Resolving complaints about fi nancial

Resolving complaints about financial services: A deliberately non-legal approach

ALEXANDER MACKEY, LEGAL COUNSEL, HOMESTART FINANCE

Commencing operations on 1 November 2018, the Australian Financial Complaints Authority (AFCA) is the organisation that resulted from the amalgamation of several prior dispute resolution services, namely the Financial Ombudsman Service Limited (FOS), Credit and Investments Ombudsman (CIO) and the statutory Superannuation Complaints Tribunal (SCT).

AFCA’s purpose is to operate the compulsory external dispute resolution scheme (EDR Scheme) for its member firms. Financial firms (as AFCA members are sometimes called) are businesses that require an Australian financial services license, and membership of AFCA is a condition of the license.1 (The system is member funded, so a healthy and stable membership group is essential).

The EDR Scheme exists to resolve complaints made by a member’s customers.

The Scheme is required to meet some essential operational requirements as follows: • the complaints mechanism must be accessible to persons who have a complaint • complaints must be resolved in a way that is fair, efficient, timely and independent • complaints can be resolved by a determination that is binding on financial firms but not complainants • reasonable steps must be taken to ensure compliance by members of the scheme with determinations.2

AFCA itself is accountable to ASIC3 and while it has the power to determine complaints it has limited powers to enforce those determinations – such matters must be referred to the Australian Prudential Regulatory Authority (APRA), ASIC or the Commissioner for Taxation.4

WHAT ARE THE RULES?

Much like courts and tribunals AFCA publishes Complaint Resolution Scheme Rules for what is essentially an arbitration service where the context is fairness of outcome rather than the determination of legal rights and liabilities.

Without delving into all the details, the essential criteria for a complaint to be received by AFCA include the fact that the complaint must arise from a customer relationship (noting some special provisions for superannuation complaints and ‘other’ types of complaints).5

There are some categories of complaint that are subject to automatic exclusion, for example: • complaints that are only about the level of a fee, premium, charge, rebate or interest rate, • complaints about the allocation of a benefit to competing beneficiaries, and • complaints that have been previously determined by either AFCA or some other dispute resolution process including previous schemes, courts, or tribunals.6

In terms of complaints about credit providers, AFCA must exclude complaints concerning the Financial Firm’s assessment of the credit risk posed by a borrower, the security to be required for a loan and complaints about small business credit facilities exceeding $5 million.7 There are also equivalent or similar exclusions relating to insurance, investment and superannuation complaints.8

Furthermore, AFCA has some discretionary power to exclude complaints: • if another organisation or institution is a more appropriate forum for the complaint, • if the complaint relates only to the existence of a financial firm’s practice or policy and does not involve any allegation of misapplication of policy or maladministration, or • if the complaint is frivolous, vexatious, misconceived, or lacking in substance.9

There are a range of remedies available for the different types of complaints across the superannuation, insurance, and credit facility categories but the general monetary compensation limit is around $540,000. Non-superannuation complaints can also attract more variety, where remedies can include anything from the forgiveness of a debt through to an apology.10

Rules A.1.3 and A.1.4 explain that the complaint resolution process is free, and by no means compulsory, for complainants.

Rule A.8 sets out the complaint resolution approach which begins with facilitating negotiations between the parties then moves to conciliating a complaint, providing a preliminary assessment, or proceeding to determination of the complaint.

It is during this process that AFCA can also decide that there is no merit to the complaint, that there has been no loss suffered, or no error made, and it can elect to not continue considering the complaint as a result.

The preliminary assessment and determination phases of course proceed after there has been an information gathering and sharing process and the opportunity for both sides to provide written submissions about the matters in issue.11

Except for a couple of details specific to superannuation complaints that are set out in Rule A.14.1, when determining any other complaint, the AFCA Decision Maker must follow Rule A.14.2 and do what the AFCA Decision Maker considers is fair in all the circumstances having regard to: • legal principles, • applicable industry codes or guidance, • good industry practice and • previous determinations of AFCA or

Predecessor Schemes.

