Articles, Publications & Resources

Australian Financial Complaints Authority: is bigger really better?

Published in the Australian Banking & Finance Law Bulletin (2017) 33(5) BLB 89

The proposed creation of the Australian Financial Complaints Authority (AFCA) not only amalgamates three external dispute resolution (EDR) bodies[1] but also significantly increases the jurisdiction currently exercised by the Financial Ombudsman Service (FOS). That increased jurisdiction will mean many more consumer and small business disputes of higher value will be heard by AFCA, rather than courts. This article explores whether the proposed increase in jurisdiction strikes the right balance.

Establishment of AFCA

In his budget speech delivered on 9 May 2017, Federal Treasurer the Honourable Scott Morrison MP announced the establishment of a “one-stop shop” for Australians to resolve their disputes and obtain binding outcomes from the banks and other financial institutions, to be known as AFCA.[2] The announcement was framed as the government’s response to the Review into Dispute Resolution and Complaints Framework, chaired by Professor Ian Ramsay. On the same day, the final report of that review (Ramsay Report) was released to the public, having been released to the government a little over a month earlier. The Ramsay Report sets out some of the detail of AFCA’s structure, jurisdiction and remit should the Commonwealth Government (as seems likely) adopt the recommendations made in relation to it.

The current position

Pursuant to s 912A(1)(g) and (2) of the Corporations Act 2001 (Cth), financial services providers (FSPs) are required to have in place dispute resolution procedures that include membership of one or more EDR schemes approved by the Australian Securities and Investments Commission.

Currently, three separate external dispute resolution bodies deal with financial disputes. FOS is by far the largest of the three, having dealt with 34,095 disputes in the past year. By comparison, the Credit and Investments Ombudsman (CIO) dealt with 4760 disputes in the same period, and the Superannuation Complaints Tribunal (SCT) 2368. Notwithstanding the high volume, FOS most efficiently dealt with disputes, with an average resolution time of 62 days. CIO’s average resolution time was 107 days, and the SCT’s a staggering 796 days.

FOS’s jurisdiction in relation to consumer disputes is currently limited to facilities under $500,000 with a compensation cap of $309,000. The jurisdiction in relation to the credit facilities of small businesses is larger (up to $2 million), however there is no difference in the compensation cap. Small businesses which can access FOS are those with less than 20 employees, or less than 100 employees in the case of a manufacturing business.

Upon the submission of a dispute to FOS, a tripartite contract comes into existence between the customer, the FSP and FOS by which those parties agree that the dispute will be determined in accordance with the FOS Terms of Reference (TOR).[3]

The TOR provides that, in dealing with disputes that come before it, FOS proceeds with the minimum formality and technicality,[4] is not bound by rules of evidence,[5] and has regard to (but is not bound to apply) legal principles. The TOR confers on FOS’s broad powers to grant remedies including the payment of a sum of money, compensation for financial and non-financial loss, forgiveness or variation of a debt, or the release of security for a debt.[6]

No appeal lies from a decision of the FOS. A determination is subject to judicial review only if it can be shown to be unreasonable in the Associated Provincial Picture Houses Ltd v Wednesbury Corp[7] sense; that is, if the decision is one to which no reasonable tribunal could properly come on the evidence. Put another way, the decision must be so unreasonable that it could not have been made in accordance with the tripartite contract.[8] It is not sufficient that the decision is wrong. To date, there do not appear to have been any successful challenges to determinations made by FOS.

Recommendations of the Ramsay Report

The Ramsay Report makes 11 recommendations. The central recommendation is the replacement of FOS, the SCT and the CIO with AFCA, a single external dispute resolution body capable of resolving all financial disputes. AFCA’s jurisdiction will represent a significant expansion of FOS’s, guided by the principle that the substantial majority of consumers’ and small businesses’ financial disputes should be able to be resolved through external dispute resolution.

Chapter 6 of the Ramsay Report sets out in further detail its recommendation[9] as to the features of AFCA. These are broadly consistent with those of FOS, in that AFCA is to have regard to but is not bound to apply legal principles, and has the power to grant a wide range of remedies from which very limited rights of appeal lie. The only significant change proposed is the use of a panel to resolve especially complex disputes, although no further detail is provided in this respect.

Increase in consumer and small business jurisdiction

The Ramsay Report recommends[10] the following jurisdictional limits and compensation caps:

Category of dispute Monetary limit Compensation cap
Consumer and non-credit facility small business $1 million $500,000
Small business credit facility $5 million $1 million
Guarantee supported by security over principal place of residence (PPR) unlimited unlimited

 

For consumer and non-credit facility small business disputes about mortgages, the Ramsay Report recommends that consultation commence on whether the compensation cap ought to be immediately raised to $1 million, and that the lower limit ought only to apply where the higher cap is likely to result in a substantial lessening of competition. Such loss of competition would arise as a result of smaller firms being unable to obtain professional indemnity insurance.

