Australia: Banking and finance sector moves one step closer to dispute resolution reform

What you need to know

• From 1 July 2018 a single scheme for external dispute resolution in the banking and finance sector, the Australian Financial Complaints Authority (AFCA), will replace three existing dispute resolution schemes including the Financial Ombudsman Service.
• The new legislation establishing the AFCA scheme is expected to be passed by Parliament following the recommendation of the Senate Economics Legislation Committee. The legislation mandates increased ASIC oversight and greater obligations on members to report internal dispute resolution outcomes to ASIC. The new scheme will also provide AFCA with greater jurisdiction to hear disputes and award compensation.
• The cost to business of the transition is estimated to be $43.85 million, and the new framework will have a number of practical ramifications for those within the banking and finance sector.

Earlier this year, the Federal Government announced that it would introduce a new external dispute resolution framework for the banking and finance sector through the establishment of a 'one-stop shop' for all financial complaints, the Australian Financial Complaints Authority (AFCA).

On 14 September 2017, the Treasury Laws Amendment (Putting Consumers First - Establishment of the Australian Financial Complaints Authority) Bill 2017 (Bill) was introduced to the Parliament. The Bill was referred to the Senate Economics Legislation Committee (Committee) for review and on 17 October 2017, the Committee provided its report recommending that the Bill be passed.¹

AFCA will replace the three existing dispute resolution services currently in the sector:

• Financial Ombudsman Service (FOS)
• Credit and Investments Ombudsman (CIO)
• Superannuation Complaints Tribunal (SCT).

From 1 July 2018, AFCA will deal with all new complaints that would have previously been dealt with by FOS, CIO and SCT. Consumers will be able to bring a complaint to AFCA for free and consumers who have an existing complaint before FOS, CIO or SCT will be able to transfer their complaint to AFCA. FOS, CIO and SCT will continue to operate after 1 July 2018 in order to clear their existing complaints.

What will AFCA do?

AFCA will be able to hear disputes within the following limits:

The proposed jurisdiction limits above are a sharp increase from the value of claims currently able to be heard by FOS, CIO and SCT. As a result, once AFCA is established, significantly more consumer and small business disputes will be able to be brought before AFCA instead of previously having to go through the court system because of a lack of jurisdiction.

AFCA will be required to comply with specific mandatory requirements, including the following:

• AFCA's operations will be funded by contributions from AFCA members
• AFCA must have an independent assessor to review the handling of complaints
• Consumers must be able to access AFCA free of charge
• AFCA must include a complaints mechanism for complainants who are dissatisfied with the outcome of their complaint
• AFCA must resolve disputes in a fair, efficient, timely and independent manner
• AFCA must take reasonable steps to ensure members are complying with determinations.

Although AFCA will be industry-funded, AFCA will have the responsibility of determining exactly how it will be funded and how much funding it will require. AFCA will also have flexibility in deciding how each dispute is required to be resolved, including the requirement for disputes to be resolved by way of mediation, conciliation or determination.

Consistent with the statutory powers currently available to SCT, AFCA will also have the following additional statutory powers in respect of superannuation disputes:

• join third parties
• require the production of documents and information relevant to a dispute
• require parties to attend a conciliation conference
• refer questions of law to the Federal Court.

Although AFCA will be industry-funded, AFCA will have the responsibility of determining exactly how it will be funded and how much funding it will require. AFCA will also have flexibility in deciding how each dispute is required to be resolved, including the requirement for disputes to be resolved by way of mediation, conciliation or determination.

Consistent with the statutory powers currently available to SCT, AFCA will also have the following additional statutory powers in respect of superannuation disputes:

• join third parties
• require the production of documents and information relevant to a dispute
• require parties to attend a conciliation conference
• refer questions of law to the Federal Court.

Regulatory oversight

The Australian Securities and Investments Commission (ASIC) will oversee AFCA and will be granted increased powers. ASIC will have the power to:

• issue regulatory requirements regarding the performance of AFCA's functions
• approve all material changes to the AFCA scheme
• issue directions to AFCA requiring it to:
• • increase monetary limits for the value of claims or the value of remedies for non-superannuation disputes
  • comply with a mandatory requirement
  • comply with a condition of authorisation, or
  • comply with ASIC's regulatory requirements.

AFCA will also have enhanced reporting obligations, requiring certain matters to be referred to ASIC, the Australian Prudential Regulation Authority (APRA) or the Commissioner of Taxation as required. Where AFCA considers that there is a systemic issue arising from the complaints made under the scheme or considers that a settlement made between the parties requires further investigation, AFCA must give the details of the issue to one (or more) of ASIC, APRA or the Commissioner of Taxation, as appropriate.

AFCA members will also be required to report to ASIC on their internal dispute resolution outcomes and ASIC will also be allowed to publish any information received under the new reporting requirements (including firm specific information). ASIC does not currently have this power and financial firms are not currently required to report this information to ASIC.

How will these changes affect those within the banking and finance sector?

The new framework has a number of ramifications for financial firms operating within the sector. These include the following key points:

1. All financial firms providing financial and credit services to consumers will be required to be members of AFCA
2. All members will be contractually bound to comply with AFCA's terms of reference
3. All decisions made by AFCA will be binding on all members
4. Financial firms will be required to report to ASIC on their internal dispute resolution outcomes and ASIC will be permitted to publish information received under the new reporting requirements
5. Each party to a superannuation dispute will be able to appeal to the Federal Court on a question of law in an AFCA determination however no appeal rights are available to parties in any other type of dispute
6. Financial firms will be required to maintain their membership of FOS, CIO and SCT for up to 12 months following AFCA's commencement on 1 July 2018.

What happens next?

On 26 July 2017, the Federal Minister for Revenue and Financial Services announced that a transition team has been appointed to oversee the establishment of AFCA. The transition team will be led by Dr Malcolm Edey, the former Assistant Governor for the Reserve Bank of Australia. Once the relevant legislation has passed Parliament, the transition team will move to consult with industry and consumer stakeholders and oversee the transition of operations from FOS, CIO and SCT to AFCA. Treasury has estimated that the financial costs of transition for affected businesses will be in the vicinity of $43.85 million.²

There will also be consultation prior to 1 July 2018 as to whether disputes relating to certain products, including mortgages and general insurance products, should commence with a financial remedy cap of $1 million (instead of the proposed $500,000).

Much of the operational detail of the AFCA scheme, including the approved jurisdictional limits, is not provided for within the Bill and will most likely be contained in the AFCA terms of reference which have yet to be worked out. This is intended to allow AFCA flexibility so that any operational improvements can be made promptly without requiring a formal change to legislation. With ASIC's oversight of the AFCA scheme, the extent to which the AFCA's terms of reference will mirror the current FOS and CIO terms of reference (as ASIC approved industry ombudsman schemes) and ASIC's Corporate Plan for 2017-2018 (which is focused on improving consumer outcomes) remains to be seen.

We will provide a further update once the terms of reference become available.

Footnotes

¹ The Senate Economics Legislation Committee's Report is available at https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/PuttingConsumersFirst/Report.
² Explanatory Memorandum to the Bill at [4.32].

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories