Financial Services Disputes – Notify, Investigate & Remediate

David HugginsDavid Huggins, Principal of Huggins Legal, writes that as a result of amendments to the Corporations Act that came into effect on 1 October 2021, the way that financial services related disputes are resolved has been fundamentally altered.


The impact of the amendments to the Corporations Act

The amendments that came into effect on 1 October 2021 create an enhanced breach reporting process and new obligations to notify, investigate and remediate affected clients. The new provisions apply to matters that became apparent on or after 1 October 2021, irrespective of when the events actually occurred.

The way that things were done in the past

The way that things were done in the past can be seen from a scenario that involves poor financial advice provided to a retail client. A firm would become aware of a problem because a client made a complaint about an adviser. Advisers often make the same mistake across multiple clients. If one client has been provided with bad advice there will often be other clients who have been similarly affected.

The firm potentially has an obligation to make a breach report to ASIC. In the context of the loose way that the old provisions were drafted, the firm decides that it does not have to make a breach report. The firm, despite having suspicions about what the adviser might have done with respect to other clients, ignores this issue and decides that it will deal with those clients if they make a complaint.

With respect to the client who made the complaint, the firm denies liability and waits to see if the client will make a complain to AFCA or commence Court proceedings. As a practical matter, the firm knows that retail clients, because of the expense involved and the risk of adverse costs orders, will, very rarely, commence Court proceedings.

Assuming that the client makes an AFCA complaint, the firm will aggressively defend the matter arguing that it has nothing done wrong and, if it has, the client has suffered no or minimal loss. Submissions about loss are made on the basis of assumptions about future matters that are least favourable to the client.

Eventually, the parties enter into settlement negotiations. The firm makes settlement offers starting at a very low level and eventually going higher sometimes to multiples of 10 or 20 times the amount of the original offer that was made. The amount of the offer that is eventually accepted by the client is partially dependent upon what the client could have recovered at AFCA but it also depends on other factors such as subjective judgments about the strength of the case and the client’s desire to have the matter resolved quickly. The matter is settled for what the client is willing to accept not what the outcome might have been if it had been determined by AFCA.

The new system – breach reporting

Under the new system, matters that involve poor financial advice where a client has suffered loss will have to be reported to ASIC. ASIC will therefore be able to assess whether the firm is complying with the new obligations.

The new system – the obligation to notify

Under the new system, each affected client, not just the client who made the complaint must be notified about the matters that have been reported to ASIC. The era when a firm could wait and see if a client will make a complaint has come to an end. Firm’s must now, in effect, notify clients that they can make a claim for compensation.

The new system – the obligation to investigate

Under the new system, the firm must conduct an investigation into what has occurred. As part of that process, the firm must quantify the loss and damage that each affected client has a legally enforceable right to recover from the firm. This is an important issue, the firm has to quantify what the client could recover in a Court, not what the client might be willing to accept on a settlement. Each affected client has to be notified of the outcome the investigation. The effect of this obligation being that clients who might never have made a complaint will be advised of the fact that they have a right to receive compensation and all clients will be made aware of the amount of compensation that they could potentially recover.

The new system – the obligation to remediate

Under the new system, the firm must pay to the affected clients, the amount of their loss or damage that has been calculated by the firm. This amount may be significantly more than a client would have accepted on a settlement. The fact that compensation has been paid does not prevent the client commencing proceedings in a Court but the amount paid already will have to be offset against whatever additional amount the Court may award. For practical reasons, few clients will choose to commence proceedings in a Court. The position with respect to AFCA is unclear, but it is probable that clients will be able to make an AFCA complaint with a view to obtaining more compensation. These complaints will solely be about the quantum of a claim because the firm will have, in effect, admitted liability.

Penalties and difficult issuers concerning the relationship between firms, their insurer and lawyers

Failure to comply with any of the obligations referred to above, exposes the firm to the risk that a civil penalty of up to $11.1M could be imposed. Where the firm does not comply with its obligations the firm’s employees and officers are exposed to the risk that banning action could be taken against them. In addition, the firm must keep sufficient records to enable the firm’s compliance with its obligations to be readily ascertained. It is unclear whether legal professional privilege would apply to these types of records but it probably will not.

The practical difficulties that can arise under the new system can be illustrated by a simple example. The firm’s insurers and its lawyers propose that loss be calculated in a way where it is arguable as to whether that loss calculation fairly represents the way that a Court would calculate loss. The firm accedes to this and, in doing so, it exposes itself to the risk that a civil penalty could be imposed upon it and banning orders could be made against persons who were involved in the decision. The issue is made more difficult because the firm will not know how a Court calculates loss and will have to rely upon the insurer’s lawyers about this issue. The effect of this dynamic being that the firm and its employees and officers will have to rely upon a loss calculation conducted by third parties whose interests (to minimise the amount that is paid) will not necessarily align with the firm’s and its employee and officer’s interests (to minimise regulatory risk).

David Huggins is Principal of Huggins Legal. David has more than two decades of experience and specialises in the resolution of financial services-related disputes, including regulatory disputes. David has worked at ASIC, ASX and a national law firm and has operated Huggins Legal since 2005. Contact David at

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