At a glance
By Gary Anders
The Australian Securities and Investments Commission (ASIC) has overseen at least A$5.6 billion in financial services remediation over the past six years, to an estimated seven million current and past customers.
According to ASIC, as at 31 December 2022, this included A$4.7 billion in remediation paid or offered by six of Australia’s largest banking and financial services institutions for fees for no service misconduct or non-compliant advice, compensation paid by insurers for selling “junk” insurance, and failure to deliver on price discount promises and poor sales practices.
Remediation claims have surged since the end of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019.
More remediation payments may be on the horizon, given the number of legal class actions that have been lodged against a range of major financial institutions and are still active in the courts.
The case for risk-based regulation
In September 2022, ASIC published updated and expanded regulatory guidance to help financial services organisations remediate affected customers as quickly and efficiently as possible once a problem has been identified.
Regulatory Guide 277 Consumer remediation (RG 277) applies to Australian credit licensees and Australian Financial Services (AFS) licensees, including superannuation trustees. It is underpinned by the notion that organisations have a legal obligation to operate efficiently, honestly and fairly.
In addition to being informed by six years of ASIC’s regulatory oversight experience – including a slew of legal actions – the guide was developed during a two-year public consultation process that included consumer and industry stakeholders.
According to ASIC deputy chair and commissioner Karen Chester, “ASIC’s guidance puts the onus on industry to get on with fair and timely remediations – returning the money they owe to wronged consumers”.
To date, ASIC has needed to oversee large-scale remediations to ensure affected consumers were treated fairly and received the compensation to which they were entitled, Chester says.
“The release of our expanded guidance, along with the updated field guide Making it right, delivers licensees all they need to achieve the right remediation outcomes on their own.
“It explicitly allows the use of assumptions to help firms address knowledge gaps and accelerate remediation programs in a way that does not disadvantage consumers,” Chester says.
Fundamental to ASIC’s guidance is the need for financial services organisations to take prompt and decisive action once an issue requiring monetary or other remediation has been identified. This includes scoping out the issue to understand what has occurred, the number of customers affected, the monetary size involved and how it can be resolved accurately and efficiently.
ASIC recommends that organisations use “beneficial assumptions” where there are “knowledge gaps”. This enables organisations to calculate remediation payments in favour of all affected consumers, including where organisational records are lacking, to save time and cost.
ASIC advises organisations to give consumers the benefit of the doubt when making assumptions, to be transparent, to incorporate tracking and monitoring, and to record outcomes against the goal.
Systems and processes
Mark Gossington, KPMG financial services – risk strategy and technology partner, has worked on a range of major remediation projects in Australia and the UK.
Gossington believes it is essential for licensees to have adequate systems and processes in place to ensure that misconduct or other failures are identified when they occur, and to protect and compensate consumers for any losses suffered as a result.
“This is a key indicator of whether the licensee is meeting its licensing obligations. In our experience, licensees have been reactive, waiting for incidents to be identified and reported before initiating consumer remediation. More work needs to be done to turn this into a proactive endeavour to detect incidents that have not yet come to light,” Gossington says.
Proactive remediation is also critical, because consumers of financial products or services will generally neither be aware, nor have a reasonable way to be aware, that they have suffered a loss, Gossington says.
In a high percentage of remediation cases, the original issue is identified either because of customer complaints or because poor product design has been identified by the business post sale.
The Australian Financial Complaints Authority (AFCA) has also identified and reported an estimated 227 definite systemic issues and serious contraventions of the law to federal regulators, resulting in an additional A$280 million in refunds to 6.5 million consumers.
AFCA CEO and chief ombudsman David Locke says the service would prefer that complaints never reach it, but if they do, the best outcome for everyone is early resolution by agreement.
“As long as the outcomes are fair and just, we think early resolution is good for everyone,” Locke says. “For industry, it means retaining customers’ business and goodwill. For consumers, the sooner a matter is resolved the better, because financial disputes can be very stressful.”
Locke says AFCA’s role is not only to resolve disputes, but also to work with the financial services industry to help it improve practices. “Our aim is to see fewer complaints, not more.”
Many remediation projects are still manually investigated, but organisations are increasingly looking to harness technology.
According to Gossington, technology tends to be used to fix a known problem. “Then, obviously, customers need to be put right in some way, whether that’s by a monetary payment or other type of remediation,” he says.
After scoping and scaling the problem, the next step is to ascertain whether a customer contact exercise is warranted.
Technology and data analytics can enable licensees to reimburse affected customers automatically and directly, without needing to contact them.
“Some banks now will just pay the money straight back into your bank account and you won’t even really know about it, other than getting a letter after it has been paid to your bank account.
“We might be doing the actuarial calculations for you if it is a complex payment. That’s where we have to work out interest and returns and refunds depending on the nature of the product. It becomes a multi‑year process in that case – quite a complex project,” says Gossington.
Locating past customers and their banking details to repay them can be an issue.
“You’d be surprised how difficult it is sometimes to track people down to make a payment back to them.
“Many people are obviously very suspicious of any contact now, particularly with all the scams and data breaches. It’s actually very difficult to get people even to open an email, SMS or letter from their financial institution because they assume it’s potentially fraud or a scam,” Gossington says.
Where a customer cannot be remediated automatically, protocols require licensees to locate customers on multiple occasions using different methods such as mail, email, SMS or paid advertisements. If licensees ultimately cannot locate the person to which the money is owed, it can sometimes be paid into an unclaimed monies fund or to a registered charity.
“Ultimately, financial institutions would rather pay the money back to their members or customers who are owed money,” Gossington says. “It’s an opportunity to put things right with the customer.”
Compliance and government resources
Depending on their complexity, remediations can take anywhere from months to years to resolve.
“Some investment advice programs have taken more than five years to complete, because there’s always a tail of complex cases where they’re high value, there’s a legal dispute, there’s a complaint, or you can’t find the individual and they have a significant amount of money,” Gossington says.
Some more sophisticated firms have been able to speed up the process by adapting their custom-built compensation calculators, so every time they find a new one, they need not build it from scratch. This means they can make a payment quickly – sometimes within weeks rather than months.
“The banks have hundreds of smaller remediations to finish. It will become an ongoing requirement to remediate customers when you find problems. You’ve got to do your duty to put them back into the right position,” says Gossington.
Chester says that licensees simply need to do better at identifying and remediating problems earlier to avoid the costly lag and drag of remediation. “The common stumbling block we have seen across remediations is underinvestment in systems.”
“Underinvestment has led to a trifecta of failures. First in delivering on promises to consumers, second in identifying the failures and third in remediating consumer loss in a timely way.”
Chester says the regulator has now effectively drawn a line in the sand by getting licensees to abide by its regulatory guide by investigating and completing their own remediations. “Going forward, while ASIC may need to intervene in some isolated cases, we cannot and should not oversee remediations in order for consumers to receive fair and timely outcomes.”