Joint consumer submission to FOS TOR consultation - FINAL-ag

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					Joint consumer submission to Financial
 Ombudsman Service’s Issues Paper –
Developing New Terms of Reference for
   the Financial Ombudsman Service



      Authored by Consumer Action Law Centre
                   October 2008




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                                                          Contents

1.       Background .............................................................................................................. 4
     1.1   About this submission ............................................................................................. 4
     1.2   Consultation with consumer advocates ................................................................... 4
     1.3   Comment on guiding principles and constraints ...................................................... 5
     1.4   Priority issues ......................................................................................................... 7
2.       Terminology and definitions .................................................................................... 7
3.       Access to the scheme .............................................................................................. 8
   3.1     Definitions of consumer and small business............................................................ 8
   3.2     Internal dispute resolution ....................................................................................... 9
   3.3     Time limits for IDR ................................................................................................ 13
   3.4     Assistance with lodging disputes........................................................................... 14
   3.5     Other access issues.............................................................................................. 15
4.       Types of complaints that FOS can consider ........................................................ 16
   4.1     Nexus with Australia ............................................................................................. 16
   4.2     Non-customer complaints ..................................................................................... 17
     i. Complaints by tenants ........................................................................................... 17
     ii. Lender’s mortgage insurance ................................................................................ 18
     iii. Group insurance policies ....................................................................................... 19
     iv. Mistaken payments in internet banking transactions .............................................. 19
     v. Complaints about FSP practices ........................................................................... 20
     vi. Motor vehicle third party property claims ............................................................... 20
     vii. Complaints about privacy and confidentiality ......................................................... 23
     viii. Complaints by a non-customer who is asked for a payment .................................. 23
   4.3     Time limits for EDR ............................................................................................... 24
   4.4     Exclusions from jurisdiction ................................................................................... 26
     i. Hardship variations................................................................................................ 28
     ii. Maladministration in lending .................................................................................. 31
     iii. Fees and charges.................................................................................................. 31
     iv. Decisions about allocating competing beneficial interests ..................................... 33
     v. Decision to reject insurance proposal .................................................................... 34
   4.5     Proceedings in alternate forums............................................................................ 35
     i. Proceedings underway in a court or tribunal .......................................................... 35
     ii. Proceedings underway in an EDR scheme............................................................ 37
     iii. Proceedings subject of arbitration or decision ....................................................... 38
     iv. Parties have agreed to settlement ......................................................................... 39
     v. FOS discretion to refer to more appropriate forum................................................. 39
   4.6     Agreement to jurisdiction....................................................................................... 41
   4.7     Monetary limits...................................................................................................... 41
   4.8     Awarding compensation ........................................................................................ 44
5.       Complaint resolution.............................................................................................. 45
   5.1     Principles .............................................................................................................. 45
   5.2     Mediation and conciliation ..................................................................................... 47
   5.3     Decision-making model ......................................................................................... 48
   5.4     Complaints alleging fraud...................................................................................... 51
   5.4     Criteria for decision making................................................................................... 52

                                                                                                                                     2
     5.4     Appeals................................................................................................................. 53
     5.5     Extensions of time................................................................................................. 53
6.         Reporting externally ............................................................................................... 55
     6.1     Reporting to ASIC ................................................................................................. 55
     6.2     Reporting publicly ................................................................................................. 57
7.         Other matters .......................................................................................................... 58
     7.1     Relationship with Industry Code Monitoring and Compliance ................................ 58
     7.2     Scheme reviews ................................................................................................... 59




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1.     Background

1.1    About this submission

This submission has been prepared on behalf of Australian consumer advocates by
Consumer Action Law Centre. Consumer Action has been engaged by the Financial
Ombudsman Service (FOS) to consult with consumer advocates across Australia in order to
prepare a detailed submission to FOS’s Developing New Terms of Reference for the
Financial Ombudsman Service (the Issues Paper).

Details of the consultation process are set out below.

This submission has been endorsed by the following organisations:
    • Consumers’ Federation of Australia
    • Consumer Action Law Centre
    • Consumer Credit Legal Centre NSW
    • CHOICE
    • Financial and Consumer Rights Council
    • Financial Counsellors’ Association of Queensland

Throughout this submission, the following abbreviations are used:

       ASIC                   Australian Securities and Investments Commission
       BFSO                   Banking and Financial Services Ombudsman
       CBP                    Code of Banking Practice
       CTTT                   Consumer, Trader and Tenancy Tribunal
       CCMC                   Code Compliance Monitoring Committee
       COSL                   Credit Ombudsman Scheme Limited
       EDR                    External Dispute Resolution
       EWOV                   Energy and Water Ombudsman Victoria
       FSP                    Financial services provider
       IDR                    Internal Dispute Resolution
       IOS                    Insurance Ombudsman Service
       FICS                   Financial Industry Complaints Service
       FOS                    Financial Ombudsman Service
       RG                     Regulatory Guide
       ToR                    Terms of Reference
       TIO                    Telecommunications Industry Ombudsman
       UCCC                   Uniform Consumer Credit Code
       VCAT                   Victorian Civil and Administrative Tribunal

1.2    Consultation with consumer advocates

This submission has prepared following consultation with consumer advocates. This
consultation included:
    • Interviews with the following consumer advocates in the preparation of the
       submission:

                                                                                     4
             o    David Coorey and Lauren Hrouda, Legal Aid NSW
             o    Jenni Mack and Elissa Freeman, Choice
             o    Jan Pentland, AFCCRA
             o    Paul O’Shea, University of Queensland
             o    Elizabeth Lanyon
             o    Catherine Uhr, Legal Aid Queensland
             o    Fiona Guthrie, Queensland Consumer’s Association
             o    Brendan Pentony, Consumer representative on FOS panel
             o    Nicola Howell, Queensland University of Technology
             o    Katherine Lane and Karen Cox, Consumer Credit Legal Centre NSW & the
                  Insurance Law Service
               o John Berrill, Maurice Blackburn
               o Denis Nelthorpe, West Heidelberg Community Legal Service
               o Peter Gartlan, Incolink
               o Justin Malbon, Monash University
               o Banking Issues Group, Financial and Consumer Rights Council
               o Consumer Action staff
      •   The completion of questionnaires and the provision of other information from the
          following people:
               o David Tenant, Consumer Law Centre of ACT
               o David Lawson, Financial Counsellors Association of Queensland
               o Fiona Hawkins, Relationships Australia Queensland
               o Bronny Kernaghan, Kilmany UnitingCare
               o Donna Letchford, Camcare Camberwell
               o Joel Townsend, Victoria Legal Aid
               o John Mumford, Bass Coast Regional Health
      •   A roundtable discussion attended by 20 consumer advocates.

In addition to consultations with consumer advocates, the comments and recommendations
in this submission has been informed by:
     • Issues discussed at the consumer directors’ meeting at the 2008 EDR conference;
     • Submissions by consumer advocates to other related consultations, including the
         periodic reviews of the BFSO, IOS and FICS;
     • The periodic independent reviews of BFSO, IOS and FICS; and
     • Terms of reference and rules of other ombudsman schemes.

1.3       Comment on guiding principles and constraints

Consumer advocates acknowledge and are generally supportive of the Issues Paper’s
comments relating guiding principles and constraints for the development of the new ToR.
However, the following comments should be considered.

First, consumer advocates are aware of, and are participating in, ASIC’s concurrent review
of RG 139 (Approval of external dispute resolution schemes) and RG165 (Licensing: Internal




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and external dispute resolution).1 We are also aware that this process may impact upon the
finalisation of the ToR and the operations of FOS in the future. Noting that ASIC’s aims to
refine and harmonise the approaches taken by EDR schemes, rather than to review the
underlying policy as it relates to EDR schemes, consumer advocates do not think that the
ASIC review should necessarily have a large bearing on the ToR. Nevertheless, we will
comment on issues raised in ASIC’s consultation paper throughout the submission.

Second, consumer advocates are very strongly supportive of the principle that consumers
must not be disadvantaged by the merger. This is a key theme of this submission and
where proposals have the risk of being disadvantageous to consumers, we will not support
the proposal. We agree with the related principle that the ToR should aim for best practice
and that the FOS Board should be open to new ideas or adopting practice from other
schemes, including international schemes. We have referred to other schemes where we
think they demonstrate best practice.

Third, consumer advocates are also keenly aware that a central justification for the merger is
that it will deliver efficiency for FOS itself and for participants in the dispute resolution
process. However, consumer advocates are concerned that efficiency, particularly through
consistency in approach, should not trump effectiveness as an objective or underlying
principle of the scheme. There is a strong case, particularly in the short to medium term, to
maintain some areas of difference in how disputes are resolved, to ensure effectiveness and
consumer confidence in the scheme.

Fourth, consumer advocates generally agree that the new ToR should be principles-based
and avoid unnecessary specificity or detail. We agree that the ToR should be framed to
allow for adaptation for future needs. However, a balance must be achieved so that a
flexible principles-based approach does not have the effect of eliminating appropriate detail,
particularly where detail is required to ensure confidence in procedure and process. It is
noted that a principles-based approach is still likely to require the development of further
guidance.2 If this occurs, FOS must give an upfront commitment to developing this guidance
in an equally transparent and robust manner. Further comments in this vein are discussed
below in the section on dispute resolution.

Fifthly, consumer advocates are strongly supportive of the proposal that the ToR be written
in plain English. The majority of consumers who access EDR schemes do so without
professional assistance from an advocate and it is imperative that the ToR be drafted in a
way that can be understood by the lay reader.

Finally, although this is not covered in the guiding principles and constraints, consumer
advocates believe that the goal of the ToR should be to ensure that almost all complaints are
considered by FOS in preference to, or before, any court or tribunal. This could be
implemented by including a principle in the ToR that FOS is a forum of first choice for both

1
  ASIC, Consultation Paper 102: Dispute Resolution – review of RG 139 and RG 165, 8 September
2008.
2
  Julia Black, Principles based regulation: Risks, challenges and opportunities, presentation in the
University of Sydney, Department of Business Law seminar series, March 2007, pp 14-15, at
http://www.econ.usyd.edu.au/content.php/18133.html.

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FSPs and consumers. This principle should also inform the resolution of many of the
questions raised in the Issues Paper.

