Australian Bankers Association. Comments on FOS Proposed Terms of Reference Changes Arising from 2013 Independent Review.

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1 Australian Bankers Association Comments on FOS Proposed Terms of Reference Changes Arising from 2013 Independent Review August 2014 Consultation Paper Section Summary of Proposal TOR paragraph reference Comments 1 Streamlined process for simpler, low value disputes. Appoint Adjudicators to decide disputes. Adjudicators will share similar powers to those of an Ombudsman, but their authority will be limited to issuing Determinations and Jurisdictional Decisions on simpler, lower value disputes. 2.2, 2.5, 2.6, 8.5, 8.6, 17.5, 17.6, 20.1 The ABA gives its qualified support to the proposal for the appointment of Adjudicators with powers similar to an Ombudsman but with authority limited to issuing Determinations and Jurisdictional Decisions as part of a streamlined process for simpler, lower value disputes. Qualifying factors for support 1. The ABA requests an opportunity to review the proposed amendments to the FOS Constitution for appointment of Adjudicators as those amendments have not been provided at this stage. 2. The definition of Adjudicator does not refer to proposed ToR 2.5 which describes factors that the Board are to consider in making an appointment. A comparison of the proposed powers of an Adjudicator and qualifications for appointment as an Adjudicator with those of an Ombudsman should be provided, for example is there to be a difference between an Ombudsman making a Determination and an Adjudicator

2 issuing a Determination? 3. Are there special powers for an Adjudicator (or limitations on an Applicant s ability to contest an Adjudicator s Determination or Jurisdictional Decision) that will speed up the dispute resolution process over and above the simpler, lower value nature of the dispute? 4. Will an Adjudicator s appointment be permanent or temporary? 2 One step lodgement and referral process Redesign FOS s Registration and Acceptance processes so that all lodged disputes are referred to the financial services provider s (FSP s) internal dispute resolution process. This will provide the FSP with a final chance to resolve the dispute before FOS considers it. 6.3, 6.4, 15.3, 15.4 The ABA gives its qualified support to this proposal as the Operational Guidelines are not expected to be available until 1 January 2015 and these matters should be clarified: 1. The timeframe or timeframes (depending on what) within which FOS must refer the Dispute back to the FSP. 2. The timeframe for the FSP to either resolve the Dispute or for the FSP to provide an IDR response? 3 Outside TOR objection timeframes Take a more assertive approach to help produce more timely resolution for disputes that are outside FOS s jurisdiction: replace the standard 30 day timeframe to object to a jurisdictional assessment with a timeframe nominated by FOS allow FOS the ability to reduce 5.3, 7.4 The ABA supports measures that will reduce the time taken by FOS to resolve a question about jurisdiction and agrees with the removal of the 30 days timeframe in ToR clause 5.3(b) The proposed amendment may reduce the timeframe granted to an Applicant to contest a Jurisdictional Decision.

3 (as well as increase) any timeframe imposed by the TOR, to provide greater flexibility. However, where FOS is empowered to review the matter if FOS is satisfied an Applicant s objection may have substance, clause 5.3(b) and the Operational Guidelines are silent on the time within which FOS power to close matters relating to Jurisdictional Decisions is to be concluded. 4 Small Business Credit Disputes Exclude credit disputes lodged by a small business if they are about a credit facility that exceeds $2 million. In order to provide flexibility by changing timeframes for disputes assessed as being outside of FOS jurisdiction, it would be helpful for FOS to provide examples of situations in which this discretion is likely to be exercised to manage the expectations of the FSP and the Applicant. Further, this guidance should indicate if, where this exercise of discretion is applied, it could result in FOS placing additional restrictions or actions on the FSP, for example, due to the shorter timeframes proposed and in what respects. The ABA opposes the amendment to clause 7.4 because it is broader than required under the outcome of the FOS Independent Review, and appears to give FOS the power to vary any timeframes anywhere in the TOR. 5.1I The ABA supports this amendment as ABA members experience has been that small business disputes tend to be more complex and protracted. Court pre-trial processes are able to identify and confine the material issues in dispute to the pleadings in order to resolve the dispute.

4 However, these points need clarification:- 1. It is unclear at what point in time the assessment is made about whether the relevant credit facility exceeds $2m i.e. the original credit limit or the amount outstanding at the time of the time of the dispute? 2. Often a small business may hold a number of credit facilities with the one bank which are crosscollateralised (secured) and exceed $2m either individually or as a whole. The Applicant may not have disclosed when lodging the dispute about a credit facility that does not exceed $2m, that the dispute is about other related credit facilities. How will FOS deal with a dispute that appears within jurisdiction at the time of lodgment but expands into a consideration of other related credit facilities? 3. One question is whether FOS would consider the practicalities for FOS to accept a dispute from a small business if, for example, there were five loans of $1.9m each involved? 5 Disputes lodged by agents charging a fee for service Require Applicants being assisted by a fee-for-service agent to provide any required information at the time they lodge a dispute. 6.1(d) The ABA welcomes the stated amendment to ToR clause 6.2(d) (sic 6.1(d)). However, where the information required by FOS is provided to accompany the dispute but FOS may not be satisfied that the Applicant s agent is considered by FOS to be unsuitable to represent the Applicant, it is unclear that FOS has power to continue to not accept the dispute. A further amendment to clause

