct (e.g. in the event of a data breach). Similarly in cases where an “opt-in” remediation approach is adopted, early and regular communication will be important.

A licensee may communicate with clients at the following times (among others):

  • at the beginning of a remediation program, to inform the client that they are included in the scope of the review and remediation; or
  • after the review has been completed, to inform the client of the financial decision and how the client will be remediated, if applicable.

It will be important that the communication strategy is well planned, and compliant with the licensee’s obligation to notify clients of significant events under section 1017B of the Corporations Act.

 

Step 2: Initial communication with clients

Where the licensee communicates with clients before a decision is made on whether remediation is appropriate, ASIC recommends that such correspondence is made in writing and contains the following:

 

Step 3: The form of communication

Outlined below are six fundamental principles that licensees should have regard to when considering the form of communication to be utilised for a remediation program.

  1. Consider the “first impression” of the correspondence. Clients may not read correspondence that looks dense or complex. Conversely, clients may also not read correspondence that is covered in corporate branding which resembles marketing material. It is important to strike the right balance to ensure that clients understand that the correspondence relates to an important matter which requires their attention without losing their interest.
  2. Use the appropriate method for communicating. Licensees should consider the client’s circumstances including their technical literacy and age when nominating the appropriate method for communication to ensure that the client has access to the nominated communication channel. In doing so any preferences previously expressed by clients should strongly influence any decision that is made.
  3. Use the appropriate tone for communicating. Licensees should consider the client’s financial literacy and language skills and where required, ensure that correspondence does not use overly complex jargon. Interpreters and staff who are trained cross-culturally or trained to cater for clients with particular needs (e.g. poor English skills or low financial literacy) may assist. Where appropriate, diagrams and tables should be utilised to illustrate any complex issues.
  4. Avoid lengthy letters. Instead of lengthy letters that may become difficult to digest, any ancillary information can be moved into supplementary material to accompany the letter, such as a brochure. This will ensure that the letter conveys the key points for the client while still providing all other information.
  5. Highlight the actions the client is required to take and the key messages. The likelihood of the client taking the required actions will increase where the licensee prominently highlights, at the top of any communication, what the client is required to do. This will also help the remediation program run efficiently and smoothly.
  6. Where possible, remove uncertainty about the process. If possible, explain what is expected to happen in the future such as how long each remediation step may take and when the client can expect to hear back from the licensee.

 

Step 4: Ongoing communication

The level of ongoing communication with clients throughout the process will depend on the nature of the remediation program, the progress of the review and remediation against the timeframe initially communicated to clients, the client’s preferences, and the licensee’s existing communication strategies. Licensees should give careful consideration to the best time to contact clients, as sending correspondence too frequently can be costly and also cumbersome for the client. In addition, correspondence should not be sent around certain periods, such as the December/January holiday period.

Clients should at least have an opportunity to obtain updates on the progress of their review. ASIC suggests that this could be done, for example, by:

  • providing a direct telephone number or email that the client may contact to obtain this information (e.g. a hotline);
  • providing access to a secure electronic facility that includes information on the progress of the review of the client’s file (e.g. an online portal); or
  • communicating in a way that is agreed with the client.[1]

 

Step 5: Final communication with clients

When communicating a decision to a client, licensees should clearly set out in writing:

  • what the decision is;
  • the reasons for the decision;
  • what factors have been taken into account in forming the decision;
  • if remediation is offered, its components, how it was calculated and how it will be paid; and if not offered, the reasons why;
  • the client’s rights if they are unhappy with the decision (e.g. lodging a dispute with EDR scheme or calling the hotline);
  • contact details if the client wishes to discuss the decision further.[2]

The form of communication as considered in Step 3 above should be considered when designing the final communication to clients.

 

Requesting a response from clients

Sometimes it may be necessary to request a response from clients. For example, the licensee may require the client to provide additional information or communicate their acceptance of an offer of remediation.

