One cannot, it seems, have too many industry ombudsmen equipped with lettuce leaves.
A single industry ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes)
The Panel recommends that there be a single industry ombudsman scheme to deal with all financial, credit and investment disputes (apart from superannuation disputes) to replace FOS and CIO .
The Panel considers that a shift to a single industry ombudsman scheme for these disputes would incorporate all the strengths of the existing industry ombudsman model — such as the focus on providing low cost, fair and accessible dispute resolution, the ability to innovate and adapt to changes in the regulatory and broader socio-economic environment, and the focus on improving industry behaviour — while addressing the problems that arise where the framework consists of multiple schemes with overlapping jurisdictions.
An assessment of this draft recommendation against the Review principles is presented below.
New industry ombudsman scheme for financial, credit and investment disputes
Efficiency ↑ economies of scale expected, as w ell as the capacity to reallocate resources as priority areas shift; opportunity to enhance coverage across the framework; and review scheme’s powers and remedies. Removes jurisdictional overlap .
Equity ↑ equity as creating a new scheme provides an opportunity to strengthen accountability and improve fairness for users .
Complexity ↓ consumer confusion and complexity .
Transparency ↑ transparency is possible as a shift to a single scheme removes competition between financial firms on price, and so removes any incentives by the scheme not to be financially transparent.
Accountability ↑ accountability as creating a new scheme provides an opportunity to enhance accountability mechanisms and regulatory oversight
Comparability of outcomes ↑ comparability of outcomes due to greater consistency in processes and procedures .
Regulatory costs ↓ costs for ASIC and industry: duplicative costs would reduce with the move to a single scheme.
In relation to key features such as the scheme’s jurisdiction, governance arrangements and monetary limits and compensation caps, the Panel considers that:
- the jurisdiction of the new scheme should be at least as broad as FOS’s existing jurisdiction , which is the broader of the two existing schemes ;
- governance arrangements should recognise the importance of ensuring that the scheme is, and is perceived to be, independent of its members, and is sufficiently resourced and has appropriate processes to render high - quality and timely decisions; and
- monetary limits and compensation caps should be higher than the current monetary limits and compensation caps of FOS and CIO.
A new industry ombudsman scheme for superannuation disputes
The Panel considers that the existing problems with SCT cannot be addressed within the existing tribunal structure, even with substantial reforms to funding, governance, appointment processes or other aspects of the legislative regime, as the rigidity of the statutory model would continue to hamper flexibility and innovation, making it difficult for SCT to respond to unanticipated future challenges. Recognising that the core purpose of the Review is to make recommendations to ensure that the EDR system can deliver effective outcomes in a rapidly changing and dynamic financial system, the Panel recommends that SCT be transitioned to a new industry ombudsman scheme for superannuation disputes.
In transition ing to a superannuation industry ombudsman scheme , the Panel intends to retain the existing strengths of SCT, such as:
- unlimited monetary jurisdiction; and
- a broad jurisdiction to review decisions of trustees of superannuation funds .
However, the new structure would also incorporate the strengths of industry ombudsman schemes such as:
- decision making centred on providing ‘fairness in all the circumstances’;
- flexibility to innovate;
- a flexible and responsive funding model ;
- a board , with an independent chair and equal number of directors with industry and consumer backgrounds , to oversee the scheme ;
- the a bility to make timely and appropriate staffing decisions;
- systemic issues work to improve industry practice;
- regular independent reviews of the scheme ; and
- strong stakeholder engagement to increase accessibility .
The following table assesses the draft recommendation for a new superannuation industry ombudsman scheme against the Review principles.
New industry ombudsman scheme for superannuation disputes
Efficiency ↑ efficiency and more timely decision making due to more flexible and responsive funding, enhanced governance, faster and more flexible recruitment , flexibility to develop new procedures and tailor processes to disputes and respond to changes in the external environment .
Equity ↑ equity, with reduced delays, greater flexibility to define ‘fairness’ and to provide for a range of remedies, including for non - financial loss.
Complexity ↓ complexity, with a focus on developing informal dispute resolution processes and an easy - to - navigate system.
Transparency ↑ transparency of funding and operations, with a focus on stakeholder engagement .
Accountability ↑ accountability, with ASIC oversight and periodic independent reviews .
Comparability of outcomes ↑ comparability of outcomes ; eg. as independent reviews provide additional scrutiny of procedures and processes.
Regulatory costs ↑ potential direct regulatory costs (increased industry funding, regulator costs from overseeing scheme , offset by some decreased costs in m aintaining legislation, making appointments). A user pays (industry funded) model may reduce cost as there would be an incentive for funds to reduce complaints to EDR.
Future directions: a single industry ombudsman scheme for all disputes in the financial system
The Panel considered the merits of moving immediately to a single dispute resolution body to handle all dispute s in the financial system , including superannuation disputes . On balance, the Panel’s view is that it is preferable to initially introduce an ombudsman model in superannuation through a separate scheme focused exclusively on superannuation disputes. This approach is more likely to facilitate strong stakeholder engagement in the development and implementation of the scheme, which has been a critical foundation for industry ombudsman schemes in other parts of the financial system and in other industries .
