ASIC commences consultation on proposed updates to RG 256 Consumer Remediation
What you need to know
- ASIC have released a consultation paper on proposed updates to RG 256 – Client Review and Remediation by Advice Licensees (CP335)
- The updated guidance is proposed to extend to all Australian Financial Services Licences (AFLS), Australian Credit Licences (ACL) and Responsible Superannuation Entities (RSEs) except SMSFs.
- This updated guidance is likely to have a material impact on the way licensees design and operate consumer remediation and compensation programs including;
- Scoping, execution methodologies and compensation calculations;
- Data and record keeping to demonstrate fair and efficient outcomes;
- Definition and measurement of key risk indicators to ensure delivery against industry and licensee values and standards
- Submission are due to ASIC by 26 February 2021
Licensees will need to:
- Understand the potential impact of ASIC's proposed amendments to both their in-flight consumer remediation programs and their internal polices relating to remediation and compensation.
- Determine if they wish to make a submission to ASIC as part of the consultation process.
- Consider the change management process that will be required to implement the proposed changes to both inflight programs and licensee remediation and compensation practices.
ASIC has released consultation paper 335 outlining a number of proposed changes to Regulatory Guide 256 including extending the guidance to the to the design and operation of consumer remediation programs conducted by all AFSLs, ACLs and RSEs. ASIC has outlined 7 key areas where they are proposing to update existing guidance and is inviting input on key issues relating to the proposals outlined. ASIC have indicated that this is part one of a two step consultation process.
Licensees will need to consider the proposed changes carefully in the context of their inflight programs and business as usual remediation and compensation policies before responding to the consultation process. We have summarised some of the key consideration below.
1. When to initiate a remediation
ASIC has proposed a two tier approach to determine when a licensee should initiate remediation. Tier one requires remediation to be initiated when one or more consumers suffer potential or actual detriment or disadvantage, as a result of a licensee engaging in misconduct, an error or compliance failure. Tier 1 would typically involve a breach of the law or contractual failings.
Tier two, which may overlap with tier one, would require licensees to initiate remediation where a failure causing loss has breached standards, expectations or values, including conduct which is not aligned to the licensee's values, standards or industry codes.
Under tier one, ASIC is proposing to broaden the circumstances requiring remediation by:
- removing the reference to systemic issues as an indicator of when remediation is required, as well as the reference that it may not be appropriate to remediate product failures;
- stating that remediation must be initiated where actual or potential harm is caused to 'one or more customers', as opposed to the current wording of 'a number of customers'.
- Tier one includes 'error' as a failure to explicitly capture circumstances
Under tier two, ASIC is proposing:
- remediation be conducted in line with its revised remediation guidance having regard to the licensee's general obligations;
- to remove the concept of a review and remediation program from the current RG 256, as a "program" may not be required to remediate consumers
Licensees will need to consider:
- The monitoring and supervision that will be required to enable them to detect cases which may trigger a tier two scenario. As some values and standards may be conceptual and aspirational, organisations will need to give careful thought to interpreting what does and does not constitute a breach of these values and standards that may require remediation.
- How the move from 'number of consumers' to 'one or more consumers' as an indicator of when remediation is required, will impact how they initiate and run remediation activities, including how to maintain a single view of all remediations applicable to a consumer and ensuring that there is clear accountability for consumer remediation.
2. The review period for a remediation
ASIC proposes that the relevant period for a remediation should begin on the date a licensee reasonably suspects the failure first caused loss to a consumer. This is in contrast with the current RG 256 which prescribes a minimum of seven years for a review period, except in some circumstances.
Licensees will need to consider;
- The criteria that should be used to determine an appropriate lookback period for each remediation and where required, individual consumer cohorts. A one size fits all approach is unlikely to be suitable.
- How decisions around lookback periods will be made and recorded.
- Their approach in circumstances where accurate data may not be available to substantiate consumer harm beyond 7 years including; decommissioned / legacy systems, third / related party document retention etc.
