January 2017

January 2017 • 1

Overview A recurrent theme in financial sector news over the last few years has been the misconduct of a number of financial advisers, and the losses their clients suffered as a consequence. Some of Australia’s largest financial institutions have been caught up in scandals that involved advisers employed at those firms.

In some cases, this misconduct indicated systemic problems. In response, the licensee would have set up a program to review the advice provided to clients, and to remediate clients who may have suffered loss as a result of adviser misconduct. In response to growing public and political concern, ASIC has released new regulatory guidance to establish a best practice for review and remediation.

Learning objectives After reading this article you should be able to:

Outline the key features of a review and remediation program

Explain how to determine the clients who should be included in such a program

Identify appropriate resources and personnel to oversee and participate in such a program.

Knowledge areas and accreditation Knowledge area: Ethics (60 minutes/1.0 point).

FPA CPD points 1.0 Dimension: Professional Conduct (Ethics) (FPA 008606).

AFA CPD points 1.0 (AFA 01022009).

CPA Australia CPD points 1.0 (CPA 000175).

FBAA CPD points 1.0.

SMSF Association CPD points 1.0.

Review and remediation programs

Review and remediation programs

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AFS licensee remediation programs The failings of some financial advisers employed by some of the country’s largest financial institutions have come to light with disappointing regularity over the past few years.

In some cases, systemic issues were identified in relation to financial advice services offered by these institutions, and review and remediation programs have been set up to identify and compensate clients who have suffered as a result of the shortcomings in the advice they received.

High-profile programs which have been publically announced include the:

Commonwealth Bank’s Open Advice Review Program

National Australia Bank’s Customer Response Initiative

Macquarie Group’s Client Remediation Program.

While review and remediation programs are sometimes required by ASIC as part of an enforceable undertaking, the regulator states that it is seeing a growing trend in programs conducted proactively by licensees. To assist, ASIC has released a Regulatory Guide

designed to establish a best practice for such programs.

New ASIC guidance Regulatory Guide 256: Client review and remediation conducted by advice licensees (RG 256) was released by ASIC on 15 September 2016.

The key features of ASIC’s guidance include:

When a review and remediation program is called for

How the program interacts with other Australian financial services (AFS) licensee obligations, including Corporations Act 2001 (Corporations Act) requirements, and the licensee’s internal dispute resolution (IDR) and external dispute resolution (EDR) schemes

How to determine what the scope of the program should be

How a program should be designed and implemented

What is appropriate in terms of governance and involvement at senior management level

Communicating with clients

Record-keeping requirements.

To download RG 256, visit www.asic.gov.au:

Select “Regulatory Resources”

Under “Find a document”, select “Regulatory guides”

Select “RG 247–RG 256”

Select “RG 256 Client review and remediation conducted by advice licensees.”

Quicklink

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ASIC emphasised that programs must be conducted in a way that is efficient, honest and fair, and stated that consumers must have confidence that any program they participate in is fair, consistent and transparent.

The guidance has three main aims:

1. To improve outcomes for consumers

2. To provide a streamlined and well-understood review and remediation framework

3. To set out the key principles against which ASIC will assess whether a review and remediation program is operating efficiently, honestly and fairly, in line with the general AFS licensee obligations.

As its name suggests, there are two key parts to a review and remediation program conducted by an AFS licensee. These are to:

Review personal advice where a systemic issue in relation to the advice has been identified, and

Remediate clients who have suffered loss as a result.

The outcome of the program should be that the affected client(s) is placed in the position they would have been in had the misconduct not occurred.

Remediation is typically monetary, but can also be non-monetary, for instance, providing disclosure not previously given, or directing clients into products that are more appropriate.

When is a review and remediation program called for? A review and remediation program will generally be called for when:

A systemic issue has been identified that is a result of the decisions and behaviour of the advice licensee, or an individual adviser or advisers (as representatives of the licensee) in relation to the provision of personal advice to retail clients

The affected clients are likely to have suffered a loss.

RG 256 applies to programs conducted by AFS licensees who provide personal advice to retail clients. Review and remediation processes may also be put in place by licensees who are not advice licensees (for instance, Australian credit licensees), or in relation to general advice.