The Ramsay Report drew parallels between the position of consumers and small businesses, observing that both groups faced challenges regarding access to justice, and highlighting the potential social impact of financial disputes on proprietors and employees. Apart from the proposal that a panel adjudicate complex disputes, the Ramsay Report did not address in a detailed way any measures to deal with the inevitable increase in the complexity of disputes that arise in relation to business facilities.

No limit for certain guarantees

The proposal that AFCA have unlimited jurisdiction in respect of guarantees supported by the guarantor’s PPR is problematic. It was not given detailed treatment in the Ramsay Report. While the idea that a customer’s home is deserving of special treatment is a perfectly understandable sentiment, it is unclear how it logically follows that no limit at all is appropriate. It is not entirely clear why a borrower whose home is worth many millions of dollars, and to whom no impediment exists to accessing justice via the court system ought to be afforded the same advantages as those who cannot.

Further, it is unclear whether a guarantee intended to be within AFCA’s jurisdiction is one that is supported only by the guarantor’s PPR, or if it includes a guarantee supported by real property including the guarantor’s PPR. The latter scenario leaves open the possibility that a customer who had guaranteed substantial business debts supported by a vast portfolio of real property could enjoy the advantages of EDR. Such a person would plainly not be subject to the same barriers to entry to the court system as the average guarantor. The rationale for such persons having access to EDR is unclear.

Finally, the large body of law that has developed in relation to guarantees over many hundreds of years can be complicated. Adjudicating disputes in relation to guarantees can therefore be expected to have a high margin for error.

Is bigger really better?

The economies of scale that can be exploited by the amalgamation of FOS, the CIO and the SCT will undoubtedly create efficiencies which will mutually benefit consumers and FSPs. But, it is submitted, bigger is not necessarily better when it comes to the proposed increases in monetary limits and compensation caps.

It may be accepted that the high costs of dispute resolution via the courts create a barrier to entry for many consumers and small businesses. In many cases, the quantum of their claims will not justify the expense of litigation. These high costs arise largely because court rules and procedures are often highly technical, such that the assistance of skilled legal practitioners is required. But these rules (such as rules of evidence) exist not for rules’ sake, but to achieve procedure fairness, and ultimately, justice according to the law. These important features of our legal system ought not to be lightly swept aside. Moreover, the fact that that litigation can favour large, deep-pocketed institutions is not a scenario unique to FSPs. It applies equally to, for example, the individual or small business person defamed by a segment on a current affairs television programme. Are such persons any less deserving of access to justice than a consumer of financial services?

It must also be acknowledged that determinations made by FOS in accordance with the TOR are likely to favour consumers. Those determinations do not have to apply the law to the facts as found by FOS, will be binding on the FSP (if the customer elects) and the scope to challenge an incorrect determination is extremely limited.

The potential for an unjust outcome is an acceptable price to pay for enhanced access to timely, affordable dispute resolution for those who would not otherwise enjoy such access. But there must be sensible limits. Those limits must reflect the fact that the laws relating to financial services (and in particular, guarantees) can be complicated and are best applied in courts, by judges. They should also reflect that the starting point should not be that EDR ought to be available to all consumers of financial services as of right. Why should a wealthy business owner whose business liabilities are secured by a guarantee supported by an expensive harbour side mansion (perhaps in conjunction with several other investment properties) enjoy the advantages associated with access to EDR? Can a business that can afford to repay interest on a $5 million facility not also afford legal representation?

There is undoubtedly a place for efficient, inexpensive dispute resolution in the financial services sector, even if it means FSPs are disadvantaged. But it should be available to those who cannot afford litigation, not to those who can.

[1] The Superannuation Complaints Tribunal (SCT), Credit and Investments Ombudsman (CIO) and Financial Ombudsman Service (FOS).

[2] S Morrison, “The right choices to secure better days ahead” speech delivered at the Second Reading of the Appropriation Bill (No 1) 2017–18 (9 May 2017) http://budget.gov.au/2017-18/content/speech/html/speech.htm.

[3] Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456 ; [2012] VSCA 185 ; BC201206000 at [35]–[36].

[4] FOS Terms of Reference, cl 1.2(b).

[5] FOS Terms of Reference, cl 8.1.

[6] FOS Terms of Reference, cl 9.

[7] Associated Provincial Picture Houses Ltd v Wednesbury Corp (1947) 45 LGR 635 ; [1947] 2 All ER 680 ; [1948] 1 KB 223.

[8] Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd (2014) 288 FLR 374 ; [2014] VSCA 179 ; BC201407004 at [93].

[9] I Ramsay, J Abramson and A Kirkland Final Report: Review of the Financial System External Dispute Resolution and Complaints Framework (April 2017) 134 — Recommendation 2.

[10] Above n 9, at 134 and 172 — Recommendations 4 and 5.