The new industry ombudsman scheme for superannuation disputes should be encouraged to work closely with the new scheme for financial, credit and investment disputes, to share knowledge and resources (such as back - office functions) and realise efficiencies where possible .
Once the two new schemes are fully operational and have garnered consumer and industry support, consideration should be given to further integrating the schemes to create a single ombudsman scheme for all financial system disputes. The Panel notes that integration of this kind would be consistent with the evolution and adaptation that has been a hallmark of t he existing EDR framework, with the current ombudsman schemes the products of amalgamations and consolidations.
The Panel is confident that its draft recommendations — which should be considered as an integrated package of reforms — will address shortcomings in the current EDR framework and ensure that the framework is well - placed to address current problems and withstand future challenges.
Other matters: whether an additional statutory dispute resolution body is needed
In its Issues Paper, the Panel sought stakeholder views on the establishment of an additional statutory dispute resolution body in the financial system. The majority of submissions did not support this proposal. For the reasons outlined in Chapter 6, the Panel is of the view that an additional statutory dispute resolution body is not required.
Report of the House of Representatives Standing Committee on Economics — Review of the Four Major Banks
On 24 November 2016 , the House of Representatives Standing Committee on Economics released its Review of the Four Major Banks: First Report . One the Committee’s recommendations is:
... that the Government amend or introduce legislation, if required, to establish a Banking and Financial Sector Tribunal by 1 July 2017. T his Tribunal should replace the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. The Government should also, if necessary, amend relevant legislation and the planned industry funding model for the Australian Securities and Investments Commission, to ensure that the costs of operating the Tribunal are borne by the financial sector.
The Panel observes that many of the Committee’s recommended features for this body are consistent with the Panel’s draft findings and recommendations including:
- free access for consumers;
- decisions to be binding on members of the body;
- the body to be funded directly by the financial services industry; and
- the body to have a board that is comprised of equal numbers of consumer and industry representatives.
The Panel also observes that the Committee has recommended the Government establish the body by legislation if required indicating it is not necessarily the case the body would be established by legislation or that it would operate within a legislative framework. This would only occur if it is required.
A difference between the recommendation of the Committee and the draft recommendations of the Panel is that the Committee recommends the establishment of a Tribunal to replace FOS, CIO and SCT. In this Interim Report, the Panel makes draft recommendations for the establishment of a single industry ombudsman scheme for financial, credit and investment disputes and an industry ombudsman scheme for superannuation disputes. In Chapters 2, 4 and 5 of this Interim Report the Panel identifies what it sees as the advantages that ombudsman schemes have when compared to tribunals, such as SCT, when dealing with disputes relating to financial products and services.
The recommendations of the Committee are a matter for the Government. However, the Panel will give further consideration to the Committee’s recommendations in its Final Report.
Increased accountability and transparency
Recognising the importance of ensuring that the new ombudsman scheme for financial, credit and investment disputes and the new ombudsman scheme for superannuation disputes are, and are perceived to be, independent of financial firms and consumers, and are sufficiently resourced to provide robust, timely and quality decision making, the Panel considers there is a case for enhancing some existing accountability mechanisms. Both new schemes, in order to fulfil their mandate of providing effective EDR, must meet the standards set by ASIC and be accountable to their users. At a minimum, the Panel recommends that ASIC’s regulatory guidance requires schemes to:
- be adequately funded (for example, in order to be able to respond to unforeseen spikes in dispute volumes);
- have sufficient coverage (including fit - for - purpose monetary limits in the case of the new scheme for financial, credit and investment disputes);
- be subject to more frequent, periodic independent reviews (the Panel is of the view that given the importance of independent reviews, they should occur more frequently than every five years, which is currently the case for FOS and CIO. The Panel notes that independent reviews of ombudsman - type schemes in the financial services sector in the United Kingdom and Singapore occur every three years — see Chapter 2 and Appendix 1 ) ; and
- be responsive to findings of independent reviews, including by providing detailed updates on implementation of actions taken in response to an independent review and a detailed explanation when a recommendation of an independent review is not accepted by the scheme.
Additionally, the Panel recommends that each scheme establish an independent assessor whose role would be to investigate complaints by users (consumers, small business and financial firms) into the handling of a dispute by the schemes. The independent assessor’s role would not involve reviewing the findings or outcomes of the relevant decision (that is, they would not be an avenue of appeal). The assessor would make a recommendation in relation to the service handling of the dispute which, where the dispute was not handled satisfactorily, may include that the scheme make an apology or provide compensation to the affected user. The independent assessor would report directly to the Board.
The Panel also recommends bolstering ASIC’s capacity to oversee the new industry ombudsman schemes by providing ASIC with more specific powers to allow it to give directions to schemes, as appropriate, to comply with the EDR benchmarks.
Internal dispute resolution
Recognising that sound EDR is supported by sound IDR, the Panel also recommends that financial firms be required to undertake enhanced public reporting of their IDR activity and the outcomes consumers receive in relation to IDR complaints. ASIC should be provided with power to determine the content and format of IDR reporting. Additionally, the industry ombudsman schemes should be required to register and track the progress of disputes referred back to a financial firm’s IDR processes.
