ASIC RG 256 — ASIC Regulatory Guide – RG 256 Client review and remediation conducted by advice licensees

Page 1 REGULATORY GUIDE 256 Client review and remediation conducted by advice licensees September 2016 About this guide This guide sets out our guidance on review and remediation conducted by Australian financial services (AFS) licensees who provide personal advice to retail clients (advice licensees). The guidance should also be applied to review and remediation that is not related to personal advice to the extent relevant. Note: This guide applies to remediations initiated before 27 September 2022. Remediations initiated on or after 27 September 2022 must be conducted in a manner consistent with Regulatory Guide 277 Consumer remediation (RG 277). Page 2 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in September 2016 and is based on legislation and regulations as at the date of issue. On 27 September 2022 we added the note on the front page. Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 3 Contents A Overview .................................................................................................4 Who does this guide apply to? ................................................................5 When will this guide apply? .....................................................................6 What is client review and remediation? ...................................................6 What is a systemic issue? .......................................................................8 Our policy objectives ..............................................................................10 Key considerations for review and remediation .....................................10 Our role ..................................................................................................12 B When review and remediation is appropriate ....................................13 When to initiate review and remediation................................................13 Interaction with IDR and EDR obligations .............................................14 Interaction with AFS licensing obligations .............................................15 C Determining the scope of review and remediation ..........................19 Identifying the scope of review and remediation ...................................19 Inviting clients to participate in review and remediation ........................22 Revising the scope ................................................................................23 D Design and implementation ................................................................25 Designing a review and remediation process ........................................25 Developing the processes for review and remediation ..........................26 E Communicating with clients ...............................................................42 Communicating generally with clients about review and remediation ............................................................................................42 When and how to communicate with clients..........................................43 F Ensuring clients have access to external review of decisions ..............................................................................................47 Settlement deeds ...................................................................................48 Key terms .....................................................................................................49 Related information .....................................................................................51 Page 4 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 4 A Overview Key points This regulatory guide sets out our guidance on client review and remediation (review and remediation) that: • is conducted by Australian financial services (AFS) licensees who provide personal advice to retail clients (advice licensees); and • seeks to remediate clients who have suffered loss or detriment as a result of misconduct or other compliance failure by an advice licensee (or its representatives) in giving personal advice. Review and remediation, which may be large or small scale, generally aims to place affected clients in the position they would have been in if the misconduct or other compliance failure had not occurred: see RG 256.5–RG 256.6 and RG 256.13–RG 256.20. The principles in this guide should also be applied to review and remediation that is not related to personal advice, to the extent relevant, although we recognise that: • implementation may differ between the various types of review and remediation; and • licensees may need to consider specific legislative requirements or other guidance that applies: see RG 256.7–RG 256.11. Key considerations for advice licensees include: • when to initiate the process of review and remediation (see Section B); • the scope of review and remediation (see Section C); • designing and implementing a comprehensive and effective process for review and remediation (see Section D); • communicating effectively with clients (see Section E); and • ensuring access to external review (see Section F). RG 256.1 Poor conduct by advice licensees undermines trust and confidence in the financial system and may result in significant investor and consumer losses. This can have a detrimental effect on investors and consumers, and could put retirement savings at risk. RG 256.2 It is therefore important that advice licensees proactively address systemic issues caused by misconduct or other compliance failures, and have robust review and remediation processes in place to protect and compensate their clients for loss or detriment suffered as a result. Critically, this means allocating adequate resources to the review and remediation to ensure it is conducted in an efficient and timely way. Page 5 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 5 Who does this guide apply to? RG 256.3 This regulatory guide applies to client review and remediation conducted by AFS licensees who provide personal advice to retail clients (advice licensees). Note 1: We use the term ‘clients’ in this guide to mean ‘retail clients’. Note 2: ‘Personal advice’ is defined in s766B(3) of the Corporations Act: see also ‘Key terms’. Note 3: Our guidance applies to personal advice about both Tier 1 and Tier 2 products: • ‘Tier 1’ products are all financial products that are not Tier 2 products; and • ‘Tier 2’ products are general insurance products, except for personal sickness and accident (as defined in reg 7.1.14 of the Corporations Regulations 2001); consumer credit insurance (as defined in reg 7.1.15); basic deposit products; non-cash payment products and First Home Saver Account deposit accounts. RG 256.4 Advice licensees seek, through review and remediation, to address systemic issues where these issues are a result of the decisions, omissions or behaviour of the licensee (or its representatives) in