The client situation
As part of their ‘Fees for no service’ Remediation Program (the Program), the client was also required to provide compensation for lost investment earnings (or interest). However, there were a number of challenges with obtaining actual investment returns (or interest amounts) across all relevant products and funds. As a result, the client wanted to conduct detailed analysis to determine an appropriate proxy or set of proxies for foregone investment returns (or interest amounts) to apply when calculating remediation payments for all customers. The approach adopted would also need to satisfy the regulator as being appropriate in the circumstances.
We held an initial brainstorming session with the key parties from the Program to understand the wider objectives and the information and data that was available to inform the process. We were then able to use our understanding of the wider market and previous regulatory guidance to identify an initial framework of potential proxies for consideration, comparing returns over a variety of time periods to the returns that could have been achieved based on the spectrum of funds in which customers were invested.
As the project progressed, we were able to build on our findings from earlier stages and we able to identify additional data we could obtain regarding the products and past performance. As a result, we were able to refine our analysis, taking into account the risk profiles that customers would have been advised upon, and we were then able to use this information to determine a set of appropriate proxies for use under different customer scenarios.
We also used our analysis to identify a number of possible exceptions to the set of proxies we had developed and worked with the client to develop an action plan to deal with them. For example, through a number of brainstorming sessions and collaboration with the client, we were able to identify the situations in which customers actual returns could be determined based on the data available and consider the funds which experienced periods of high performance during the remediation period and would potentially need separate analysis.
Outcome for the client
The client used our findings and advice to develop a framework for identifying which customers an actual return could be determined for and which customers would require the use of a proxy, limiting the future work that could be required should calculations need to be reworked. The client was able to build a model to determine the appropriate benchmark from the set of options we provided that would be applicable for each customer segment over the remediation period and therefore process the remediation payments in a timely manner.
The client was also able to use our advice to support conversations with their customer advocacy and risk teams to ensure that the business as a whole was comfortable with the robustness of the process and that this also met the needs and expectations of both customers and the regulator.