ASIC remediates remediation expectations with new RG 277

Key Points

• ASIC has recently released Regulatory Guide 277 (RG 277) – which describes ASIC’s expectations as to how all holders of Australian financial services licences (AFSL) and Australian credit licences (ACL) should structure their systems and processes for reviewing misconduct and compliance failures, and remediating clients who have suffered loss or damage as a result.
  
  
• RG 277 is an important development for all AFS and credit licensees. It represents a significant expansion of ASIC’s remediation guidance and, unlike its longstanding predecessor (RG 256), applies to both AFSL and ACL holders and to all remediation scenarios.
  
  
• In RG 277, ASIC says it expects licensees to initiate remediation promptly and proactively, and not to wait for consumers to complain or proceedings to be instituted.
  
  
• ASIC also provides core principles and examples as to how licensees should appropriately engage in remediation, as well as a ‘field guide’ which licensees can use to conduct remediation activities.
  
  
• While RG 277 is primarily aimed at retail client remediation, ASIC states in RG 277 that it considers that in some cases it may be appropriate to include wholesale clients in remediations also.

RG 277 – key developments

1 – RG 277 applies to all AFS and credit licensees

ASIC now expects all AFS and credit licensees to have review and remediation schemes which align with RG 277. Although the predecessor review and remediation guide (RG 256) has been widely used by licensees as a ‘yardstick’ for conducting consumer remediation programs, it only applied directly to AFSL holders providing personal advice to retail clients. RG 277 is the first time that ASIC has provided universal ‘minimum standards’ of remediation for all AFS and credit licensees.

2 – Emphasis on proactive review and remediation

RG 277 places a heavy emphasis on proactive review and remediation. Where licensees have engaged in misconduct or compliance failures that have caused, or may cause consumer loss, ASIC expects that they will promptly initiate the remediation.  

Three key themes emerge from RG 277 and the accompanying consultation paper on the most recent draft (CP 350) as to ASIC’s expectations for proactive review and remediation:

1. Licensees should not wait for consumers to complain, or for the commencement of proceedings, to initiate remediation. They should initiate a remediation as soon as they become aware of the misconduct or other failure which has caused the consumer loss.  Deputy Chair Chester has stressed that while ASIC has needed to oversee large scale remediations in the past, RG 277 puts the onus on industry in respect of remediations and ASIC ‘cannot and should not oversee remediations in order for consumers to receive fair and timely outcomes’.
   
   
2. Remediation is not only required by misconduct or compliance failures that are breaches of core obligations and other reportable situations. Licensees may also be required to initiate remediations for breaches of contract and breaches of industry codes of conduct (such as the ePayments Code and the Banking Code of Practice).
   
   
3. Licensees should be ‘client-centric’ and should not take an ‘overly technical or legalistic approach when identifying misconduct or other failures’.

3 – Remediation principles and examples

ASIC expects that AFS and credit licensees will conduct remediations which adopt nine important principles:

1. Consumers are to be returned as closely as possible to the position they would have been in had the misconduct or other failure not occurred.
   
   
2. Licensees should understand the full nature, extent and impact of the misconduct or other failure – they should aim to identify all consumers who have or may have suffered loss, and fully understand the nature, extent and impact, including its root causes.
   
   
3. Consumers should be given the benefit of the doubt. If assumptions are utilised for efficiency or to account for gaps in records or data, they should be consumer-centric and seek to minimise the risk of affected consumers being under-compensated or deemed ‘out of scope’.
   
   
4. Licensees should ensure that key decisions are justified and documented. This seems like common-sense but remediation programs are often poorly documented, particularly in relation to scoping decisions, and this can make it difficult to withstand scrutiny from ASIC.
   
   
5. Licensees should apply reasonable endeavours when making remediation payments – they should generally return money owed to affected consumers regardless of value (subject to the ‘low-value compensation threshold’ – discussed below).
   
   
6. Licensees should be timely without sacrificing quality consumer outcomes – remediation should be efficient and timely so as to not exacerbate detriment, or increase the likelihood of poor outcomes.  It may be appropriate to split a remediation into stages (e.g. prioritising certain customer cohorts, perhaps by focussing on the ‘easier’ or vulnerable cohorts first).
   