1.4    Priority issues

This submission canvasses a broad range of issues including almost all of those raised by
the Issues paper, the issues identified in the consumer consultation document3 and
additional matters raised by consumer advocates in consultations and the roundtable
workshop. The priority issues for the consumer movement are as follows:
    • Improved access to the scheme, including:
           o the ability for FOS to take complaints by telephone (section 3.3);
           o better processes relating to IDR that ensure smooth referrals (section 3.2);
           o improved timeliness to complaint resolution (section 3.3)
    • The complaints that can be considered by the scheme, including:
           o non-customer complaints (section 4.2);
           o complaints about hardship variations and fees and charges (section 4.4)
    • The approach taken to monetary limits (section 4.7), including:
           o That the monetary limit become the compensation cap rather than a claims
              cap;
           o That the limits should be raised to $500,000 by 1 January 2012, with an initial
              increase to $350,000 on 1 January 2010 followed by a rise to $425,000 on 1
              January 2011.
    • The proposed dispute-resolution model, including:
           o ensuring that complaints are resolved in a transparent and accountable
              manner (sections 5.1-5.3).



2.     Terminology and definitions

Consumer advocates are generally supportive of the proposed terminology and definitions.
However, so as to ensure clarity as well as ease of access for consumers, we make the
following comments.

While the distinction between ‘complaint’ and ‘dispute’ in the Issues Paper is clear,
consumer advocates are concerned that this distinction may create difficulties for
consumers’ access to the scheme. Consumers generally perceive of their problems with
FSPs as complaints, rather than disputes, which is a more formal or legalistic term. A
complaint, as defined by the Australian Standard ISO 10002 2006, is:

      An expression of dissatisfaction made to an organization, related to its products and
      services, or the complaints handling process itself, where a response or resolution is
      explicitly or implicitly expected.

Consumer advocates are very supportive of this definition and would suggest that this
definition be adopted for the ToR. This definition removes the onus on consumers to

3
 A consumer consultation document was prepared by Consumer Action as a summary of the Issues
Paper and provided to consumer advocates.

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explicitly state that something is a complaint, preventing complaints from falling through the
cracks. There is a similar concern that if a consumer is required to phrase their complaint as
a ‘dispute’ before access to FOS is granted, many consumers will similarly fall through the
cracks. Given the guiding principle that the ToR be drafted in plain English, consumer
advocates recommend the use of ‘complaint’ rather than ‘dispute’.

Consumer advocates are strongly supportive of using the term “financial services provider”
or FSP instead of member. There has been a longstanding concern that “member” implies
that the scheme is set up for the industry’s purposes rather than for fair and impartial dispute
resolution. While it may be appropriate for ‘member’ to be used in the context of running the
organisation and the constitution (given that FSPs do own FOS), the term “member” is not
useful in the resolution of disputes.

Consumer advocates have raised concerns with the terms ‘written decision’, ‘appeal’ and
‘ombudsman’. The use of these terms appears to pre-empt any consideration of views as to
appropriate decision-making models. Further comments in relation to this are provided in
section 5 below on decision-making.

           Consumer advocates recommend:
              • That the ToR refer to “complaints” rather than “disputes”.
              • That the ToR refer to “financial services provider” or “FSP” rather
                than “member”



3.        Access to the scheme

3.1       Definitions of consumer and small business

Consumer advocates are strongly supportive of FOS being able to consider all complaints
brought by an individual. We agree that the term ‘retail client’ is too restrictive and would
amount to a lessening of access for many consumers. The term ‘retail client’ has a legal
definition which is complex and varies according to the financial product. As such, using
such a term would be complex, costly and administratively burdensome to apply,
significantly derogating from the objective of efficiency. Further comments about access for
individuals who are not customers or clients of an FSP are detailed in part 4.2 of this
submission.

While consumer advocates have not considered the issue of access for ‘small business’ in
detail, some advocates have raised concerns about the arbitrary nature of the definition
proposed that is based on the number of employees in a company or same group of
companies. That said, we acknowledge that the definition is a well understood one that has
its origin in the Corporations Act 2001 (Cth). Given that, and given it accords with the
principle in Regulatory Guide 139 that an EDR scheme’s coverage be sufficient to deal with
the majority of consumer complaints (or different types of complaints in the relevant industry
or industries4), this definition does appear appropriate.


4
    See proposal in CP 102: proposal E1.

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        Consumer advocates recommend:
           • That the ToR not use the term “retail client” but make it clear that
             all individuals can make a complaint to FOS.

3.2    Internal dispute resolution

One of the most pressing issues raised in consultation with consumer advocates was access
to FOS in terms of the requirement for a consumer to have a complaint considered by an
FSP’s IDR process before access to FOS is granted. While advocates strongly support the
principle that an FSP should have sufficient opportunity to resolve a complaint with a
consumer, advocates have become increasingly concerned by consumers commonly get
‘lost’ in an FSP’s IDR processes, resulting in complaint fatigue and ineffective resolution of
complaints. In some cases, consumers view the requirement to proceed through an FSP’s
IDR processes as a tactic to prevent resolution of a complaint, especially where that
complaint has already been considered and/or handled by some other department or area of
an FSP.

Considering the above, consumer advocates strongly support the Issues Paper’s preferred
option that a consumer should be able to lodge a complaint with FOS if they have already
made a complaint to any area or department of the FSP and the complaint remains
unresolved. From a consumer’s perspective, there is often little understanding of what area
or department a complaint is made to – rather, the complaint is made to the FSP. While it
should be open to an FSP to structure their complaint handling services in a manner in
which they see fit (including multi-tiered IDR), consumers should be entitled to a final
response from an IDR within the maximum time period. If the matter remains unresolved at
the expiration of the maximum time period allowed for IDR (in section 3.3 below, we submit
that this period should be 30 days), the FSP should be obliged to provide a response that
informs the consumer of their right to complain to EDR.

        Case Study 1 – Knock. Knock, Knockin’ on EDR’s door
        Source: Insurance Legal Service
        Mr & Mrs B’s house was destroyed by a fire in early December 2007. A claim was
        made on their home and contents policy. After seven months of investigation the
        claim was finally formally rejected in late June 2008 as a result of “factual
        inconsistencies” in the claimants’ story. Throughout this period, Mr & Mrs B had been
        in contact with IOS on numerous occasions and were referred back to the insurer
        each time. In early July 2008 ILS wrote to FOS – General Insurance seeking access
        to EDR on the basis that our clients were in severe financial hardship, that the claim
        had already been examined by a variety of internal sections of the insurer, that the
        dispute was entrenched and unlikely to be resolved, and that in the circumstances a
        referral back to IDR would only exacerbate the delay and resultant hardship. FOS
        responded by referring the matter back to IDR in mid July. In August ILS wrote again
        to FOS, and this time to ASIC also, pointing out that the matter had already been to
        the National Customer Dispute Resolution Manager and the Customer Advocacy
        Case Manager, the likelihood of an alternative resolution to the matter was very
        unlikely. FOS agreed to accept the dispute in mid-August 2008.




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Consumer advocates with experience with insurance disputes have particularly raised this
as an issue. The problem arises partly because of the operation of clauses 6, 7 and 8 of the
IOS ToR as well as the General Insurance Code of Practice. While clause 6.2(b) of the IOS
ToR requires IOS to consider a complaint where the member has failed to provide an IDR
decision within 15 business days of receiving notification of the dispute, the requirement to
refer a consumer to EDR does not arise until an IDR decision has been made. In practice,
the IOS require an IDR ‘decision’ before accepting a complaint. This means that consumers
are generally not aware of their right to take a complaint to EDR.

            Case Study 2 – Illusory access to dispute resolution
            Source: Insurance Legal Service
            Mr S had a car accident. Liability was in dispute. He lodged a claim with his insurer
            shortly thereafter. Nine months after the accident he contacted the ILS because the
            insurer had indicated they would probably reject the claim but had not officially done
            so in writing or given reasons for the rejection. Despite numerous conversations with
            the insurer in relation to his claim, he had no knowledge of the availability of IDR or
            EDR. Meanwhile, his car had not been repaired and he was being harassed by debt
            collectors for the insurer of the other driver’s vehicle.

Consumer advocates have raised concerns about some insurance companies taking
advantage of this anomaly so that IDR decisions are not made (or are drawn out for an
extremely long time). Consumers thus do not find out about their right to take a complaint to
EDR and often experience complaint fatigue and pull out of the process. Allowing a
consumer to lodge a dispute with FOS if they have made a complaint to any area or
department of an FSP and it remains unresolved will go part way to preventing this from
happening. However, for consumers not to get ‘lost’ in IDR, consumers have to be told
about their right to take their complaint to EDR upon lodging their dispute at IDR.

While general awareness about a consumer’s ability to take a complaint to FOS should
increase with the merger, consumer advocates are concerned to ensure that a consumer
becomes aware of the existence of FOS at points in time where that knowledge is
necessary. As such, the ToR should require FSPs to inform consumers of their right to take
a complaint to FOS at all relevant points of contact (that is, of their right to make the
complaint to FOS upon expiration of the maximum time period), including:
    • upon receipt of a complaint;
    • at the time the FSP responds to a complaint;
    • at the time the consumer is informed about any adverse decision or action (ie,
       decision to reject an insurance claim, serving of a default notice under a credit
       contract, decision to appoint an investigator in relation to an insurance claim);5 and
    • in any request regarding a payment of a debt, including correspondence from a debt
       collector or a letter of demand.

Consumer advocates are strongly supportive of a ‘lodgment’ type approach to complaints
receipt by FOS, where complaints that are made directly to FOS (before being considered by
the FSP) are registered by FOS staff who then facilitate the complaint being referred back to
the FSP’s IDR process. Consumers who make a complaint firstly to FOS should be

5
    It is noted that FICS Rule 8.3 already includes a similar requirement.

                                                                                                      10
provided with a reference number for their complaint and they should be given the direct
contact details (phone number) for the FSP’s IDR section. In some appropriate cases, FOS
should actually direct the FSP to contact the consumer (if, for example, the consumer did not
have an easy ability to make that contact).