ASIC stated that where review and remediation does not relate to personal advice, the principles set out in RG 256 should be applied “to the extent relevant”.

What does “systemic” mean?

An understanding of the word “systemic” is important in determining whether an issue can be handled by the licensee’s existing IDR processes, or whether a review and remediation program may be called for.

In RG 256, ASIC defines a “systemic issue” as:

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.

A systemic issue will often have implications beyond the immediate rights of the parties to a complaint or dispute.

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Types of systemic issue include:

Misconduct by one adviser that affects several clients

Misconduct by several advisers in relation to the process of giving advice (e.g. the way records are kept, or the way disclosure is handled)

Misconduct by several advisers in relation to advice about a particular class of products

An advice licensee not having sufficient processes in place to identify and address misconduct or other compliance failure in an efficient and timely way.

Types of systemic issues include:

Providing advice that is not in the client’s best interests

Failing to give priority to the client’s interests

Fraud

Failing to provide appropriate disclosure

Conducting unauthorised transactions on a client’s account

Failing to act on a client’s instructions.

How does a program fit into the licensee’s IDR and EDR obligations? A review and remediation program sits alongside a licensee’s IDR and EDR obligations. While there may be interaction between the licensee’s IDR processes, EDR processes and a review and remediation program, each serves a distinct purpose.

One of the key distinguishing factors is that review and remediation is not complaints-driven. If a client initiates a complaint with the licensee, the first step is for the complaint to be reviewed by the licensee’s IDR processes.

Complaints that come to the licensee’s attention through its IDR scheme may lead the licensee to believe there may be a systemic issue, and consequently to put in place a review and remediation program.

The program is, however, likely to end up reviewing the advice of many clients who did not themselves make a complaint. The licensee is required to proactively identify clients who may have been affected by the deficient advice.

If a client has made a complaint, the IDR obligations (including the timeframes of the IDR process) will apply, even if the complaint falls within the review and remediation program.

Consider

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In other words, including a complaint in a program does not exempt a licensee from its IDR obligations.

The role of the EDR scheme is to review complaints made by clients who are dissatisfied with the licensee’s decisions made during the IDR process, or as part of a review and remediation program.

How does a program fit into a licensee’s other regulatory obligations? There are a number of regulatory obligations that are relevant to a licensee’s review and remediation program.

Section 912A(1)(a) of the Corporations Act states:

A financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.

RG 256 makes clear that this obligation includes taking responsibility for the consequences of the licensee’s actions, including remediating clients who have suffered loss due to the actions of the licensee or its representatives.

Having sufficient resources to conduct a review and remediation program when required, and to remediate affected clients, is part of a licensee’s obligation under section 912A(1)(d) Corporations Act to have adequate resources to provide financial services covered by the AFS licence.

A licensee’s obligation to properly monitor and supervise its representatives also implies an obligation to take steps to rectify any deficiencies in the representative’s behaviour.

Section 912B of the Corporations Act requires licensees to have arrangements in place to compensate clients for losses they suffer as a result of breach by the licensee or its representatives of their obligations under Chapter 7 of the Corporations Act.

Licensees should also consider whether the systemic issue that results in the need to establish a review and remediation program also triggers the breach reporting obligations of the Corporations Act.

How should a program’s scope be determined? A review and remediation program should cover the right advisers, the right clients and the right timeframe.

As a first step, the licensee will need to determine the type of misconduct that may have caused loss, and which advisers may have engaged in that misconduct.

The licensee may do this by, for instance:

Looking at complaints being dealt with by its IDR processes

Reviewing a broad selection of advice given to clients

Looking for unusual patterns in advice given to clients (e.g. advice that generates higher than normal commissions)

Reviewing the outcomes of compliance audits of advisers.

For example

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The licensee will then need to assess which clients may have received advice from those advisers, and suffered a consequential loss.

The program should include not only current clients, but also those who have previously had their advice reviewed by the licensee’s IDR or EDR processes — particularly if the program uncovers information that would change the result of the IDR/EDR review to the client’s benefit.

