Continuing Federal Government reforms of the financial services sector will see the end of separate external dispute resolution forums, with the introduction of a one-stop shop for all financial disputes in mid-2018.
In the 2017 Federal Budget, the Government flagged its intention to bring the Australian Financial Complaints Authority (AFCA) into operation by 1 July 2018. These reforms are based on the recommendations of the Ramsay Review of the financial system, external dispute resolution and complaints framework.
The stated objective of AFCA is to provide a ‘one stop shop’ for external dispute resolution for all financial disputes. It will replace the current system which comprises the Financial Ombudsman Service (FOS), Credit and Investments Ombudsman and the Superannuation Complaints Tribunal, thus bringing the expertise and conduct of complaints across all financial services sectors under one roof.
Importantly, for insurers and banks, it is proposed that compensation caps for certain financial products, such as mortgages and general insurance products, should move immediately to $1 million upon AFCA’s commencement. This represents a significant increase in current limits, and promises to significantly increase the number of claims being run through the alternative dispute forum as a preliminary step to litigation.
Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms. As was the case with previous forums, there will be no cost to consumers to bring a complaint to AFCA, and consumers will be free to litigate their claims if they are unsatisfied with the determination made by AFCA.
It is the Government’s intention that AFCA will commence operations with:
- unlimited monetary jurisdiction for superannuation disputes;
- a $1 million limit on the size of non-superannuation consumer disputes (a 100% increase on the current limit);
- a minimum $500,000 compensation cap for non-superannuation consumer disputes (a 62% increase on the current cap);
- $5 million small business credit facility limit (a 250% increase on the current limit);
- $1 million compensation cap for small business disputes (a 224% increase on the current cap); and
- no monetary limits or compensation caps for disputes relating to guarantees supported by a mortgage or other security over the guarantor’s primary place of residence.
The Australian Securities and Investments Commission (ASIC) will be provided with stronger powers to oversee AFCA. The budget allocated $4.3 million to ASIC over four years to help monitor the development of AFCA. ASIC will have a general directions power to ensure AFCA complies with legislative and regulatory requirements. Given the scale of the complaints it will handle and the breadth of expertise it will require across all areas of financial services, the various facets of the financial services industry will be keen to understand how and when this general directions power will be used.
The Government will also legislate to require financial firms to report to ASIC on internal dispute resolution outcomes.
The Government has established a transition team, led by former Reserve Bank Governor Dr Malcolm Edey. The Government released an exposure draft bill to seek additional feedback on a range of matters, including the proposal for the compensation cap to be increased to $1 million for certain financial products upon the commencement of AFCA (for which submissions closed on 14 June 2017). There have been complaints from some parts of the industry that this consultation process has been inadequate. The short consultation period of little more than one month has raised general questions as to whether it has been a full and proper process. Complaints have particularly come from smaller financial services firms, who do not wish to subsidise the scheme for the benefit of larger players, who are invariably a larger source of complaints. Nevertheless, the bill is expected to be presented to the Parliament soon. The Opposition has not indicated whether it will be supportive of the bill.
If it is successfully passed, this reform may lead to more efficient dispute resolution. However, the increased monetary jurisdiction and reporting requirements have the potential to increase the volume, scale and cost of handling disputes through non-court processes. The financial services industry waits with bated breath to understand the impact of the introduction of AFCA, and the role ASIC and the transition team will play in ensuring the AFCA is properly resourced and trained to handle the complaints it is likely to be confronted with.