relation to the provision of personal advice to clients. Small-scale review and remediation and small licensees RG 256.5 Our guidance is intended to apply to all advice licensees described in RG 256.3, regardless of the licensee’s size or the size of the review and remediation. RG 256.6 The principles in this guide can be scaled up or down, depending on the size of the review and remediation, and may be adapted to suit advice licensees of different sizes and with different internal structures. Review and remediation not related to personal advice RG 256.7 Not all review and remediation is conducted in relation to personal advice. Other examples include processes to remediate clients for: (a) misconduct or other compliance failure by a licensee (or its representatives) other than advice licensees (e.g. other AFS licensees, credit licensees or financial product providers); or (b) misconduct or other compliance failure by advice licensees that does not relate to personal advice (e.g. misconduct or other compliance failure relating to general advice). RG 256.8 Review and remediation may be conducted by persons other than advice licensees, such as superannuation trustees, credit providers or financial product providers. Although our guidance is intended to Page 6 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 6 apply to advice licensees providing personal advice, many of the principles in this guide are applicable to review and remediation that is not related to personal advice. RG 256.9 All review and remediation generally follows the same steps—that is: (a) determining who are the potentially affected clients; (b) designing and implementing the process; (c) communicating with clients; and (d) providing for external review if the client is not satisfied with the operation of the review and remediation or the result. RG 256.10 Persons conducting review and remediation that is not related to personal advice should apply the principles in this guide to the extent relevant. RG 256.11 We recognise, however, that: (a) implementation of the principles may differ between the various types of review and remediation; and (b) licensees may need to consider any specific legislative requirements that apply, or other guidance on client review and remediation (e.g. the good practice guidance on managing errors and compensation in Regulatory Guide 94 Unit pricing: Guide to good practice (RG 94) which applies to product providers). When will this guide apply? RG 256.12 Our guidance applies to client review and remediation initiated on or after the date of issue of this guide. Note: In this guide, the process of review and remediation is ‘initiated’ when an advice licensee makes the decision to address a systemic issue through review and remediation. The next steps will generally be to determine the scope of the review and remediation and then to design the framework. What is client review and remediation? RG 256.13 All AFS licensees have an obligation to ensure that their financial services are provided efficiently, honestly and fairly: s912A(1)(a) of the Corporations Act 2001 (Corporations Act). RG 256.14 Complying with this obligation includes AFS licensees taking responsibility for the consequences of their actions if things go wrong when financial services are provided and clients suffer loss or detriment. This includes remediating clients who have suffered loss or Page 7 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 7 detriment as a result of misconduct or other compliance failure by the licensee or its current or former representatives. Note: This is consistent with the Federal Court of Australia’s (Federal Court) view on the meaning of ‘efficiently, honestly and fairly’ for the purposes of s912A(1)(a) in Australian Securities and Investments Commission v Camelot Derivatives Pty Limited (In Liquidation) [2012] FCA 414. RG 256.15 Generally, the review and remediation process is a set of activities set up within a business to review the services provided to clients—where a systemic issue caused by misconduct or other compliance failure in relation to those services has been identified—and to remediate clients who have suffered loss or detriment as a result (whether monetary or non-monetary). RG 256.16 Review and remediation can be a separately resourced large-scale exercise, where a business sets up a separate project team and recruits additional staff; or it can be a small-scale exercise operated by existing staff and using a business’s existing resources. RG 256.17 What is an appropriate response to a systemic issue will depend on a range of factors. For advice licensees, this includes the number of clients affected, the number of advisers involved, and the nature of the misconduct or other compliance failure. RG 256.18 Regardless of the approach adopted, advice licensees should initiate the process of review and remediation as soon as they become aware of a systemic issue, rather than wait for a client to make a complaint or a claim against them. Example 1: Review and remediation using existing resources Scenario Advice licensee ABC Advisers (ABC) discovered, after receiving a complaint from one of its clients, that one of its advisers had been giving inappropriate advice to clients to acquire a margin lending facility. After determining that the adviser had given inappropriate advice to five clients, ABC’s compliance officer reviewed the advice provided to the five affected clients, and made appropriate compensation offers. Commentary In this example, it was appropriate for the advice licensee to review the advice and remediate clients using its existing resources, given that only one adviser was involved and a small number of clients were affected. RG 256.19 The aim of review and remediation is generally to place affected clients in the position they would have been in if the misconduct or other compliance failure had not occurred: see RG 256.128. Page 8 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 8 RG 256.20 Remediation of clients may be monetary (e.g. compensation), non- monetary (e.g. providing disclosure not previously given or moving clients into more appropriate products), or a combination of both. What is a systemic issue? RG 256.21 In this guide, we define 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. RG 256.22 Systemic issues may be identified, for example: (a) by an advice licensee’s external dispute resolution (EDR) scheme or ASIC; (b) by analysing trends in complaints made to an advice licensee or to the licensee’s EDR scheme; or (c) from the results of an advice licensee’s regular compliance checks or audits of a particular adviser or advisers. RG 256.23 A systemic issue, however identified, could include, for example: (a) misconduct or other compliance failure by one adviser that may affect several clients; (b) misconduct or other compliance failure by several advisers in relation to the process of giving advice (e.g. disclosure or record keeping); (c) a problem with several advisers in how they give advice about a particular class of products; or (d) an advice licensee not having sufficient processes in place to identify and address misconduct or other compliance failure in an efficient and timely way. RG 256.24 The types of systemic issues covered by this guide are those where clients may have suffered loss or detriment as a result of the decisions, omissions or behaviour of an advice licensee, or an individual adviser or advisers (as representatives of the licensee), in relation to the provision of personal advice to clients. RG 256.25 These systemic issues may include, for example: (a) failure to provide advice that is in the best interests of the client (or providing advice without a reasonable basis for the advice, if advice was given before the Future of Financial Advice reforms); (b) failure to provide appropriate advice; (c) failure to give priority to the interests of the client; Page 9 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 9 (d) failure to adequately disclose the relevant risks to a client; (e) fraud (e.g. signature forgery); (f) failure to provide key disclosure documents (e.g. Financial Services Guide, Statement of Advice, fee disclosure statement or renewal notice), or providing disclosure documents that fail to comply with the requirements under the law; (g) providing false or misleading statements; (h) failure to act on a client’s instructions; or (i) conducting inappropriate or unauthorised transactions on a client’s account. Example 2: Conducting unauthorised trades on a client’s account Scenario Advice licensee Green and Brown Advisory Services (Green and Brown) provides financial services to retail clients. Its AFS licence does not authorise it to provide managed discretionary account (MDA) services to its clients. An adviser at Green and Brown provided advice to a number of clients to invest in a diversified portfolio of managed investments and listed securities. Some months later, the adviser identified a further listed security, Black and Blue Ltd, that they thought would be appropriate for the portfolio of these clients. Without consulting with or receiving any instructions from their clients, the adviser proceeded to buy shares in Black and Blue Ltd for each of their portfolios. Shortly afterwards, the value of the unauthorised share purchase dropped significantly due to a corporate scandal affecting Black and Blue Ltd. One of the affected clients noticed the trades and queried them with Green and Brown, who subsequently conducted an internal investigation into the trading. On confirming that none of the clients had authorised the trades, Green and Brown commenced a review to help clients to dispose of the unauthorised assets. Green and Brown also provided financial remediation to the clients to compensate them for their losses. Commentary In this example, it was appropriate for the advice licensee to initiate a review and remediation process to remediate clients for the unauthorised trades on their accounts. Page 10 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 10 RG 256.26 While consideration of the nature of complaints can assist advice licensees in determining whether review and remediation is appropriate, review and remediation is not solely driven by complaints but requires licensees to seek out all clients that may have suffered loss or detriment as a result of the systemic issue identified. Our policy objectives RG 256.27 It is important that review and remediation is conducted in a way that is comprehensive, timely, fair and transparent. Consumers should have confidence that any review and remediation in which they are involved is conducted in this way, regardless of the size of the review and remediation or the size of the advice licensee. RG 256.28 More specifically, our guidance aims to: (a) improve outcomes for consumers; (b) provide a streamlined and well-understood review and remediation framework for advice licensees; and (c) set out the key principles against which we will assess whether the review and remediation process is operating efficiently, honestly and fairly, in line with the general AFS licensee obligations. Key considerations for review and remediation RG 256.29 There are a range of principles that you should consider when initiating, designing and implementing the review and remediation process. The key principles are set out below. When review and remediation is appropriate RG 256.30 You should consider a range of factors when deciding whether to initiate the process of review and remediation, including the nature of the misconduct or other compliance failure, who to engage with as part of the process, and how such a process will interact with other AFS licensee obligations. RG 256.31 Review and remediation is more likely to be appropriate where a systemic issue has occurred that may have caused loss or detriment to the affected clients. Not all systemic issues will require review and remediation: see Section B. Page 11 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 11 Scope of review and remediation RG 256.32 The scope of review and remediation will often depend on the type of misconduct or other compliance failure, the size and structure of your business, and the size of your client base. There is no one-size-fits-all approach to determining the appropriate scope of review and remediation. RG 256.33 The scope of review and remediation should be determined in a way that ensures it covers the right advisers, the right clients and the right timeframe: see Section C. Design and implementation of review and remediation RG 256.34 The process of review and remediation should be comprehensive, timely, fair, and transparent. There should be clearly defined principles to guide the process and an appropriate governance structure (including oversight by a senior person). The process should also be straightforward for the client. RG 256.35 In some situations, it may also be appropriate to have an independent expert provide assurance about the governance and operation of the review and remediation. RG 256.36 Public reporting provides transparency of review and remediation and may be needed for a larger-scale exercise affecting many clients, or a review and remediation following public reports of client losses, and alleged misconduct or other compliance failure : see Section D. Communicating with clients RG 256.37 Effective, timely and targeted communication is key to ensuring that clients understand the review and remediation and how it will affect them. RG 256.38 You should proactively contact potentially affected clients, and consider the best way to do this in light of your client base and appropriate methods of communication: see Section E. External review of decisions RG 256.39 It is important that clients have access to your EDR scheme if they are not satisfied with the decision you