Using Assumptions For Consumer Remediation – Applying RG 277 Guiding Principles In The Process
On 27 September 2022 ASIC released Regulatory Guide 277 Consumer Remediation (RG 277) which is intended to supersede the existing guidance in Regulatory Guide 256 Client review and remediation conducted by advice licensees (RG 256).
RG 277 is a significant expansion of ASIC’s remediation guidance and now applies to all Australian Financial Services (AFS) and Australian Credit licensees, including superannuation trustees.
It is important to note the guidance within RG 277 applies to all remediation activity from 27 September 2022; however licensees may still utilise RG 256 for any remediation programs already underway at this date.
Summary of RG 277 framework for remediation
RG 277 sets out ASIC’s expectations of licensees when undertaking consumer remediation and comprises a framework for delivering a streamlined and consumer-focused remediation program. The guidance includes 9 key principles that should be considered by licensees to ensure compliance with the general obligations applicable to all licensees to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.
Importantly, the guidance details the expected methodology for scoping the nature, cause and full extent of the failure, and how to determine an appropriate outcome for all impacted consumers.
Use of Assumptions in consumer remediation
Whilst there are numerous and significant changes in RG 277, a key development is the introduction of assumptions, whereby ASIC detail how the use of assumptions in remediation programs may assist licensees to remediate more efficiently and effectively.
When releasing the new guidelines ASIC’s Deputy Chair Karen Chester provided the following insight: ‘The release of our expanded guidance, along with the updated ‘Making it right field guide’, 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.”
However, licensees should proceed with caution when using assumptions to remediate consumers, with the guidance highlighting several key considerations.
Two key guiding principles to applying assumptions
Regardless of the scale or complexity of a remediation, there are two key guiding principles:
• “To return affected consumers, as closely as possible, to the position they would have otherwise been in had the misconduct or other failure not occurred” and
• “Give consumers the benefit of the doubt and minimise the risk of under-compensation”.
To do this, a licensee needs to understand which consumers are impacted by the misconduct or other failure and what the impact has been or potentially may have been to these consumers.
As the new remediation regime places no limitation on the review and remediation period, ongoing checks and ‘good data’ are very important for a successful remediation. A licensee with good data and records may decide to use assumptions to save time and costs and make the remediation more efficient, without compromising the quality of the remediation. Whilst a licensee with absent records, may need to consider what available data could provide an evidence base, for the period when the records are incomplete.
When developing assumptions, thought should also be given to another principle “Be timely without sacrificing quality consumer outcomes”.
Minimising the risk of under compensation
It’s important to develop assumptions that are evidence based, can be justified and the formulation of those assumptions will give the benefit of the doubt to consumers, whilst minimising the risk of under compensation.
However, despite the best intentions the assumptions may not always be correct. This could result in an unjustified narrowing of the scope of remediation. Assumptions should be revisited for appropriateness and accuracy throughout the remediation process.
Due to inappropriate averaging or unjustified discounting when calculating the compensation amount, care must be taken to ensure under compensation doesn’t occur. The outcome of the remediation should not provide a commercial benefit to the licensee.
Although trustees must not under-compensate affected consumers, they must also ensure any compensation applied via assumptions considers the overall impact on other non-affected members and best financial interest duty.
Other things to consider when developing assumptions
• Irrespective of the size of the licensee, if misconduct or other failures have occurred, remediation must take place. licensees could look to source data from across the impacted organisation, from service providers or consultants to assist with filling in gaps when formulating assumptions.
• Licensees need to consider what other internal or external information could be triangulated to inform scoping. If it is known or suspected that a consumer has held a product for a period longer than the data available suggests, Information such as a date joined fund, date commenced on system or purchased date of a product, could be used to help determine how far back the remediation review period extends.
• All assumptions must be documented, including the justification for the assumption.
• Determine what margin of error and risk is both fair and appropriate for the remediation – there is no single approach for this. It may also be appropriate to apply different assumptions to different cohorts of impacted consumers within a licensee’s business.
• Licensees must also consider the impacts to their fiduciary duties when using assumptions such as their legal responsibilities and obligations. These may include instances when conducting superannuation remediation or calculations are required for unit pricing discrepancies.
Monitoring assumptions to ensure beneficial outcome for consumers
Finally, assumptions should be monitored to ensure fair and timely consumer outcomes are achieved, as well as confirming the assumptions continue to function as expected. It’s also important to continue monitoring assumptions throughout the remediation process up until the final payments to impacted consumers have been made.
The assumptions should be reviewed, If new information becomes available during remediation that suggests assumptions are no longer beneficial to consumers, licensees should revisit the assumptions and consider whether any supplementary compensation is necessary.
Proof of monitoring activities should be documented and retained as part of the remediation process, because ASIC may request remediation monitoring data if it believes it is necessary.
If your organisation needs assistance with remediation projects, QMV can help.
QMV are experts in remediation and known for delivering on complex requirements. Our team includes specialist consultants with the hybrid technical and analytical skills required for remediation. For further information please telephone our office p +61 3 9620 0707 or submit an online form.
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