ASIC plans to extend its consumer remediation guidance to all AFS licensees

  • Newsletter Article
  • Published 08.04.2021

On 3 December 2020, ASIC published a first round Consultation Paper 335 ‘Consumer Remediation: Update to RG 256’ inviting feedback from the industry on its plans to update its 2016 Regulatory Guide 256 ‘Client review and remediation conducted by advice licensees’. 

The headline change proposed is that the updated remediation guidance will go beyond financial advice and will apply to all AFS licensees and superannuation trustees. This is likely to have a substantial impact on the design and execution of consumer remediation.   

The proposed changes come at a time when a lot of remediation work is continuing and there is a substantial amount of regulatory development. In its guidance review, ASIC noted that although it has seen some positive changes from industry, in its experience licensees are ‘still sometimes’ using remediation approaches that are ‘not aligned with their stated values about the treatment of consumers and arguably with their legal obligations’.

The key takeaways from ASIC’s guidance review are summarised below.

Two-tiered approach to initiating a remediation

ASIC has proposed a two-tiered approach to initiating remediation:

  • Under Tier 1, ASIC says a remediation ‘must’ be initiated when a licensee has engaged in misconduct, an error or compliance failure, and caused actual or potential consumer loss to ‘one or more’ consumers, as opposed to ‘a number of consumers’ in the current guidance. It proposes the removal of any reference to 'systemic' issues.  
  • Under Tier 2, ASIC proposes that a licensee ‘should consider’ initiating a remediation where a licensee’s failure causing loss ‘breaches industry codes or conduct not aligned to a licensee’s values or standards (e.g. industry codes, business values or promises made such as doing what is right, or putting the customer first)’. 

The high water mark set by ASIC appears to be founded in a licensee's general obligations under s912A(1)(a) of the Corporations Act 2001. ASIC acknowledges that ‘some licenses adopt a remediation approach that is not limited to establishing a legal or compliance breach only – it also takes into account what their consumers and the broader community would expect in terms of righting wrongs’.

Once initiated, ASIC’s position is there is ‘no one-size-fits-all approach to remediation’ and it can be tailored and scaled as needed, according to the size and scope of the failure. 

Extended review period for a remediation 

ASIC recommends that ‘as a starting point, the relevant review period for a remediation should begin on the date a licensee reasonably suspects the failure first caused loss to a consumer’. Additionally, ASIC proposes scrapping the seven-year time-period for remediation in RG 256, noting that ‘many remediation issues go back more than seven years by the time they are uncovered’. 

In essence, ASIC expects that insurers and trustees need to go back further than seven years when reviewing remediation issues. The rationale being that increased technology and data management capabilities have enabled robust record keeping. ASIC reiterates that consumers should not be disadvantaged due to poor record keeping or poor systems and governance frameworks. 

Using beneficial assumptions 

ASIC has proposed that licensees should only rely on assumptions in remediation if they are beneficial to the consumer. ASIC says that beneficial assumptions are those that are ‘evidence based and well documented’, ‘aim to return all affected consumers as closely as possible to the position they would have otherwise been in (this may include giving a consumer the benefit of the doubt)’, and are monitored to ensure they continue to deliver to these requirements.

In particular, ASIC expects licensees to use beneficial assumptions to determine affected consumers or to calculate potential loss suffered ‘if [licensees] need to make up for absent records, especially if absent records may be considered a breach of their record keeping obligations’. In these circumstances, ASIC expects:

  • licensees to make beneficial assumptions in a consumers favour if there is evidence to suggest the consumer has been, or may have been, affected by the failure. ASIC says beneficial assumptions preference inclusivity rather than exclusivity’ when determining affected consumers
  • licensees to ‘err on the side of overcompensationin applying assumptions to calculate the amount of loss. ‘That is not to say that licensees are obliged to overcompensate’, ASIC continues. ‘Rather if they choose to use assumptions to save time and cost or account for absent records, the assumption should equate to actual loss or err towards overcompensation rather than the risk returning less than what consumers are owed’.

ASIC adds that:

consumers should not be disadvantaged if a licensee fails to keep proper records in line with its record-keeping obligations, or if an authorised representative of the licensee has failed to comply with its obligations to provide records on request. Poor or incomplete records is rarely a justification for a failure to remediate consumers or to limit the scope of a remediation’. 

ASIC recommends that any decision to apply assumptions should be well documented and appropriately justified.

Implications

The proposals in ASIC’s remediation review are preliminary and ultimately may change. Nevertheless, impeding changes to consumer remediation makes the review of existing remediation processes an ever present focus. 

Insurers and superannuation funds should consider the potential impact the revised guidance may have on their existing processes including:

  • processes for initiating remediation - ASIC makes it clear that it expects financial firms to attend to remediation issues as soon as they develop for ‘one or more consumers’, and before a problem festers or becomes systemic;
  • processes which enable the detection of a Tier 2 scenario - as some values or standards may be aspirational, firms should also consider what does and does not constitute a Tier 2 scenario that may require remediation;
  • decisions around review time periods and a remediation approach in circumstances where accurate data may not be available; and
  • assumptions in remediation methodologies.

ASIC is currently reviewing feedback received in relation to the first round consultation. At a future date, the corporate regulator will release a draft-updated guidance for a second round of consultation. 

We will keep you up to date with further developments.