5 6.1 or to either ToR clauses 5.1 or 5.2 should be made. The ABA is supportive of FOS being able and prepared to black list certain individuals or agencies if they have had a pattern of poor conduct. This would enable FOS to make quicker decisions on those cases. 6 Exclusion of any traditional trustee services disputes 6 Jurisdiction over income stream insurance claims disputes The exclusions would apply where there is a question of a beneficiary s capacity, there is an appropriate tribunal to handle guardianship matters, a court appointed trustee, a question testamentary capacity to make a will. And in a traditional trustee dispute to remove the requirement for FOS to obtain the consent of all other affected parties. Consider creating a separate monetary limit for income stream insurance claims disputes. 5.1 j), 5/1 s). 5.1 t), 15.7, o) possible approach only. Options offered for discussion The ABA does not have any comments on this proposal. Currently, clause 5.1(o) provides that FOS may not consider a dispute where the value of the Applicant s claim in the Dispute exceeds $500k. FOS is considering whether there should be a separate per month jurisdictional limit for income stream insurance claims. There is an inclination for the ABA to support an amendment to clause 5.1(o) to include a further clause for income streams as set out in FOS Issues for Consideration and Possible Approaches Paper See page 2. However, the ABA requests that if FOS is intending to make this change that it contacts the ABA to afford a better opportunity to consider the change with the ABA s

6 membership. 7 Discretion to allow sale of an asset Give FOS the discretion to allow an FSP to sell an asset the subject of a dispute (as well as or instead of other action to preserve it) The ABA agrees with the proposed amendment to clause 13.1(b)(ii). There is the view that this change might have accompanied the changes to ToR 13.1(b)(1) which commenced on 1 January It is consistent with those changes that this amendment is made. Often there is no benefit to either party if a secured asset cannot be sold because the Applicant had not consented to a sale. ABA members experiences show that in many such cases preventing a sale is often detrimental to the Applicant s interests to mitigate a loss. The bank has responsibility to realise a secured asset according to the applicable law. 8 Indexation of compensation caps Index the current compensation caps in accordance with the current paragraph 9.8, and change paragraph 9.3 to relocate the consequential loss cap to a new Schedule 3. This is a format change, rather than a change to the content of the TOR. The format change will make clearer which compensation caps will apply to disputes lodged at different times. 9.3, Schedule 2, Schedule 3 The ABA supports the amendment to clause 9.3 and the inclusion of Schedule 3. Compensation caps will be reviewed more frequently through the use of compensation schedules in the TOR. 9 Level of FOS s monetary limits and increasing its current jurisdictional limits and the caps on the maximum compensation that can be awarded; 5.1 o) The ABA s main issues are:

7 compensation caps: and indexing these amounts (see also 8 above). 1. FOS process not applying normal rules of law 2. Lack of consistency and rigour in FOS decision 3. Impacts to PI insurance given proposed increases to caps/limits Commentary: The ABA understands that the Financial Planners Association has indicated that PI insurers are generally concerned with the FOS process, mainly in FOS not applying normal rules of law (evidence/precedence) and a lack of rigour applied by FOS at arriving at decisions. PI insurers are said to be concerned about the lack of consistency in decisions and one off decisions which impact on PI insurers ability to decide whether to run with the dispute or settle it early. The FPA is understood that PI insurers are less concerned when the limits of the scheme were set at $100,000/$150,000, but have become more concerned with limits were set at the current $280,000 level. A decision to increase the threshold further (even by indexation) may increase these concerns and potentially cause some PI insurers to reconsider their exposure to the financial planning profession (especially given the current focus on that industry). There is also a question why the current amount needs to be increased, given it only occurred recently. With the $500,000 loss limit which is understood to be consistent for wholesale client threshold, there is concern

8 10 Accountants joining FOS 11 FOS Operational Guidelines Updates Services provided by accountants: How should the scope of FOS s jurisdiction over accountants be defined? What activities engaged in by accountants should be expressly included in, or excluded from, FOS s jurisdiction under the Terms of Reference? over the practice of splitting of claims resulting in disputes being considered for overall losses which are well in excess of the $500,000 amount. [Note: The FOS jurisdictional limit to claims where the loss caused does not exceed $500,000 can only be increased as approved by ASIC which is currently set in RG139. This contrasts with the compensation which FOS is able to award on a claim, which is proposed to be increased by indexation from the current cap in this of $280,000 to $313,500.] 5.1 u) The ABA strongly recommends that FOS consider the Tax Agent Services Act 2009 (TASA) to ensure the scope of FOS jurisdiction aligns to these requirements, especially as it relates to services provided by financial planners e.g. incidental advice. It is also critical that any decisions around increasing monetary limits or compensation caps (9 above) consider possible implications to the broader professional indemnity (PI) insurance sector, particularly financial planning. Once again aligning to TASA, obligations require applicants for registration to maintain or be able to maintain professional indemnity (PI) insurance that meets requirements. There needs to be a broader PI insurance consideration for the issues put forward by FOS. The ABA notes regarding FOS s draft Operational Guidelines that the draft text appears to have removed some sections regarding exceptions to paragraph 13(a) of the TOR. The draft seems to have removed the part

9 that commences with "In addition, where the proceedings relate to debt recovery ". This is to deal with matters involving legal proceedings. It is not clear if FOS intends to remove the section (which confirms FSPs can continue with a FOS dispute if an applicant has taken certain steps in legal proceedings). The ABA would appreciate FOS clarifying whether this omission is an intended change and, if so, for FOS to provide commentary about the reasons for the change for the ABA to consider.