FOS PROPOSED TERMS OF REFERENCE - SUBMISSION IN REPLY

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1 20 May 2009 Mr Phil Khoury The Navigator Company Pty Ltd C/- Financial Ombudsman Service GPO Box 3 MELBOURNE VIC 3001 by phil.khoury@thenavigator.com.au Dear Mr Khoury, FOS PROPOSED TERMS OF REFERENCE - SUBMISSION IN REPLY Thank you for the opportunity to make a submission in response to the submissions regarding the Proposed Terms of Reference for the Financial Ombudsman Service, dated 19 March 2009 (the Terms of Reference). Before proceeding with the submission I should protest at the timing, given the release of ASIC RG139 a little more than 48 hours before the deadline for submissions in reply. By way of background, Futuro Financial Services is an AFSL Holder (238478), and currently has 90 Authorised Representatives Australia wide. Exemption for Managers of Funds and Schemes Further to the submission by Garnaut Private Client Advisers dated 27 March 2009, concerning ToR 5.1 (f) and (h), this submission is strengthened by the new RG , which states that, from 1 January 2010, the Terms of Reference must cover the vast majority of types of consumer complaints in the relevant industry (changes underlined). Clearly, a term of reference which ruled out a large proportion of potential disputes in an industry breaches RG In the funds management industry, responsible entities are authorised to operate managed investment schemes. The vast majority of types of consumer complaints in this industry must, at least, include complaints about the operation of managed investment schemes. Hence, ToR5.1(h) breaches RG The required changes to ToR5.1(f) and (h) are as follows. The following amendments should be made to ToR 5.1(f): the exclusion should be for Disputes about the investment performance of a financial investment, except a dispute concerning management of the financial investment, non-disclosure or misrepresentation. Page 1 of 9

2 Again, the reasons for this amendment are: to bring the terminology in ToR 5.1(f) into line with the defined terms in ToR 14.1; to eliminate any ambiguity caused by the clash of the exclusions in ToR 5.1(f) and ToR 5.1(h); to clarify the circumstances in which a complaint concerning investment performance is excluded. The following amendments should be made to ToR 5.1(h): the exclusion should be for Disputes relating to the management of a financial investment, except a Dispute concerning non-disclosure, misrepresentation, maladministration, related party transactions, negligence, gross incompetence or fraud. (The term maladministration is defined in ToR 14.1 and relates to breach of duty or legal or contractual obligation.) Again, the reasons for this amendment are: to bring the terminology in ToR 5.1(h) into line with the defined terms in ToR 5.1(f) and 14.1; to eliminate any ambiguity from a potential clash of the exclusions in ToR 5.1(f) and ToR 5.1(h); to clarify and limit the circumstances in which a complaint concerning management is excluded; to ensure that genuine disputes concerning management of a financial investment, such as a superannuation fund or a registered managed investment scheme, are within the jurisdiction of FOS and that, as a result, FOS complies with ASIC Regulatory Guide Monetary Limit on Jurisdiction The reasons given by ASIC for the change from monetary limits to compensation caps are: (a) it provides greater access to EDR for consumers and investors, especially those with a claim just above the monetary limit who would have been precluded from accessing the scheme; and (b) it removes the need for EDR schemes to expend significant resources determining jurisdiction before the substance of a claim can be considered. 1 Further, in RG ASIC states, for example: from 1 January 2012 the compensation cap awarded by the scheme for consumer complaints involving monetary amounts that meet the value of the retail client test under s761g (currently $500,000) (emphasis added). This suggests that a cap on jurisdiction equal to the amount prescribed for the purposes of s761g of the Corporations Act 2001 would be appropriate. 1 ASIC Report 156 Report on submissions to CP 102 Dispute resolution review of RG 139 and RG 165, p21 Page 2 of 9

