ASIC weighs in on bad financial advice reviews

25 January 2016 | Regulator to set guidelines for banks on review and remediation processes.

Setting the banks straight

2016 will be the year ASIC creates industry-wide guidelines for how banks can make good on bad service and advice. The financial regulator is currently seeking comment on a set of draft guidelines for review and remediation programs.

Review and remediation programs have become popular instruments for banks and other financial advice providers (collectively called advice licensees) in recent years, for all the wrong reasons. These programs are set up in the wake of systemic issues being identified in relation to financial advice services, and take the form of a widespread, in-house review of advice. The aim is to identify and compensate those clients who may have been ripped off or offered dodgy advice.

The Future of Financial Advice (FoFA) reforms aim to clean up the financial advice industry. Read what FoFA means for you when seeking financial advice.

Review and remediation: everybody's doing it

"We are seeing a growing trend in these programs being conducted proactively to address issues that advice licensees have identified within their business," said Joanna Bird, Senior Executive Leader of ASIC's Financial Advisers team. "In light of our regulatory experience and this growing trend we thought it was important to develop guidance to ensure that all review and remediation programs (whether large or small) are conducted in a way that is efficient, honest and fair."

There are currently three major review and remediation programs underway by big banks. CBA and Macquarie Group are well underway, while NAB recently began inviting customers to submit their advice for review. The programs were set up after a series of scandals that plagued the financial advice sector, in which it was exposed that rogue advisors from these institutions were failing to act in the best interests of their clients.

Last week Westpac agreed to begin a review and remediation process after ASIC raised questions about the bank's open-handed approach to credit limit increases. The regulator found that Westpac was failing to make reasonable inquiries about whether or not credit card holders were actually employed before approving applications to increase their credit limit. The bank will begin reviewing cases where customers had experienced financial difficulty, and will offer refunds where appropriate.

Consistency across the industry

The guidelines seek to properly define "review and remediation program" and "systemic issues", and set non-compulsory procedures for advice licensees to follow. ASIC hopes this will establish a best practice for these programs, which previously had been ad hoc affairs designed almost entirely by organisations themselves.

"Licensees are required to act efficiently, honestly and fairly. Following our regulatory guidance will assist licensees to meet this obligation," said Ms Bird.

The proposed guidelines include the expectation that financial service providers will proactively try to identify potentially affected clients, rather than waiting for victims to contact them. ASIC also suggests that review programs should look at advice for as far back as licensees have retained records, even if it is from earlier than the mandatory retention period

The financial regulator also plans to close a mind-boggling loophole around record-keeping requirements. Advice licensees are required to keep records for up to seven years. Some choose to outsource this to contracted third parties. However, when the time came to review customer advice during a review and remediation process, licensees found they were unable to access their own customers' old records, since the contract had lapsed. ASIC proposes to amend the rules to make it clear that licensees must not only retain records, but have access to them.

The final regulatory guide is set to be released in May.