This is sometimes referred to as AFCA’s fairness jurisdiction and it is what sets the scheme apart from every other form of dispute resolution. It is a system which (to the horror of many) allows AFCA to make determinations that bind a financial firm and that do not necessarily align perfectly (or sometimes at all) with the law or the parties’ contractual rights and obligations.

It is the genius of the design.

Legal reasoning has its place, but it lacks flexibility. Courts are bound by statutes, case law, and judges prefer not to be overturned on appeal. Legal reasoning can also be artificial, permit technicality to overrule “common sense” and thereby produce outcomes that do not match community expectations. But the problems do not start there.

To pursue litigation, an aggrieved party needs resources, the process takes time and even if the complainant wins, the financial firm may well appeal.

Right minded consumers do not readily choose to take on those risks.

CRITICISMS OF THE SCHEME

At the top of the list of criticisms of the Scheme is that the existing legal rights, duties and liabilities of the parties are not given priority. This is, however, openly and unapologetically acknowledged. They are not ignored; they are part of a list of several factors given consideration.12

From a financial firm’s perspective AFCA determinations, even if wrong in the conclusion according to law, are not reviewable, except for any evident unreasonableness in the Wednesbury sense of the word. 13

A central issue in one challenge to AFCA’s legitimacy was that giving it the power to make determinations contravenes Ch III of the Constitution by conferring judicial power on a non-judicial body.14 It does not.

This is the case for two main reasons: • Judicial power is about determining the existence of rights and liabilities by the application of law, and • The exercise of judicial power results in binding and conclusive determinations of rights and liabilities that are immediately and independently enforceable.15

These are not features of the AFCA Scheme. Opinions may well be formed and expressed about the legal principles and the facts as they relate to the law, but those are merely steps toward arriving at what is the true determination – that is, what is fair and reasonable in all the circumstances. Then, once the fairness determination is made, it is not truly enforceable without the exercise of further independent (and real) judicial power.16

One further indication that AFCA does not exercise judicial power is that it can decline to make a determination, including on the ground that it considers the complaint might be more appropriately dealt with by a court. 17 CONCLUSION

The space allowed for this short article does not permit the author to indulge in a venting of all the petty frustrations and grievances that financial firms have about the operation of the Scheme. And rest assured there are some. It is not a perfect system. But then again, none are.

On balance however it must be acknowledged that the EDR Scheme levels the playing field and gives complainant’s a realistic option for dispute resolution when the legal answer and the “right result” are possibly two different things. B

Endnotes 1 s 912A(1)(g) Corporations Act 2001 2 s 1051(4) Corporations Act 2001 3 ss 1052 – 1052D Corporations Act 2001 4 s 1052E Corporations Act 2001 5 see AFCA Rules A.4.3(a), B.1 and B.2 6 see AFCA Rule C.1.2 7 see AFCA Rule C.1.3 8 see AFCA Rules C.1.4, C.1.5, and C.1.6 9 see AFCA Rule C.2.2 10 see AFCA Rule D.2.1 11 see AFCA Rules A.9 and A.10 12 Patersons Securities Ltd v Financial Ombudsman Services

Ltd (2015) 108 ACSR at 501 at [95] and Investor

Exchange Limited v Australian Financial Complaints

Authority Limited and Lornette Pty Ltd ATF Lornette

Superannuaiton Fund [2020] QSC 74 13 Investor Exchange Limited v Australian Financial

Complaints Authority Limited and Lornette Pty Ltd

ATF Lornette Superannuaiton Fund [2020] QSC 74 at [21] and [27]. Bad faith, bias fraud, dishonesty or a misconception of the task required by the decision maker are also grounds for review at [30]. 14 QSuper Board v Australian Financial Complaints

Authority Limited [2020] FCAFC 55 at [2] 15 Ibid at [107] and [109] 16 s 1052E(1)(d) Corporations Act 2001 provides that the matter is referred to APRA, ASIC or the Commissioner of Taxation to pursue in the appropriate forum. 17 QSuper Board v Australian Financial Complaints

Authority Limited [2020] FCAFC 55 at [150]