At such times, licensees may request that clients respond within a specified timeframe. In doing so, the timeframe should be prominently disclosed, reasonable and flexible, taking into account that clients will require time to consider the letter and collect any information. ASIC recommends that licensees give clients at least 30 days to respond to any requests.[3] Whatever timeframe is provided, clients should not be excluded from the review and remediation or be denied remediation on the basis of not responding within a specified timeframe.[4]

Where a client does not respond, reasonable efforts should be made to contact the client. This may include:

  • searching records for alternative contact details; or
  • searching publicly available information.

Licensees should also consider what assistance could be provided to clients to generate responses. For example, licensees could provide:

  • a checklist of simple tasks that a client is required to complete in order to accept an offer of remediation;
  • a slip form that the client can sign and return, along with a return envelope; and
  • a hotline that the client can call to ask any questions before providing their response.

Care needs to be exercised if the remediation program is structured to remediate clients only if they opt-in to the program. Regulators may regard this approach as inappropriate, not customer centric and in some cases, may even view an opt-in approach as a breach of certain statutory obligations.

 

Acceptance of an offer of remediation

Settlement deeds are an important part of the process, particularly from a risk management perspective. However, deeds should only be relevant to the conduct being remediated and should not require the client to waive any other rights they may otherwise have. Further, settlement deeds should not restrict a client’s ability to speak to:

  • Commonwealth, state or territory agencies (e.g. ASIC, OAIC);
  • AFCA;
  • an industry body associated with the licensee; or
  • the client’s legal representatives.

Well-drafted settlement deeds are a great tool to settle the liability of the licensee arising out of the original misconduct. Previous AFCA decisions demonstrate that it will not intervene in a complaint with a pre-existing settlement agreement, as long as the licensee complied with its obligations under the settlement agreement.[5]

Licensees can also consider offering assistance to clients who wish to seek their own professional advice about the licensee’s offer of settlement. Such assistance could come in various forms, such as offering:

  • to reimburse the client (e.g. up to a limit of $5,000) for professional advice sought by the client (e.g. advice sought from a lawyer, accountant or financial adviser); or
  • the service of a group of professionals independent of the licensee’s business to provide advice to the client, free of charge.

ASIC has stated that an offer of assistance is appropriate where, given the nature of the remediation offer (e.g. its relative size compared to the client’s overall wealth or the complexity of the underlying issues) the client might reasonably want to test the offer but may not have the resources to do so.[6]

 

[1] RG 256.184.

[2] RG 256.184.

[3] RG 256.188.

[4] RG 256.190.

[5] See, for example, AFCA Determination case number 669093.

[6] RG 256.198.

 

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
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Sky Kim
Sky Kim
Solicitor
+61 2 9225 5573

Remediation Round-Up: Timeframes and statute of limitations

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

  • The selection of a remediation period is a critical decision in the development of a remediation plan, and will depend on a range of factors including risk, liability and reputational issues.
  • Licensees must avoid unnecessary delays, as this may indicate that licensees have not allocated adequate resources to conduct the remediation

 

Selection of timeframe for remediation

The selection of a timeframe is an integral part of any remediation. This involves the licensee considering the period of time during which the relevant misconduct or other compliance failure may have occurred, and making a decision on the time period for which it will remediate. The following considerations are relevant in selecting a timeframe:

  • availability of accurate records regarding the subject of the remediation, noting that licensees are required to keep certain records in relation to the provision of financial services for at least seven years;
  • applicable statute of limitation period (discussed below);
  • whether the loss is ongoing;
  • any potential reputational issues that may arise should remediation not occur; and
  • scale and significance of the misconduct.

In RG 256, ASIC has stated that it generally does not expect licensees to review advice given to clients more than seven years before it became aware of the misconduct or other compliance failure.

However, ASIC expects that licensees will act in a way that gives priority to the interests of clients when deciding a remediation timeframe. In this regard, ASIC noted that in certain circumstances, it may be appropriate to review records going back further than seven years.

