Re: Developing new terms of reference for the Financial Ombudsman Service

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1 10 October 2008 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 Re: Developing new terms of reference for the Financial Ombudsman Service The Energy and Water Ombudsman (Victoria) (EWOV) is pleased to have this opportunity to respond to the issues paper Developing New Terms of Reference for the Financial Ombudsman Service (14 August 2008). It is challenging to bring together the separate schemes that form part of the Financial Ombudsman Service (FOS) and we commend the openness of the paper. Access to the scheme Issue A: definition of those entitled to access FOS (p. 17 of the issues paper) The proposed description of consumers who can use FOS is simple and concise. It is important to provide for wide access to the scheme. It would be excellent if such a straightforward approach could be effective. EWOV did wonder whether the definition needed to specify that the individual or small business should be a customer of the financial services provider, but we note from the discussion under issue D that this has been covered. In combination, this clause and that proposed under issue D would successfully describe both who can access FOS and what kind of dispute they can bring. Issue B: definition of small business access (p. 18) EWOV provides access to business without limitations and we support FOS access for small business customers. As a matter of principle, the same definition for all divisions of FOS is clearly appropriate, and the number of employees approach suggested on page 18 seems more objective than turnover. Energy and Water Ombudsman (Victoria) Limited ABN GPO Box 469 Melbourne Victoria 3001 Telephone Facsimile Freecall Freefax TIS NRS ewovinfo@ewov.com.au Website

2 Issue C: balancing ready access with IDR (p. 20) EWOV agrees with the paper that consumer fatigue is a deterrent to pursuing a matter if the onus is put on the consumer to understand the internal workings of the financial services provider and to work through different layers of the company. EWOV s approach is a simple one: we count the number of contacts the customer has had with the provider: if none, the customer is usually referred back to the provider s call centre; if one, the customer is referred to a higher level in the company (EWOV manages the process by forwarding the details of the customer and issue to the company, which is obliged to make contact with the customer within one business day); if two or more, the customer is given a choice of a referral back to a higher level at the company or a fully investigated complaint. An important point to note is that if the matter is in progress and the provider needs time to be allowed to finish its processes, the customer is usually referred back to the person they last spoke with at the provider. All our information and publicity stress the importance of contacting the provider first to try to resolve the matter through internal dispute resolution but these steps should not become a marathon for the customer. We strongly believe that the system of deadlock letters or a waiting period of 45 days is unfair to consumers and contrary to the principle that alternative dispute resolution offers speedy resolution. We recognise that the ASIC Regulatory Guideline refers to 45 days, but this does not seem to us to be best practice. EWOV supports the preferred option set out in the paper, namely that a consumer should be able to lodge a dispute with FOS if they have already made a complaint to any area of department of the financial services provider and the dispute remains unresolved. However, FOS will need to have a clear and defensible basis on which to either refer or investigate or risk dissatisfaction from providers who may feel the service is acting prematurely or inconsistently. The proposal as set out suggests that disputes will be referred back unless the time limit for IDR has elapsed. EWOV believes it is also important to take account of how many contacts the consumer has had and whether the provider has acted on undertakings it made. The paper asks if FOS should refer disputes to the IDR area if the complaint has already been raised with the financial services provider, rather than leaving it to the consumer. EWOV also strongly believes that a referral from the Ombudsman scheme is far preferable than merely giving the customer a number to call. Our refer to higher-level ( RHL ) process involves the EWOV staff member sending an to, or phoning, the relevant provider setting out the issue. The provider s higher level contact is obliged to make contact by the end of the next business day, even if only with an interim reply. The power of this process to remove the customer s disappointment and anger is considerable, and our surveys of customers who have had an RHL show a high level of satisfaction - 2