3 The required amendment is the insertion of a new ToR 4.2(c), as follows and renumbering of the existing (c) and (d): c) where the value of the Applicant s claim in the Dispute (or the amount of a related claim by the Applicant against the Financial Services Provider) exceeds the amount prescribed for the purposes of section 761G(7)(a) of the Corporations Act 2001; to ensure that FOS remains a small claims arena, by ruling out very large claims; consistent with the reasons given by ASIC for requiring a compensation cap, it provides access to FOS for consumers whose claim is just above the cap on compensation and will not require calculation for claims with a value close to the compensation cap; to allow the prescribed amount to be specified in guidelines, which can be changed if the regulations change; to ensure that larger claims are pursued in a legal framework with appropriate protections for Members; and to be consistent with ASIC Regulatory Guide , by ensuring that the compensation cap applies only to complaints involving monetary amounts that do not exceed the amount prescribed for the purposes of section 761G of the Corporations Act Waiver of Claim The Terms of Reference provide for a binding release for the full amount claimed to be provided to the Financial Services Provider by an Applicant before accepting a Recommendation or a Determination [ToR8.8]. This measure is welcome but the timing is not satisfactory. Given that there is no cost to the Applicant, there is a possibility of forum shopping by Applicants with larger claims. Even claims of $500,000 are very large and the Terms of Reference have no limit, at present. An Applicant could try out FOS and, if the award is insufficient, proceed through legal channels. If the Applicant is entering the process in good faith, the release should be given to the Financial Services Provider before the process commences. The required new to ToR6.2 is as follows (with re-numbering of existing ): 6.2 Release for Large Disputes When requested by the Financial Services Provider who is party to the Dispute or where it appears to FOS that the value of the Applicant s claim in the Dispute (or the amount of a related claim by the Applicant against the Financial Services Provider) exceeds or may possibly exceed the maximum remedy specified in paragraph 9.2, FOS will require the Applicant to provide to the Financial Services Provider a binding release in respect of any amount above the specified maximum remedy. Page 3 of 9

4 to ensure that Applicants with larger claims enter the FOS process in good faith and not as an exercise in forum shopping; to ensure that time or resources are not wasted in precisely determining the amount of the claim at the outset; and to promote confidence in the integrity of the FOS process. Increase in Maximum Remedies In ToR 9.7(b), the board of FOS is given the power to periodically review and increase the maximum monetary limits without following the amendment procedure set out in the constitution. Given the importance to members of monetary limits on claims, this discretion is not acceptable. The required change is to delete ToR9.7(b) (with re-numbering of existing 9.7(a)): to ensure that members retain their constitutional rights to be consulted before significant changes are made to the Terms of Reference; to ensure that the Terms of Reference are not used as a method of effectively amending the constitution without due process; and to ensure that proposed changes which affect the cost and availability of professional indemnity insurance of members and, hence, the viability of their businesses are fully and openly discussed. Consequential Losses The Terms of Reference provide for compensation for losses which are both direct and consequential. The inclusion of consequential losses is over and above the requirements of RG and should not be included. The required new to ToR9.2(a) is as follows: a) the Financial Services Provider compensate the Applicant for direct financial loss or damage; and to ensure that only investment losses and other direct monetary losses can be claimed by Applicants; to ensure that discussion of the degree of connection between the alleged matters giving rise to the Dispute and the alleged consequential loss or damage do not delay hearings and add complexity; and Page 4 of 9