Similar approaches can be undertaken in relation to remediation programs that apply with respect to other financial products. For example, where an error in a bank’s loan book system causes miscalculations with respect to client’s interest payments for the entire duration of the loan, it may be appropriate to remediate the client’s loss for the entire duration of the loan, even if the loan is more than seven years old. Similarly, an error in the calculation of annual premiums for a life insurance product may need to be remediated by reference to the overpayment that applied for the entire lifetime of the product until the issuer became aware of the error.

In May 2020, ASIC announced a review of RG 256, with a view to ensuring that it applies to remediation across the entire financial services sector. Accordingly, ASIC’s views in RG 256 are likely to become more instructive across a range of remediation programs beyond financial advice.

Statute of limitations and AFCA jurisdiction

As outlined above, the statute of limitation period is an important factor when determining a timeframe for remediation. This is because a strict legal obligation to remediate may no longer exist with respect to a loss for which the statute of limitation period has already expired (as the relevant cause of action will have expired). However, licensees should keep in mind that ASIC expects that licensees will act in a way that gives priority to the interests of clients and should therefore consider whether its decision to not remediate losses for which the statute of limitation period has expired could potentially attract ASIC’s scrutiny, as well as result in adverse reputational consequences.

Further, AFCA may use its discretion to consider a complaint for which legal proceedings have already been instituted by the complainant if the relevant limitation period will shortly expire, provided that the complainant undertakes in writing to AFCA not to take any further steps in the proceedings while AFCA is considering the complaint, even though it is AFCA’s ordinary practice to not consider a complaint while legal proceedings with respect to the same subject matter is on foot.

 

Limitation periods

We have outlined the relevant limitation periods for common causes of action below.

Cause of action Limitation period When the limitation period starts
Breach of contract for breach of simple agreements. Six years From the point of breach
Damages under the Competition and Consumer Act 2010 (Cth), including for breach of industry code. Six years After the day on which the cause of action that relates to the conduct accrued.
Damages for misleading conduct. Six years After the day on which the cause of action that relates to the conduct accrued.
Compensation orders for breach of a civil penalty provision under Corporations Act. Six years From the date of contravention.
Negligence claims Six years After the action rises, meaning when actual or ascertainable damage occurs.

 

In New South Wales, there is also a general provision which sets an ultimate time bar for limitations purposes, otherwise known as a “long stop provision”. Section 51(1) of the Limitation Act 1969 (NSW) provides that an action on a cause of action for which a limitation period is fixed by the Limitation Act 1969 is not maintainable if brought after the expiration of a limitation period of thirty years running from the date from which the limitation period for that cause of action runs. The only exception is for a cause of action for which an order has been made to extend time for latent injury, which acknowledges that some types of injuries may only be manifest over a period exceeding 30 years – this is discussed below.

It is also important to bear in mind that the interaction between limitation periods and equitable causes of action is not straightforward, and will often require complex analysis with respect to when the limitation period runs from.

 

Modifications to limitation periods

There are potential modifications to the period of limitations depending on the facts of particular cases. For example, in certain cases time may not run for limitations purposes if the damage already suffered was not discoverable by the plaintiff within the limitation period. This approach has been adopted by statute in relation to latent personal injuries, as well as in case law in relation to latent building and title defects.[1]

However, there has been general resistance in adopting similar approaches in relation to other causes of action. As Deane J explained in Hawkins v Clayton:

“Commonly in [building] cases, the building never existed and was never owned without the defect and (in the absence of consequential collapse or physical damage or injury) the only loss which could have been sustained by the owner was the economic loss which would be involved if and when the defect was actually discovered or became manifest, in the sense of being discoverable by reasonable diligence, with the consequence that the damage was then sustained by the then owner … The position is different in cases where all or some of the damage, be it in the form of physical injury to person or property or present economic loss, is directly sustained in the sense that it does not merely reflect diminution in value or other consequential damage which occurs or is sustained only when a latent defect which has existed at all relevant times becomes manifest. In those cases, damage is sustained when it is inflicted or first suffered and the cause of action accrues at that time.”