Consumer advocates acknowledge that FOS’s resources should not be over-burdened by
such a requirement. However, there are a number of benefits that arise from such a system:
   • First, a registration system allows complaints made directly to FOS to be tracked.
       Consumer advocates are concerned about the significant drop off in the number of
       complaints that come back to EDR schemes where consumers have been referred
       back to an FSP at the first instance. While many of these can be explained by FSP’s
       consideration of a complaint resulting in it being resolved effectively, a registration
       system would allow complaints first lodged with FOS (or a proportion of such
       complaints) to be tracked through follow-up satisfaction surveys.
   • Second, a registration system is likely to provide impetus to improve IDR processes.
       Effective IDR processes have both business and consumers benefits, in that they will
       reduce the cost of complaint handling and make it more likely that a consumer will
       continue dealing with the particular FSP despite having a complaint with the
       organisation.
   • Third, a registration system should provide confidence to a consumer that their
       complaint is being taken seriously by the EDR scheme. There is some concern that
       consumers who are referred back to an FSP when they make a complaint at FOS
       experience a disinclination to go back to FOS – as they have already raised a
       complaint and it is not being considered, there may be a feeling that ‘FOS isn’t
       interested in my complaint’.

Consumer advocates note that a system similar to this operates currently at the BFSO, the
Telecommunications Industry Ombudsman and the Financial Co-operative Disputes
Resolution Service. It is noted that the ToR should be clear that an FSP cannot initiate legal
proceedings after a consumer obtains a reference number from FOS, even if they have been
referred back to the FSP and FOS has not taken on the substantive investigation of the
complaint (see further discussion under 4.5).

Consumer advocates also agree that FOS should have some flexibility to decide whether to
refer the matter back to IDR or to start investigation immediately. As stated above, it is
appropriate for the large majority of complaints to be referred back to an FSP if they have
not had the opportunity to consider the complaint. However, there will be complaints that are
of such significant and urgent importance that immediate investigation is warranted, even
before the time frame has elapsed. This might be the case where the unresolved complaint
is having a significant impact on a consumer’s health or financial wellbeing (ie, the
unresolved complaint means their home or other significant assets are at risk). Further,
consumers should be able to access FOS directly without referral back to the FSP where
they reasonably wish for no further dealings with the FSP (perhaps due to poor dealings
previously).

        Case Study 3 – Urgent and serious complaint
        Source: Insurance Legal Service
        Mr U became ill with a tumour while visiting relatives in Australia and a specialist

                                                                                               11
        recommended immediate surgery. Immediate surgery was predicted to give Mr U a
        90% chance of recovery, whereas a delay caused by returning to Mr U’s home
        country and booking in for surgery would reduce Mr U chance of a full recovery to
        closer to 60% (or more depending on the length of the delay). A claim was made
        immediately on Mr U’s travel insurance. The insurer responded via email within 2
        business days. The insurer indicated that it intended to reject the claim because the
        insurer’s medical officer deemed the surgery not urgent. Clarification was sought via
        email by Mr U’s son-in-law and the insurer confirmed that Mr U should return to his
        country of origin and seek treatment there. Mr U’s doctor strongly advised against
        travel in Mr U’s condition and insisted that he should book in for surgery in Australia.

There may also be cases where it is appropriate to refer the matter back to IDR even if the
30 day time limit has elapsed. As outlined below in section 3.3, consumer advocates believe
that this would be rare and should only be invoked where there are circumstances that
explain the delay in a dispute being dealt. The extension should be limited to 30 further days
(that is, a total of 60 days). An FSP should be required to provide reasons to the consumer
as to why the time limit for resolving a complaint should be extended. FSP’s should not, as
a rule, be entitled to have a complaint referred back to it when the time limit has elapsed.
This is because the time limit operates to ensure disputes are dealt with in speedy fashion
and if complaints were referred back regularly, there would be less of an incentive to resolve
complaints quickly. FOS could consider developing guidance as to its exercise of this
discretion.

        Consumer advocates recommend:
           • That the existing BFSO model of access is the minimum “best
             practice” model and there must not be any diminution in this level
             of access.
           • That the ToR make it clear that a consumer has a right to complain
             to FOS if they have already made a complaint to any area or
             department of the FSP and the complaint remains unresolved.
           • That the ToR require FSPs to inform consumers of their right to
             take an complaint to FOS (that is, of their right to make a complaint
             to FOS upon expiration of the time period of 30 days):
                 o upon receipt of the complaint;
                 o at the time the FSP responds to a complaint; and
                 o at the time the consumer is informed about any adverse
                     decision or action; and
                 o in any request regarding a payment of a debt, including
                     correspondence from a debt collector or a letter of demand.
           • That the ToR require FOS to lodge all complaints, providing the
             consumer with a reference number, even where an FSP has not
             yet considered the complaint. FOS should facilitate a referral of
             such a complaint to the FSP’s IDR section by providing the
             consumer with the appropriate contact details of an FSP’s IDR
             section. FOS should inform the consumer of their right to come
             back to FOS if the complaint isn’t resolved within the time period.
           • That the ToR allow FOS to consider a complaint even if the time
             period has not yet expired where the complaint is causing

                                                                                                   12
                significant consumer detriment or a consumer reasonably wishes
                for no further dealings with the FSP.



3.3    Time limits for IDR

As suggested above, consumer advocates believe there is a strong case for reducing the
time limit allowed for an FSP to provide a final response to complaints to 30 days (rather
than 45 days, as allowed by RG 139).

On the whole, there have been significant improvements in the ways in which Australian
FSPs have resolved disputes over recent years, including the time taken to resolve disputes.
According to ASIC’s research, 56% of all complaints are resolved within a week and 81% of
all complaints are resolved within a month.6 This can be partly explained by the widespread
adoption of AS ISO 10002 2006, which has arguably improved IDR processes.

Research also suggests that the longer the time a complaint remains unresolved, the less
satisfied a consumer is with the process.7 These findings reinforce the value of an effective
and timely IDR process.

Consumer advocates acknowledge that in some sectors, extensions to time limits may be
appropriate. For example, it is recognised that complaints about investment products or
even guarantees can be complex and time-consuming to resolve. However, a shorter time
frame to resolve complaints can operate so as to reward FSPs that have appropriate
dispute-resolution processes in place. We recommend that a longer period be available
where the FSP cannot reasonably expect to respond to the complaint within the shorter
period. We also recommend that this extension of the initial 30 day period be available only
for exceptional circumstances and that period be for no more than an additional 30 days,
which would allow a total of 60 days at IDR for complex matters. This should only be done
with the consent of the consumer and, as stated above, an FSP should be required to
provide reasons should it wish to extend the time limit for resolution of a complaint.

It is noted that ASIC proposes, in terms of RG 165, to maintain a requirement that FSPs
provide a final response to complaints within a maximum of 45 days, but within 30 days if
possible.8 Consumer advocates do not believe that this additional requirement would add
anything unless the requirement involved an actual obligation that could be enforced. An
obligation to do something “if possible” is meaningless. Considering this, and the
commentary above, consumer advocates think it is appropriate to require an FSP to provide
a response to a consumer’s compliant within 30 days.




6
  See ASIC, above n 1, p 9-10.
7
  As above, p 10.
8
  As above, proposal D1, p 19.

                                                                                          13
        Consumer advocates recommend:
           • That the ToR allow FOS to consider a complaint if an FSP has not
             resolved the complaint within 30 days of receiving notification of the
             complaint.
           • That the ToR only allow the time limit to be extended where:
                1) the consumer consents to the extension;
                2) the FSP provides compelling reasons for an extension of
                    time limit; and
                3) there are exceptional circumstances which mean the FSP
                    cannot reasonably expect to respond to the complaint within
                    the shorter period. .

3.4    Assistance with lodging disputes

A major concern expressed by consumer caseworkers is that many consumers who are told
to put their complaint in writing do not return to the scheme. Considering this, consumer
advocates submit strongly that complaints should be able to be lodged with FOS by
telephone. The ability to lodge a dispute by telephone would ensure that as many
consumers as possible, especially vulnerable and disadvantaged consumers, are able to
lodge disputes.

Many consumers experience ongoing problems with onerous requirements to access an
EDR scheme, including those with low levels of literacy and those from non-English
speaking backgrounds. Of particular concern for consumer advocates are barriers to access
such as the “referral notice” currently required by IOS.

It is noted that many EDR schemes, such as the energy and water schemes in NSW and
VIC as well as the TIO, allow complaints to be lodged by telephone. If FOS wants to
achieve world’s best practice in terms of dispute resolution, then it must provide effective
means for telephone lodgment of disputes. Consumer advocates believe that FOS staff
should be trained to take details of all relevant aspects of a complaint over the telephone
and to type a written statement which is provided to the consumer for confirmation. This
approach appears to be effective with other EDR schemes.

It is also noted that BFSO has stated that, where the consumer is unable to lodge a written
complaint, the BFSO will put the complaint in writing for the consumer and send it to the
consumer to verify and sign. It is not clear how often this is occurring or how effective the
process has been. Consumer advocates submit that this approach should be the default
position for all complaints made by telephone.

Consumer advocates believe that a different approach must be taken in relation to
consumers from non-English speaking backgrounds. It is submitted that FOS should be
required to determine whether a consumer is of a non-English speaking background and, if
so, offer an alternative approach to the lodgment of complaints. In this circumstance, the
complaint should be made over the telephone through an independent interpreter (not
through a family member) and the complaint should be read back to the consumer with that
interpreter for confirmation. The billing record of the interpreter should be kept on file as a

                                                                                            14
record of the use of an interpreter. Ongoing communication with the consumer should be in
the language of their choice.

Consumer advocates also strongly support the ability of consumers to lodge complaints via
the FOS website.

           Consumer advocates recommend:
              • That the ToR should allow a consumer to make a complaint to FOS
                by telephone.
              • This procedure should require FOS to put a complaint in writing for
                the consumer and send it to the consumer to verify. For
                consumers of non-English speaking background, this should be
                done through use of an independent interpreter who will also verify
                the content of the complaint with the consumer.

3.5       Other access issues

Consumer advocates continue to be concerned that many consumers are not aware of their
right to take a complaint to FOS. One consumer advocate who presents financial
information throughout regional Victoria to apprentices reports that, from speaking with a
total of 800 apprentices, only 5 people have stated that they were aware that they could take
an unresolved complaint to an ombudsman scheme.

So as to ensure the scheme is accessible to all consumers, the issue of public awareness
about the scheme must remain at the top of FOS’s agenda. It is acknowledged that by
having a larger, single scheme, consumers should benefit from a more widely

Consumer advocates recommend that there could be requirements placed on FSPs as well
as FOS itself about promotion of the scheme. For example, there should be requirements
that:
    • FSPs have details about the availability of FOS on their websites and in branches;
    • FOS actively promote the scheme through community agencies and the community
      directly.

It is noted that in ASIC’s consultation paper on the review of RG 139 and 165, ASIC seeks
feedback about whether communication by EDR schemes can be improved and should be
addressed as part of ASIC’s policy. 9 ASIC’s research suggests that many consumers who
access EDR schemes have misapprehensions about the scheme’s processes, decisions
and role. Consumer advocates agree that EDR schemes’ communications and promotions
strategies can be improved. Consumer advocates recommend that, when the ToR comes
into operation, FOS should undertake a wide-ranging brand awareness campaign. This
should include, for example, billboard and radio advertising.

Consumer advocates also note that the accessibility of an EDR scheme often depends on its
front line call staff – that is, those staff who initially take receipt of complaints, whether by


9
    ASIC CP 102, Issue F6.

                                                                                              15
telephone, over the internet or in writing. Often consumers, particularly those that are
vulnerable or disadvantaged, present in a way in which it might be difficult to identify the
nature of their complaint. This may be through no fault of their own. Where a consumer has
a complaint (that is, they make an expression of dissatisfaction), consumer advocates think it
is incumbent upon the EDR scheme to determine the nature of that complaint and to assist
the consumer frame their complaint appropriately. Consumer advocates believes this
requires a degree of sophistication from an EDR schemes’ front line staff. Staff must be
prepared to enter into a conversation with consumers, so that they can readily identify
whether the consumer is raising an appropriate complaint.

As outlined further below in section 5.3, it is submitted that FOS could employ a ‘consumer
advisor’ (in a similar fashion to which the BFSO has the banking advisor). This person could
be seconded from a consumer organisation and could, inter alia, assist with staff training
especially relating to the lodgment of disputes.



4.     Types of complaints that FOS can consider

4.1    Nexus with Australia

Consumer advocates broadly support the option proposed by the Issues Paper that the
relevant financial service or product that is being complained about must originate from a
contract formed or an obligation arising under Australian law. That said, consumer
advocates believe that as many complaints about member FSPs should be within jurisdiction
as possible, and that complaints should be considered even where the consumer is not (or is
no longer) domiciled in Australia. Consumer advocates submit that a better approach would
be for FOS to consider a complaint where there is a substantial connection with Australia. It
is noted that many FSPs are large companies operating in a global market and, as such,
should be prepared to refer unresolved disputes relating to all consumers to FOS, no matter
where they live. If the FSP is a member of FOS, it should not object to FOS having
jurisdiction to consider a complaint, even where the transaction or dealing entered into took
place outside Australia.

Concerns have been raised about migrants, 457 visa holders (sponsored temporary work
permits) and their families and refugees that have left Australia and subsequently have
complaints about FSPs, particularly in relation to accessing superannuation, invested
compensation payments or other benefits. We believe that these sorts of complaints should
be able to be considered by FOS, not least because FOS is probably the only dispute
resolution forum that does not require the physical presence of the complainant.

        Consumer advocates recommend:
           • That the ToR should require FOS to consider a complaint about an
             FSP that is a member of the scheme where there is a substantial
             connection with Australia.
           • That the ToR should make it clear that consumers not domiciled in
             Australia can access FOS if they have a complaint with an FSP
             that is a member of the scheme.

                                                                                           16
4.2    Non-customer complaints

Consumer advocates very much welcome the proposal that non-customers be able to make
complaints to FOS. However, we have some concerns with the approach being proposed
and whether it will encompass all disputes appropriate to be considered by FOS. The Issues
Paper proposes that, in addition to a complaint arising in respect of the provision of a
financial service directly to consumers, the following should be able to make a complaint to
FOS:
    • those that have provided security for a financial service (ie, guarantors);
    • those with a beneficial or other special interest in the product or transaction;
    • those making a motor vehicle insurance third party property claim; and
    • those making a complaint relating to privacy or confidentiality.

Our concern arises particularly from the interpretation of the term ‘beneficial or other special
interest’, and whether this will be interpreted broadly enough to cover all appropriate
complaints. While not an exhaustive list, we believe that this term should be broad enough
to ensure complaints relating to the following are within FOS’s jurisdiction.

      i. Complaints by tenants

There have been a number of recent cases around Australia where tenants have been
pursued by insurers, under rights of subrogation, after a payment of a claim for accidental
damage on a landlord or building policy. In the context of increasing sales of landlord
insurance policies these cases give rise to a number of concerns.

The first concern is that tenants may not be liable for the damage but be unaware of their
rights or lack the resources to defend court proceedings by the insurer – the insurer must
prove negligence against the tenant. Second, this type of dispute is currently outside the
jurisdiction of the IOS because the landlord and not the tenant is the policyholder. While
under the ToR of the IOS, the insurer could consent to jurisdiction allowing a tenant to have
the dispute heard by IOS, to date no insurer has consented to jurisdiction. This means that
this type of dispute will be pursued in the courts which will potentially expose a tenant to
significant legal costs.

        Case study 4 – Accidental damage, negligence and right of subrogation
        A young single mother in rented accommodation had two children under 2 years old.
        She was diagnosed with cancer, had had surgery and was undergoing
        chemotherapy. During an electrical blackout, her house was lit by candles, one of
        which was knocked over by one of the children. This caused some damage to the
        carpet.
        The landlord decided that the whole carpet needed replacing, and claimed on his
        insurance. The insurer then sought to recover the cost from the tenant. The tenant
        did not have the money to pay the insurance company, and received advice to file a
        petition for bankruptcy.

        Case Study 5 – Accidental damage, negligence and right of subrogation
        Source: Qld Legal Aid


                                                                                             17
        Tenant received a letter of demand and was sued for $1800 under right of
        subrogation. The issue was whether or not the tenant was liable for accidental
        damage or negligence. The tenant was not liable as damage was caused by an
        accident rather than negligence. The tenant was outside IOS jurisdiction. Insurer
        could agree to IDR and had the power to give consent to IOS jurisdiction, however
        insurer disagreed. An attempt was made to approach the ICA to pressure the
        insurer. Communication was made to senior management with suggestions of
        alternatives to court or protection against court costs. Furthermore, a suggestion
        was also made publicise the matter, which quickly resulted in the withdrawal of the
        summons and an agreement not to pursue the tenant.

        Case Study 6 – Accidental damage, negligence and right of subrogation
        Source: Hobart Community Legal Centre
        Client was tenant who was threatened by insurer for costs of damages. The damage
        was accidental as a result of fire in bedroom. The client denied liability and was
        advised to request IDR from insurer, insurer refused when requested. The client was
        advised to seek insurer’s consent to IOS jurisdiction; this was unsuccessful as
        insurer refused consent. The matter was referred to PILCH for pro bono assistance.

        Case Study 7 – Accidental damage, negligence and right of subrogation
        Source: Tenants Union Legal Service
        Tenant was uninsured. The kitchen caught fire whilst cooking meal which resulted in
        a cost of $8000 in damages. The body corporate/landlord claimed on the insurance
        policy. Insurer/solicitor sued tenant for damages. Consent to IOS jurisdiction was
        unsuccessful. Tenant approached PILCH for assistance and discussed negligence
        and insurance law. The discussions suggested a defence and claim for contributory
        negligence and counterclaim for negligence against landlord for failure to provide
        safety measures including fire extinguisher and fire blanket. It was also alleged that
        there were multiple breaches of the General Insurance Code of Practice. A complaint
        was lodge to Code Compliance manager at IOS. The insurer withdrew claim.

     ii. Lender’s mortgage insurance

When a consumer buys a property and needs to borrow more than 80 per cent of its value,
they are highly likely to be asked to pay a one-off insurance premium at the time of
settlement. However, if the consumer defaults on the loan, it’s not the consumer who
benefits from the insurance, but the lender. The lender is the policyholder.

If the property has to be sold as a result of default by the consumer, lender's mortgage
insurance will cover the lender for any shortfall. The insurer will then pursue the consumer to
recover the debt.

If the consumer wants cover so they do not lose their home through inability to meet their
mortgage repayments, they need to take out income and mortgage protection insurance.
Some consumers misunderstand or are mislead into thinking that mortgage lenders
insurance will provide these benefits.

If a consumer wants to dispute the purpose of the policy or seek relief from hardship caused
by the debt arising from the shortfall, the dispute is excluded from the IOS jurisdiction.


                                                                                                 18
        Case Study 8 – Mortgage Lenders Insurance, misrepresentation and financial
        hardship
        Source: Consumer Credit Legal Centre NSW
        Client in default on mortgage allowed his property to be sold for significantly less
        than the outstanding loan balance in the belief that mortgage lenders insurance
        would cover the deficit and protect from further liability for the debt. Client had not
        understood that the insurer would pursue him for the $30,000 shortfall paid to the
        financier. Client wanted to dispute liability on grounds of misrepresentation and also
        wanted relief on grounds of financial hardship.

     iii. Group insurance policies

Some insurance policies are sold as group policies, often with an employer or some other
entity as the policy holder, although an employee (or another person) may be a beneficiary
under the policy.

The main example of concern to us is group income protection policies taken out by
employers or offered through superannuation funds. These might also cover accidents away
from the workplace, where Workers Compensation schemes dont operate. Generally group
insurance offers lower cost premium rates and less stringent evidence of health
requirements than individual insurance policies and can be used by employers to attract
employees.

Group policies are also common across a range of industries where an industry or
professional association takes out a group policy in relation to negligence and indemnifies
either individuals or employees through contract.

However, disputes can arise where the policy holder (such as an employer) refuses or fails
to claim on the policy, or where the policy holder refuses to dispute a claim that has been
rejected. Currently, a beneficiary who wanted to raise a dispute with the insurer about this
would be unable to go to FOS. Consumer advocates believe this to be inappropriate and
that a beneficiary should have a right to make a complaint to FOS about their rights under
such a policy.

     iv. Mistaken payments in internet banking transactions

Internet banking facilities now allow consumers to use online banking to pay third parties.
Disputes have arisen where a consumer accidentally pays the wrong person because, for
example, they key in the wrong account number or they were provided with the wrong
account number. A problem arises in resolving these disputes as the complaint is often not
in relation to a consumer’s own FSP who provides the internet banking service. Rather, the
complaint is with a third party’s FSP. Consumer advocates believe that a consumer should
be able to make a complaint to FOS about the third party’s FSP conduct in relation to
mistaken payments. It is noted that this matter is also being considered in the context of the
Review of the EFT Code of Conduct. While consumer advocates are contributing to that
review, considering the fact that FSPs have encouraged consumers away from using paper
based transaction methods (ie, cheques) and to instead use internet banking, we think it is



                                                                                                  19
entirely appropriate for there to be fair and accessible dispute resolution processes in
relation to complaints about mistaken payments.

      v. Complaints about FSP practices

Consumer advocates raised concerns about some consumers having complaints about the
practice of an FSP, although the consumer was not a customer of that FSP. For example, a
consumer complaint about the behaviour of a particular FSP officer should be able to
considered by FOS. Another example relates to direct marketing. Consumer advocates
believe that a consumer should be able to complain about aggressive marketing, even
where a consumer did not take up the services. This is especially relevant in relation to
some consumer products that are sold door-to-door or via the telephone in conjunction with
consumer credit. While hawking is generally prohibited by financial services regulation, it is
appropriate for complaints about such conduct to be considered by FOS. If such a complaint
was vexatious or had no substance, FOS should be able to determine this promptly.

      vi. Motor vehicle third party property claims

It is noted that the Issues Paper proposes FOS to have jurisdiction in relation to motor
vehicle third party property claims. This covers the situation where an uninsured driver is
trying to recover money from another driver’s insurer. Consumer advocates agree that it is
entirely appropriate for FOS to have jurisdiction to consider such a complaint.

