Although ASIC's guidance is not applicable in New Zealand, given the different regulatory regime and jurisdictional differences, it will still be of interest to financial institutions in New Zealand, as it shows one of the approaches that overseas regulators are taking to these issues.
The proposals provide an insight into ASIC's position on practical issues that are routinely encountered in remediation exercises. Although ASIC characterises the proposals as “clarification" of existing guidance, some aspects appear to go beyond ASIC's currently documented position. The proposals will apply to all Australian financial service licensees and Australian credit licensees, as well as some fund operators. Previous ASIC remediation guidance had been focused on the provision of financial advice.
We highlight some of the key proposals below.
When to remediate?
ASIC's current position is that “review and remediation" must take place where a “systemic issue" has been identified. That is, “an issue causing actual or potential loss or detriment to a number of clients as a result of misconduct or other compliance failure". ASIC proposes to replace the “systemic issue trigger" with a two-tiered remediation model. According to this model:
- Remediation must be initiated for “Tier 1 failures". That is, misconduct, errors or compliance failures that have caused “actual or potential consumer loss to one or more consumers. These will generally involve a breach of law or contractual failing.
- Remediation should be considered for “Tier 2 failures". That is, breaches of external standards and expectations, industry codes of conduct, the institution's business values, or consumer standards and expectations that have caused loss.
The two-tiered approach suggests a material lowering of the threshold for instituting remediation (defined as a process to investigate the full extent of a failure and, where appropriate, compensate consumers in full). On ASIC's proposals, remediation does not require widespread financial impact to have been established – one affected consumer is sufficient. Breaches of non-legal standards and expectations may also necessitate remediation. These proposals are paired with a recognition that instituting a full “program" of remediation “will not always be necessary". Indeed, where a failure only affects a small number of consumers, ASIC has said that the process to rectify the loss may be “simple and prompt".
How far back to review and remediate?
ASIC currently recommends that the time period for remediation is at least seven years before the licensee became aware of the failure. In New Zealand, the FMA and RBNZ has suggested that remediation go back at least five years (with issues that pre-date this period being traced back to their origin).
ASIC has now described the seven-year period as a “disincentive for licensees to investigate the full extent of the problem" (albeit acknowledging that the review period should rarely exceed seven years). ASIC proposes that licensees go back to the date that they reasonably suspect the failure first caused loss to a consumer. This will involve a highly fact-specific assessment in each case. It is also likely that assumptions will have to be made when determining the overall scope of the issue (see immediately below).
Assumptions must benefit consumers
ASIC acknowledges that remediation exercises involve the adoption of assumptions “to save time and cost, remediate more efficiently or make up for absent records". To date, ASIC has not provided guidance on the use of assumptions (although it is frequently asked to do so).
ASIC proposes that assumptions should only be adopted in a remediation if they are beneficial to the consumer. Assumptions should:
- aim to return all affected consumers as closely as possible to the position they would have otherwise been in,
- be evidence-based and well-documented, and
- be monitored throughout the remediation to ensure they continue to favour consumers.
In particular, ASIC has directed that:
- When determining the consumers who should be “in-scope" for remediation, the net should be widened to capture more consumers than less. That is, licensees should err on the side of inclusion.
- The calculation of refunds should err on the side of overcompensation, rather than under compensation.
- If a licensee has failed to keep records in line with its obligations and is unsure whether a consumer has suffered a loss, the consumer should be included within the remediation if there is evidence to suggest he or she has been, or may have been, affected by the failure. The consumer should then be returned as closely as possible to the position they would have otherwise been in.
- Assumptions should not be adopted as a means of overcoming inadequately resourced remediation.
How to calculate remediation payments
Where remediation seeks to compensate for investment returns or interest that would have been earned by the client had the failure not occurred, ASIC expects licensees to determine the actual investment returns or interest that a client would have received had the relevant failure not occurred (ASIC's current requirement is for “a fair and reasonable rate" to be used). Now, ASIC proposes a three-step framework for calculating foregone returns or interest.
- Calculate actual foregone returns or interest rates, without the use of any assumptions, wherever appropriate to do so,
- Where it is not appropriate, possible, or reasonably practical to calculate actual returns or rates, beneficial refund assumptions can be made based on supporting evidence,
- Where there is insufficient supporting evidence, a fair and reasonable rate should be adopted that compounds daily, is “reasonably high", “relatively stable" and “objectively set by an independent body".
How to locate and pay consumers
ASIC proposes that licensees should “apply best endeavours to find and automatically pay consumers". The consultation paper does not offer any detail or guidance on what best endeavours might require. Instead, ASIC has requested feedback on the issue to better inform how specific challenges can be addressed. ASIC's preference for automatic payments is based on its experience that this is the most effective way to ensure funds reach affected customers. ASIC has specifically deterred licensees from using cheques other than as a last resort, noting that the use of cheques in Australia has declined by more than 20% since 2016.
No specific de-minimis threshold for payments
ASIC has proposed removing the specific low-value compensation threshold that currently forms part of its remediation guidance. As matters stand, licensees can make remediation payments directly to charity where the amount is below AU$20 and the consumer cannot be compensated “without significant effort". ASIC has now proposed that the use and quantum of low value thresholds should be assessed on a case by case basis. The starting position should be to return all money to consumers. ASIC also expects that all current consumers with active accounts will be remediated regardless of value.
What to do about customers that cannot be found
If customers cannot be located despite best endeavours, ASIC proposes that the relevant money should be dealt with in accordance with the applicable unclaimed money regime (if available) and that this should be communicated to consumers, along with details of how to lodge a claim for the remediation payment. ASIC's current guidance is silent on, and ASIC does not provide any proposals for, how this communication can be effected if a customer cannot be found.
If there is no applicable unclaimed money regime, the money may be paid to a charitable or community organisation. Licensees can select the recipient charities without engaging with ASIC. If possible, the charity should have a nexus to the relevant consumer harm.
Despite the above, ASIC still expects licensees to make payments to consumers who come forward after the licensee has paid the funds to charity or disbursed them in accordance with the applicable unclaimed money regime.
Documenting remediation with customers
ASIC appears to doubt that the entry into settlement deeds with consumers as part of a remediation exercise can ever provide efficient, honest and fair outcomes. ASIC has requested feedback on when, if ever, licensees can legitimately use settlement deeds in the course of remediation. It has said that overly generous remediation (through the adoption of beneficial assumptions) should not be a basis for limiting consumer rights to challenge the remediation outcome.
Submissions on the consultation paper close on 26 February 2021. Bell Gully will be following the consultation process and subsequent developments closely.
If you have any questions on the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.