have made in relation to whether misconduct or other compliance failure has occurred and whether remediation is appropriate, and about the nature of remediation offered. Page 12 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 12 RG 256.40 You should consider engaging with your EDR scheme when establishing a review and remediation process so that relevant documentation, timeframes and other arrangements are agreed upfront between you and your scheme. This will facilitate the streamlined consideration, review and decision by the EDR scheme when necessary. RG 256.41 Where appropriate, you should offer assistance to clients who wish to seek their own professional advice to assist their response to the review and remediation conducted: see Section F. Our role RG 256.42 ASIC often becomes aware of an advice licensee’s systemic issues through breach reports, proactive surveillance, reports of misconduct from the public, and reports of systemic issues from EDR schemes. RG 256.43 There may be times when we will encourage you to initiate a review of client advice and the remediation of clients, or we may require this as part of our enforcement activities. In these instances, and where you voluntarily commence a process of review and remediation that ASIC is aware of, our involvement may include: (a) general monitoring of the review and remediation process; (b) reviewing and commenting on the design and implementation of the review and remediation; (c) requesting regular reporting on the progress of the review and remediation, and providing feedback on those reports; or (d) a combination of the above. Note: This is not an exhaustive list. RG 256.44 The extent of our involvement will depend on a range of factors—for example: (a) the size of the review and remediation; (b) your past conduct and conduct in response to the systemic issue; (c) the nature of the misconduct or other compliance failure and the impact on clients; (d) your experience in past review and remediation processes, or similar activities; and (e) ASIC’s available resources. Page 13 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 13 B When review and remediation is appropriate Key points Review and remediation is generally appropriate where a systemic issue has been identified that may have caused loss or detriment to clients: see RG 256.45–RG 256.48. There are interactions between the review and remediation process and your dispute resolution obligations: see RG 256.49–RG 256.50. Internal dispute resolution (IDR) obligations (including timeframes) will still apply to complaints from clients that fall within the scope of the review and remediation: see RG 256.51–RG 256.55. There are a range of AFS licensing obligations that will interact with the review and remediation process: see RG 256.56–RG 256.73. When to initiate review and remediation RG 256.45 Generally, review and remediation of the type covered in this guide will be appropriate if: (a) a systemic issue has been identified that is a result of the decisions, omissions or behaviour of an advice licensee, or an individual adviser or advisers (as representatives of the licensee), in relation to the provision of personal advice to retail clients; and (b) the affected clients may have suffered a loss or detriment (whether monetary or non-monetary): see RG 256.3–RG 256.11. RG 256.46 Review and remediation is not appropriate in all circumstances. The aim of review and remediation is for the advice licensee to proactively seek out clients who have potentially been affected by the misconduct or other compliance failure, and to remediate those clients for any loss or detriment suffered. RG 256.47 There may be times when a systemic issue only affects a small number of clients and these clients have all made a complaint. In these circumstances, review and remediation would be unnecessary because all affected clients would be aware that they may have suffered loss or detriment as a result of the misconduct or other compliance failure, and would receive consideration of their complaint and be remediated through your IDR processes (and EDR if required). RG 256.48 Review and remediation may also not be appropriate where: Page 14 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 14 (a) the loss or detriment suffered is a result of a product failure and is not a result of your decisions, omissions or behaviour, or that of your representatives; or (b) you are subject to a current systemic issue investigation by your EDR scheme seeking remediation for affected clients where this investigation covers the same or similar issues. Note: This is not an exhaustive list. Interaction with IDR and EDR obligations RG 256.49 Interactions between review and remediation and your IDR processes and/or EDR scheme include the following: (a) Systemic issues are often identified through trends in IDR complaints or trends in disputes handled by your EDR scheme. (b) Review and remediation will, in many cases, use your IDR resources (e.g. human resources, procedures for reviewing advice and calculating loss, and record-keeping systems). (c) The external review of decisions from review and remediation will generally be carried out by your EDR scheme. RG 256.50 While there are interactions between your dispute resolution obligations and review and remediation, each also has a distinct purpose: (a) IDR: Complaints initiated by your clients are reviewed as part of your IDR processes (see RG 256.51–RG 256.55). (b) Review and remediation: This process reviews the advice of a selection of clients that you determine may have been affected by a systemic issue within your business (i.e. they are not ‘complaints driven’). (c) EDR: Your EDR scheme reviews complaints by your clients if they are not satisfied with your decision following IDR, or following review and remediation. Your EDR scheme also identifies systemic issues and serious misconduct, and will seek action from you in response. When do the IDR obligations apply? RG 256.51 When a review and remediation process is being conducted, the IDR obligations will not apply to many of the clients within the scope of the review and remediation. This is because many of the clients that have their advice reviewed as part of the review and remediation will have Page 15 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 15 been selected by you and will not have made a complaint about the potential misconduct or other compliance failure. RG 256.52 However, where a client has made a complaint to you, and that complaint is within the scope of the review and remediation, the IDR obligations (including the timeframes) will apply to that matter. A final response must still be provided to these clients within 45 days. We understand that, in some situations, it may be difficult to meet the 45-day timeframe. In these cases, you must send a breach report to ASIC. Note 1: Class Order [CO 09/339] Internal dispute resolution procedures