   
7. Remediation processes should minimise complexity for consumers – consumers who have been affected by the misconduct should be automatically included in the scope of a remediation (as distinct from ‘opt-in’ arrangements that require consumers to respond to correspondence or provide information before being included in scope).
   
   
8. Licensees must ensure they disgorge all profit from the misconduct or other failure.
   
   
9. Licensees must ensure that the remediation is adequately resourced and governed – people managing a remediation should have relevant experience, and licensees may wish to consider appointing an independent expert to provide assurance.

Throughout RG 277, ASIC provides 28 examples of how licensees conducting remediations might appropriately respond to circumstances which arise in the course of the remediation.   

These examples illustrate the key principles, and are likely to be a useful resource for licensees given the diversity of situations which they address.

4 – Guidance on low-value payment threshold and uncontactable consumers

ASIC’s prior guidance in RG 256 provided for a low-value payment threshold whereby remediation amounts of less than $20 could be paid directly to charity if they could not be paid to the affected consumer ‘without significant effort’. RG 256 referred, by way of example, to a consumer who ‘no longer holds an account’, and this led to a default practice among some licensees of paying low value remediation amounts due to former customers directly to charity.

ASIC has revised its guidance to provide that remediation payments should only be made directly to charity if the licensee owes $5 or less (after interest), to a former customer and does not have their payment details. Despite objections during the consultation processes, ASIC pressed on with this amendment and has observed that the reduced threshold is necessary to incentivise licensees to continue to enhance their data management and retention capability.

Otherwise, ASIC expects:

• where licensees have current payment details on file, they will make remediation payments to current and former customers regardless of the value;
  
  
• where licensees do not have current payment information on file, they should make all ‘reasonable endeavours’ to contact the affected customer (noting that what is reasonable will depend on the value and context). If the remediation payment cannot be made in spite of reasonable endeavours, the licensee must not retain the money and should lodge it with an unclaimed money regime or pay it to a charity or not-for-profit.

5 – Guidance on interaction with other obligations

RG 277 sheds important light on ASIC’s view as to the role of remediation obligations within the broader ecosystem of obligations that apply to AFSL and ACL holders.  

In the introduction to RG 277, ASIC stresses that the remediation framework is underpinned by the general conduct obligation on AFSL and ACL holders to do all things necessary to ensure that the financial services or credit activities covered by their licence are provided efficiently, honestly and fairly. ASIC also expresses a view that inadequate remediation may constitute a breach of this obligation.

There is certainly scope for argument as to whether the ‘efficiently, honestly and fairly’ conduct obligation applies to the remediation of financial services or credit activities that have already been provided.  Unless or until the question is determined by the Court, licensees should be wary of admitting that flaws in a consumer remediation program constitute a failure to comply with the ‘efficiently, honestly and fairly’ conduct obligation, particularly since the obligation is now the subject of civil penalty provisions that apply to both AFSL and ACL holders.

ASIC’s outlook

1 – Future actions

AFS and credit licensees should consider RG 277 as an indicator of ASIC’s expectations in the remediation space and its likely focus on it.  It is noteworthy that ASIC’s 2022-2026 Corporate Plan does not include a reference to the remediation regime.  

It is also noteworthy that in CP 350 ASIC stated that many respondents indicated that proposed standards were in line with current remediation practices. Nevertheless, licensees should expect ASIC to commence investigations in the coming months into remediation regime compliance.

ASIC acknowledges in CP 350 that the current framework under the breach reporting regime is not sufficient to provide accurate information about remediations in the financial services sector. ASIC encourages licensees to be transparent and accountable about their remediation programs, and has flagged that it is supportive of legislative reform which will allow it to collect relevant data in this space.

2 – Communications and monitoring

In CP 350 ASIC acknowledges the communications and monitoring difficulties which inhere in operating a proactive remediation regime under RG 277.  

ASIC’s view is that consumers should generally be given the opportunity to find out about the misconduct or other failure, and be notified of their rights to review the outcome, and that it is inappropriate for consumers to receive remediation payments with no indication of what it is for. However, ASIC acknowledges that difficulties may arise, especially in communicating assumptions that the licensee may have made in the course of its remediation in respect of individual consumers.

Moving forward, licensees carrying out remediation that relies on assumptions should keep consumers informed on how they can find out more information about the assumptions that may impact their remediation.

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^{This article was originally co-authored by Felicity Healy.}