5 Compensation for Non-financial Loss In ToR 9.2(b), the board of FOS is given the power to order compensation for nonfinancial losses. Given that FOS is an EDR for the financial services industry, the possibility of awards for non-financial losses exceeds the requirements of RG and is not acceptable. The Terms of Reference give FOS the power to award interest and costs and these should be sufficient compensation for the matters set out on ToR 9.2(b)(i). The required change is to delete ToR9(b) (with re-numbering of existing 9.2(a)): to ensure that Applicants can be compensated for all direct financial losses up to the compensation cap; noting that Disputes relate to the financial services industry, acknowledging that all disputes are financial in nature; allowing remedies under privacy law to be dealt with in another forum; and contributing to the speed and simplicity of the FOS process by eliminating complex arguments concerning the quantification of alleged non-financial losses. Interest The Terms of Reference provide for a wide discretion for awards to include interest. This is over and above the requirements of RG and should be toned down. The required new to ToR9.4 is as follows: a) FOS may decide that the Financial Services Provider pay interest on a payment to be made by the Financial Services Provider to the Applicant after considering the contribution to the delay (if any) by either party, including the time elapsed between when the cause of the Dispute arose and when the Applicant lodged a complaint with the Financial Services Provider, the time taken by the Financial Services Provider to respond to the complaint and the time elapsed between the receipt of the response by the Applicant and the lodgement of the Dispute with FOS. b) The longest period for which interest can be awarded is the time between the date of the cause of action or matter giving rise to the claim to the date of the Recommendation or Determination. c) FOS may award interest only on direct financial losses incurred by the Applicant. d) The rates of interest to be applied are as follows: (i) for periods of up to 12 months the interest rate applicable to an at-call deposit account at the Commonwealth Bank of Australia, compounded monthly; and (ii) for period in excess of 12 months the applicable Commonwealth Treasury 10-year bond yield, as published by the Reserve Bank of Australia, for each month of the period. Page 5 of 9

6 to ensure that the Terms of Reference comply with RG139; to ensure that the interest award regime is certain and not left to guidelines which can be altered without the constitutional process; to ensure that interest is not awarded on awards for non-financial losses or consequential losses, as these awards should include an interest component, if applicable; and Costs The Terms of Reference provide for a wide discretion for awards to include the Applicant s costs. This is over and above the requirements of RG139 and should be modified. The required new to ToR9.3 is as follows: 9.3 FOS will not normally require the Financial Services Provider to reimburse the Applicant for costs but FOS may award costs, up to a maximum of 10% of the cap specified in paragraph 9.6, if it believes that the Applicant was required to incur those costs due to the act or omission of the Financial Services Provider. In particular, FOS may consider requiring the Financial Services Provide to pay the reasonable costs of the Applicant: a) if the Financial Services provider requests a hearing, the costs of the Applicant in attending the hearing; b) if the Financial Services Provider first requests legal representation, the costs of legal representation for the Applicant; and c) where the act or omission of the Financial Services Provider has caused abnormal costs in obtaining evidence to support the Applicant s claim, the abnormal costs of the Applicant in obtaining the evidence. The required amendment to ToR9.6(b)(ii) is as follows: (ii) compensation for interest is excluded. to ensure that the Terms of Reference comply with RG139; to ensure that the costs award regime is certain and not left to guidelines which can be altered without the constitutional process; to ensure that the cap on compensation retains its integrity; and Coverage The Terms of Reference provide for a wide range of Disputes to be heard by FOS which do not relate to the matters authorised under the Australian Financial Services Licences of Members. Members are compelled to be members of FOS by a condition in the Australian Financial Services Licence and may otherwise not feel inclined to incur the Page 6 of 9

7 costs of membership, both financial and by way of abrogation of legal rights. As a result, the acceptance of this expanded coverage should be for the discretion of the Member. There are alternative ways of addressing this issue. First, there is the method recommended in the submission by Halsey Legal Services, which is to align the definitions in the Terms of Reference with the definitions in financial services laws. Secondly, there could be an exclusion for disputes outside the authorisations of the AFSL, allowing the agreement of the member under ToR 4.4 to come into play. The required new to ToR4.2(b)(i) is as follows: i) the provision of a Financial Service by the Financial Services Provider to the Applicant if the Financial Service is authorised or purported to be authorised under the Australian Financial Services Licence of the Financial Services Provider The reasons for this amendment are eloquently laid out in the submission from Halsey Legal Services. Members are effectively coerced into membership of FOS and should not be forced to sign away legal rights, in matters not covered by financial services laws. Discretion to Include Disputes The Terms of Reference provide for a wide discretion to exclude certain types of disputes. In effect this is a discretion to include disputes that should not be heard by FOS. In some of these matters, once it is established that the Dispute falls into the appropriate category (which may involve submissions from the Applicant and the Financial Services Provider and consideration of these and other matters by FOS), FOS should not have the discretion to proceed to consider the dispute. The encouragement set out in RG should be seen as an encouragement to Members to consent to certain disputes being considered by FOS and not a mandate to compel members to engage with wholesale clients at FOS. The required new to ToR5.2 is as follows: delete paragraphs (b), (d), (e), (f), (g) and (h). The required amendment to ToR5.1 is as follows: insert the paragraphs deleted from ToR5.2 in the appropriate order. The reasons for the changes to paragraphs (b) and (h) are well set out in the submission by Halsey Legal Services. Page 7 of 9