requires AFS licensees, as part of their IDR procedures, to adopt specific sections of Australian Standard 10002-2006 Customer satisfaction— Guidelines for complaints handling in organizations (AS ISO 10002-2006). Regulatory Guide 165 Licensing: Internal and external dispute resolution (RG 165) gives guidance on the obligations of AFS licensees in operating IDR processes. Note 2: Breach reports should be addressed to: ‘Misconduct and Breach Reporting, Australian Securities and Investments Commission’. The written report should be emailed to ASIC at fsr.breach.reporting@asic.gov.au. RG 256.53 If a final response is not provided within the 45-day timeframe, the client must be informed of their EDR rights. Including a complaint in your review and remediation process does not exempt you from your IDR obligations. Note: These complaints may need to be prioritised over the review of advice of other clients: see RG 256.125. RG 256.54 If a client makes a complaint about your decision—following a review of their advice as part of the review and remediation process—the client should be directed to your EDR scheme and not to your IDR processes. In most cases, because you have already reviewed the advice given to the client, there would be little value in re-examining this advice. Doing so is likely to add an unnecessary layer of complexity and result in delays for the client. RG 256.55 Complaints outside the scope of review and remediation will continue to be dealt with through your usual IDR processes. Interaction with AFS licensing obligations RG 256.56 You must consider a range of AFS licensing obligations that will interact with review and remediation. Page 16 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 16 Operating efficiently, honestly and fairly RG 256.57 As noted in RG 256.13, all AFS licensees have an obligation to provide their financial services efficiently, honestly and fairly: s912A(1)(a) of the Corporations Act. RG 256.58 Complying with this obligation includes taking responsibility for the consequences of your actions if things go wrong when providing financial services and clients suffer loss or detriment. This includes remediating clients who have suffered loss or detriment as a result of misconduct or other compliance failure by you or your current or former representatives. Note: See Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104) for further information. RG 256.59 You should give priority to any review and remediation, and not unnecessarily delay the process. You must still ensure that you comply with your ongoing obligations while developing and conducting the process of review and remediation. Adequate resources RG 256.60 AFS licensees—other than bodies regulated by the Australian Prudential Regulation Authority (APRA)—are required to have adequate resources to provide financial services covered by the AFS licence: s912A(1)(d) of the Corporations Act. RG 256.61 If you do not have adequate resources to conduct the review and remediation process (when appropriate), and to remediate clients, you may be in breach of this obligation. RG 256.62 We are likely to look more closely at you if the timeframe for remediating clients is lengthy, taking into account the nature of the misconduct or other compliance failure and the number of affected clients. Unnecessary delays may indicate that you do not have adequate resources to conduct the review and remediation or are not prioritising the remediation of clients and acting efficiently, honestly and fairly. Monitoring and supervision RG 256.63 Under the Corporations Act, an AFS licensee is required to: (a) take reasonable steps to ensure that its representatives comply with the financial services laws (s912A(1)(ca)); and (b) ensure its representatives are adequately trained, and competent, to provide the financial services authorised by the licensee (s912A(1)(f)). Page 17 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 17 RG 256.64 Where a systemic issue is identified in relation to an existing representative, you have an obligation to take steps to rectify any deficiencies in the representative’s behaviour. Note: See RG 104 for further information. Breach reporting RG 256.65 AFS licensees must notify ASIC in writing of any ‘significant’ breach (or likely breach) of their obligations under s912A (including licence conditions), s912B (compensation arrangements) or financial services laws, as soon as practicable, and in any event within 10 business days of becoming aware of the breach (or likely breach). RG 256.66 You must consider whether the breach (or likely breach) is significant and, if so, provide timely notification to ASIC. Whether a breach is significant will depend on individual circumstances. RG 256.67 In many cases, a systemic issue that triggers the initiation of the review and remediation process will also be a significant breach for the purposes of the breach reporting obligations. You must make this assessment on a case-by-case basis. Note: See Regulatory Guide 78 Breach reporting by AFS licensees (RG 78) for further information. Compensation arrangements RG 256.68 Under s912B of the Corporations Act, AFS licensees must have arrangements for compensating retail clients for loss suffered as a result of a breach by the licensee or its representatives of their obligations in Ch 7 of the Corporations Act. RG 256.69 These arrangements must: (a) satisfy the requirements in the Corporations Regulations 2001 (Corporations Regulations), which are that AFS licensees must obtain professional indemnity (PI) insurance cover that is adequate, considering the nature of the licensee’s business and its potential liability for compensation claims (reg 7.6.02AAA); or (b) be approved by ASIC as alternative arrangements. RG 256.70 Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126) sets out what ASIC regards as the minimum requirements for adequate PI insurance. RG 126 also provides information about when we will approve alternative arrangements. Page 18 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 18 RG 256.71 The Corporations Regulations also provide exemptions from the requirements for some AFS licensees that are regulated by APRA or are related to an entity regulated by APRA: reg 7.06.02AAA(3). RG 256.72 Whether remediating clients in a single instance of client loss or as part of a broader client remediation process, advice licensees will often consider how their compensation arrangements can assist in providing remediation to clients. RG 256.73 You should engage with your PI insurer as early as possible, and throughout the review and remediation process. You should also consider discussing with your PI insurer, as early as possible in the review and remediation process, whether they would prefer to review any proposed communications with clients. This is to minimise the risk that the rights of your PI insurer will be prejudiced by any action you take and that, as a