ASIC has gone to industry with a consultation paper that proposes several changes to client remediation regulation rules, including doing away with the current seven year review period and making sure remediation assumptions are always beneficial to clients.

The consultation paper seeks to update 2016’s  Regulatory Guide 256Client review and remediation conducted by advice licensees, and comes after ASIC observed licensees using remediation approaches “not aligned with their stated values about the treatment of consumers”.

“Some licensees view remediations as a distraction from their core business, while others take a legalistic approach that neglects consumer interests or fails to prioritise or resource remediations,’ ASIC noted.

The headline change proposed is an amendment to the relevant period for remediation from the current seven years to “the date a licensee reasonably suspects the failure first caused loss to a consumer”. In effect, the change means licensees will need to go back further than seven years when reviewing remediation issues. ASIC notes that most firms have increased technology now, which enables more robust administration and file keeping.

The corporate regulator also proposed that assumptions made by licensees in remediation issues that involve absent records should only be beneficial to clients, an area which isn’t specifically covered in RG 256.

Beneficial refund assumptions should “err on the side of overcompensation rather than under compensation”, ASIC states, while also noting that licensees shouldn’t feel the need to go overboard.

“That is not to say that licensees are obliged to overcompensate,” ASIC continues, “rather that if they choose to use assumptions to save time and cost or account for absent records, the assumptions should equate to actual loss or err towards overcompensation rather than risk returning less than what consumers are owed.”

ASIC also seek to implement a broad two-tiered approach to remediation whereby traditional (tier 1) cases of “misconduct, error or compliance failure that causes loss” would be joined by failures causing loss that breach business values, industry codes of conduct, external or consumer standards.

Instead of waiting for a problem to fester, ASIC proposes, licensees should attend to remediation issues as soon as they develop.

“We are proposing that a remediation must be initiated when a licensee has engaged in a misconduct, error or compliance failure relating to a financial service provided by and covered under the licensee’s relevant licence and caused actual or potential consumer loss to ‘one or more’ consumers, rather than a ‘number of consumers’.”

Further proposals include a three-step framework for calculating foregone returns or interest, removing the low-value compensation threshold and a clarification of the guidance for remediation money that can’t be returned to the client.

The corporate regulator is currently monitoring 100 mediations with a potential $3.55 billion return to 3.6 million clients. ASIC says a driver for the review into compensation was the proliferation of remediation cases “blown out’ by system failures.

“There are opportunities for firms to not only identify the issues that can lead to remediations earlier, but also to make sure that they have arrangements and systems in place to return money to affected consumer as fast and as fairly as possible”, ASIC’s acting chair Ms Chester said in a statement accompanying the release. “We are also seeing some positive signs from firms who are looking at ways to fast track remediations, including through the use of beneficial assumptions.”

ASIC invites comments from industry participants with the closing date for submissions on February 26, 2021. At a future date draft draft regulatory guidance will be released for further consultation, ASIC noted.

“We want firms to get on with the job of doing fair and efficient remediations in line with their legal obligations,” Chester added. “The issues we are consulting on reflect the questions that firms frequently ask ASIC. Clarity on these issues will help firms step up and deliver good consumer outcomes.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
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