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In August 2020, Australian Securities and Investment Commission’s (ASIC) estimated that in relation to remediation projects it was aware of, approximately $1 billion in customer remediation has been paid and almost $3 billion remains unpaid by major institutions.
A significant percentage of the compensation is due to customers of Australia’s largest advice licensees in relation to fees charged for services alleged not to have been provided or in relation to which inadequate evidence of service was available.
There has been wide and sustained media and regulator criticism of the delay in the repayment of these balances.
It is suggested one of the reasons has been an overly legalistic approach by licensees to the assessment of which customers are due compensation and in that event the amount of the compensation.
While it is undoubtedly true that following publication of REP499 Financial advice: Fees for no service, there was an ongoing debate between ASIC and some licensees about how remediation should be undertaken, they are largely issues of the past.
Many of the largest programs are now well progressed, with the identification of customers and calculation of compensation. Sadly, a new challenge has emerged - returning the compensation.
On April 19, 2019, ASIC and APRA wrote to all Responsible Superannuation Entities (RSEs).
The letter in effect expressed the regulators’ view that RSEs had often been partly responsible for the fee for no service (FFNS) issue in that they had permitted advice fees to be deducted from their funds (which are trust funds) without adequate evidence there was an entitlement to the fee (and in particular having been satisfied the service for which the customer was being charged, had been provided).
RSEs were reminded of responsibilities they owed to beneficiaries of their funds (the customers) to ensure their policies and processes to monitor the appropriateness of deductions for advice fees, were effective.
In addition, the letter set out what the regulators regarded as the obligations of RSEs in relation to the recovery and treatment of fee for no service compensation. Until that time, many RSEs had been content for advice licensees to get on with FFNS remediation programs on the assumption the advice licensees held the primary obligation to do so (and regulators had not objected to that position).
In July 2019 the ATO published its own guidance for RSEs setting out the ATO’s expectations for the treatment of FFNS compensation payments. As a starting point, the expectation is that usually the payment should be returned into the superannuation regime in order not to breach the SIS Act early release provisions. The guidance is not straightforward and imposes potentially onerous obligations on the RSE to understand how the compensation payment has been calculated (in particular those parts of the compensation which relate to lost investment earnings) in order to ensure treatment in accordance ATO guidance. The ATO is also undertaking further consultation with a view to issuing guidance in relation to other complications arising by the return of compensation monies to superannuation, including the impact of potential breaches to the contribution limits in the year compensation is received.
At a practical level, the combination of the APRA/ASIC and ATO guidance has resulted in significant delays in the payment of compensation. Concerned about potential regulatory issues which any or all of ASIC/APRA and the ATO have raised, RSEs have understandably taken a conservative approach to assessing the basis upon which compensation payments can be received – recognising their own obligation to ensure customers are appropriately compensated.
There are many challenges being grappled with, but two examples include:
These considerations, among others, seems to have resulted in increasing delays to make good to customers. Advice Licensees have an increasing back log of client payments they wish to make – what is the answer?
Ultimately, there are a few potential solutions, and each of the regulators potentially has a role to play.
It is important this issue is resolved quickly. The delay in finalising these remediation programs impacts consumer trust and confidence not only in the advice and superannuation industry but in our regulators as well. At a more pragmatic level, when more than $30 billion has been released from superannuation funds since June, the opportunity to return significant monies in short order to the COVID-19 battered Australian economy seems almost too good to ignore.
John is an experienced executive and qualified lawyer (Australia and UK) with in excess of 20 years' experience in professional conduct, risk and compliance including civil, criminal and regulatory surveillance, investigation and litigation focused on failures in business and business processes across a range of sectors including financial services, public listed companies and professional services.