8 The reasons for the other amendments are: Disputes relating to the practice or policy of the Financial Services Provider and not involving allegations of maladministration (as defined in the Terms of Reference) or inappropriate application of the practice or policy should not be heard by FOS, provided these were adequately disclosed to the client; if it is established that a Dispute is frivolous or vexatious or lacking in substance, FOS should not have the discretion to proceed to consider that Dispute to do so would be a patent and absurd waste of resources; and a business Applicant which is not a small business and therefore is a wholesale client within the meaning of section 761G should not be able to access FOS without the consent of the Member; there should be no possibility of double jeopardy for a Financial Services Provider and, if a matter has already been considered by FOS or another EDR service or a court or tribunal, the Applicant should not be able to raise the matters again in FOS. Procedural Fairness The Terms of Reference do not comply with RG139.83, in that there is not an explicit requirement to accord with the principles of natural justice. This should be made an overriding requirement. The required amendment to ToR8.1 is as follows: 8.1 Procedural Fairness FOS is not bound by any legal rules of evidence but its complaints handling and other procedures must accord with the principles of natural justice. to ensure that the Terms of Reference comply with RG139.83; to ensure that there is an overriding requirement to apply natural justice, which is a set of principles well established at law and objectively determinable; and Fees and Charges The Terms of Reference provide for a wide discretion to consider Disputes about fees and charges, notwithstanding that the fees and charges have been properly and adequately disclosed. If there has been proper disclosure, there should be no Dispute. There is no compulsion to accept a Financial Service and, if the fees and charges are not satisfactory, the complainant would be free to seek an alternative financial service provider. The required new to ToR5.1(a) is as follows: delete sub-paragraph (ii). to ensure that unreasonable Disputes over fees and charges are not considered by FOS; Page 8 of 9

9 to ensure that Members which have taken seriously their duty to disclose fees and charges to clients are not open to retrospective adjustment of those fees and charges after the Financial Service has been provided; and Defamation This matter has been affected by the change from member in the previous terms of reference, to Financial Service Provider in the proposed Terms of Reference. Almost invariably, members are corporate entities. The new definition includes individuals who may be employees, agents or contractors. The problem is well explained in the submission of Halsey Legal Services. It is difficult to see how the rights of an individual employee or contractor can be abrogated by the agreement of the Member to the Terms of Reference. The required new to ToR6.1 is as follows: 6.1 Lodging of Disputes An Applicant may lodge a Dispute with FOS by referring the Dispute to FOD for resolution. FOS may assist the Applicant in this process. The Applicant must couch the Dispute in reasonable language and avoid statements about persons where, if those statements were published outside the FOS dispute resolution process, they may be taken as defamatory. The required amendment to ToR13.3 is as follows: 13.3 Defamation protection A Financial Services Provider shall not instigate defamation action of any kind against an Applicant in respect of allegations made by the Applicant about the Financial Services Provider to FOS but a Financial Services Provider who is not a Member may instigate such action in respect of allegations made about that person, if those allegations are published other than to FOS. The reasons for this amendment are well explained in the submission of Halsey Legal Services. I commend these amendments to you and look forward to your response, including, if any of the above suggested amendments is not adopted, reasons for that decision. Yours sincerely, PAUL KELLY DIRECTOR Page 9 of 9