Ramsay review final report and the establishment of the Australian Financial Complaints Authority

Professor Ian Ramsay’s final report of the Review of the financial system external dispute resolution and complaints framework (Final Report) was released last week. The most significant of the 11 recommendations contained in the Final Report is the establishment of a single external dispute resolution body for financial and superannuation disputes, to replace FOS, CIO and the SCT.

Treasurer Scott Morrison, in his speech to Parliament on 9 May 2017, said that the Government agreed with the recommendation to establish a “simpler more accessible and more affordable one-stop-shop for Australians to resolve their disputes and obtain binding outcomes from the banks and other financial institutions, to be known as the Australian Financial Complaints Authority” (AFCA).

Highlighted below are some of the changes recommended by the Final Report which will affect consumers and small businesses.

Higher claim and compensation limits

AFCA will have higher claim and compensation limits than those which currently exist for consumer and small business disputes. The Final Report considered that the current limits are too low, with the result that many small businesses are precluded from accessing EDR. Their only alternative has been to go to court, yet many cannot afford the legal costs.

Consumer financial disputes

A monetary limit of $1 million and compensation cap of no less than $500K will apply to consumer financial disputes. The amounts currently applied by FOS are $500K and $309K, respectively.

Small business financial disputes

For small business disputes (other than credit facility disputes), a monetary limit of $1 million and a compensation cap of no less than $500K will apply.

For credit facility disputes, small businesses will be able to bring a claim where the credit facility is of an amount up to $5 million (up from $2 million). Awards of compensation of up to $1 million will apply (up from $500K).

FOS has analysed data that suggests an increase to the jurisdictional limits proposed by the Final Report would capture about 98% of all small business financial disputes.

Disputes involving guarantees

There will be no monetary limit or compensation cap for disputes about whether a guarantee should be set aside, where the guarantee is supported by a mortgage or other security over the guarantor’s primary place of residence.

Expert panels

The increase in claim and compensation limits could see the volume of complex disputes rise. To strengthen the quality of decision-making, the Final Report recommends AFCA use panels to resolve complex or novel disputes.

Accountability and oversight by ASIC

With the aim of improving the standard of complaints handling and enhancing accountability, AFCA will have an independent assessor whose role will be to review complaints about the handling of disputes.

Given ASIC’s current powers do not extend to compelling compliance with legislative or regulatory requirements, the Final Report recommends ASIC be provided with a general directions power to require performance by AFCA.

Internal dispute resolution

Regardless of whether or not a complaint has already been through the financial firm’s IDR process, AFCA will refer all complaints it receives back to the financial firm for a final opportunity to resolve the matter within a defined timeframe. These will be tracked to encourage early dispute resolution and help identify systemic issues in IDR.

The Final Report found that data on IDR activities is limited, making it difficult to determine its effectiveness. To improve transparency, financial firms will be required to report to ASIC on their IDR activities and ASIC will have the power to publish the data. The Government has indicated that it will provide $4.3 million to ASIC over four years from 2017-18 to assist with this function.

Where to now?

The Government has agreed with all of the Final Report’s recommendations and says it will establish AFCA by 1 July 2018. To read the Government’s written response to the Final Report, click here.

Prior to the release of the Final Report, we interviewed Philip Field, Lead Banking & Finance Ombudsman at FOS who told us of some of the challenges that will be faced in the first 12 months of introduction of a single EDR body. “I think that the biggest challenge will be building on the expertise that exists across both organisations [FOS and CIO] to ensure a common culture that is based on an understanding of resolving disputes fairly. Another challenge will be making sure that all stakeholders, members, consumers and consumer representatives understand that the move towards a single scheme will build on expertise and they will still have their disputes resolved in a fair and proper manner.” For the full interview with Mr Field, click here.