'Remediation' as a legal term

By George Blades, Jonathon Hetherington
ASIC Financial Services

Farewell to quotation marks 6 min read

'Remediation' started life as a term businesses and consultants used to describe the process relating to customer compensation. What it meant depended on the particular process adopted. Lawyers would often place it in quotation marks accordingly.

A lot has changed in the past few years. Remediation has taken on a distinctly more 'legal' nature. The term will soon be included in the Corporations Act, and last year the Federal Court in no fewer than four substantial cases ruled on the proper scope and conduct of remediations. The quotation marks are no longer necessary.

Or are they?

With the growing law on remediations, one would be forgiven for thinking the requirements of remediations are more (rather than less) certain. But ASIC's recent consultation paper (CP335) on proposed changes to its remediation guidance (RG256) may have created further space between what is legally required of remediations and what ASIC may expect of them. Any gap is, of course, concerning for businesses considering important remediation issues, including whether they need to, or even can, remediate.

Remediation as a legal term

2020 was a big year for remediation law. Judges in four decisions provided substantial comments on the proper scope and conduct of remediations. This included comments on the timeframe (both in commencing the remediation and their duration), scope, 'look back' period, communication with the regulator and the independence of assurance reviews. Notably, judges said decisions made in remediations had serious legal consequences, both with respect to the quantum of pecuniary penalties for the underlying conduct, but also, importantly, as a source of liability itself (through unconscionable conduct and/or a breach of the 'efficiently, honestly and fairly' obligation).

Cases like these further serve to crystalise remediation as a matter with legal dimensions and consequences.

Also, in December, Parliament passed the Financial Sector Reform (Hayne Royal Commission Response) Act 2020. The Act will make 'remediation' a term of the Corporations and NCCP Acts from October this year. There, it will be used synonymously with (a type of) 'compensation', which the relevant provisions say is payable by a licensee where there are 'reasonable grounds' to believe a customer has suffered or will suffer loss as a result of a breach and the customer has a 'legally enforceable right to recover' that loss from that licensee.

It's noteworthy the remediation obligation here is narrower than what is proposed in ASIC's CP335. A few examples suffice:

  • for the statutory compensation obligation to bite, 'reasonable grounds to believe' are necessary. CP335 proposes that a licensee, if it doesn't know whether a customer suffered loss, makes a 'beneficial' 'scoping assumption' in favour of the customer;
  • only customers who have a 'legally enforceable right to recover' need be remediated under this law (which, for example, would exclude customers whose losses are time-barred due to the expiry of a limitation period). CP335 proposes that all customers who have (or may have) suffered loss be remediated; and
  • the law will require a licensee to remediate where the customer has a claim against the licensee. CP335 proposes licensees remediate failures by others, including subsidiaries.

Obligation to remediate

That is not to say the new laws are the only source of an obligation to remediate. Of course they are not. But they serve to demonstrate an important line between cases where there is a clear legal obligation to remediate (based on a breach of contract or trust) and when the obligation arises because of some more amorphous or less tangible principle.

In some cases, eg a breach of contract, the source of the obligation will be obvious. Licensees generally understand they need to compensate loss here because, if the issue were litigated, the licensee would be ordered to compensate the loss. But what about the scenario where a court – following established legal principle – would not order compensation?

In these situations licensees (and often directors and super fund trustees in particular) get nervous. And rightly so. ASIC's expectation that a licensee will remediate for some unfairness, for example, may not be enough to justify sending millions of dollars out the door.

ASIC's traditional response to this is that the 'efficiently, honestly and fairly' obligation steps in to create the obligation to compensate where otherwise there is none. All we will say about that here is there is a limit to what that obligation can require (the requests for legal advice about what that obligation requires have not been so limited.)

ASIC's new response in CP335 is to adopt a 'belt and braces' approach and rely on other licensee obligations to bolster its position that a licensee may be required to remediate even where there is no obvious breach of contract or law. One such obligation is the 'compensation arrangements' obligation in s912B of the Corporations Act. ASIC's reliance on s912B is an unexpected move. Prior to that, ASIC had indicated the section was about other things – in RG126, for example, ASIC states the 'primary way to comply' with s912B is 'to have professional indemnity (PI) insurance cover'.

How these general obligations apply will continue to be a live issue in many remediations. We suspect they will continue to cause concerns for directors and trustees weighing these obligations with their own general obligations to act in the best interests of the company or members as a whole.


It looks to be another interesting year for remediations. A revised RG256 is set to be released for a second round of consultation. And further developments in case law are expected, with ASIC recently commencing further remediation related civil penalty proceedings.

Licensees may wish to revisit their remediation practices and keep a close eye on these developments.