This distinction is also observable in Mulcahy v Hydro-Electric Commission, where the Federal Court of Australia found that the cause of action accrued normally and not when the plaintiff became aware of the fact that the defendant employer failed to notify the plaintiff employees of their statutory right to elect to contribute to a fund, as the critical knowledge was reasonably discoverable and therefore not comparable to a hidden crack in the building, as the case is in defective building cases.[2]

Further, the running of time for limitation purposes may be suspended in the event that the plaintiff suffers a disability or where the cause of action is deliberately or fraudulently concealed.[3]

 

Complaints to AFCA

As mentioned, AFCA’s jurisdiction is also a relevant consideration in determining an appropriate remediation period.

Under AFCA’s Complaint Resolution Scheme Rules, AFCA will not consider a complaint unless it was submitted to AFCA before the earlier of the following time limits:

  • within six years of the date when the complainant first became aware (or should reasonably have become aware) that they suffered the loss; and
  • where the complaint was given an IDR response prior to submitting the complaint to AFCA, within two years of the date of that IDR response.

Special rules apply with respect to superannuation complaints and complaints to which the National Credit Code apply. For superannuation complaints, the following limitations apply:

  • for complaints with respect to the payment of a death benefit, AFCA will only consider a complaint if the complainant objected to the licensee within 28 days of being given notice of the proposed decision. The time limit for this complaint is 28 days from the financial decision;
  • for complaints about statements given by the licensee to the Commissioner of Taxation, the time limit is 12 months from the date of notice; and
  • for all other superannuation complaints including where the complainant has an interest in the death benefit, but was not properly notified of the proposed payment or the objection period, the time limit is two years from the IDR response.

For superannuation complaints with respect to total permanent disability (TPD) decisions by the trustee, RSA provider or insurer, the following diagram illustrates the time limits that apply:

For financial hardship, unjust transaction or unconscionable interest and other charges under the National Credit Code, the complaint must be submitted by the later of:

  • when the credit contract is rescinded, discharged or otherwise come to an end, two years from the contract end; and
  • when an IDR response was provided, two years from the IDR response.

 

ASIC expectations on implementation

In addition to the foundational expectation that licensees will act in a way that gives priority to the interests of clients, ASIC also expects licensees to ensure any remediation is conducted in an efficient and timely way by the licensee allocating adequate resources to any remediation program.

ASIC is more likely to closely scrutinise the remediation program if the timeframe for remediating clients is lengthy, taking into account the nature of the misconduct or other compliance failure and the number of affected clients.

Unnecessary delays may indicate that the licensee does not have adequate resources to conduct the review and remediation, or that the licensee is not prioritising the remediation of clients and acting efficiently, honestly and fairly.

It is in the licensee’s interests to remediate in a timely manner, as delayed remediation could increase the amount of interest it must pay to compensate for foregone returns or interest (i.e. time value for money), noting that where it is not reasonably practicable to determine the actual investment returns or interest, ASIC considers it is appropriate to use the cash rate set by RBA plus 6%.

 

[1] See, for example, section 50D of the Limitation Act 1969 (NSW); Sutherland Shire Council v Heyman (1985) 157 CLR 424; Cyril Smith & Associates Pty Ltd v Owners Strata Plan No 64970 [2011] NSWCA 181.

[2] (1998) 85 FCR 170 at 245.

[3] See, for example, Limitation Act 1969 (NSW) s 52.

 

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
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Sky Kim
Sky Kim
Solicitor
+61 2 9225 5573

Remediation Round-Up: Regulatory and implementation issues

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.

Example

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

Scoping

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 .

Example

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.

Timing

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:

 

Issue Considerations
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.

 

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
Hartley Spring
Hartley Spring
Solicitor
+61 2 9322 4656

Remediation Round-Up: Sources of compensation funds

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

Remediation Round-Up: Legal basis for remediation

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
Is your potential remediation program:

  • sufficient to cover any statutory, contractual, tortious or equitable claims that customers could bring in respect of the conduct sought to be addressed by the remediation?
  • tailored to address the risk of further litigation or ASIC regulatory action, including potential enforcement action or the use of ASIC’s proposed directions power?

Please get in touch with our experts on remediation issues in respect of financial and credit services if you have any questions.

