ASIC has released Regulatory Guide 277 Consumer Remediation (RG 277) which replaces Regulatory Guide 256 Client Review and Remediation Conducted by Advice Licensees (RG 256), after a consultation process that began in December 2020. In addition to releasing RG 277, ASIC has also published its field guide, ‘Making it right: How to run a consumer centred remediation’.
Licensees beware: there is no transition period for the application of RG 277. RG 277 will apply to all remediations commenced on or after 27 September 2022. It is essential that licensees understand ASIC’s views.
Some of the key changes include:
- the remediation review period is to begin whenever the misconduct or other failure causing consumer loss first occurred rather than the review and remediation period being generally limited to 7 years but can be limited by reference to the records held by the organisation unless reasonable assumptions can be made
- the “low-value compensation threshold” has been lowered from $20 to $5, although the $20 threshold remains unit pricing error guidance
- access to internal dispute resolution (IDR), before matters are referred to external dispute resolution (EDR) schemes
- ASIC has moved from considering settlement deeds as appropriate to considering them problematic (although acknowledging that they may be required in some circumstances)
- more examples included throughout the document to assist licensees to understand their obligations.
ASIC notes in Report 737 that many licensees were already following the procedures required under RG 277 prior to it being finalised and published. Nonetheless, RG 277 represents a shift from RG 256 in expressly applying to remediation by all Australian financial services (AFS) licensees and Australian credit licensees and not just remediation conducted by AFS licensees who provide personal advice to retail clients.
We discuss the key components of RG 277 below.
Summary Table
The below table does not summarise the entirety of RG 256 and RG 277, only some of the key changes discussed in this article.
|
RG256
|
RG277
|
Example
uses 2
|
|
Applies to licensees providing personal advice to retail clients |
Applies to all AFS and credit licensees |
|
|
Remediation should follow principles which are largely consistent with the principles outlined in IDR regulatory guidance |
There are nine key principles for conducting a remediation |
|
|
Remediation is required when:
|
Remediation is required when:
|
|
|
The process for determining the scope of the remediation process is:
|
The process for determining the scope of the remediation process is:
|
|
|
Review and remediation period is generally limited to 7 years from the date on which the licensee became aware of the misconduct or other compliance failure |
Remediation review period is to begin whenever the misconduct or other failure causing consumer loss first occurred. If this extends beyond record-keeping requirements (and records have been destroyed), licensees should consider using assumptions to account for absent records |
|
|
Remedies may be monetary, non-monetary or both (noting that RG 256 refers to calculating compensation by reference to principles for compensation established under the licensee’s EDR scheme whilst RG 277 does not) |
Remedies may be monetary, non-monetary or both (noting that RG 256 refers to calculating compensation by reference to principles for compensation established under the licensee’s EDR scheme whilst RG 277 does not) |
|
|
Licensees should consider foregone returns or interest when determining financial loss |
Licensees should consider foregone returns or interest when determining financial loss |
|
|
Licensees should calculate the actual foregone returns or interest. Where this is not possible, licensees should apply a rate that is ‘fair and reasonable’, such as the Reserve Bank of Australia (RBA) cash rate + 6% |
Licensees may calculate the actual foregone returns or interest, use assumptions which are beneficial to consumers to determine the foregone returns or interest or use a combination of both approaches. In some circumstances, a prescribed interest rate under legislation may be relevant. Alternatively, it may be appropriate to assume a rate of interest at the RBA cash rate + 6%. |
|
|
Licensees must not profit from the misconduct or failure |
Licensees must not profit from the misconduct or failure |
|
|
Low-value compensation threshold is $20 |
Low-value compensation threshold is $5 |
|
|
Where clients are below the low-value compensation threshold and the client cannot be compensated without significant effort, licensees may instead make a community service payment |
Licensees must make ‘reasonable endeavours’ to find all affected consumers, except where:
If the licensee is unable to pay the compensation following reasonable endeavours, it may either make payments to an unclaimed money regime or to a charity or not-for-profit organisation If a low-value compensation threshold is applied, the licensee can automatically allocate those amounts to a charity or not-for-profit organisation (or in the case of a superannuation fund or managed investment scheme, retain those amounts in the fund or scheme for the benefit of the remaining beneficiaries) |
|
|
Clients should have access to an EDR scheme if they are not satisfied with the licensee’s decision |
IDR requirements apply to consumers who make complaints relating to a remediation. Licensee must advise consumers that they can have their remediation outcome reviewed by AFCA, following the IDR process |
|
|
Settlement deeds are considered appropriate (to the extent they apply to the content of the remediation) |
Settlement deeds are considered problematic, although ASIC acknowledges that they may be necessary in some circumstances |
|
|
Licensees should be transparent about reviews and remediations |
Licensees should be transparent about reviews and remediations |
|
Who does RG 277 apply to?