Enhanced small business access to redress
It is clear that there are strong and compelling reasons for further steps to be taken in relation to the resolution of disputes for small business. The Panel considers that coverage of the framework should be expanded by improving access to dispute resolution for small business, to increase efficiency and equity. This is best achieved by ensuring the monetary limits of the new scheme for financial, credit and investment disputes are higher than the monetary limits of the existing industry schemes (FOS and CIO).
Better handling of complex disputes through panels
Recognising the potential for increased complexity of disputes, particularly given the increased monetary jurisdiction of the new industry scheme for financial, credit and investment disputes (relative to the status quo), the Panel recommends that both new industry schemes consider the use of panels (which consist of an industry representative, consumer representative and a scheme ombudsman) as a means of enhancing the quality and robustness of decisions.
While recognising the costs associated with decision making by panels (including additional time to resolve the dispute), the Panel notes the benefits of utilising industry and consumer expertise and of getting ‘buy - in’ from consumer and industry stakeholders. Schemes should also ensure they are transparent to users about the circumstances where a panel will be used.
Compensation scheme of last resort
An efficient, resilient and fair financial system that facilitates economic growth and meets the financial needs of its users is dependent on the trust and confidence of those users. However, it is clear that many Australians currently lack confidence in the financial system and this is due, at least in part, to the issue of uncompensated consumer losses.
Where consumers are denied compensation due to a financial firm’s lack of resources, it has a negative impact on both the individual consumer and the broader financial system. In circumstances where the market is currently unable to provide a solution to this problem, the Panel is of the view that there is considerable merit in introducing an industry - funded compensation scheme of last resort.
The Panel is aware that to help achieve broad consensus about the structure and operation of a compensation scheme of last resort, the Australian Bankers’ Association and FOS are working with key stakeholders to identify any issues that would impede implementation of such a scheme. The Panel will consider the outcomes of this work in the context of its Final Report.
Noting these draft recommendations represent a significant shift from the current system, the Panel is calling for further submissions on the broad approach, the draft recommendations, and implementation and transitional issues. The Panel supports a staged process f or implementation, recognising that such an approach may better manage transitional issues. 1The Panel's draft recommendations are -
Draft recommendation 1 A new industry ombudsman scheme for financial, credit and investment disputes
There should be a single industry ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes) to replace FOS and CIO.
Draft recommendation 2 Consumer monetary limits and compensation caps
The new industry ombudsman scheme for financial, credit and investment disputes should provide consumers with monetary limits and compensation caps that are higher than the current arrangements, and that are subject to regular indexation.
Draft recommendation 3 Small business monetary limits and compensation caps
The new industry ombudsman scheme for financial, credit and investment disputes should provide small business with monetary limits and compensation caps that are higher than the current arrangements, and that are subject to regular indexation.
Draft recommendation 4 A new industry ombudsman scheme for superannuation disputes
SCT should transition into an industry ombudsman scheme for superannuation disputes.
Draft recommendation 5 A superannuation code of practice
The superannuation industry should develop a superannuation code of practice.
Draft recommendation 6 Ensuring schemes are accountable to their users
Both new schemes should be required to meet the standards developed and set by ASIC. At a minimum, ASIC’s regulatory guidance should require the schemes to:
- ensure they have sufficient funding and flexible processes to allow them to deal with unforeseen events in the system, such as an increase in complaints following a financial crisis or natural disaster;
- provide an appropriate level of financial transparency to ensure they remain accountable to users and the wider public;
- be subject to more frequent, periodic independent reviews and provide detailed responses in relation to recommendations of independent reviews, including updates on the implementation of actions taken in response to the reviews and a detailed explanation when a recommendation of an independent review is not accepted by the scheme; and
- establish an independent assessor to review the handling of complaints by the scheme but not to review the outcome of individual disputes.
In addition, ASIC’s regulatory guidance should require the new scheme for financial, credit and investment disputes to regularly review and update its monetary limits and compensation caps so that they remain relevant and fit - for - purpose over time.
Draft recommendation 7 Increased ASIC oversight of industry ombudsman schemes
ASIC’s oversight powers in relation to industry ombudsman schemes should be enhanced by providing ASIC with more specific powers to allow it to compel performance where the schemes do not comply with EDR benchmarks.
Draft recommendation 8 Use of panels
The new industry ombudsman schemes should consider the use of panels for resolving complex disputes. Users should be provided with enhanced information regarding under what circumstances the schemes will use a panel to resolve a dispute.
Draft recommendation 9 Internal dispute resolution
Financial firms should be required to publish information and report to ASIC on their IDR activity and the outcomes consumers receive in relation to IDR complaints. ASIC should have the power to determine the content and format of IDR reporting.
Draft recommendation 10 Schemes to monitor IDR
Schemes should register and track the progress of c omplaints referred back to IDR.
Draft recommendation 11 Debt management firms
Debt management firms should be required to be a member of an industry ombudsman scheme . One mechanism to ensure access to EDR is a requirement for debt management firms to be licensed.The Interim Report observes that
The Panel is of the view that there is considerable merit in introducing an industry - funded compensation scheme of last resort