consequence, you may void or reduce your cover. Page 19 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 19 C Determining the scope of review and remediation Key points Identifying the scope of review and remediation is an important step in ensuring that all potentially affected clients are captured by the review and remediation. The process you undertake to determine which clients are affected will depend on the nature of the misconduct or other compliance failure, the size and structure of your business, and the size and nature of your client base. There is no one-size-fits-all approach to determining the group of affected clients. You should determine the scope of review and remediation in a way that ensures it covers the right advisers, the right clients and the right timeframe: see RG 256.74–RG 256.88. While you should seek out potentially affected clients, there may also be limited times when you need to invite additional clients to participate in the review and remediation (e.g. if there is doubt about whether all potentially affected clients have been included in the scope): see RG 256.89–RG 256.92. The scope of review and remediation should be flexible enough to allow for revisions if more information becomes available: see RG 256.93–RG 256.97. Identifying the scope of review and remediation RG 256.74 Identifying the scope of review and remediation is an important step in ensuring that all potentially affected clients are captured by the review and remediation. This includes determining the nature of the misconduct or other compliance failure that has occurred, and which clients may have been affected, and testing whether the scope is appropriate. Note: A similar range of factors may be considered in determining whether there is a systemic issue that would warrant initiating a review and remediation process. Type of misconduct or other compliance failure and relevant advisers RG 256.75 Generally, the first steps you will take to determine the potentially affected clients are to identify: (a) the nature of the misconduct or other compliance failure that may have caused loss or detriment; and Page 20 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 20 (b) which advisers may have engaged in that misconduct or compliance failure. RG 256.76 You should then assess which clients may have received advice from these advisers and may have suffered loss or detriment. The processes you undertake to determine the affected clients will depend on the nature of the misconduct or compliance failure, the size and structure of your business, and the size and nature of your client base. There is no one-size-fits-all approach in determining the group of clients affected, and you may need to adopt more than one approach. RG 256.77 The scope of the misconduct or other compliance failure and the relevant advisers could be identified, for example, by: (a) assessing the nature of all complaints received through IDR; (b) reviewing an appropriate sample of advice provided; (c) examining any trends in the advice given to clients that may indicate advisers have given non-compliant advice (e.g. advice that generated higher-than-average commissions). One way this can be done is by analysing the data held about advisers, the advice they give and/or their client base; (d) considering what may have caused the misconduct or other compliance failure (e.g. inadequate or incorrect training material) and making further investigations into the advisers affected by the relevant factors; (e) assessing the results of regular compliance audits of advisers, and the action taken as a result of these audits; and (f) reviewing the results of any ASIC surveillance. Type of clients RG 256.78 You should consider which of your current and past clients received, or may have received, the type of advice that is of concern. Large multi- licensee groups should also consider whether the scope of the review and remediation should include all advice licensees within the group. RG 256.79 There may be times when a client who has previously had their advice reviewed through your IDR processes or by your EDR scheme should be included in the scope of review and remediation. This is likely to be the case if you become aware of information that may change the assessment of these matters in favour of the client. RG 256.80 It is important that the scope of the review and remediation is not so narrow that it will exclude clients that may have been exposed to another type of misconduct or compliance failure by advisers. For example, if the review and remediation is targeted at reviewing Page 21 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 21 insurance advice given by an adviser, but you are aware that the adviser has in several instances provided non-compliant advice in other product areas, these other product areas should be included in the review and remediation. Both relate to misconduct or other compliance failure by the adviser in giving personal advice. RG 256.81 In some situations, it may be appropriate to include other types of clients (e.g. wholesale clients) within the scope of review and remediation. You should make this assessment on a case-by-case basis. RG 256.82 You are not required to include a client within the scope of review and remediation if: (a) the client advises you that they do not wish to have their advice reviewed; or (b) you have invited a client who was outside the original scope of the review to participate in the review and remediation, and the client has not responded to the invitation after reasonable efforts have been made to contact the client. RG 256.83 You should, however, have processes in place to review the advice of clients who indicate at a later date—including after the review and remediation has been concluded—that they wish to participate. How far back should advice be reviewed RG 256.84 It is important that the right timeframe is selected as part of the review and remediation. This involves you considering over what period of time the relevant misconduct or other compliance failure may have occurred and the length of time that clients have potentially been affected. RG 256.85 We will not generally expect you to review advice given to clients more than seven years before you became aware of the misconduct or other compliance failure. This is consistent with the requirement for AFS licensees to keep certain records in relation to the provision of financial product advice for at least seven years. RG 256.86 However, in certain circumstances—such as where the client has held the product about which advice was given for a long period of time—it may be appropriate to review records going back further than the minimum seven years. We expect that you will act in a way that gives priority to the interests of your clients when deciding how far back to review advice given to clients. Note: Condition 57 of Pro Forma 209 Australian financial services licence