In brief
ASIC has released a consultation paper about client review and remediation programs to address client losses because of adviser misconduct. Partners Michelle Levy and Malcolm Stephens look at what ASIC says a licensee should do if they identify systemic misconduct by advisers providing personal advice.
Overview
ASIC has released Consultation P247: Client review and remediation programs and update to record-keeping requirements. In it ASIC says that a licensee should establish a review and remediation program if it identifies a systemic issue in relation to personal advice. ASIC's threshold for what amounts to a systemic issue is pretty low, for example it might relate only to a single adviser. In short, it is anything that is more than a complaint by a client about an adviser. While the scale of the systemic issue will influence the scale of the program, ASIC says the elements should be the same. They require the licensee to: determine the scope of the program; design and implement the program; communicate with clients; provide for external review if the client is not satisfied with the operation of the program or the result.
Why is a program required?
ASIC says that taking responsibility for remediating clients who suffer loss because of misconduct is part of the licensee's duty to provide financial services efficiently, honestly and fairly. It also says that licensee should 'prioritise' the 'remediation of clients' – it is not clear whether this is part of the licensee's obligation to act efficiently, honestly and fairly or whether ASIC is referring to the duty of priority that applies to an adviser in relation to the personal advice they give to their client. ASIC makes the point that a systemic issue is very likely to be a significant breach that must be notified to ASIC, but it also makes the point that this is a question for the licensee to consider in each case.
What is the scope of the program?
First, ASIC says that licensee must determine the scope of the program – who are the advisers, who are the potentially affected clients and over what timeframe. ASIC says that licensees should review advice as far back as the licensee has records (records should be kept for seven years). Once the potentially affected clients are identified, the advice they have received must be reviewed – a review should not, in the ordinary course, depend on a client accepting an invitation to participate in the review.
Design and implementation – what is required?
There is a lot in this section of the paper. ASIC says that the licensee should consider the resources that will be required, who will conduct the review, how it is to be conducted, what independent oversight is needed, what governance arrangements are appropriate, record keeping and whether to publicly report on the program. The approach should be 'consumer-focused' which ASIC explains as being helpful, communicating in plain English, showing commitment to remediating any losses and giving clients the benefit of the doubt when information is missing. It should also be 'objective, unbiased and equitable in its dealing with clients and have commitment from senior management'. ASIC also says that the licensee must speak to its EDR about putting in place processes to make it easier for clients to complain to the EDR about the program.
Advice should be reviewed as quickly as possible and ASIC says this would normally mean that a file is reviewed and a decision is made to remediate a client (or not) within 90 days. There should also be independent oversight, which might be by a person internal to the licensee although they must be sufficiently independent from the remediation program. This possibility raises the potential for conflicts to interfere with remediation program – and while ASIC identifies the issue, it really leaves it to licensees to address.
ASIC says that the licensee should be able to explain all of its decisions, record everything and retain those records. The licensee should also keep ASIC informed.
And what about compensation?
If the review identifies that a client has suffered loss because of misconduct, then the client should be compensated (or in ASIC's words 'remediated'). And this is where the paper is pretty light on – ASIC does not give licensees much help about how loss should be calculated and compensation determined. ASIC does say that the licensee's aim is to put the client in the position they would have been in had it not been for the misconduct. And that is fine as far as it goes. But ASIC also says that: 'compensation should be calculated in line with relevant EDR scheme principles'. In most cases, the relevant EDR scheme will by the Financial Ombudsman Service (FOS). But it is not clear that this is what a licensee should do – if the adviser's conduct involves a breach of the Corporations Act or a breach of their fiduciary duties, then compensation might need to be determined having regard to what they would be entitled to under the Act or in equity. It also doesn't acknowledge that there might be cases where a compromise might be appropriate.
What about communicating with clients?
ASIC says that a licensee should write to clients at the beginning of the review program and at the end and possibly during the process. It says that communication should be effective, timely and targeted so that clients understand the review and remediation program. Clients should be told that the licensee has identified potential misconduct that might affect advice provided to the client and that the licensee is conducting a review and remediation program and what that involves. They should tell the client what it means for them and how they can contact the licensee. They should also tell them about how they might complain to the EDR.
Record keeping requirements amendments
The consultation paper ends with ASIC's proposal to amend CO14/293 to make it clear that when a licensee or one of its representatives provides personal advice, the licensee must ensure that client records are not only kept for seven years but also that the licensee continues to have access to these records during the period in which they are required to be retained.
What should you do?
If you would like to respond to the paper, submissions are due by 26 February 2016.