In setting the timeframe, the licensee should look at the period over which the misconduct is likely to have occurred. RG 256 states that, except in certain limited circumstances, ASIC will not generally expect licensees to review advice going back more than seven years (consistent with the timeframe for general record-keeping obligations).

As mentioned, a review and remediation program is not complaints-driven. The licensee is expected to proactively identify clients who fall within the scope of the program, regardless of whether they have made a complaint. Those clients should have their advice reviewed, and if it is found that they have suffered loss due to misconduct, be remediated for that loss.

ASIC states that it is the licensee’s responsibility to take reasonable steps to determine the affected clients.

In some circumstances, however, it may also be appropriate to invite clients outside of the original scope of the program to participate. This may be the case when the licensee cannot be certain that the program will capture all potentially affected clients, or where an adviser had engaged in several types of misconduct, the exact scope of which is unclear.

However, a licensee cannot simply rely on inviting clients to express an interest in participating in review and remediation. The licensee must take a proactive approach to identify affected clients.

Sometimes during the program, evidence of other misconduct may surface that was not originally anticipated when the program was being put together. A program must be flexible enough to allow for the scope to be modified as more information about misconduct comes to hand.

ASIC states that determining the scope of a review and remediation program is not a one-size-fits-all process. The scope will depend on the type of misconduct, the size and structure of the licensee, and the size and nature of the client base.

For instance, large groups with multiple licences need to assess whether the program should cover other advice licensees within the group.

How should a program be designed and implemented? Factors a licensee will need to consider in designing a review and remediation program include:

Resources required

Who is to review the advice, and how the review process will operate

Independent oversight and appropriate governance arrangements

How to keep records

Whether to report publicly on the program.

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ASIC encourages licensees to engage with their EDR scheme at the stage of designing a review and remediation program, and states that advice should be reviewed according to the principles of the EDR scheme to which the licensee belongs. This will be typically either the Financial Ombudsman Service or the Credit and Investment Ombudsman.

Of note is that EDR schemes are not bound by the rules of evidence that apply in court proceedings. They consider evidence and then make decisions based on the balance of probabilities.

As part of engaging with the EDR at the design stage, the licensee can ensure that relevant documentation, timelines and other arrangements are agreed upon with the EDR. This will be of benefit in the event that a client subsequently makes a complaint about the program to the EDR.

The aim of an EDR process is to place clients in the position they would have been in had the misconduct not occurred. A review and remediation program should generally calculate compensation in line with the principles of the EDR.

RG 256 states that compensation should include the payment of actual investment returns or interest the client would have earned if the misconduct had not taken place.

ASIC expects that in most cases, a licensee should be able to accurately determine this amount. However, in exceptional circumstances when this is not possible, ASIC says it is appropriate to use the RBA cash rate plus 6%.

Proper resourcing

The licensee must allocate adequate resources to a review and remediation program to ensure that it is run efficiently. “Resources” refers not only to human resources, but also to technological resources and record-keeping systems.

The staff who are involved in a program must be adequately trained and supported. Reviewers should meet the competence standards to provide personal advice in the product area that is being reviewed.

It goes without saying that advisers who are the subject of the review and remediation program should not be involved in the program, and should not be in a position to influence the reviewers.

Licensees can outsource some or all of the program, but they remain responsible for the operation of the program, whether or not it is conducted in-house.

Clear principles for the review process should be established so that reviewers are able to be consistent and fair. A licensee will need to strike an appropriate balance between being consistent and being flexible.

Consider

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ASIC encourages the use of templates to guide reviewers of advice and to help in record-keeping. However, a tick-a-box approach is to be avoided, as the reviewer should take into account the details of each individual case and exercise judgment in deciding whether misconduct has occurred.

In some cases, peer review may be appropriate to ensure that advice is being reviewed consistently and fairly. In this process, the initial review of the advice is followed by a second assessment conducted by a third party.

Peer review is not called for in all review and remediation programs, but may be beneficial when the advice involved complex investment strategies, or where the program involves many clients and many advice reviewers.

The review process should be undertaken in a timely fashion. RG 256 does not prescribe a set timeframe, instead stating that:

Advice should be reviewed in a timely way and as quickly as possible without compromising the quality of the review. What is a reasonable timeframe will depend on the nature of the matter.

