ASIC calls for consultation on proposed review and remediation program guidelines

KEY TAKE OUTS

  • ASIC has released its consultation paper on review and remediation program guidelines.
  • Submissions from industry participants were due on 26 February 2016.
  • The final regulatory guide and amended class order relating to record keeping obligations of AFSL holders will be released by ASIC in May 2016.

Review and remediation programs, both small and large-scale, have increasingly become part of everyday life in Australia’s financial services institutions. Some have been initiated voluntarily while others were required by ASIC as part of enforcement action. Significant resources are expended in the design, implementation and scrutiny of these programs.  

In late 2015, ASIC released Consultation Paper 247: Client review and remediation programs and update to record-keeping requirements to provide draft guidance to Australian Financial Service Licence (AFSL) holders who provide personal advice to retail clients. The Consultation Paper provides draft guidance on:

  • When to establish a review and remediation program;
  • How to determine the scope of the program;
  • The design of a comprehensive and effective program;
  • Effective communication with clients; and 
  • Ensuring access to the external review of decisions. 

The Consultation Paper seeks feedback on a range of issues, to assist ASIC consider the financial and other impacts of the draft guidelines. 

What is a review and remediation program?

A review and remediation program is a project set up within an AFSL holder’s organisation to review personal advice where a systemic issue in relation to that advice has been identified, and remediate clients who have suffered loss as a result of that advice.

In ASIC’s view, such programs should place affected clients in the position they would have been in had the misconduct not occurred.1 Remediation can be monetary (by way of compensation), non-monetary (for example by transfer to more appropriate financial products) or a combination of both.2 

ASIC’s objective in setting guidelines is to ensure that clients have confidence that all programs, regardless of size, are fair, consistent and transparent.3 ASIC has stressed that a program should avoid unnecessary complexity, be simple and free for the client and requires that all communications with clients must be effective, timely and targeted. Clients are to have access to an AFSL holder’s external dispute resolution scheme if they are not satisfied with any part of, or the decision reached in, a program.

Systemic Issues

The concept of a ‘systemic issue’ is central to the draft guidelines and is defined in the Consultation Paper as “an issue that may have implications beyond the immediate rights of the parties to a complaint or dispute, or that may have implications for more than one client”4. Examples of systemic issues provided in the Consultation Paper5 are:

  • Misconduct by one adviser that may affect several clients;
  • Misconduct by several advisers in relation to the process of giving advice (e.g. disclosure or record keeping);
  • A problem with several advisers in their advice about a particular class of products; or
  • A lack of sufficient processes to identify and address misconduct in a timely way.

Types of systemic issues6 are:

  • Failure to provide advice in the best interests of the client;
  • Failure to provide appropriate advice;
  • Failure to give priority to the interests of the client;
  • Fraud;
  • Failure to provide key disclosure documents or providing disclosure documents that don’t comply with the requirements under the law; or
  • Providing false or misleading statements. 

Systemic issues may be identified from client complaints or by regular compliance checks/ audits of advisers.

Establishing a program

There are several factors that must be considered when determining whether to establish a program, including:

Whether it is appropriate to set up a program or whether a small number of affected clients can be dealt with under existing dispute resolution avenues;

Who should be engaged to conduct the program and whether it should be a new team established or can operate within existing teams and resources; 

How a program will interact with existing dispute resolution and AFSL obligations;

  • What form of independent oversight is needed;
  • Whether an independent expert is required;
  • How to keep records of the program;
  • What technological resources are required; and
  • Whether public reporting of the program is appropriate.

The scope of a program will depend on the type of misconduct, the size and structure of the AFSL holder and the size and nature of the client base.7 It should be broad enough to ensure it covers the right advisers, the right clients and the right timeframe and should be flexible to accommodate an extension of the timeframe or misconduct. 

Once a class of clients has been identified, the advice provided to all clients within that class must be considered, regardless of whether those clients have made a formal complaint about the adviser or conduct in the past.

ASIC has confirmed that the development and operation of all review and remediation programs should have some level of independent oversight.8 An independent expert may also be appropriate9 where:

  • The program is very large;
  • There are complex issues;
  • The program is part of an enforceable undertaking or ASIC imposed licence condition;
  • Reporting to the public is appropriate; and
  • An AFSL holder has little or no experience in such programs. 

ASIC’s involvement in a program

Often review and remediation programs are required by ASIC as part of enforcement action. ASIC may become aware of systemic issues through breach reports (ss912A and 912B Corporations Act 2001), proactive surveillance or public complaints. ASIC may become involved in reviewing the design and implementation of a program depending on:

  • The size of the program;
  • The AFSL holder’s past conduct (including past review and remediation programs) and its conduct in response to the systemic issue;
  • The nature of the misconduct; and
  • ASIC’s available resources.10

Record-keeping Obligations

The Consultation Paper also proposes changes for the record-keeping obligations of AFSL holders, to be recorded by way of amendment to Class Order [CO 14/923] ‘Record-keeping obligations for Australian financial services licensees when giving personal advice’, to ensure that client records are retained to show evidence of the AFSL holder’s compliance with Corporations Act duties of best interest when personal advice is provided.

Submissions

The time for providing submissions in response to the Consultation Paper closed on 26 February 2016. The final regulatory guide and amended class order will be released by ASIC in May 2016.  

1      Paragraph 7 of the Consultation Paper
2      Paragraph 35
3      Paragraph 9
4      Paragraph 36
5      Paragraph 40
6      Paragraph 42
7      Paragraph 18
8      Paragraph 132
9      Paragraph 138
10    Paragraph 76