2 Cover Story. New Era. in Financial Dispute Resolution

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1 2 Cover Story New Era in Financial Dispute Resolution

2 Jul Aug Practice Direction 31 on Mediation came into effect on 1 January 2010 encouraging civil cases to attempt mediation before going to court. On the other hand, the Hong Kong SAR Government has announced the establishment of the Financial Dispute Resolution Centre (FDRC) in 2012 to settle monetary disputes between consumers and financial services providers. These two initiatives have raised plenty of questions: How will these measures affect the handling of financial disputes? What will ordinary consumers and financial institutions have to take note of after the implementation of the new FDRC? How will the mechanism be measured as successful and what challenges lie in its way? The financial markets have experienced severe bouts of turbulence in the past few years. Ever since the Lehman incident, we have often seen disgruntled and aggrieved customers protesting outside the banks with signs and banners, reducing the image of the banks to a century low and jeopardizing Hong Kong s image as the premier financial centre of Asia. With a growing number of financial disputes, coupled with the fact that regulators can only investigate if there are any regulatory breaches by financial services providers and have no authority to adjudicate on any financial remedy for consumers, the Government has expedited the establishment of a one-stop solution for financial disputes. Further, with society demanding more peace and harmony and the Practice Direction 31 on Mediation ( PD 31 ) came into effect on January 1, 2010 as part of the Civil Justice Reform encouraging all 1 civil cases to attempt mediation before litigation for dispute settlement, it has speeded up the confirmation to establish the Financial Dispute Resolution Centre (FDRC) in Like with most new practices, no pain, no gain is the common phenomenon. There are challenges and issues that need to be monitored and resolved before we can reach a solution that satisfies all. In this article, we will critically discuss the challenges and success factors for the FDRC and the popularization of Alternative Dispute Resolution (ADR) as an effective means for resolving financial disputes, and give some insights from the perspectives of banks and financial institutions, consumers and ADR practitioners. The Change of Landscape and the Need for a More Effective Means to Resolve Financial Disputes In September 2008, Lehman Brothers, the fourth largest US investment bank at that time, declared itself insolvent by filing for Chapter 11 bankruptcy protection. This sent shockwave around the world, including Hong Kong where about HK$20 billion invested in Lehman minibonds held by approximately 48,000 investors 2 were rendered almost worthless.

3 4 Cover Story Aggrieved investors accused banks of mis-selling and misrepresentation, and the complaints over the compensation deals on Lehman-related investment products have been dragging on since then. Despite rounds of negotiations and various buy-back offers proposed by financial institutions, we can still see protests of all kinds at bank branches every day. Financial disputes have existed for a long time. We have witnessed substantial differences in how banks and financial institutions and their customers manage disputes before and after the Lehman incident. Prior to Lehman s collapse, most financial disputes were handled and resolved outside of the public eye and in a private manner. Both financial institutions and consumers would tend to resolve their disputes among themselves, except for when there was a big or special case that had to be heard in court. These might be due to the fact that on one hand, financial institutions prefer less publicity for these cases, and would like to resolve them quickly so they could concentrate on business. On the other hand, consumers were also less prone to holding protests. This changed after Lehman s fall. Consumers tend to use the power of the publicity and media more readily to help gain support from the community and generate more pressure on financial institutions when making their claims. On the other hand, banks and financial institutions have become more circumspect when issuing compensations, worrying that it would constitute precedents and/or raise false alarms or misexpectations among the community. In other major financial centres, such as in the United Kingdom, United States, Australia and Singapore, independent authorities that handle financial disputes are in place and running effectively. After years of calling for similar mechanisms to be built in Hong Kong, the Government finally confirmed the establishment of the FDRC by mid-2012, and the use of ADR as the first approach to resolving financial disputes. The Financial Dispute Resolution Centre and Wider Use of Alternative Dispute Resolution for Financial Disputes In his Policy Address, the Hong Kong SAR Chief Executive, Donald Tsang, encouraged the use of mediation as a means to alleviating conflicts and fostering harmony. The Secretary for Justice, Wong Yan Lung, and the ex-chief Justice Hon Andrew Li Kwok Nang, worked to incorporate PD 31as part of the Civil Justice Reform s request for all civil cases 3, ultimately ensuring it came into effect on 1 January, The proposed FDRC, which administers the Financial Dispute Resolution Scheme (Scheme), follows a similar direction. It provides a mediate first, then arbitrate avenue for individual consumers to resolve monetary disputes with financial services providers. The Lehman Brother saga has made plain that as an international financial centre, Hong Kong is suffering from its lack of an independent authority for settling financial disputes outside the court system. Regulators can only investigate if there is any regulatory breach by the financial services providers and have no authority to adjudicate on any financial remedy for consumers. It is at the financial services providers discretion to offer monetary remedies to consumers. If no mutually satisfied remedy is made, consumers can only bring the case to court, a step which may be disproportionately costly and protracted.