If the matter is small and not complex, ASIC expects licensees to use IDR timeframes as a guide. A licensee must provide a final response to a client who has lodged a complaint with their IDR process within 45 days.

ASIC states that when a licensee fails to make a decision within a reasonable timeframe, this may indicate that the licensee is not:

Allocating adequate resources to the review and remediation

Prioritising the remediation of clients

Acting efficiently, honestly and fairly

Failing to adhere to the above requirements are breaches of AFS licensing obligations.

Oversight and governance Independent oversight in developing and operating a review and remediation program is essential. It can be provided either by someone external to the licensee, or by a senior person in the licensee’s organisation who is independent from the program.

RG 256 states that external oversight may be appropriate if the program is large in scale, or includes complex issues, or when a licensee has little experience designing and operating a program. It may also be preferable where the program is required as part of an enforceable undertaking or other licence condition imposed by ASIC.

If an external person is used, their independence must be beyond question.

For example

Consider

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RG 256 lists a number of potential risks to an expert’s ability to be objective and impartial, such as when:

The expert has received significant fees or remuneration from the licensee in the previous two years

There are existing business or personal relationships between the expert or their associates, on the one hand, and the licensee and their officers on the other.

Responsibilities of the person overseeing the program may include:

Helping at the design stage

General oversight and checking operational effectiveness

Reviewing a random selection of assessments to ensure they are being carried out consistently and fairly.

In terms of governance, ultimate responsibility for the program must rest with someone who holds a senior position at the licensee’s business. That person, whether it is the principal of the firm, the board, or a director or senior executive appointed by the board, should be regularly informed of the program’s progress.

Keeping good records

As part of a review and remediation program it is essential to keep good records, including:

How the program was designed

Details of communication with clients

Details of internal communications, and communication with any external parties who

were part of the review process

The assessment of the file, and any subsequent peer review

Recommendations made by the file reviewers and the reasons for those recommendations

Decisions and reasons for those decisions, particularly where the decision varies from the file reviewer’s recommendation

How the type of remediation is determined

Timeframes in reviewing a file.

Public reporting

It may be appropriate to report publicly on the progress of a review and remediation program. This is most likely to be the case if the program is large scale, or has followed well-publicised reports of the adviser misconduct that has led to the establishment of the program.

How should clients be communicated with? Communication with clients is a key part of a review and remediation program. Licensees need to consider what information to communicate to clients, and how and when to communicate.

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A guiding principle is that communication should be simple and remove complexity where possible. The focus should be on the recipient, and what will make the communication most effective from that person’s perspective.

Principles for effective communication set out in RG 256 include:

Using the appropriate tone and method of communication, taking into account the client’s circumstances such as age, financial literacy and language skills

Using simple language and avoiding legal jargon

Presenting information in a user-friendly way — avoiding dense slabs of text, and using short, simple sentences and paragraphs

If it is essential to send complex information, consider including this in supplementary material (e.g. a booklet) rather than in the main letter

Highlighting the action the client is required to take

Explaining clearly what the process is, what the client can expect and when.

It is likely that the licensee will have to contact clients several times during the process.

As a minimum, the licensee will initially need to inform the client that they are included in the scope of the program, and after the client’s advice has been reviewed, let them know of the final decision and any remediation that will apply.

Other communication may take place during the process. For instance, the licensee may need to communicate with the client to request additional information about the client’s particular case. The client should also have the ability to receive updates on the progress of their review.

Communication will typically be in writing. ASIC states that if any key information is communicated verbally to the client, for instance, by phone, this should be followed up in writing within 10 days.

When the licensee requires a response from a client to a request to provide further information or to accept an offer of remediation, a reasonable and flexible timeframe should be given.

RG 256 states that client should be given a minimum of 30 days to respond to any requests. If no response is received, the licensee should make reasonable efforts to contact the client.

If a client does not respond within a specified timeframe, this cannot be used as a reason to exclude the client from the program, or to deny the client remediation.

If a client responds after the review and remediation program has been wound up, the licensee should have in place another process to review the client’s advice, potentially through the licensee’s IDR mechanism.