3. Using beneficial assumptions
ASIC proposes that assumptions used to make remediation more efficient or to enable compensation to be calculated in the absence of records, should only be employed if they benefit / favour each individual consumer. ASIC also proposes that such assumptions will need to be:
- evidence based and well documented,
- aim to return all affected consumers as closely as possible to the position they would have been in; and
- monitored to ensure that the assumption continues to deliver to these requirements.
Licensees will need to consider;
- If they will need to undertake a review process to assess all current assumptions in their remediation methodologies.
- Whether remediation programs which rely on grouping cohorts of consumers according to certain characteristics are appropriate anymore. The process of confirming whether an assumption will benefit a particular consumer may require a granular review approach.
- If assumptions based on sampling and averaging require review.
- If scoping practices that utilise beneficial assumptions currently preference inclusivity rather than exclusivity.
- If the requirement for beneficial refund assumptions to err on the side of overcompensation will require a reform of calculation methodologies.
4. Calculating forgone returns or interest
ASIC proposes providing further guidance to the calculation of forgone earning or interest including proposing a three step framework for determining the best approach in the circumstances. Additionally, ASIC is proposing that licensees will need to determine and justify what constitutes a fair and reasonable interest rate in circumstances where it is not possible or practicable to either calculate actual foregone earnings or to use a beneficial assumption based approach.
Licensees will need to consider:
- Whether their current approach (if it is not based on actual forgone earnings or interest) meets the tests outlined in the proposed three step framework.
- The impact of ASIC's proposed guidance in the circumstances where they are applying a proxy interest rate in place of a evidenced based calculation, including what constitutes a fair and reasonable interest rate and on what basis that rate should compound.
5. Finding and automatically paying consumers – and abandonment of low value threshold
ASIC proposes that licensees should apply best endeavours to find and automatically pay consumers, with cheques used as a payment method of last resort. ASIC further proposes that the low value threshold guidance in RG 256 be replaced with the principle that all consumers are returned to the position they would have otherwise been in regardless of the value and that it is up to licensees to determine and justify any decision to utilise a low value threshold for particular cohorts of clients.
Licensees will need to consider:
- What would constitute best endeavours in locating contact details for inactive consumers.
- Ensuring appropriate privacy controls are in place when collecting this information from third parties.
- Where the licensee does not have current bank account details, what mechanisms are available to gather this information and what would be required in terms of consumer action.
- How payments can be made inside the super system where fees were deducted from a superannuation fund that is unrelated to the licensee and the member has subsequently left that fund.
- If low value thresholds are currently being applied, are they justifiable in the circumstances and would there be a requirement to review the approach for previously reviewed cohorts of consumers.
6. Remediation money that cannot be returned to consumers
ASIC is proposing further guidance on the treatment of compensation where the money cannot be returned to the consumer, despite best efforts. This includes when monies should be paid to the relevant unclaimed money regimes and the circumstances under which it may be appropriate to make a payment to charity.
Licensees will need to consider;
- Their current process for disgorgement of compensation monies where the consumer cannot be located.
- Where the existing unclaimed money regimes can be used and where there are barriers (such as minimum thresholds).
- The cost and timeliness implications of returning amounts of less than $20 where the consumer cannot be easily located, including the requirement for client involvement in the return of low amounts (see section 5).
7. Settlement Deeds
ASIC proposes to clarify guidance in the use of settlement deeds and the use of implied consent.
Licensees will need to consider;
- If the circumstances under which they are currently seeking release are limited to the conduct being remediated.
- Whether the consumer has the ability to determine if an offer is adequate and fair when agreeing to a release.
- If they are relying on implied consent.
- In what circumstances do they believe that settlement deeds are required in order to protect the licensee interests.
Authors: Chris Baker, Head of Managed Services Risk Advisory; Gwladys Ngo Tedga , Director Risk Advisory; Ian Bolster, Partner Dispute Resolution, Stephen Tudjman, Consultant Financial Regulatory.
The services provided by the Ashurst Risk Advisory practice do not constitute legal services or legal advice, and are not provided by Australian legal practitioners. The laws and regulations which govern the provision of legal services in the relevant jurisdiction do not apply to the provision of non-legal services.
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