The guide applies to AFS licensees and credit licensees. RG 277 specifically notes that superannuation trustees, retirement savings accounts providers, debt management service providers and providers of claim handling and settling services must comply with RG 277.
Conversely, RG 256 only applies to AFS licensees who provide personal advice to retail clients. However, providers were encouraged to apply the principles in RG 256, to the extent relevant to reviews and remediations unrelated to personal advice. The new regulatory guidance specifically covers a much wider range of providers and services.
When remediation must be undertaken?
Remediation should be initiated when there has been ‘misconduct or other failure’ which may have caused consumer loss. Misconduct or other failure includes a breach of financial services law or credit legislation, contractual failings and errors and extends to decisions, omissions or behaviours of current or former authorised representatives, third-party service or product providers, consultants and other significant related entities, as well as those of licensees. It is not limited to reportable situations as defined under the Corporations Act 2001 (Cth) or the National Consumer Credit Protection Act 2009 (Cth).
This does not represent a substantial departure from when remediation needed to be initiated previously, although may be a slight broadening of the criteria. Under RG 256, remediation needed to be initiated where a systemic issue had occurred that led to consumer loss. In contrast, the new regime does not require there to be a ‘systemic’ failure. Rather, it refers to scalability of a remediation process and requires licensees to determine thresholds for when a remediation becomes a ‘program’ and when a remediation can be effectively dealt with through other processes (e.g. existing compliance processes).
It is the licensees’ responsibility to have adequate mechanisms in place to proactively identify misconduct or other failures. Monitoring processes should be flexible and support timely identification of misconduct or other failures (e.g. by proactively monitoring and analysing data and trends that might show anomalies in services or product provision). Licensees subject to design and distribution obligations should also monitor whether consumers are receiving products which are consistent with their likely objectives, financial situation and needs.
What does consumer remediation involve?
Ensure access to evidence, data and records
Licensees have a range of record-keeping obligations and should ensure that relevant records are easily accessible.
Once the relevant records are identified, licensees should take all reasonable steps to access and secure the evidence, data and records held by the business or third parties. This process should be done as soon as possible in the remediation process.
Investigate the nature, cause and extent of the misconduct or other failure
When conducting a remediation, licensees should:
- Identify the root cause of the issue
- Investigate the full extent of the misconduct or other failure to properly identify all consumers affected
- Consider whether file sampling is necessary to check that the problem is not more widespread than initially suspected.
Determine the remediation review period
The remediation review period should begin when the licensee reasonably suspects the misconduct or other failure first occurred and caused loss to a consumer. The remediation review period is not necessarily limited to the record-retention period but can be limited in practice to the records held by the organisation unless reasonable assumptions can be made.
Licensees should consider applying assumptions to identify and compensate consumers who suffered loss beyond the record-retention period or where record retention obligations have been breached.
RG 277 notes that where licensees have adequate processes in place to identify misconduct or other failures promptly, the remediation review period will likely not extend beyond the record retention requirements. Remediation review periods that exceed record retention requirements may indicate a systemic underinvestment in the systems and processes in place to identify misconduct or other failures as they arise.
RG 277 does not limit the remediation review period to the limitation period for the relevant cause of action.
Identify affected consumers
Licensees should review all evidence and records necessary to identify the affected consumers. Licensees may need to use assumptions if records are missing or to achieve fair and timely remediation outcomes. If assumptions are used, they should be beneficial to consumers (i.e. licensees should minimise the risk of consumers falling out of scope).
Remediation should not be undertaken on a consumer opt-in basis.
Review and test your scope
During remediation, there may be additional misconduct or other failures identified. Licensees should consider whether their remediation scope needs to be updated if this occurs and may wish to test their remediation scope to ensure it captures all affected consumers.
Determine an appropriate outcome for consumers
The overarching principle is that consumers should be returned, as close as possible, to the position they would have been in if the misconduct or other failure had not occurred. This could entail monetary or non-monetary remedies, or both. RG 277 provides a non-exhaustive list of remedies which may be appropriate in particular circumstances.
Monetary remedies and interest
If providing monetary remedies, licensees should consider any direct and indirect financial loss, including foregone returns or interest. The licensee may calculate the actual financial loss incurred by consumers, apply assumptions which are beneficial to consumers (i.e. or use a combination of both approaches.
