• AFS Licensees facing significant new obligations

11 key points from ASIC’s consultation paper on client review and remediation programs

In late 2015, ASIC released its consultation paper on proposed guidance for Australian Financial Services Licence (AFSL) holders concerning client review and remediation programs. The guidance sets out the key principles against which ASIC will assess such programs.

With less than a month before the consultation periods ends, here are 11 key points from the paper, along with some commentary from our Forensic Consulting team.

1. A client review and remediation program is a project set up to review advice given by financial advisers where a ‘systemic’ issue has been identified.

ASIC defines a systemic issue as 'an issue that may have implications beyond the immediate rights of the parties to a complaint or dispute, or that may have implications for more than one client'.

The paper provides examples of systemic issues, such as:

  • misconduct by one adviser that may affect several clients
  • misconduct by several advisers in relation to the process of giving advice (e.g. disclosure or record keeping)
  • a problem with several advisers in how they give advice about a particular class of products
  • the advice licensee not having sufficient processes in place to identify and address misconduct in a timely way

2. There should be some kind of external oversight in developing and operating the program.

Licensees can outsource remediation programs; however, as Essendon footballers found to their cost, Licensees cannot outsource the ultimate responsibility.

3. Programs must seek out potentially affected clients, rather than relying on clients to identify themselves or make a complaint.

4. Groups with multiple AFS licenses must consider if the systemic issue may exist in other Licensees.

5. The Licensee must ‘clearly articulate and record how they determined the scope of the review and remediation program.’

A Licensee’s focus is understandably going to be on running the program. Many decisions will be taken, and there is a risk that these are not documented in such a way that later review can easily identify how the decision was made.

If the program is later reviewed by ASIC or another party, a lack of documentation can lead to significant additional work by the Licensees. They may have to review detailed records and recreate data to justify the decisions taken. This all adds to the cost of the remediation program.

6. It is the Licensee’s responsibility to retain records for seven years (and to be able to access those records), even if the adviser moves on. However, a remediation program must review the whole period for which records are retained, including any records which are more than seven years old.

It appears that ASIC has learnt from previous programs, as we understand that some Licensees had difficulty accessing records when an adviser had moved to a different Licensee.

The requirement to review the whole period for which records are available creates an interesting issue regarding older records. Arguably, it might encourage Licensees to ensure data is deleted after the seven year period expires. However, intoday’s digital economy, it may not be practically possible to delete data. This could lead to a significant burden on Licensees to review all data they hold.

As a result, we foresee disagreements over what is meant by a ‘retained record’. Many companies will have older records held in electronic archives, but the cost of obtaining and reviewing the information may be very significant. It is not clear to what extent the Licensee must go to find retained records.

7. While the paper is aimed at remediation programs for personal advice, the principles in the proposed guidance should be applied to other programs that seek to remediate retail clients.

8. Licensees should consider whether it is in the public interest to report on the remediation program.

In general, ASIC states that public reporting is ‘especially important’ if the program follows public reports of client losses or alleged misconduct.

9. ASIC may be involved in the design or implementation of remediation programs.

This may benefit Licensees in the long run, as ASIC’s involvement will reduce the risk of a program being found inadequate at a later date and the consequent cost involved in rectifying the program.

10. Licensees should make a decision as to whether to remediate a client ‘within 90 days of notifying the client that they are within the scope of the program.’

While 90 days may seem like a long time to review a client’s file, this is a much shorter period than we have seen in previous programs. This timeframe may be difficult to achieve in larger programs.  However, the 90 days starts when clients are notified that they are within the scope of the program. This creates an incentive for Licensees to delay contacting clients so as to prevent the 90 day clock starting and contrasts with the tone of the rest of the paper, which encourages upfront communication.

11. There is some useful guidance on when and how to communicate with clients.

These points include:

  • First impressions are important – people may not read correspondence that is dense or complex.
  • Think of the appropriate method and tone of communication in light of the client’s circumstances (such as financial literacy).
  • Be clear and direct. Use plain language and avoid using legal jargon.
  • Break down multiple tasks into simple steps.
  • Use short sentences and paragraphs, and avoid lengthy letters.
  • Prominently highlight at the top of the communication the steps the client is required to take and the key message.
  • Consider the best time(s) to contact a client throughout a process.

This emphasis on clear communication is vital to ensure fair results for consumers and so that Licensees obtain appropriate results from the programs.

These principles can usefully be widely applied to business communication in general. Indeed, some professional service firms could benefit from following them!

How Grant Thornton can assist

At Grant Thornton, our experts in many fields can assist with the design, scoping and supervision of remediation programs. Our teams can also advise on risk management frameworks, risk culture and internal controls. For more information, contact Alex Bell whose details are below.

Alex joined Grant Thornton in November 2015. At his previous firm, Alex was the day-to-day leader of the compliance expert team appointed by ASIC to consider a major bank's historical issues regarding its wealth management area. This role involved reviewing two remediation programs and regular liaison with ASIC, the relevant bank and other stakeholders.