conditions (PF 209) and Class Order [CO 14/923] Record-keeping obligations for Australian financial services licensees when giving personal advice requires AFS licensees to keep records relating to Financial Services Guides, Statements of Advice and compliance with the best interests and related obligations for at least seven years. Page 22 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 22 Testing the scope RG 256.87 When assessing the scope of the review and remediation, you should be satisfied to a reasonable level of certainty that the scope you have chosen properly captures all potentially affected clients. One way this could be achieved is by documenting and applying an appropriate methodology to test by sampling that the affected clients have been properly captured. RG 256.88 You should be able to clearly articulate and record how you determined which clients would be reviewed and potentially remediated. Inviting clients to participate in review and remediation RG 256.89 You should identify the group of clients that fall within the scope of the review and remediation. These clients will have their advice reviewed to determine whether any misconduct or other compliance failure has caused loss or detriment and, if so, be remediated for that loss or detriment. This is regardless of whether these clients have made a complaint about the advice they received or whether they have expressed an interest in participating in the review and remediation. RG 256.90 In addition, there may be times when it is appropriate for you to invite other clients outside the original scope to participate in the review and remediation. This is likely to be the case, for example, when you cannot determine with a reasonable level of certainty that the scope of the review and remediation will capture all potentially affected clients. RG 256.91 In general, you cannot merely rely on inviting clients to express an interest in having their advice reviewed—that is, clients should generally not be expected to ‘opt in’ to review and remediation. RG 256.92 We expect you to take reasonable steps to determine the group of clients that may have suffered loss or detriment as a result of the potential misconduct or other compliance failure. Inviting clients to participate in the review and remediation should only be necessary in limited circumstances. Page 23 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 23 Example 3: Inviting clients outside the scope to participate Scenario ABC Financial Services (ABC) is a large financial services group. It provides personal advice to retail clients under three AFS licences. A review and remediation process was initiated to review the advice of 10 advisers across all licensees within the group. ABC determined that a group of 800 clients should form part of the scope of the review and remediation. However, record keeping across the group was very poor, which meant it was difficult for ABC and the licensees to determine whether any of the remaining clients had received advice from the 10 advisers. After reviewing all its available records to determine who had received advice from the 10 advisers, ABC decided to write to all of the remaining clients to provide them with an opportunity to advise ABC whether they had received advice from any of the 10 advisers, and to request having their advice reviewed as part of the review and remediation. The 800 clients originally chosen received a different letter, notifying them that they already formed part of the review and remediation, rather than inviting them to participate. Commentary In this example, it was appropriate for the advice licensee to invite the remaining clients to participate in the review and remediation. Revising the scope RG 256.93 Further misconduct or compliance failure may often be identified during the review and remediation that was not originally anticipated when the scope was determined. There are a range of instances in which the scope of the review and remediation may need to be revised (e.g. non-compliant advice in product areas not originally anticipated or advisers not previously identified). RG 256.94 To ensure the process is fair for all potentially affected clients, the scope of the review and remediation should be flexible enough to allow for revisions if more information becomes available about further misconduct or compliance failure by an adviser, or about other advisers that may have engaged in the misconduct or compliance failure. RG 256.95 When this occurs, you should in most cases revise the scope of the review and remediation to include any additional clients that may have suffered loss or detriment as a result of the further misconduct or other compliance failure. Page 24 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 24 RG 256.96 You should also consider whether closed matters under the review and remediation need to be re-examined to determine whether clients in the closed matters also received advice that falls within the revised scope of the review and remediation. RG 256.97 You should always adopt the approach of being inclusive rather than exclusive in determining the scope of the review and remediation. Example 4: Revising the scope of review and remediation Scenario XYZ Advisers (XYZ) is an AFS licensee that commenced a review of client advice and the remediation of clients after becoming aware that three of its advisers had regularly been giving inappropriate insurance advice. After reviewing a sample of advice by the three advisers, XYZ felt certain that the deficiencies in the advice related only to insurance advice. After commencing a review of all clients that received insurance advice by the three advisers in the past four years (the length of the advisers’ employment), it became apparent that one of the advisers was also giving superannuation advice that was inappropriate. This was discovered when reviewing advice that combined both insurance and superannuation advice. This problem was not evident with the other two advisers. XYZ reviewed a sample of the adviser’s superannuation advice over the past four years and found further instances of inappropriate superannuation advice. As a result, XYZ decided to expand the scope of the review and remediation to include superannuation advice given by that adviser. Commentary In this example, it was appropriate for the advice licensee to revise the scope of the review and remediation. Page 25 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 25 D Design and implementation Key points A well-designed review and remediation process will be easier for clients to understand and have confidence in. The process of review and remediation should be comprehensive, timely, fair and transparent. There should be clearly defined principles to guide the process and an appropriate governance structure, including some level of senior oversight (and also independent expert assurance where appropriate): see