This also applies when calculating foregone returns or interest. If it is appropriate in the circumstances to use assumptions, this could mean using a prescribed rate of interest under legislation or the RBA cash rate plus 6%, if justified in the circumstances.
Licensees should also consider the tax consequences of remediation.
Non-monetary remedies
Non-monetary remedies, such as assisting consumers to move into more appropriate products, may be appropriate where consumers have been provided information by the licensee which was not compliant with the licensee’s obligations. This could include providing misleading and deceptive information or financial advice which was not in the best interests of their client. Non-monetary remedies may also be appropriate where consumers have been subject to misconduct or other failure, but have not yet suffered monetary loss.
Other considerations
When undertaking a remediation process, licensees must also ensure:
- Adequate resourcing: this will depend on the size and complexity of the remediation and consideration should be given to:
- The financial and technological resources required, the appropriate number of people, the skills required and the diversity of their specialities
- Whether outsourcing parts of the remediation is appropriate, particularly if it is large and complex – however, licensees are encouraged to develop their own in-house remediation capabilities where possible
- Proper governance frameworks are in place: consideration should be given to:
- Accountability and reporting frameworks
- Engaging an independent consultant to oversee the process and ensure compliance with governance frameworks and regulatory compliance if appropriate or requested by a regulator
- Minimising conflicts of interest
- Good record keeping: licensees should:
- Document the remediation methodology and process
- Track key steps and decision milestones
Reaching affected consumers
Reasonable endeavours
Licensees must apply ‘reasonable endeavours’ to contact and deliver the remediation outcome to affected consumers. Whilst what constitutes ‘reasonable endeavours’ will depend on the circumstances, licensees should review whether messages have been viewed or responded to by affected consumers, if cheques have been cashed and consider multiple communication channels for non-responsive consumers.
Low-value compensation threshold
Licensees do not need to apply reasonable endeavours to contact a former customer (where payment details are not on file) if the amount owed is less than $5 (including interest).
Process
Consumer-centred approach
Licensees must take a consumer-centred approach. In doing so, refer to ASIC’s field guide titled, ‘Making it right: How to run a consumer-centred remediation’. Licensees should minimise consumer calls to action which are when consumers are required to take to access their remedies.
When communicating important information to consumers throughout the remediation process, licensees should provide details of how to lodge a complaint about the remediation process through IDR (discussed further below) and, when necessary, AFCA.
What to do with the money owed to consumers
One of the key principles underlying RG 277, is that licensees cannot profit from the misconduct or other failure. Whilst this is consistent with RG 256, the new regulatory guide provides more detail about dealing with the money owed to consumers (following the process outlined above):
|
WHAT TO DO WITH THE MONEY OWED TO AFFECTED CONSUMERS
|
INDIVIDUAL
|
Example
uses 2
|
|
|
Money that can be returned
|
|
|
|
|
Money that cannot be returned
|
|
|
|
Resolving the matter
Interaction between IDR, EDR and remediation
Under the Corporations Act 2001 (Cth), licensees must have in place an IDR procedure (see RG 271) and AFCA membership. If a consumer makes a complaint regarding the remediation, they should be directed to the licensee’s IDR procedure.
There should be appropriate sharing of information between the people involved in remediation, IDR outcomes, and if relevant, AFCA outcomes.
Licensees should let consumers know that if they are not happy with the IDR outcome, they may have their remediation outcome reviewed by AFCA. Licensees should consider waiving any rules which would inhibit a consumer’s ability to access AFCA. Most likely, this will involve waiving any time limits relevant to the complaint.
Settlement deeds
RG 277 does not advise licensees to use settlement deeds when providing remediation payments as they may limit the consumer’s rights. Moreover, instituting settlement deeds as part of your remediation process may contravene the principles for consumer communication established in RG 277 and its related field guide.
Where settlement deeds are necessary (such as to satisfy your professional indemnity insurance obligations), licensees should endeavour to draft deeds which are efficient, honest and fair.
Public reporting
ASIC does not have the power to force licensees to publish the outcome of the remediation. However, licensees are encouraged to be open and transparent about the remediation.
ASIC recommends creating a web page within a license’s website that is dedicated to the remediation. This upholds the principle of communication whilst also allowing consumers who are concerned about scams to verify that messaging they have received about the remediation is not related to a scam.
We note that ASIC has the power to publish information about remediation programs being undertaken by licensees to support transparency.
