ASIC formalises requirements for client review and remediation
After years of review and remediation activities at many advice licensees and months of industry consultation following the release of Consultation Paper 247 (CP 247) in December 2015 (including with this firm), ASIC has released its Regulatory Guide 256: Client review and remediation conducted by advice licensees (RG 256).
It demonstrates ASIC's commitment to customer advocacy and focus on timely and appropriate breach-reporting in large financial institutions.
What do you need to know?
RG 256 sets out the following key considerations for advice licensees who provide personal advice to retail clients:
- when to initiate the process of review and remediation (which generally aim to place affected clients in the position they would have been in had misconduct or other compliance failure by an advice licensee not occurred);
- how to determine the scope of review and remediation;
- how to design and implement a comprehensive and effective process for review and remediation;
- elements of effective communication with clients; and
- steps for ensuring access to external review.
The nature of each of the above elements will be influenced by factors such as the size of the licensee, the numbers of advisers or clients involved and the scale of the issue being remediated
A review and remediation program should be established to review personal advice where a systemic issue in relation to advice has been identified. CP 247 defined a systemic issue to include one that may have implications for more than one client, with this narrow scope causing concern amongst advice licensees.
In RG 256.21, ASIC has broadened the definition of systemic issue to refer to "an issue causing actual or potential loss or detriment to a number of clients as a result of misconduct or other compliance failure by an advice licensee or its current or former representatives. The impact may be a monetary loss or non-monetary detriment".
What's changed and what does this mean for advice licensees?
Despite extensive industry consultation, RG 256 is more prescriptive than CP 247. Set out below are some important messages from RG 256 that advice licensees contemplating review and remediation should consider:
Breach reporting: ASIC has already indicated in its recently released Corporate Plan that it will focus on breach-reporting in large banks as one of its surveillance projects for 2016-2017. This is evident in RG 256, which makes several references to instances where advice licensees will need to consider issuing a breach report to ASIC, including:
where a systemic issue has triggered the initiation of a review and remediation process (generally this will constitute a significant breach for reporting purposes);
where a client has made a complaint and that complaint is within the scope of the review and remediation but the advice licensee is unable to comply with its IDR obligation to provide that client with a response to the complaint within 45 days; and
where an advice licensee does not have adequate resources to conduct the review and remediation process in accordance with its obligations under s912A(1)(d) of the Corporations Act (which requires licensees to have adequate resources to provide financial services covered by the AFS). ASIC indicates in RG 256 that it will look more closely at advice licensees who incur unnecessary delays in remediating clients, as this may indicate that the licensee has inadequate resources to conduct the review and remediation or is not prioritising the remediation or acting efficiently, honestly and fairly.
Early engagement with PI insurer: RG 256 recommends that advice licensees engage with their PI insurer as early as possible and throughout the review and remediation process, including discussing whether they would like to review any proposed communications with clients. Advice licensees should also consult their PI insurer before waiving any limitation period. This is to minimise the risk of advice licensees prejudicing the rights of their PI insurer and as a consequence, voiding or reducing their cover.
Compensation arrangements: a departure from CP 247, RG 256 contains guidelines about the payment of interest on compensation amounts, including that the RBA's cash rate + 6%, reflecting the Federal Court's interest rate, is an appropriate rate of interest where it is not possible or practical to determine the actual investment returns that a client would have received. This rate well exceeds a client's likely return on a product. Given that the purpose of Federal Court interest is to incentivise payment and penalise delay, with this initiative ASIC seems to be taking a similar approach to drive compliance with its many efficiency directives in RG 256. RG 256 also recommends that advice licensees make a community service payment to an appropriate organisation (generally non-profit) where the amount of compensation payable to a client is below $20 and the client cannot be compensated without significant effort on the licensee's part.
Customer focus: RG 256 suggests that advice licensees involve a consumer advocate in the process of peer-reviewing advice to ensure that a consumer-focussed approach is adopted in the way that advice is being reviewed. It also makes recommendations to ensure that customer communication is effective, timely and targeted, informed by behavioural insights (an ongoing focus for ASIC).
Genuinely independent expert: ASIC emphasises that, whilst independent oversight can offer appropriate assurance about the governance, design and operation of a review and remediation program, it is important to ensure that the external expert engaged is and remains genuinely independent. A new development from CP 247, RG 256 flags the following examples (amongst others) as indications of potential risks to an expert's ability to exercise objective and impartial judgment:
whether the fees and remuneration from the advice licensee's business in the two years before the proposed appointment are material to the expert's revenue in Australia; and
whether the expert has participated in strategic planning for the advice licensee's business.
Henry Davis York's Regulatory Risk + Strategy team has extensive experience advising major financial institutions in relation to review and remediation programs. Please contact our team to discuss how RG 256 may impact your business.