RG 256.99– RG 256.160. There should be proper record keeping of the work that is done and the conclusions reached: see RG 256.160–RG 256.163. Advice licensees should consider whether it may be in the public interest to report publicly on the review and remediation exercise, and provide updates on progress: see RG 256.164–RG 256.167. RG 256.98 The processes that each advice licensee establishes for review and remediation will be different. However, each licensee should consider similar factors when developing these processes, including: (a) the resources required; (b) who will review the advice; (c) how to review the advice; (d) what governance arrangements are appropriate; (e) how to keep records; and (f) whether to report publicly on the review and remediation exercise. Designing a review and remediation process RG 256.99 A well-designed review and remediation process avoids unnecessary complexity. If clients can understand the process easily, they are more likely to have confidence that it will produce consistent, timely and fair outcomes. RG 256.100 All review and remediation processes should: (a) adopt a consumer-focused approach; Note: This includes advice licensees being helpful; communicating in plain English; showing commitment to remediating any loss or detriment suffered by clients; minimising negative impacts on clients; being objective, unbiased and equitable in their dealings with clients; and giving clients the benefit of the doubt where there is missing information. Page 26 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 26 (b) be free of charge to clients; (c) have commitment from senior management; and (d) be operated efficiently, honestly and fairly. Note: These principles are consistent with the principles set out in RG 165. You may also wish to consider the principles in RG 165 when designing and operating a review and remediation process. RG 256.101 You should consider engaging with your EDR scheme when designing a review and remediation process to determine whether certain processes should be put in place to better facilitate clients making a complaint to the EDR scheme about the review and remediation. RG 256.102 Engagement with ASIC about the review and remediation may be required during the design phase and throughout the review and remediation: see RG 256.42–RG 256.44. Continual improvement RG 256.103 Feedback is an important part of improving practices in all businesses. Continual improvement is also a key aspect of IDR and should similarly apply to review and remediation. RG 256.104 You should build into the design of the review and remediation the ability to assess your own performance during the review and remediation process. This will enable you to determine whether improvements can be made to the process, or to your ongoing IDR processes and general risk assessment procedures. Developing the processes for review and remediation RG 256.105 The appropriate processes that will ensure your review and remediation is being operated fairly, honestly and efficiently will depend on the scope of the review and remediation. RG 256.106 How you structure your review and remediation processes, and who in your business will be involved, are generally decisions for you to make as the advice licensee, taking into account the principles set out in this guide. You could establish a new team to operate the review and remediation process, or operate the process from within existing teams and using existing resources. RG 256.107 ASIC may at times give you feedback or directions on the appropriateness of how you have structured your review and remediation processes in light of our guidance. Page 27 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 27 Key principles when developing the processes for review and remediation When developing the processes for review and remediation, you should consider the following principles: • The process of review and remediation should be comprehensive, timely, fair and transparent. • Adequate resources should be allocated to the review and remediation to ensure it is conducted in an efficient and timely way. • There should be clearly defined principles to guide the process. Factors considered in reviewing advice and any calculation of loss or detriment should generally be consistent with the principles of the ASIC-approved EDR scheme of which you are a member. • Reviewers should adopt a consumer-focused approach, be open to feedback and show commitment to understanding any concerns about the advice a client has received. • Reviewers and managers should be competent in reviewing advice. • Conflicts of interest should be avoided. • There should be appropriate governance processes in place, including some level of oversight by a senior person (e.g. to review the design and implementation of the review and remediation). In some cases, this may involve engaging an independent expert to provide assurance about the governance and operation of the review and remediation process. • Adequate records should be maintained throughout the review and remediation process. • It may be appropriate, in some circumstances, to report publicly on the review and remediation and its progress. Allocating adequate resources RG 256.108 Adequate resources should be allocated to review and remediation to ensure the process is conducted in an efficient and timely way. If you do not have adequate resources allocated to review and remediation, you may be in breach of your AFS licensing obligations: see RG 256.60–RG 256.62. RG 256.109 Adequate resources could include, but are not limited to: (a) appropriately qualified advice reviewers; (b) training and support for less experienced advice reviewers; (c) communications experts to assist with drafting communications with clients; (d) appropriate record-keeping systems; (e) technological resources; and (f) financial resources to operate the review and remediation process and remediate clients for any loss or detriment suffered. Page 28 REGULATORY GUIDE 256: Client review and remediation conducted by advice licensees © Australian Securities and Investments Commission September 2016 Page 28 RG 256.110 Senior management should assess the need for resources and provide them promptly. The selection, support and training of personnel involved in review and remediation are particularly important. RG 256.111 What are adequate resources will depend on the size of the review and remediation. For example, a larger-scale exercise operated by a multi- licensee group would need to have more resources allocated to it than a small-scale exercise operated by a single advice licensee. RG 256.112 You may outsource all or parts of the review and remediation process—however, you are ultimately responsible for its operation. Reviewing advice RG 256.113 Clear principles and guidance should be established for reviewing advice to ensure that advice is reviewed consistently and fairly. However, the process