4 Jul Aug Financial institutions which are licensees or regulatees of the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) and have individual customer relationships with individual consumers or sole proprietorships will be obligated to join as members of the Scheme. Individual consumers and sole proprietorships are regarded as eligible claimants to the FDRC, and the maximum claimable amount for the FDRC Scheme will be set at HK$500,000. However, it is important to note that initially, insurance and MPF sectors will be excluded from the Scheme (insurance and MPF products sold by SFC-licensed corporations and authorised institutions regulated by HKMA will be covered by the FDRC), and the FDRC only handles disputes which are of a monetary nature. The FDRC does not have any of the investigative or disciplinary powers of the regulators. For cases which involve an alleged breach of regulatory requirements, they should be handled by the regulators. The intake offi cer will answer enquiries and determine if the case is eligible to be handled by the FDRC. Eligible cases would first be resolved by mediation. If it fails and if the claimant so wishes, arbitration may take place where the case will be judged by an arbitrator or the case would be litigated and heard in court 4. Challenges and Success Factors from the Perspectives of Banks and Financial Institutions, Consumers and Dispute Resolution Service Providers The intended setup of the FDRC would no doubt help to solidify Hong Kong s position as one of the major international financial centres and offer the community a more affordable and speedy avenue to resolving financial disputes. Nevertheless, there are challenges that need to be met in order for the mechanism to be effectively implemented. It is important to consider these challenges from different perspectives. Awareness, Confidence and Buy-in Despite the fact that PD31 came into effect more than a year ago and the consultation on the FDRC has concluded, the general adoption of ADR to resolve financial disputes remains low. Public awareness of ADR is weak. More clear guidelines in specific areas such as the selection and appointment of qualified ADR professionals, the pricing scheme, the process, and so on would also help improve the success rate and adoption, and would increase confidence in using ADR as an effective mechanism for resolving financial disputes. Consumers Mediation and arbitration are common forms of ADR. Mediation is a process in which a neutral and impartial mediator will assist the parties to come up with a win-win solution, while arbitration is like a hearing made in a closed court where the arbitrator (who has strong knowledge on the subject matter) would impose a final and binding award. Different from traditional litigation, ADR mechanisms are normally more costeffective with a shorter resolution time. Based on our experience, it s fair to say that many ordinary consumers do not have a good understanding of mediation and arbitration. Therefore, they have difficulty in selecting appropriate personnel to help them (which results in lower success rates) and are unaware of the benefits of these mechanisms. Banks and Financial Institutions We have seen a lot of interest from banks to try using ADR to resolve financial disputes with their customers. They are now faced with a staffing challenge. They have frequently come across mediators that have good mediation skills but have not demonstrated sound experience and

5 6 Cover Story knowledge in the financial services industry. As their cases are very specific to the industry and can be quite complex, the institutions are worried they would eventually have to return to litigation, and whatever time and cost they have spent on mediation would only result in another layer of costs. They would require some assurance on the quality and standards in both the ADR and financial services experiences and skills of these service providers. Dispute Resolution Practitioner The legal profession has divergent views on the effectiveness of ADR. Some practitioners believe it is a more cost- and time-effective way of resolving disputes, while others prefer the old-style of operating and would rather resolve disputes through litigation. Success Factor Confidence and buy-in by the users and the general public are the cornerstones for success of the FDRC and the popularization of ADR to resolve financial disputes. More education, guidance and promotion from the government and professional bodies on ADR and its benefits is necessary among the consumers, banks and financial institutions, and dispute resolution practitioners. Proven successful stories can be show-cased so as to build confidence in using ADR to resolve financial disputes. Quality of ADR Services Providers Standards, quality and demonstrated industry experience must be assured in order to build confidence and encourage more adoption of the ADR services for financial disputes. These refer to the dispute resolution skills, industry knowledge and experience in the financial service industry and the ethical code. While arbitrators are required to possess deep knowledge in the subject matter to facilitate their decisions, there are currently no laws in Hong Kong on who can become mediators. Consumers There are different mediation services providers in the market. Their quality, standard and price vary significantly and their results and success rates turn out to be significantly different, too. Many consumers tend to look for providers with strong dispute resolution skills but overlook the importance of demonstrated industry knowledge. For example, if a mediator only possesses dispute resolution skills but has not demonstrated sound industry experience, it is likely that more time will have to be spent on explaining the facts and concepts, which will lead to a higher bill. Oppositely, the success rate will increase significantly if the cases are managed by personnel with the appropriate skill sets. Banks and Financial Institutions Banking and financial services are complex in nature. With more convergence of financial services business (for example, banks and insurance companies are crossselling products, the line between investment and insurance products is getting more blurred), legal and regulatory changes, quicker turnaround times for new products and more rigid selling procedures; all these are increasing the complexity of the business. One of the main concerns among banks and financial institutions about the launch of the FDRC and wider use of ADR for financial dispute resolution is whether there would be a sufficient number of mediators and arbitrators with extensive industry experience in Hong Kong. There are persistent debates on whether just attending a few financial training modules without extensive experiences as practitioners in banking and financial services would turn general mediators and arbitrators into qualified personnel to provide quality financial dispute resolution services. Banks and financial institutions generally prefer mediators and arbitrators with extensive hands-on experience in the banking and