It is noted that, currently, IOS can only consider such complaints where the amount in
dispute is $3,000 or less, which is interpreted to include the cost of both vehicles not just the
damage to the uninsured driver. Given the fact that it is extremely rare to get a quote from a
vehicle repairer that is less than $3,000, this limit means that many potential disputes cannot
be considered by IOS. Consumer advocates do not see any reason to place a monetary
limit on such complaints.

Consumer advocates have also raised the issue that third party claims are sometimes
rejected in circumstances where the insurer has unreasonably refused to pay the insured
driver’s claim, but the insured (the customer) has not raised a complaint (often because
there is no damage to the insured’s vehicle). The most common example is where the
insured party has not paid (or cannot pay) the excess on the claim. It is arguable that this is
a breach of both the Insurance Code of Practice and the Insurance Contracts Act (sections
54 and 13) to refuse to pay a claim on the basis of non-payment of excess, and yet the non-
customer who has incurred the damage cannot access IOS under the current terms of
reference to raise this complaint. The only option for the non-customer is to take the other
driver to court to force them to raise a complaint with their insurance company, potentially
adding to the cost of the complaint. Further, unlike a claims refusal on the basis of fraud, for
example, where the participation of the insured would be essential to the resolution of the
claims dispute, this is a complaint that could be easily resolved without the participation of
the insured with no resultant prejudice to the insurer.

Concerns have been also raised about situations where the complaint is not in relation to the
amount owed by the insurer to the uninsured driver, but where the complaint is in relation to


                                                                                              20
the insurer’s decision making or actions in relation to resolving a claim.              The following
example illustrates this point.

          Case study 9 – Uninsured student in dispute with insurer
          Springvale Legal Service acted for an uninsured student in dispute with an
          insurance company. The insurance company conceded liability on behalf of
          their insured and agreed to pay for repairs to the student’s vehicle.
          The insurer required the repairs to be completed by a preferred repairer
          under the contract to the insured.          Unfortunately, the repairs were
          unsatisfactory and a dispute arose as to the rectification of the repairs. The
          student, not being a policyholder, could not access IOS despite admission of
          liability and the dispute arising out of work undertaken by the preferred
          repairer of the insurer.

          Case study 10 – Dispute over write-off
          Source: Insurance Law Service
          A caller to the ILS had claimed damages from an insurance company in
          relation to a motor vehicle accident for which the insurer’s customer was at
          fault. There was no dispute over liability but the insurer refused to repair the
          caller’s car, saying that it was a write-off and worth only $2,000. The caller
          claimed the car was able to be repaired, or alternatively that it was worth
          significantly more than the insurer claimed. The caller, not being a
          policyholder, could not access IOS despite admission of liability unless she
          limited her claim to $3,000.

Consumer advocates believe that an uninsured drive should be able to make a complaint to
FOS about the actions or practices of an insurer in resolving a claim.

Consumer advocates are also concerned that an uninsured driver cannot currently make a
complaint to IOS in relation to the payment of a debt to another driver’s insurer. The issue
particularly arises in relation to such claims by an insurer against a consumer who is
experiencing financial hardship. Note these comments are relevant in relation to exclusions
of jurisdiction considered below.

In 2006, the Insurance Council of Australia acknowledged the significance of this problem by
including a new clause on financial hardship for third party debtors in the General Insurance
Code of Practice. The new relevant clauses require an insurer to consider various options,
including repayment arrangements, where a person is experiencing difficulty repaying a debt
due to illness, unemployment or other reasonable cause, and they reasonably expect to be
able to discharge the debt if repayment terms are arranged. If a consumer is unable to
reach agreement as to payment terms with an insurer pursuant to this clause, a consumer is
entitled to have the dispute referred to IDR at the insurer. Unfortunately, if the dispute is not
resolved at IDR, there is currently no entitlement to refer the dispute to IOS/FOS.

The following case studies illustrate this problem.

          Case study 11 – Motor vehicle accident in May 2007, amount of debt
          owing $2,009.01
          Source: Victoria Legal Aid


                                                                                                  21
Mrs A is a married mother of three children, the most recent born about a few
months ago. One of her daughters is very ill and has had to undergo ten
operations in the Children’s Hospital. The hospital has arranged for payment of
medication for the daughter because of the poverty of the family which simply
cannot afford it.
The client is receiving a fortnightly Carer’s Allowance and Parenting Payments
from Centrelink. Her husband receives a long-term Disability Pension. Her
income is protected by the Judgment Debt Recovery Act 1984 (JDRA). All of
her assets are valued at less than $5,000 so the sheriff will not be able to seize
them.
It is extremely unlikely that Mrs A’s financial position will improve. Her income
is $275.50 and their weekly expenses are roughly $400. Mrs A will be entitled
to remain on Centrelink payments for at least fifteen years and longer if she
has more children. Insurer’s staff requested information about the husband’s
income despite the fact that he has no liability for the accident. The insurer
was advised that the husband was in receipt of Centrelink benefits, which is
also protected by the JDRA.
The insurer was advised that the Hospital was paying for medication and
suggested that insurer take urgent action to finalise the debt on compassionate
grounds. Although the insurer’s solicitor stopped all court action, the insurer
continued to seek further financial information. This suggests a failure to
accept or follow up the information about the hospital payment of the
medication. If the insurer accepted that the hospital was assisting in payment
of medication surely it would accept that the family was in financial hardship
This matter remains unresolved.

Case study 12 – Motor Vehicle accident 2006, amount of debt owing
$1,365
Source: Darebin Legal Service (‘DLS’)
At the time of the accident, Mr H was employed as a taxi driver. He is no
longer employed and his income comes from a carer’s pension for a member
of his family. He lives with his wife and his 19 year old daughter. He owes
money to Centrelink and this is being deducted from his benefit payments. He
has no assets or savings. As such, he is judgment proof under the Judgment
Debt Recovery Act 1984.
He was contacted by debt collectors in relation to this debt. A financial
statement was submitted to the debt collector who agreed that he was not in a
position to pay back the debt. They sent the debt back to the insurer because
of Mr H’s financial hardship. DLS contacted the insurer who said it was their
policy not to write off debts. They have not asked for a financial statement but
DLS assumed that this is because the debt collector passed on the financial
statement they had. They have notified the insurer that Mr H is judgment proof
but they again said that it was their policy not to write off debts. DLS have
alleged that the insurer’s actions are a breach of the Insurance Code of
Practice because they are failing to deal with financial hardship.
Almost two years later the matter is still unresolved and the most Mr H would
be able to pay is $10 a month–a 10 year repayment plan. This makes it very
clear that he is not in a position to pay off the debt and is struggling financially.
The length over which this has been going on indicates that his financial
position is unlikely to improve in the foreseeable future. It is likely that he will
be on a carer’s pension until he is old enough to qualify for the age pension. It
should be noted that the insurer’s response when the debt was returned to

                                                                                        22
              them, after a debt collector recognised that the client would not be able to pay,
              was to say that they would send it to another debt collector.

      vii. Complaints about privacy and confidentiality

Consumer advocates are strongly supportive of FOS being able to consider complaints
about privacy and confidentiality. There are a number of reasons for this.

Firstly, consumer concerns about the effectiveness of complaint handling by the Office of the
Federal Privacy Commissioner are well known and long-standing. A particular problem is
the fragmented nature of complaint handling through this office, requiring a consumer to
make more than one complaint to more than one organisation.10 Other concerns have been
identified relating to the effectiveness of the office as a complaints handler and that it does
not appear to effectively identify systemic problems or gaps in industry complaints
handling.11

Secondly, as FOS is aiming to be world’s best practice, consumer advocates believe that it
should position itself as the one-stop shop for financial services related consumer
complaints.

For these reasons, consumer advocates think it is entirely appropriate for FOS to consider
consumer complaints about privacy and confidentiality.

      viii.        Complaints by a non-customer who is asked for a payment

In some circumstances, consumers who are not customers of an FSP are asked to make a
payment to that FSP. This might arise in relation to a parent who is asked to make a
payment towards a debt on behalf of their child. Consumer advocates commonly see this
issue arise in relation to debt collection, where an agent or assignee of an FSP seeks
repayment of an FSP’s debt from someone who is not the customer. While in this case the
consumer in question may have a legal claim to get that payment back (ie, through the
principles of unjust enrichment), they generally will be precluded from accessing an EDR
scheme to make any complaint as they are not a customer of the FSP. Consumer
advocates submit that in any matter in which a non-customer is asked for a payment by an
FSP, then that consumer should be able to make a complaint about that FSP to FOS.

              Case study 13 – Non-customer who made payment to FSP
              Mrs X has a son with a disability. Her son receives a Centrelink disability
              pension. Her son has a drivers licence and a cheap uninsured car. After an
              accident in which the son admitted fault but was unable to pay for the
              damages, Mrs X was repeatedly contacted by staff of the insurer seeking
              payment on behalf of her son. Eventually after numerous calls, and tired of the
              harassment, Mrs X agreed to pay $1,000. On being told this behaviour was a
              breach of the ACCC/ASIC debt collection guidelines and the industry code of

10
   John Corker & Carolyn Bond, “The merry-go-round: credit report complaint handling under the
Privacy Act (2001) Privacy Law and Policy Reporter 43.
11
   Consumer Action Law Centre, Submission to Australian Law Reform Commission’s Discussion
Paper 72: Review of Australian Privacy Law, December 2007.