 

Introduction

Prior to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), remediation for misconduct played a cornerstone role in ASIC’s regulatory strategy. While the Royal Commission has prompted a regulatory pivot towards enforcement, remediation continues to be a central tenet of regulation in financial services.

The obligation to remediate usually arises in the context of a legal liability, deriving from a potential cause of action against a licensee. Effective remediation is important in ensuring protection of consumer interests. But it can also play a crucial role in managing legal and regulatory and reputational risk faced by a licensee (including the potential to reduce future compensation claims and enforcement).

Remediation is also important from the perspective of a licensee doing all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. In some cases, remediation where it forms part of the financial service might be seen as a necessary step towards negating the relevant defect or misconduct, so as to ensure that the overall service has been provided efficiently, honestly and fairly.

This chapter covers the key legal reasons why licensees may need to consider remediation. It is important for a licensee to consider the source of potential liability as this will impact on the nature and quantum of any remediation.

Remediation is relevant to many different regulatory settings, including statutory regimes governed by ASIC, APRA, the ACCC and AUSTRAC. Unless the context otherwise requires, references in this guidebook to ASIC should be interpreted as extending to these other agencies.

 

Contract, equity and tort

Remediation may arise due to a need to discharge potential liability for:

  • contractual damages;
  • account of profits or breach of trust, where the financial service provider is a fiduciary;
  • equitable compensation for fraud, mistake, unconscionable dealing or any other categories of unconscionable conduct; or
  • tortious damages for negligence or misrepresentation.

 

Statutory causes of action

Remediation of an affected customer may be required where there has been a breach of a legislative obligations, such as:

  • contravention of a civil penalty provision in the Corporations Act 2001 (Cth) (Corporations Act);
  • contravention of a provision of Sub-division C or Sub-division D of the ASIC Act 2001 (Cth) (ASIC Act); or
  • as a superannuation trustee, breach of a statutory covenant under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).

In all cases, there must be some loss or damage to the customer that needs to be remedied. In some cases, this will not be immediately apparent. For example, where a customer has made a decision based on defective disclosure, what is the quantifiable loss to the customer that must be remedied?

In some cases, it is either not possible to definitively assess what quantum of loss has occurred or whether certain customers have in fact been impacted, or alternatively, it is prohibitively expensive to investigate and ascertain the exact parameters of customer loss.

 

Case study – remediation reduces liability in litigation

A customer class action was filed against a major bank in relation to the sale of financial products. The class action alleged, among other things, breaches of ASIC Act sections 12CB and 12DA and Corporations Act sections 961B and 961G. With engagement from ASIC, the bank had proactively completed a remediation program to provide refunds for the affected clients, before proceedings were filed. In the class action, the claims would be reduced by the value of the remediation, thereby demonstrating how remediation can be used to mitigate against potential litigation.

 

AFCA systemic issue remediation

The Australian Financial Complaints Authority (AFCA) has broad power to investigate issues that it considers to be systemic in nature. As part of this process, the AFCA Rules empower AFCA to unilaterally require member firms to do or refrain from doing anything to resolve the systemic issue, which specifically includes requiring member firms to remedy loss or disadvantage suffered by a consumer or small business:

“whether or not the recipient of the remedy has complained.

The likelihood that AFCA will investigate a systemic issue may depend on a number of factors such as the nature of the alleged conduct, the volume of customer complaints to EDR and the nature of regulator involvement.

Given this risk, and depending on the circumstances, a remediation program may need to take into account the position that AFCA may take on the approach and scope for remediation, if AFCA were to become involved.

AFCA is also required to report certain matters to ASIC, APRA, the ATO or in some circumstances, any other appropriate body. A mandatory reporting obligation with respect to a particular complaint or issue arises if AFCA:

  • identifies a systemic issue;
  • becomes aware that a serious contravention of any law has occurred;
  • becomes aware of a contravention or breach of the governing rules of a regulated superannuation fund or approved deposit fund, or the terms of an annuity policy, life policy or retirement savings account;
  • becomes aware that a financial services provider may have refused or failed to give effect to a determination made by AFCA; or
  • considers that a complaint that has been settled may require investigation.