3 with the process. For providers, it gives an opportunity for a fresh start with the customer. Currently EWOV charges providers the same fee for a referral to the call centre and an RHL, so that, in effect, the provider has another chance to resolve the matter at low cost 1. Of course, the provider must resource the area which deals with RHLs adequately, but adequate resourcing of the area that deals with complaints is a requirement anyway. A more general point relating to access is that it should be quick and informal. Perhaps a statement to this effect needs to be included in the Terms of Reference. EWOV takes the vast majority of its cases over the phone and the customer is not obliged to write during the process at all. This might not be practical for some or many financial services disputes, but it is a basic principle for effective EDR that there should not be barriers for consumers, and EWOV believes the FOS Terms of Reference should reflect this. Types of disputes that FOS can consider Issue D: defining the types of disputes that FOS can consider (p. 23) EWOV considers that the proposal to set out the kinds of disputes that FOS can consider is a succinct description. EWOV is not in a position to comment on whether it captures all the relevant kinds of disputes, but it admirably melds the kinds of non-customer disputes considered by the different divisions of FOS that are outside of a direct customer-service provider relationship. We can appreciate the reasons for specifying the types of disputes that can be brought by non-customers, but you may wish to consider a clause along the lines of the one in EWOV s charter to capture this at a more general level: Complaints may be made to the Ombudsman by consumers of electricity, gas or water services and by persons directly affected by the provision or supply of (or the failure to provide or supply) such services provided by Participants. (Clause 3.2(a)) (Underlining added for emphasis) EWOV agrees that FOS should take up issues of privacy and confidentiality where these arise either in the course of another dispute or as an issue on its own. However, it would be prudent, especially where the dispute relates solely to privacy or confidentiality, to give the consumer the option of taking the matter to the Privacy Commissioner. Issue E: exclusions from jurisdiction (p.25) Obviously disputes involving non-participating financial services providers must be excluded, and similarly FOS should not become involved in disputes relating to the 1 We are moving to charge providers more for a Referral to Higher Level than referral to the provider s call centre but they will remain much lower in cost than a complaint investigation. - 3

4 performance of an investment product or the level of various fees and charges. However, point (b) of the proposed section was hard to follow: does an exception from an exclusion mean an inclusion? And does including before sub points i to iv mean that they are excluded from FOS s jurisdiction? Perhaps this could be redrafted to make it clearer. EWOV agrees with the start date of the period being the point at which the consumer knew or could reasonably have known the relevant facts. This is in accordance with EWOV s jurisdiction. Issue F: alternative proceedings in another forum (p. 27) Points (a) and (b) of the proposed approach are clearly sensible and necessary. EWOV has some reservations about point (c). The resources and power of the financial services provider and the consumer are often not equal and the consumer may have agreed to the settlement without knowledge of their alternatives or having been exhausted through a difficult process. If FOS is to exclude disputes on this ground, it may be necessary to be clear about what counts as agreement to a settlement and the protections there should be for the consumer before entering into such a settlement, especially that he or she has been told about FOS and his or her right to take the dispute there. EWOV s Charter has a clause similar to that proposed in point (d) at clause 6.3 (d): The Ombudsman has the discretionary power to decline to investigate a complaint if in the opinion of the Ombudsman: (d) the complaint is more appropriately or effectively dealt with by another body However, we believe that such a decision should be made by an Ombudsman or at a high level in FOS. Issue G: monetary limits (p.29) This is a difficult issue for FOS. EWOV agrees with the approach described on page 30 of abandoning jurisdictional limits on the receipt of cases and replacing them with a cap on FOS s power to make an award. This is what EWOV does: there is no monetary limit to admitting a dispute but the customer is clearly told at the start of the process that if their issue goes to the level of a Binding Decision, there is a cap. It is not unusual for there to be a conciliated outcome which is in excess of the Binding Decision limit. It is also not unusual for the amount in dispute to change considerably (it often reduces) in the course of the conciliation. - 4

5 It does not seem to us that there would be a significant impact from this approach. Cases involving the monetary limit are the exception, and it is necessary for an EDR scheme to take equal account of the interests of both the consumer and the financial services provider. Just as EDR processes are explained to the consumer at the beginning of a dispute, so could monetary limits and their implications for the consumer s dispute: it is just part of how things are if the consumer decides to use the EDR service. EWOV believes that for the merger to be a reality there should be a common approach to monetary limits, but that it is reasonable for this to take place over some time rather than as a sudden move. Accordingly, option (c) on page 31 seems to us to be preferable. EWOV further believes that the Board of FOS should review monetary limits every three years so as to take into account developments specific to the financial services sector rather than using the automatic indexation approach. Dispute resolution Issue H: decision making model (p.32) This is another difficult issue for FOS. EWOV operates on the single decision-maker model, but it should be noted that the effectiveness of conciliation is such that I have not issued any Binding Decisions since To constrain the cost of decision-making, it is crucial that conciliation and negotiation at the level of case manager or investigator or staff member be allowed ample opportunity to resolve the dispute. I would certainly see it as unnecessary to prescribe a certain kind of decision-making model based on the value of the dispute. That may have nothing to do with the complexity of the issues or the degree to which the parties are entrenched in their positions these are the factors that determine whether conciliation at the staff level will work. While I appreciate the rationale for a Panel approach, I believe the single decision-maker model is more appropriate. The support that is necessary for a Panel can be a drain on resources and the Panel itself is an added expense. A series of Panel decisions may have less consistency than a series of decisions made by a single decision maker. Because the single decision maker issues written reasons for the decision, it will be evident that he or she has sought and considered advice from a variety of sources. These sources can include industry expertise from outside the scheme; it is not necessary to have all the knowledge and expertise in either a panel or the staff of the scheme. Indeed, the single decision maker may have considered more input than a Panel. In the case of FOS, where there are specialised areas of financial services products, it is appropriate to have a number of Ombudsmen making decisions in their area of expertise, but given the aim is to make resolutions at the lowest level compatible with natural justice and the agreement of both parties, I would not recommend the creation of a large - 5

