regulator

Class Actions & Remediation


"There will be an increased focus on remediation, both internally and externally. The Commission’s messaging is loud and clear:

'When management is acting in a way that is delaying the remediation of customers, and damaging the bank’s relationship with regulators, it is appropriate for the board to intervene and say, ‘Enough is enough. Fix this, and fix it now.'

'The regulator is not called on to choose between remediation and enforcement. Remediation for consumers is one important goal. It is not the only goal to be pursued.'

Fair and timely remediation of misconduct should deter class actions. However class actions where an adviser doesn’t or cannot remediate may be encouraged by the CSLR. The CSLR should provide an important avenue for customers who are disadvantaged by the insolvency or inadequate liquidity of their advisers.


Relevance & consequences for industry

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Changes to ACFA’s role including the Compensation Scheme of Last Resort

The recently established external dispute resolution body, the Australian Financial Complaints Authority (AFCA), will now:

  • have a role in the public reporting of firm remediation activities; and

  • administer a newly established industry-funded compensation scheme of last resort (CSLR) for future claims.

The CSLR will pay out compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour or a determination from AFCA, but are unable to get the compensation owed by the financial firm (for example, because the firm has become insolvent).

The CSLR will:

  • have a scope wider than financial advice failure, but its limits are presently unclear;

  • be funded, as a licence condition, by financial firms engaged in the types of financial services covered;

  • require that consumers and small businesses have a decision from AFCA, a court or tribunal that remains unpaid after “reasonable steps” have been taken to obtain payment (with those “reasonable steps” to be defined by the CSLR).

Increased responsibility for remediation on senior executives and AFSL holders

The BEAR will be extended to all APRA-regulated entities. All covered entities will be required to nominate one senior executive to be accountable for the design, delivery and maintenance of all products offered, and “any necessary remediation of customers in respect of any of those products.”

Where an AFSL holder identifies misconduct by one of its financial advisors in respect of financial advice given to a retail client, it will be required to make whatever inquiries reasonably necessary to determine the nature and full extent of an adviser’s misconduct and to “inform and remediate affected clients promptly.

ASIC and remediation

  • ASIC’s focus will likely shift away from a remediation-first policy and ASIC will take “as its starting point”, the question of whether a court should determine the consequences of a contravention;

  • ASIC will be granted a directions power, which extends to ordering remediation.

What you should do next

To take immediate steps to:

  • review all identified prior misconduct for the last 10 years and determine whether that misconduct has been fully remediated, or whether further remediation is required;

  • put in place appropriate structural and governance changes required to address the BEAR changes, including identifying an appropriate senior executive to be accountable for customer remediation;

  • design and establish the appropriate channels to connect with AFCA in respect of the public reporting of remediation activities;

  • establish institutional structures that are equipped to respond promptly to, and give full effect to, an ASIC direction ordering that remediation activities to be undertaken;

  • prepare for a post-Commission world in which ASIC will be less likely to be satisfied simply with remediation, but will likely pursue more court enforceable remedies; and

  • provision for the costs associated with the CSLR.

Organisations should put in place appropriate reporting and quality assurance mechanisms for remediation. Maintaining appropriate records will assist institutions should they be required to provide information in respect of future scrutiny that may come from regulators.

Authored by: Moira Saville, Samantha Kinsey, Phillip South and Ben Goodyear.

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