Credit licensees are being asked to respond to ASIC’s new regulatory guide on how they should conduct remediations to return money owed to consumers.
The Australian Securities and Investments Commission (ASIC) on Wednesday (17 November) released an updated and expanded draft regulatory guide on consumer remediation.
The guide covers Australian credit licensees (credit licensees); Australian financial services (AFS) licensees; and retirement savings account (RSA) providers.
For example, financial advisers and mortgage brokers will need to comply with both this guide and the new obligations to notify, investigate and remediate when conducting remediations, in certain circumstances.
ASIC outlines that the obligations to notify, investigate and remediate are “aimed at a subset of licensees (those that provide personal advice and credit assistance) and address conduct that historically remained undetected for undue periods”.
These build on the existing remediation framework under a licensee’s general obligations.
The draft regulatory guide has been released following an initial consultation with industry. After releasing the first draft for consultation last year, the regulator has updated the guide as part of the two-part consultation process.
The industry is now being asked to provide feedback to this draft guide before the final guidance is released.
While the objectives underlying the guidance haven’t materially changed, ASIC has made updates and/or clarifications about whom the guide applies to, when remediation needs to be initiated and key principles for conducting it, as well as determining appropriate remedies, including calculating foregone returns and interest.
The guide also outlines the interaction between remediation and a licensee’s legal duties and obligations (including breach reporting, internal dispute resolution, design and distribution obligations; and the new notify, investigate and remediate obligations on certain licensees), among other updates.
Examples relating to credit law
In remediations following a breach of credit laws that has led to a consumer being provided with an unfair or inappropriate loan or consumer lease, the guide outlines that a licensee should consider the following remedies:
ASIC’s draft guide added: “Principal reduction is called for when a consumer is suffering financial difficulty caused by the licensee’s misconduct or other failure. It is generally not acceptable to lower regular repayments by extending the term of the loan (and expecting a consumer to remain indebted for longer than they had agreed).
“Similar considerations should be made where other forms of lender error (e.g. failing to convert an interest only loan to principal and interest) has led to consumer loss.”
The new regulatory guide also introduces a $5 low-value compensation threshold. This means that for sums over this amount, licensees should “apply reasonable endeavours to contact [customers] and make remediation payments automatically, where possible”.
However, if a former customer is owed $5 or less (after interest) with no current payment information on file, rather than making reasonable endeavours to pay the money directly to the consumer, ASIC’s guide outlines that it would be “appropriate for the licensee to instead make a residual remediation payment to a charitable or community organisation (known as applying a ‘low-value compensation threshold’)”.
Overall, ASIC includes 25 examples to help illustrate expectations for how the guidance should be applied in practice.
One such example provides a scenario where a hypothetical bank had incorrectly charged fees on a number of its home loan products for more than 10 years. These fees were added to the balance of the loan and incurred interest at the home loan interest rate. Some of these home loan customers had since exited the product after fully paying off their loan.
ASIC outlines in the example that the bank then calculated the actual additional interest each of these customers had incurred within its own product up to the exit date. However, it was difficult to determine the consumers’ foregone returns or interest outside of the product from the date the consumer paid off the fees and additional interest (i.e. the exit date when the full balance of the loan was paid) to the remediation date.
As per the guidance, the bank therefore decided to apply “a fair and reasonable rate” of the 10-year Australian government bond rate plus 3 per cent, to account for the time value of money from the date of exit, to the date of remediation payment.
ASIC suggests that this would be appropriate to use “as it is consistent with the principles of a fair and reasonable rate in the circumstances”.
‘Underinvestment in systems’ a major ‘stumbling block’: ASIC
Speaking of the new draft guidance, ASIC said that “proactive remediation upon discovery of misconduct or other failures is necessary for licensees to achieve good outcomes for their consumers and comply with their licensing obligations to act efficiently, honestly and fairly”.
ASIC deputy chair Karen Chester commented: “Recent experience has shown that poor conduct has significant financial implications for companies, their investors, and ultimately their customers. This is demonstrated by the costly lag and drag of remediation and reputational damage.
“Right now, ASIC is monitoring 64 remediations that will see the return of about $5.4 billion to more than 5.6 million consumers upon finalisation. There are many other remediations that are dealt with by firms without any ASIC involvement.
“We want our new guidance to help firms remediate with greater confidence and speed.
“Importantly, we have expanded our guidance to cover all financial services licensees, credit licensees and retirement service providers. Our draft guidance sets out how all licensees should act to ensure their remediations are conducted efficiently, honestly and fairly.
“Licensees must do better at identifying and remediating problems earlier.
“One of the most common stumbling blocks we have seen across remediations is underinvestment in systems. This underinvestment has led to multiple failures. First and foremost, in delivering on promises to consumers, second in identifying the failures and third in being able to remediate consumer loss in a timely way.”
The draft regulatory guide can be found here.
Licensees are being asked to respond to specific questions in the guide, describe any alternative approaches necessary, and detail the likely compliance costs, effect on competition, and other costs or benefits from the guide.
[Related: ASIC consults on new remediation guidance]
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