Remediation or class action?

There has been much fanfare and commentary in recent weeks about the class action market in Australia, culminating in the recent decision by the Federal Government to require litigation funders to fall within the purview of our financial licensing regime.

In recent years, we have seen organisations facing into the challenge of simultaneously navigating:

• Litigation by regulators as part of enforcement activities;
• Requirements by regulators to initiate remediation programs, particularly in the case of financial services organisations where ASIC considers this part of the obligation to do all things necessary to provide services fairly efficiently and honestly;
• Class action activity in relation to disaffected stakeholder groups (principally customers and shareholders).

It is easy to understand why some organisations see benefit in conflating the response strategies because the underlying fact patterns, or interpretations thereof, are common.

It goes without saying that unmeritorious claims in class actions should be defended rigorously.  However, there has been a discernible shift in more recent years for organisations to accept there may have been harmed groups, even in situations where reasonable efforts were made to prevent and detect such harm and/or there is no admission of legal wrongdoing.

In these situations, leaders face the invidious choice of getting on with resolving the harm and potential losses, whilst also managing the legal risks in resolving cases with regulators and class action firms.  This situation arises because litigation can commence and move forward very quickly whereas remediation programs take some time to mobilise.  Many leaders inevitably find themselves in a sort of "prisoner's dilemma".

Benefits of a remediation program

Where it is appropriate and possibly viewed as inevitable, completing a remediation program before a class action can materially progress provides significant benefits to organisations:

1. Remediation is, in and of itself, a deterrent to class actions, since stakeholders will not be entitled to further redress through the class action for losses for which they have already been compensated.
2. The methodology can be fit-for-purpose for the organisation and align with intended stakeholder outcomes.  Successful programs have already shown that, done right, they present an opportunity to re-engage with customers, engendering long-term loyalty and trust.  For class actions that are successful, the approach to remediating customers is put in the hands of the plaintiff law firm combined with any prevailing orders from the courts.
3. Payments to customers are 100% of loss/detriment.  Class action payments are approximately 70% of this since costs to fund action (both lawyers and funders) average about 30%.  In terms of customer-centricity, properly run remediation programs will always put more money in the hands of customers.
4. Program costs overall can be neutral – the costs of defending a class action all the way have been shown to be not materially different to the operational cost of remediation programs.  Importantly, many of these operational costs are spent on data, systems and people and represent an investment in the business, as opposed to a simple outgoing to external support.
5. Remediation programs often create assets for the business to use once the program has been completed.  Data models, risk controls, systems fixes and enhanced policies, to name a few, have enabled organisations to reduce forward compliance risks, providing a useful return on investment.
6. Brand positioning is enhanced since the organisation can command the communications and engagement process, whereas a class action is widely reported (often inaccurately) by media.  The adage "there's no such thing as bad press" doesn't really apply to class action lawsuits – it's far better for brand value to be admitting past harms and showing progress on fixing the issues.