6 number of Ombudsmen. That could lead to pressure to escalate the level of decision making. Perhaps a helpful approach to evaluating the Panel approach to decision-making would be to consider whether the Panel decisions depart from the recommendations of staff on many occasions. If they do not, one has to question the need for the Panel. I note that currently Panel decisions under the General Insurance model are not subject to appeal, and that those under the Life Insurance and Superannuation Division have only a limited right of review; in effect this means that Panel decisions are binding on the consumer as well as the financial services provider. Under the EWOV model, Binding Decisions are binding on the scheme participant only if the consumer accepts the decision. That way the consumer still has the option of going to court. Issue I: specification of dispute resolution processes (p. 36) EWOV supports the preference FOS has expressed for not specifying dispute resolution processes in great detail and is generally supportive of the proposal set out in this section of the paper. The only suggestion we would make is to expand (a) slightly by including some principles for how the dispute will be handled. For example, the investigation of disputes will be undertaken in a just informal and expeditious manner. Otherwise, the proposed wording is an excellent statement. Awarding compensation Issue J: consistency in awarding compensation (p. 39) To comply with ASIC Regulatory Guideline 139, FOS should have the ability to award compensation for non-financial loss, but, as noted, compensation for such losses should generally be modest unless the claim for that loss can be successfully tested. EWOV s practice is to consider customer service issues and, in Binding Decisions, to make awards that reflect deficiencies in customer service. In the conciliation of complaints, financial recognition of customer service issues is a frequent component. The recognition is generally modest. Consequential loss is a difficult area and awards for it are likely to be seen as punitive by financial services providers. EWOV believes that any awards for consequential losses should be subject to testing the loss and consideration of any options the consumer had for mitigating those losses. It would be unwise to include specified limits in the Terms of Reference, although we suggest a statement of principle that compensation for such losses is secondary to claims for direct loss and damage and that any punitive damages awards will be exceptional. - 6

7 Appeal procedures and test cases Issue K: opportunity to revisit a decision (p.41) The proposed provisions are clear and straightforward. The appeal options available to both the financial services provider and the consumer are clear and the effect of a Determination is similar to Binding Decisions in the EWOV scheme. Since either party can trigger the next level of decision making without giving reasons it would seems sensible to allow submissions at the next level of decision making so that FOS can be aware of the grounds on which either party considers the previous level to have been unsatisfactory. Provided there are clear time limits for submissions, I do not see any disadvantage to allowing them. Issue L: test case process (p. 44) EWOV has a limited ability to raise a test case. It arises when there is a dispute between the Ombudsman and a scheme participant about the effect of the law or of regulatory instruments. In that instance, the Ombudsman may refer the matter to the Essential Services Commission, Senior Counsel or the courts for determination or authoritative advice, as the case may be, at the expense of the scheme participant. It is a rarely used provision, and I would be more likely to seek authoritative advice rather than to refer the matter to the courts, but it is a useful provision to have. FOS s preferred option appears sensible. The fact that there would need to be a FOS Recommendation before the financial services provider may give notice of a test case preserves the consumer s access to FOS while also giving the provider the option of taking the matter further. Reporting externally Issue M: reporting systemic issues to ASIC (p. 46) EWOV believes that the inclusion of examples of systemic issues in the Terms of Reference could be constraining because there may be a tendency to see the examples as defining rather than illustrative. FOS can give examples to financial services providers in publications other than the Terms of Reference. EWOV s Systemic Issues Process is a document separate from the Charter and it contains examples of systemic issues. EWOV s approach to systemic issues is slightly different for energy and water. In electricity and natural gas, our role is to identify systemic issues and report them to the Essential Services Commission (ESC) for investigation and any subsequent action the ESC has a legislative mandate to investigate and obtain redress for affected customers. - 7

8 In water, EWOV s role extends to identifying and investigating systemic issues and seeking redress for all affected customers, whether they have complained or not then reporting these outcomes to the Department of Sustainability and Environment. Our suggestion to FOS is that it is preferable for the Ombudsman to seek redress for the affected customers, referring the matter to ASIC only when there is inaction or lack of co-operation on the part of the member of the scheme. We hope the above comments are of use to you and wish FOS well in the challenging and exciting process of determining its Terms of Reference. If there are any queries please contact me on (03) Yours sincerely Fiona McLeod Energy and Water Ombudsman (Victoria) - 8