                                                                                                  23
          practice, Mrs X has asked whether she can seek to recover the money paid
          under duress.

In short, we submit that any individual who has a complaint with an FSP involving loss,
damage, harassment, or a potential claim for a financial or other benefit, should have access
to FOS unless the FSP can demonstrate a substantial likelihood that the complaint could not
be fairly and effectively resolved by EDR. Whether real prejudice would be experienced by
the FSP in FOS considering the complaint would usually turn on whether there is another
party (often the FSP’s customer) whose participation would be required to resolve the
dispute and whether that party would consent to such involvement. We submit that many
complaints could be resolved between the non-customer and the FSP with the assistance of
FOS and further that this is consistent with the principle that EDR should be the preferred
forum for all complaint. This principle should be reflected in the ToR.

        Consumer advocates recommend:
           • That the phrase ‘beneficial or other special interest in the product
             or transaction’ be interpreted broadly, so that as many non-
             customers as possible can make a complaint to FOS.
           • That the ToR is clear that consumers in the following
             circumstances can make a complaint to FOS:
                 o complaints by tenants in relation to landlord insurance
                    policies;
                 o complaints by borrowers in relation to lender’s mortgage
                    insurance;
                 o complaints by employees in relation to group employment
                    insurance policies;
                 o complaints by internet banking users in relation to mistaken
                    payment;
                 o complaints about FSP practices, such as direct marketing;
                 o complaints about motor vehicle third party property claims,
                    including by non-insured debtors;
                 o complaints about privacy and confidentiality; and
                 o complaints by a non-customer who is asked for a payment.

4.3    Time limits for EDR

Consumer advocates broadly agree with the Issues Paper’s proposal to set a single time
frame for complaints of six years. It is submitted that this should be from when the
consumer should have reasonably known all the facts relevant to the complaint. We warn,
however, against the use of the term ‘cause of action’ in the clause relating to time limits, as
is proposed by the Issues Paper. The date of a cause of action will always be the same date
or an earlier date compared to the date the consumer should have reasonably known all the
facts relevant to the complaint, so it is not clear that inclusion of ‘the date of a cause of
action’ is necessary given the approach by the Issues Paper for the date to be the latter
date. The “reasonably know all the relevant facts” test provides for flexibility and ensures
consumers are not disadvantaged by the fact that they are not aware of the relevant facts
which give rise to their potential complaint.


                                                                                             24
It is noted that the proposal is consistent with the current ToR for FICS which excludes
disputes where the consumer knew or ought reasonably have known all the relevant facts
(ie, sufficient to be aware that they had grounds to pursue a dispute) more than 6 years
before lodging a dispute.12 A requirement that the consumer knew all relevant facts relating
to a dispute should include any matter adverse to the consumer. In relation to complaints
about guarantees, for example, the time limit should not run until the time the consumer
knew the FSP wanted to enforce the guarantee. On the basis of the principle that consumers
must not be disadvantaged by the merger, consumer advocates support this approach. We
note that this proposal is supported by ASIC in its consultation paper reviewing RG 139.13

Consumer advocates also submit, in relation to minors, that the time period should not begin
running until the minor has reached age of majority (that is, 18 years).

It is noted that this approach can create problems as this time limit may be more generous
compared to the time limit available for claims pursued at the courts because of more
restrictive statutes of limitation. In general, statutes of limitation for contract only allow
claims to be made from six years from the date of the accrual of cause of action. The
proposed limitation period for FOS may be much longer than this, given that a consumer
may not be aware (or reasonably ought to have been aware) of all the relevant facts in a
dispute until a point in time after the accrual of a cause of action.

For example, in relation to an insurance claim, the statute of limitations period usually runs
from the date at which the consumer can make the claim (ie, the date the theft occurred
under a home contents insurance policy). However, in relation to a pursuing a complaint at
the EDR scheme, the period is unlikely to begin running until after the consumer is aware
that the insurance company has rejected the claim or rejected an IDR complaint. Given that
insurers can take a long time to make a decision about a claim, and an even longer time to
determine an IDR complaint, it is foreseeable that the consumer may still be able to make a
complaint to FOS despite their right to pursue action at a court having elapsed. One of the
integral features of an EDR scheme is that a consumer can refuse to accept a decision of
the scheme and pursue the matter in courts. In this circumstance, a consumer will be
prevented from doing so, effectively making the EDR scheme’s decision binding. While
consumer advocates do not submit that the ToR should necessarily deal with this
complexity, it is submitted that FOS should have a standard process in place to advise
consumers (in a general way) about the implications of statutes of limitations for their claim.
In matters where it is clear that the time limit for taking a matter to the court is soon to expire
(before an EDR process is likely to be finalised), FOS should be advising consumers to seek
independent legal advice about their matter.

As noted elsewhere, there is a general principle for EDR schemes that if a consumer does
not accept the decision of an EDR scheme, then they may pursue their rights through a
court. Consumer advocates are concerned that consumers may be prevented from doing
this if the time taken for complaint handling at FOS has meant that an FSP can lodge a
defence to any claim by a consumer at a court that the statutory period for making a

12
     FICS Rules, clause 14.1(p).
13
     ASIC, above n 1, proposal F4.

                                                                                                25
complaint has expired. Consumer advocates submit that FSPs should be required to not
plead the statute of limitations in any subsequent court matter, should the time taken for
complaint handling at FOS be the reason that the statutory time limit has expired.

        Consumer advocates recommend:
           • That the ToR should provide for a single time frame in which
             complaints can be made of six years from the date the consumer
             should have reasonably known all the facts relevant to the
             complaint.
           • That FOS should have processes established to advise consumers
             to seek legal advice if it is likely that their period to pursue action
             through the courts would expire while FOS is still considering the
             complaint.
           • That in court proceedings subsequent to any FOS complaint
             handling, FSPs should not be allowed to plead the statute of
             limitations should the time taken for complaint handling at FOS be
             the reason that the statutory time limit has expired.

4.4    Exclusions from jurisdiction

Consumer advocates are deeply concerned about some of the exclusions from jurisdiction
proposed by the Issues Paper, including complaints relating to an FSP’s commercial
judgment and complaints relating to the practice or policy of an FSP. As a broad comment,
consumer advocates would acknowledge that it may be appropriate for some complaints that
genuinely relate to an FSP’s commercial judgment or a practice or policy of the FSP to be
excluded from jurisdiction, however there are concerns that these terms are interpreted too
broadly. Consumer advocates are concerned that exclusions have been used as a way of
not making decisions about many consumer complaints, particularly where these complaints
are difficult or controversial. The proposal of the Issues Paper confirms this concern, as
outlined below.

The current terms of reference of ASIC-approved EDR schemes (including the predecessors
to FOS) state that the schemes will have reference to law, good industry practice and
fairness in all the circumstances. The current broad, and arguably arbitrary, interpretation of
the commercial judgment exclusion has carved out areas of law as “no go zones” somehow
preserved for the courts and tribunals alone. We submit that this carve out was never
intended when the original commercial judgment exclusion was devised, nor is it consistent
with the principle in RG 139 that scheme coverage should include the majority of consumer
complaints in the relevant industry. The inclusion of the three factors to be taken into
consideration in the resolution of complaints suggests that if anything, approved EDR
schemes should have reference to a broader range of issues than the courts, specifically
fairness and good industry practice. Instead the schemes have narrowed their purview and
excluded issues that are the subject of existing case law and/or stature, excluding some of
the most common types of consumer complaint in the process. While we accept that there
will be some cases that will only be suitable for the formal legal process, we argue that these
should be as few as possible (our concerns about the “more appropriate forum” exclusion
are also discussed at section 4.6). Further, we suggest that what would distinguish such

                                                                                            26
disputes would not be the relevant legal issue (test cases as discussed in section 4.6 aside)
but the nature and complexity of the evidence required.

Genuine product pricing, and lending and underwriting guidelines, are examples of issues
that would be generally accepted as matters of commercial judgment in which a court would
be loathe to interfere. However, the courts and the various parliaments have developed laws
and precedents over time recognising the need to place some fetters on commercial
behaviour including in relation to some aspects of the aforementioned sacrosanct areas of
“commercial judgment”. It is appropriate that these rules and standards can also be applied
by EDR schemes, or the effectiveness of both the law and EDR is severely diminished.

One approach to resolving concerns with the proposed exclusions is to not define the terms
‘commercial judgment’ or ‘policy and practice of an FSP’, but to leave them undefined and
include a principle that any exclusion be construed as narrowly as possible. Such an
approach would be consistent with the principle in RG 139 that the coverage of the scheme
be sufficient to deal with the majority of (the type) of consumer complaints in the relevant
industries. FOS could develop a guideline about construing the exclusion narrowly, using
statutory interpretation principles.

A related approach would be to include the principle that exclusions be construed narrowly,
but to more clearly define the exclusions so that the ToR clearly identifies complaints that
genuinely relate to commercial judgment or a policy or practice of an FSP (that should be
outside the scope of FOS’s jurisdiction). For example, the ToR could state that complaints
about what is genuinely an upfront price of a financial product or service,14 or complaints that
would jeopardise the ability of the FSP to maintain its prudential obligations (for example, the
decision not to approve a loan facility), would be complaints relating to commercial judgment
or a policy or practice of an FSP. Any complaint that did not raise such issues should be
within the jurisdiction of FOS. Further, even issues that fall broadly within the area of
product pricing or prudential concerns, should not be excluded where there is an existing
legal precedent or legislative provision that could be applied to the circumstances. In other
words, FOS should apply “the law”, not selective parts of it.

It is also essential that an EDR scheme be able to make a full and comprehensive decision.
As discussed in further details below, the BFSO has to date maintained it can only review
the process of hardship decisions. Further and more disturbingly, the BFSO has declined to
make decisions on repayments arrangements in unjustness matters. When a consumer is at
an EDR scheme it is essential that the EDR can resolve and determine the whole dispute,
not only part of the dispute.

However it is achieved, consumer advocates submit that any exclusions to the jurisdiction of
FOS should be as clearly and narrowly defined as possible to prevent future “exclusion
creep”. As a minimum it is consumer advocates submission that the following types of
complaints should be clearly within jurisdiction:
   • Complaints about variations to a credit contract under the Uniform Consumer Credit
       Code (UCCC);

14
  This could be done in an approach similar to that proposed for the national unfair contract term
laws, based on the United Kingdom’s Unfair Terms in Consumer Contracts Regulations 1999.