AFCA is not specifically required to notify the financial services provider when it intends to report or has reported any of these matters to a regulator. Additionally, these reporting obligations arise when AFCA forms the relevant view about the matter, and in this regard ASIC has indicated that AFCA should not necessarily wait until a matter has been finalised.

 

AFCA external dispute resolution

Individual complaints to AFCA about particular conduct can also result in a member firm being required to provide a greater amount of compensation than that which a customer may be entitled to under the law, and greater than what is offered under a remediation program.

This is because AFCA is not required to make a determination that adheres to the law. Rather, AFCA is required to make a determination primarily by reference to what it considers to be fair in all the circumstances.

In this regard, it may be appropriate to consider whether remediation is warranted to proactively address this risk.

 

Breach reporting and ASIC directions

On 31 January 2020, the Government released exposure draft legislation which will enable ASIC to give binding directions to financial services licensees to address suspected prior or future contraventions of a financial services law.

This will give ASIC a far-reaching new power to give directions, including a direction on a licensee to establish and implement a specified customer compensation program as prescribed by ASIC.

The directions power is expected to give ASIC a tool to mandate particular aspects of a remediation program, without a need for lengthy negotiation. For example, it may be possible that a direction could be given to require remediation to occur:

  • to specified classes of affected customers;
  • through specified methods (e.g. with specified requirements around the format, timing and content of communications with customers); and
  • of a specified amount to each affected customer.

These powers have not yet been enacted, and it remains to be seen how intrusive they may be and how ASIC will use them.

 

Ex gratia remediation

In some cases, a licensee may determine to implement an ex gratia remediation program. This could be for reputational reasons, as well as to avoid having to undertake a costly and time consuming review to determine whether remediation is legally required.

In such cases, the licensee will need to give careful consideration to the proposed remediation approach, including the quantum of remediation and whether the remediation should be used to seek a discharge from potential future claims.

 

Determining whether the remediation exercise is ex-gratia or is in satisfaction of a legal obligation

This is an important issue as it is often not clear whether the relevant financial institution has a strict legal obligation to compensate or is rather offering payments on an ex-gratia basis. In some cases, there may be a legal obligation but the financial institution is knowingly paying above the required level of compensation because it is too difficult or too costly to determine the exact quantum of compensation.

 

‘Efficiently, honestly and fairly’

The Corporations Act 2001 (Cth) (Corporations Act) imposes a statutory obligation on financial services licensees to:

“do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”

Although customers do not have standing to make a claim for compensation for a breach of this obligation, ASIC has expressed a view that the obligation itself requires licensees to remediate customers ‘if things go wrong when financial services are provided and clients suffer loss or detriment’.[1]

This view does assume that remediation is a material part of a financial service (noting that above obligation applies to financial services covered by the Insurer’s AFSL).

From one perspective, in a situation where a financial service has not been provided efficiently, honestly and fairly, remediation might be seen as a necessary step towards negating the relevant defect so as to ensure that the overall service has been provided efficiently, honestly and fairly.

For example, it could be said that a customer who is charged an incorrect fee for a financial service will still have been provided the service efficiently, honestly and fairly if they are appropriately compensated for any excess fee.

Less clear is ASIC’s position that affected customers should be identified and compensated in an ‘efficient, honest and fair manner’. This has not been tested in court, and in any case the actual extent to which licensees would be required by this obligation to conduct remediate customers in a particular manner will depend significantly on the particular facts of a situation. such as:

  • the practicality, cost and time requirements of taking one possible remediation approach over another;
  • the quantum of remediation that affected customers are legally entitled to receive, weighed against the cost of a particular remediation approach; and
  • the number and proportion of affected customers that are likely to receive compensation.

 

Sources of compensation funds

An integral part of remediation is to consider where funding for remediation will emanate from. Issues of insurance cover, the right of indemnification for trustees, third party redress, as well as whether shareholder funding is necessitated may be relevant to a particular remediation exercise. These issues will be addressed in a future article of the Remediation Round-Up series.