6 8 Cover Story financial services industry, as these are the people who can truly understand the terminologies, products, selling procedures, customers and latest industry development, and will shorten the time for resolution and increase the success rates. Success Factor Currently there are different accreditation bodies for mediators in Hong Kong, and this also means that there is no standardized system of accrediting mediators. A single accreditation body should be set up in order to ensure the quality of mediators and to provide consistency. Also, this body can oversee the conduct of mediators and ensure there are continuous professional training programs in place. Since industry knowledge is important for resolving financial disputes, some accreditation or benchmarking mechanisms should also be built-in to measure and ensure the adequacy of industry knowledge among mediators. These accreditation and/or benchmarking arrangements will help ensure the quality of mediators and instil confidence among the public and financial institutions on employing ADR to resolve financial disputes. The Essence of the FDRC Scheme The proposed FDRC Scheme currently does not cover the MPF and insurance sectors. Although arguably these products are regulated by their respective authorities (ie insurance claim complaints arising from personal insurance policies by the Insurance Claims Complaints Bureau ( ICCB ) and MPF by the Mandatory Provident Fund Schemes Authority), with the convergence of financial products, there would be a need to consider a one-stop body for financial disputes. In fact, other major financial centres such as UK, Australia and Singapore have setup similar one-stop bodies covering different sectors such as banking, investments, insurance and financial planning. In addition, the current proposed limit is set at HK$500,000 per claim. With the growing of the investment markets there is a need to keep aware of whether this limit is appropriate. Conclusion Overseas experience shows that ADR can be an effective way to resolve different kinds of disputes, preserve relationships and restore harmony. The establishment of the FDRC would be an important milestone in promoting the use of ADR and would provide a more cost- and time-effective alternative to litigation to resolve financial disputes and strengthen Hong Kong s position as one of the world s major financial centres. In order to make the new era of financial dispute resolution a success, a more concerted effort has to be invested to overcome the challenges, as stated in the title no pain, no gain. It has to ensure more education and promotion is done in the market, quality mediators and arbitrators with extensive banking and financial service experience are engaged and groomed, the community s concerns on the FDRC Scheme are addressed, and the FDRC mechanism and the effective application of ADR in the financial services arena are regularly reviewed to reflect the continuous evolution of the banking and financial services landscape. For banks and financial institutions, to effectively get prepared for the FDRC and market challenges, they would on one hand require consolidating their staff s skills on handling complaints and dispute resolution, and on the other hand, they can review, re-engineer and strengthen their strategy and procedure on customer experience and customer complaint management. 1 PD 31 applies to all civil proceedings in the Court of First Instance and the District Court which have been begun by writ, except proceedings in Construction and Arbitration List (See PD 6.1 Part F), Personal Injuries List (See PD 18.1 paragraphs 14 and 25 to 49), Equal Opportunities List under the Sex Discrimination Ordinance (Cap. 480), Disability Discrimination Ordinance (Cap. 487) and Family Status Discrimination Ordinance (Cap. 527), and proceedings to recover tax under the Inland Revenue Ordinance (Cap. 112). PD 6.1 Part F and PD 18.1 paragraphs 14 and 25 to 49 contain relevant provisions dealing with the encouragement and facilitation of mediation. 2 Keynote speech by Hong Kong Secretary for Justice at ICC Commercial Mediation Workshop, Department of Justice, pdf, November 12, Refer to footnote 1 for the exceptions. 4 If arbitration is chosen, the award is final and binding. Success Factor The proposed FDRC arrangements have taken overseas learning and local situations into consideration. However, the arrangements will need to be constantly reviewed and adjustments and fine-tuning made when necessary. Charles Lam Managing Director Louise Chan Director CLLC Dispute Resolution Services Limited