                                                                                                     27
     •    Complaints about reckless or irresponsible lending practices (or ‘maladministration’ in
          lending);
     •    Complaints about the imposition of fees and charges that are in breach of law or that
          are unfair;
     •    Complaints about a decision to reject an insurance proposal;
     •    Complaints about the terms of a repayment arrangement of an insurance debt; and
     •    Complaints about decisions to allocate the benefit of a financial product between
          competing beneficiaries.

         i. Hardship variations

Consumer advocates submit that the ability of FOS to consider complaints about hardship
variations is not only appropriate in terms of ensuring the majority of (the type) of consumer
complaints can be considered by the scheme, and in terms of fairness to consumers, but
also that there is also a firm legal basis for FOS to consider such complaints.

Sections 66 and 68 of the UCCC provide a right for a consumer to apply to have a credit
contract varied due to hardship. The general principle of section 66 is:

         a debtor who is unable reasonably, because of illness, unemployment or other
         reasonable cause, to meet the debtor’s obligations under a credit contract … may apply
         to the credit provider for such a change.

If the application is refused, section 68 provides that ‘the debtor may apply to the Court to
change the terms of the credit contract’ and the ‘Court may order that the credit provider
‘change the credit contract in a manner set out in section 66 and make such other orders it
thinks fit’. There are no guidelines on the exercise of this power other than the applicant, the
credit provider and any guarantor must be given a ‘reasonable opportunity to be heard’.

When a credit provider refuses a section 66 application by a consumer and the consumer
does not accept that refusal, the credit provider and the consumer are in dispute or,
alternatively, such refusal is a mater about which the consumer can make a compliant.

It has been suggested that an EDR scheme cannot hear this complaint as it amounts to a
section 68 application, which may only be considered by a court or tribunal. However, it
should be noted that the power for an EDR scheme to resolve disputes derives from the
contract between the FSPs and the EDR scheme. While there are some limitations which
derive from the common law, these are concerned with matters of process and natural
justice.15 In addition, as noted above, EDR schemes are established to provide alternative



15
   In CitiPower v. Electricity Industry Ombudsman (Vic) Ltd [1999] VSC 275, the Supreme Court of
Victoria upheld a decision of the (then) Electricity Industry Ombudsman. It decided that in
determining whether an event is beyond the reasonable control of a participating company, the
Ombudsman is obliged to ‘consider matters within her province of knowledge’ and to bear in mind
current law and reasonable and relevant industry practice. The court indicated that it would substitute
its own opinion for that of the Ombudsman only if the determination of the Ombudsman was so
aberrant as to be irrational.

                                                                                                     28
dispute resolution for the particular industry16 and that such schemes resolve complaints
having regard to the law, good industry practice and fairness in all the circumstances.

Considering this, consumer advocates believe it is entirely appropriate for an EDR scheme
to consider the provisions of section 68 of the UCCC in resolving complaints about a refusal
of a section 66 application. The provisions of section 68 can, and should, operate as a guide
to the exercise of the EDR scheme’s power.

It should also be noted that not all jurisdictions have low-cost tribunals available for credit
contract disputes. In Queensland, for example, a consumer must approach a court should a
credit provider refuse a section 66 application which will require legal assistance. In fact,
this may soon be the case for all consumers across Australia. The recently announced
proposal for the Federal Government to take responsibility for the regulation of consumer
credit17 will likely mean that consumers will not be able to make a complaint about consumer
credit in a state tribunal, but instead in a Federal court (the constitution prevents the Federal
parliament vesting judicial power in a tribunal). There is real and growing concern that this
will significantly reduce access to justice for consumers to exercise their right to apply for a
hardship variation. Allowing consumers to make complaints about a refusal of an application
for hardship variation at FOS would ensure that consumers can access their rights under the
UCCC and ensure the scheme is accessible for as many types of complaint as possible.

The BFSO has refused to consider complaints about refusals of a section 66 application due
to the exclusion in its ToR relating to ‘disputes relating solely to an FSP’s commercial
judgment in decisions about lending or security’.18 The BFSO has stated:

      The power in s 68 is expressly reserved to the relevant court or tribunal. We do make
      decisions in other contexts that take into account remedies available under common law
      or statute for breach of a common law or statutory obligation. However, unlike other
      powers of the court set out in the UCCC and other consumer protection legislation, the
      power in section 68 is not a power exercisable on a finding that there has been a breach
      of another section or that otherwise involves a finding of prohibited conduct. Section 66
      of the UCCC does not require a credit provider to agree to a hardship variation request,
      although it is implicit in the fact that the section exists that credit providers should at least
      give genuine consideration to an application. There is therefore a compelling argument
      that, while we can certainly review the process involved in making the decision, the
      actual decision to agree to or reject a variation is a commercial decision of the credit
      provider, rather than a breach of a legal duty or obligation. If that is so it is not within our
      powers to make a decision under s 68 in the terms of that section.

With respect, section 66 variations are not “carte blanch” changes to the credit contract. For
example, they are not available for loans over the ‘floating threshold’ (currently $332,750).19
Further, they can only be made on the basis of ‘illness, unemployment or other reasonable
cause…’. They are substantially limited in their outcomes by section 66(2) and must not

16
   See, eg, FOS constitution, objects clause, cl 2.
17
   Australian Government, National Consumer Credit: single standard national regulation of consumer
credit for Australia, October 2008.
18
   Clause 5.1; BFSO bulletin 46.
19
   Regulation 22A (as at September 2008, adjusted).

                                                                                                          29
involve a ‘change being made to the annual percentage rate or rates’ and the fact that the
debtor must reasonably expect to be able to discharge their obligations if the terms of the
contract were changed.20

Further, we note that there are other sections of the UCCC that do not require the finding of
a “breach” or finding of prohibited conduct for an EDR scheme to consider a complaint.
Section 70, for example, relating to the reopening of unjust transactions, provides a list of
factors in sub-section 2 listing what the court may take into consideration in determining
whether a transaction can be reopened. While these factors are to be taken into account by
a court, no finding of particular conduct outlined in those clauses or of any prohibited
conduct needs to be made in making an order that a transaction be reopened. The practice
of the BFSO is to consider the factors in section 70 in determining whether there has been
maladministration in lending.21

Refusal, therefore, of a reasonable application by a debtor under section 66, is not simply an
exercise of commercial judgment; rather it is more akin to a legal judgment. A court or
tribunal makes such a legal judgment when it considers a section 68 application. Refusal
that gives rise to a complaint, therefore, should be capable of resolution by an EDR scheme.

It is also noted other ombudsman schemes, such as the Credit Ombudsman Service Limited
(COSL), have a similar “commercial judgment” exclusion but do not interpret this as
preventing consideration of hardship variations. In the Guidelines to the Rules of COSL, it is
stated that while COSL cannot substitute its decision for that of the lender’s where an
assessment has been properly made by the lender, COSL considers that it is entitled to
examine the quality of the lender’s decision-making process.22

Consumer advocates, particularly caseworkers such as financial counsellors, have noted
some of the perverse outcomes that result from the BFSO’s position that it cannot consider
complaints about hardship applications. In some cases, consumers have made a complaint
to BFSO arguing maladministration in lending and have succeeded in obtaining a conciliated
outcome that reduces the total amount owing on a loan. However, the FSP has insisted on
unrealistic repayment arrangements. Under the terms of settlement, usually the whole
agreement is void if the consumer does not meet the required repayments. As such, the
BFSO-conciliated outcome is meaningless. For the EDR scheme’s settlement processes in
such cases to be effective, there must be ability for the scheme to develop appropriate
alternative repayment arrangements.

It should be noted that consumer advocates are not suggesting that FOS be required to
develop alternative payment arrangements where it would be impractical or unreasonable to
do so. Consumer advocates recognise that in some cases it may be a better outcome for
all, especially where there is property involved, for the loan to be foreclosed and the
consumer to maintain whatever equity they have in their property. That said, consumer
advocates believe it is entirely appropriate for FOS to consider complaints about a refusal to
grant a hardship variation. In fact in the current economic client of rising unemployment and

20
   Section 66(1), Uniform Consumer Credit Code.
21
   BFSO bulletin 46.
22
   COSL, Guidelines to the Rules of COSL, cl 16.

                                                                                           30
global economic instability, it is in the public interest to ensure that borrowers in hardship are
given some flexibility in meeting their obligations, to avoid the snowballing effect of large
numbers of bankruptcies and home repossessions. If the complaint lacks substance, or the
application for variation is not reasonable, the scheme will (like a court) determine that the
FSP does not have to vary the relevant contract in the manner sought.

For completeness, we reiterate our comments above about the ability of FOS to consider
complaints about the terms of a repayment arrangement for an insurance debt. Similar to
our comments provided here, we do not view such a decision to amount to commercial
judgment.

        ii. Maladministration in lending

Consumer advocates strongly support the ability of FOS to consider disputes about reckless
or irresponsible lending, currently termed “maladministration in lending” by the BFSO.
Maladministration in lending is defined in the BFSO’s ToR as any act or omission “contrary
to or not in accordance with a duty owed at law or pursuant to the terms (express or implied)
of the contract between the financial services provider and the disputant”.

The legal and contractual obligations which are relevant to the BFSO in determining whether
there has been maladministration in the lender’s decision include:
    • an FSP’s common law contractual duty to exercise reasonable care and skill;
    • whether the particular circumstances of the case give rise to a claim of
       unconscionable or misleading conduct or breach of implied warranties under the
       Australian Securities and Investments Commission Act 2001 (Cth);
    • the provisions of the UCCC, particularly the considerations under section 70 where
       applicable; and
    • the provisions of clause 25 of the Code of Banking Practice.

It is noted that the BFSO has stated that in most cases where there is maladministration in
lending, the consumer will remain liable for the principal advanced but that the credit
provider will not be able to collect interest or fees.23 Consumer advocates believe that
improved remedies are necessary to ensure a consumer achieves a fair outcome when they
have been the victim of reckless lending. This could include providing relief for the
consumer by making the debt unenforceable to the extent that it exceeds an amount of
credit that would have been granted if the FSP had undertaken an appropriate credit
assessment.

        iii. Fees and charges

Consumer advocates submit that complaints about the imposition of fees or charges,
including the level of such fees and charges, should be able to be considered by FOS. It is
noted that there is a very different commercial environment today from when the EDR
schemes’ ToRs were originally drafted. According to the Reserve Bank of Australia, bank
income from fees and charges has increased by over 68% since 2000, now reaching over


23
     BFSO bulletin 45.

                                                                                               31
$10 billion annually.24 The share of fee income derived from consumers as against
businesses over that time has increased as well (from 33 per cent to 42 per cent).25 Given
this significant fee burden, consumers have a legitimate interest in ensuring complaints
about fees and charges can be considered by an impartial dispute resolution scheme.