 

To keep up to date with the Remediation Round-Up series and our latest regulatory updates see our blog FSR Australia Notes.

 

[1] RG 256.14

 

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

Remediation Round-Up – Who is the proper payee?

Background

This edition of HSF FSR Australia Notes is the first in our series dealing with legal remediation issues arising from exercises undertaken post Royal Commission.

In this edition, as the title indicates, we examine the topical issue of where compensation payments should be made in a situation where multiple parties have been involved in the arrangements giving rise to a remediation exercise.

We start with some fundamental legal principles and proceed to examine some specific topical scenarios.

Grass roots principles

Legal vs ex gratia payments

Remediation exercises can be differentiated in accordance with a myriad of factors and scenarios. One key factor is whether the remediation exercise arises on the basis of a fully-fledged legal obligation on the one hand, or an ex gratia basis on the other.

In our strong opinion, different legal results flow in each of these scenarios in terms of proper payee.

In a legal obligation scenario, compensation payments must be paid to the proper legal recipient of the monies, being the party who has the legal right to payment based on having the relevant cause of action.

In an ex gratia scenario, compensation payments could be paid to different entities who may not be the parties who would have the primary cause of action.

This distinction is explored in more detail below.

Payments to trustee vs members

Here, one must distinguish a number of different scenarios:

  • Where a trustee of a trust pays monies in respect of a contract entered into by it with a third party;
  • Where a trustee of a trust pays monies in respect of a contract entered into by a member of a superannuation fund with a third party; and
  • Where the trustee is essentially acting in a paying agent capacity.

In Scenario 1, the trustee is party to the contract and usually would be the party who would have the legal cause of action and hence, the legal right to compensation. This is clearly the case where the trustee has entered into the contract for the benefit of relevant members, who are not privy to the contract with the third party. We deal with this scenario below in the context of a contract with a financial services licensee or representative relating to the provision of financial advice. The rationale for this conclusion is that the trustee has expended trust property and hence, it has the right and obligation to receive compensation payments.

In Scenario 2, the trustee is not the party to the contract. Rather, it is the member who is the party contracting with the third party. However, the trustee is still paying consideration for the contract out of trust property. In this scenario, we must distinguish between payments from the trust which are from general trust assets, as opposed to in the next scenario, where the payments from the trust are made from monies to which the relevant member is entitled. In a superannuation fund, these latter amounts would be vested entitlements of the member, payable to him or her on request in the ordinary course. Unrestricted non-preserved amounts (and pension entitlements) are a case in point. Where adviser fees are paid from such amounts, the analysis in Scenario 3 would apply. This scenario is explained in more detail in the next section.

The short of it is that where the trust pays contractual consideration from trust assets and the member is not entitled to the redemption proceeds of those assets, then the application of those assets will be typically an expense of the trust fund. Again, the trustee is the right party in terms of having the legal right to receive the remediation payments. The trustee would have needed to properly characterise that payment to the third party (i.e. contractual consideration) as a properly incurred expense of the fund.

When it comes to remediation payments, the trustee would again have the right and obligation to receive those payments (assuming again the remediation is in respect of a legal obligation of the paying entity, as opposed to an ex gratia payment).

In Scenario 3, the member has entered into the relevant contract or arrangement and has a vested entitlement (i.e. a trust entitlement) to the commercial consideration paid by the trustee to the third party. Here, the member instructs the trustee to pay the third party. In this scenario, the remediation payments are the right of the member to receive, and not the trustee. Unlike Scenario 2, the trustee has no legal right or obligation to receive these payments.

The trustee is effectively acting as a paying agent, paying at the direction of the member. Once the member instructs the trustee to pay, then the monies cease to be trust property, the trustee is discharged from its trustee obligations and it has no right or liability to receive remediation payments. Of course, such a position could be altered by contrary provision made in the trust deed or by arrangement between the trustee and the relevant member.