Most communication is likely to be initiated by the licensee, and RG 256 makes clear that licensees are expected to be proactive in their approach.

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In addition, licensees should make it as simple as possible for clients to obtain information, or obtain progress reports on their case. This could be done by providing a phone number or email address for clients to contact, or by providing secure access to an electronic facility that can supply information on the progress of the client review.

The final communication of the outcome of the review, and the decision on any remediation, is clearly of great importance. This correspondence should set out:

The decision reached

The reasons behind the decision

If remediation is offered, how it was calculated, and if not, the reasons why

Action the client can take if they are unhappy with the decision (typically, taking a complaint to the licensee’s EDR scheme)

Contact details if the client wishes to discuss the decision further with the licensee.

What if the client is unhappy with the review’s outcome? The licensee’s responsibilities to the client do not end once the decision is made as part of the review and remediation program. The licensee must ensure that the client has free access to EDR processes and other resources to review the licensee’s decision.

In many cases, the next step for a client who is dissatisfied with an aspect of the review and remediation program, or with the decision the licensee has made in their case, will be to take their complaint to the licensee’s EDR scheme.

When the licensee communicates their final decision to the client, they should clearly set out in the correspondence how the client can proceed.

The licensee should also consider whether the EDR scheme monetary and time limits should be waived if these limits would constrain the scheme’s ability to deal with the client’s complaint. However, ASIC recommends that licensees check with their professional indemnity insurer before agreeing to do this.

The licensee must assist the client by providing information and documents that were used in reaching the decision on the client’s case. This process will be facilitated if the licensee has agreed on relevant documentation, timelines and other arrangements with the EDR scheme at the time of developing the review and remediation program.

In some cases, clients may want to obtain their own professional advice with regard to a licensee’s decision. RG 256 states that licensees should consider whether some form of assistance is appropriate, either by:

Offering to pay the costs, up to a specified limit, of advice from a lawyer or accountant, or

Arranging for the services of a group of professionals independent from the licensee to be available free of charge.

Consider

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Assuming the client accepts the decision made by the licensee, a settlement deed or contract will generally be put in place.

RG 256 specifically states that a settlement deed should not place restrictions on the client’s ability to speak to ASIC, an EDR, an advisers’ professional association, or to seek legal representation if the client has concerns about the handling of their review or about the way the review and remediation program has been conducted.

Record keeping The availability of accurate records is crucial to the fair and efficient operation of a review and remediation scheme.

Licensees have a legal obligation to ensure that client records are retained to demonstrate that the licensee has met their best interests duty and related obligations. Records must be kept for at least seven years.

ASIC has, however, noted difficulties in recent review and remediation programs when the licensee no longer has access to client records, making them unable to properly review advice provided to the client, and determine whether the client suffered a loss.

This has typically occurred when authorised representatives have been contracted to retain records on behalf of a licensee. When the authorised representative moves to another licensee, or leaves for some other reason, the first licensee may lose access to client records.

ASIC has acted to close this loophole. Class Order [CO 14/923] Record-keeping obligations for Australian financial services licensees when giving personal advice will be amended to clarify that licensees must be able to access client records for the period they are required to be retained — regardless of who retains the records.

Conclusion AFS licensees have a legal obligation to remediate clients who have suffered a loss as the result of the decisions and behaviour of the licensee, or of the licensee’s advisers.

If an issue is systemic, the licensee is likely to have to implement a review and remediation program. The main aim of a program is to place the affected clients in the position they would have been in had the misconduct not occurred.

If the licensee determines that the nature of the misconduct warrants establishing a program, it must ensure the program covers the right advisers, the right clients and the right timeframe.

The process needs to be comprehensive, timely, fair, and transparent, with an appropriate governance structure, and independent oversight.

The licensee must communicate effectively with clients to ensure that they understand and participate in the program, and must provide access to an external review of decisions made by the program.

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To give advice on the product(s) referred to in this article you must be licensed or accredited by your licensee and operating in accordance with the terms of your/their licence. Kaplan Professional recommends consulting a tax adviser on matters relating to tax advice and a legal professional for legal advice.

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