Deep-dive into the three scenarios in an advice contract setting

Scenario 1

It is possible, in a contract for financial advice, that the trustee has a contractual arrangement with the advice licensee/representative. The contract might take the form of an obligation of the adviser to provide advice to the member but the trustee:

  • contracts with the adviser in respect of that obligation; and
  • pays the consideration for the advice from trust monies on the basis that the payment satisfies both the sole purpose test (under section 62 of the SIS Act) and the general law trust requirement that the payment is otherwise a properly incurred expense of the trust.

In some cases, the scenario may be further complicated by reason of the member also having entered into some form of contractual arrangement with the adviser in parallel. This might take the form of agreeing a fee level with the adviser.

In truth, this last element alone would not usually constitute a contract between the member and the adviser. However, if the arrangement between adviser and member is broader than this, then this could involve a parallel contract. The implications of such a parallel contract are likely to be complicated but, in our experience, should not typically alter the basic premise presented above, which is that legally-based remediation payments should be properly paid to the trustee.

Scenario 2

This scenario is more common in our experience and more straight-forward. Here, again the trustee pays the relevant contractual consideration from the trust fund. The payment, if made from general trust assets (and not from a vested entitlement of the member), would need to have been characterised as a proper expense of the trust.

Here, the proper payee of the remediation amounts is the trustee and in fact, the trustee has a legal obligation to be paid those amounts and to pursue them if necessary. So in a superannuation fund context, the payer of the remediation amounts would pay the trustee and the trustee would normally insist on those payments. Those payments would go back to become part of the trust corpus (in trust law parlance) of the superannuation fund and become part of the financial product in Corporations Act terms.

As mentioned above, the scenario we are describing is one where the payer has a legal obligation to pay and not an ex gratia scenario (discussed below).

Scenario 3

As mentioned above, this third scenario encompasses the following types of payments made by a relevant recipient of the advice, who has an absolute vested entitlement to those monies by way of client direction to the trustee:

  • payments from a managed investment scheme;
  • payments from an IDPS;
  • payments from a cash management trust; and
  • payments from a superannuation fund, where the payments made were from unrestricted non-preserved amounts.

Here, the advised client will typically have given the trustee a one-off or standing instruction to pay the advice fee from the person’s assets held in the relevant trust.

It is crystal clear at law that such a payment on direction of the client is a payment made by the client where the direction would involve the redemption of units/an interest of the client (as would normally be the case). It follows that remediation payments can and should be paid to the client directly.

The trustee:

  • has no obligation to receive such payments;
  • has no right to receive such payments; and
  • is discharged from its trust obligations as soon as the direction to pay given by the client is acted on.

It follows that in the ordinary course, remediation payments should not be paid to such a trustee. In fact, a beneficiary may sustain loss if the payment is made to a trustee due to a fee or tax detriment. It is conceivable that the beneficiary could hold the payer of the compensation liable for any such loss

Ex gratia payments

Finally, it is appropriate to make some observations in relation to the scenario of ex gratia payments.

There will be situations where it is not clear, or cannot be substantiated, whether or not financial advice was actually given and hence, whether the relevant contractual promise was met. In such situations, it is not uncommon for the relevant advice licensee/representative to make remediation payments on an ex gratia basis.

The issue here is whether the same principles articulated above apply. It seems to us that the answer is typically no.

If the payment is not based on a strict legal obligation, then there should be no prima facie reason why the remediation payments could not be paid to a client directly, even where the contractual consideration was paid from the trust fund.

This said, the payer will need to take care that it is not exposing itself to potential double liability should a claim based on the actual legal position materialise at a later stage.

It is beyond the ambit of the current article to traverse this last issue in any further detail as the position is complex and likely to be fact specific, as well as involving taxation considerations.

However, should you require more information in relation to this last point or any other aspect of this article, please do not hesitate to contact any of the HSF FSR team members below.

As mentioned above, this is the first in our series of Remediation Round-Up editions and more will follow in due course. If there is a remediation issue (or any other issue) you would like us to write about, please do not hesitate to contact one of our team members.

 

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
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Lesley Symons
Lesley Symons
Executive Counsel
+61 7 3258 6704