Consumer advocates submit that a complaint about a fee or charge should be able to be
considered by FOS on the following bases:
   • a fee in excess to that which is allowed in the contract between the consumer and
       the FSP;
   • a fee that is imposed unlawful (ie, under section 72 of the UCCC or pursuant to Part
       2B of the Fair Trading Act 1999 (Vic));
   • a fee which is excessive and is considered to be a penalty at law; and
   • a fee not properly disclosed in the contract or which was misrepresented.

Consumer advocates also submit that a complaint about fee or charge should also be to be
considered on the basis of fairness. The Ministerial Council of Consumer Affairs has
proposed to introduce a national law prohibiting unfair contract terms, including terms of a
consumer contract that impose fees or charges unfairly.26 It is proposed that this law will
apply to the financial services sector, including credit. If the new law takes an approach
similar to the Fair Trading Act 1999 (Vic) or the UK’s Unfair Terms in Consumer Contract
Regulations, then a term which, in all the circumstances, causes a significant imbalance in
the rights and obligations to the detriment of the consumer will be considered unfair. It is
also noted that FOS is to make its decisions considering, inter alia, fairness in all the
circumstances. Consumer advocates see no reason why FOS can’t use this aspect of its
decision making in reviewing consumer complaints about fees and charges.

An example of terms that impose potentially unfair fees are those that provide for variation in
the level of the fee or charge. Such terms are common not only in transaction accounts or
credit contracts, but also insurance contracts (in relation to premiums). In these cases,
consumer advocates believe that consumers should be able to complain about the way or
the basis on which the fee is varied. For example, in many income protection insurance
policies there is a clause similar to the following:

      We guarantee not to increase the premium rate payable other than specified by this
      policy or to reflect the impact of government charges, before the fifth anniversary of the
      risk commencement date. After that date, we reserve the right to vary the premium rate
      payable for benefits of this class, provided we apply the same increase to all policies with
      this class of benefit and it is based upon a current assessment of risk, provided we apply
      the same increase to all policies with this class of benefit.

In this circumstance, a consumer may want to make a complaint on the basis that the
increase was not made to all policies with this class of benefit or it was not based on a
current assessment of risk. To determine this, a consumer should be able to seek the
underlying information that formed the basis for the variation.

24
   Reserve Bank of Australia, Banking fees in Australia, May 2008.
25
   As above.
26
   Ministerial Council on Consumer Affairs, Communiqué, 15 August 2008.

                                                                                                     32
It is noted that the Issues Paper proposes that FOS can consider complaints about the
application of a fee or charge in breach of contract. Consumer advocates note that there are
other laws, apart from the law of contract, that regulate FSP fees and charges. For example,
section 72 of the UCCC empowers a court to declare certain credit fees and charges
unconscionable and to annul or reduce the fee or charge. Consumer advocates believe that
consumers should be able to make a complaint about a fee or charge on the basis that it
would be considered unconscionable pursuant to section 72.

It is also noted that the proposal that FOS can consider complaints about the application of a
fee or charge in breach of contract could imply that fees which are excessive and are
considered a penalty at law could be the subject of complaint. It would be better, however,
for this to be made explicit in the ToR. As the ongoing litigation between the Office of Fair
Trading in the UK and UK banks and building societies demonstrates, FSPs are quick to
amend their terms and conditions to ensure that terms that impose fees are structured as
fees for service rather than fees imposed upon default of contract. While in Australian law,
whether a term of a contract is penal is a matter of substance not of form,27 it would be
clearer and remove the potential for dispute, if this was clarified.

It is also noted that other EDR schemes, for example the Telecommunications Industry
Ombudsman (TIO), consider that it is appropriate to consider a complaint that a fee or
charge is unfair. The TIO has stated that it will review terms of contracts (including those
that impose fees and charges) on the basis of fairness pursuant to Part 2B of the Fair
Trading Act 1999 (Vic).28 Consumer advocates see no reason why FOS should not similarly
be able to review terms that impose fees and charges on the basis of fairness, and submit
that to restrict such complaints on the basis that the imposition of fees and charges is a
policy of the FSP is inappropriate and will reduce access to the scheme.

      iv. Decisions about allocating competing beneficial interests

Consumer advocates do not see how a decision about allocating a benefit from a financial
product between competing beneficiaries is a commercial judgment. This is because, in this
circumstance, the complaint does not appear to be about the total amount of the benefit. As
such, the complaint will not have commercial implications for the FSP.

Consumer advocates recognise that, in some respects, a dispute between competing
beneficiaries may not be a dispute between a consumer and FSP, but rather, between two
consumers. However, as the FSP makes the ultimate decision about the way in which a
benefit is allocated, a consumer can have a complaint with the FSP about how that decision
arrived at. Nevertheless, consumer advocates acknowledge that there will be difficulty in
FOS considering such complaints where only one of the consumers asks FOS to consider
the complaint – FOS cannot make an adverse decision against a consumer who has not
sought FOS’s involvement in the matter. Given this, consumer advocates submit that FOS
should be able to consider complaints about allocating competing beneficial interests where

27
   Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor [2007] NSWSC
406
28
   TIO position statement on unfair contract terms.

                                                                                              33
all relevant consumers consent. Such complaints should not be excluded on the basis that
the decision amounts to a commercial judgment.

      v. Decision to reject insurance proposal

Consumer advocates believe that the Issues Paper’s proposal not to allow FOS to consider
a complaint about an insurance proposal rejection, except whether the rejection was
indiscriminate, malicious or based on incorrect information, is too broad. Consumer
advocates believe that a consumer should be able to complain about such a rejection if it is
unlawful or if it is not based on an insurer’s underwriting guidelines. For example, the
complaint might be that the insurer misapplied the underwriting guidelines of failed to follow
appropriate processes.

It is noted that this might be argued to be a rejection that was indiscriminate or malicious.
However, these words appear too narrow – discrimination could be implied as to be
discrimination upon some basis that is prohibited by anti-discrimination legislation (ie,
disability) and malicious has an understood legal meaning that sets a high bar to establish
the requisite intent.

It is noted that anti-discrimination laws allow discrimination in relation to insurance where
there is actuarial evidence that supports a basis for discrimination and it is reasonable in all
the circumstances. However, consumer advocates submit that FOS should have capacity to
consider complaints about whether such evidence exists. It is noted that a consumer may
also complain to state or federal anti-discrimination bodies about such complaints, however,
it is submitted that FOS should be able to consider such complaints due to its expertise in
the financial services sector. This also accords with the principle that FOS is world’s best
practice in terms of dispute resolution and the ASIC principle that the EDR scheme be
constituted to consider the majority of consumer complaints in the industry. Appropriate
remedies in these sorts of complaints could be access to insurer’s underwriting guidelines or
the actuarial evidence that is said to be relied upon.

It is also noted that IOS has established a medical panel which reviews decisions made by
medical indemnity insurers, particularly where the effect of a decision is to reduce the
earning capacity of a medical practitioner. For example, a decision to refuse insurance
cover for obstetrics to an obstetrician or registered practitioner that undertakes such work
would significantly impact the earning capacity of the practitioner. The IOS medical panel
can review whether a medical indemnity provider’s decision was reasonable in the
circumstances and, if it is not, order that the insurance cover would have to resume.
Consumer advocates see no reason why this approach cannot be applied to other insurance
products.

        Consumer advocates recommend:
           • That the ToR include a principle that proposed exclusions from
             FOS’s jurisdiction that relate to an FSP’s commercial judgment or
             policy or practice be interpreted narrowly.
           • That the ToR state that only complaints about what is genuinely an
             upfront price of a financial product or service, or complaints that


                                                                                             34
                would jeopardise the ability of the FSP to maintain its prudential
                obligations, would be complaints relating to commercial judgment
                or a policy or practice of an FSP, except where the issue in dispute
                is subject to relevant law, or specifically included in the terms of
                reference.
            •   That the TOR specifically require that FOS can determine the
                whole of the complaint. Determining a repayment arrangement as
                part of a determination is not part of any commercial judgment
                exemption.
            •   That the ToR state clearly that the following complaints should be
                within FOS’s jurisdiction:
                    o complaints about variations to a credit contract under the
                        UCCC;
                    o complaints about reckless or irresponsible lending practices
                        (or ‘maladministration’ in lending);
                    o complaints about the imposition of fees and charges that
                        are in breach of law or that are unfair;
                    o complaints about a decision to reject an insurance proposal;
                    o complaints about the terms of a repayment arrangement of
                        an insurance debt; and
                    o complaints about decisions to allocate the benefit of a
                        financial product between competing beneficiaries, where
                        all parties agree to FOS considering the dispute.

4.5    Proceedings in alternate forums

Consumer advocates submit that the Issues Paper’s proposal that FOS will not consider a
dispute:
     • where proceedings are underway in another court, tribunal or EDR scheme;
     • the dispute was the subject of an arbitration or a decision of a court, tribunal or
        another EDR scheme;
     • the parties have agreed to a settlement of the dispute; or
     • FOS considers another forum is more appropriate;
is too restrictive.

While it is acknowledged that a multiplicity of proceedings about the same subject matter is
not in the public interest, the approach proposed by the Issues Paper unnecessarily restricts
access to FOS for many consumers. Consumer advocates believe that the goal of the ToR
should be to ensure that almost all complaints are considered by FOS before any court or
tribunal. This could be implemented by including a principle in the ToR that FOS is a forum
of first choice for both FSPs and consumers.

      i. Proceedings underway in a court or tribunal

If the Issues Paper’s proposal was to proceed, the first question to be considered is “when
are proceedings underway in another court or tribunal?” Using general legal principles, a
proceeding is generally underway when the initiating process (whether it is by statement of

                                                                                          35
claim, summons or writ) has been filed in a court. Consumer advocates would not support
an interpretation that resulted in the serving of a default notice being considered that legal
proceedings are underway.

Consumer advocates are very concerned about FSPs initiating legal proceedings before a
consumer has had an adequate chance to make a complaint about the subject matter of
those proceedings at FOS. This is particularly the case for vulnerable consumers and in
relation to debt matters where, for a variety of reasons, a consumer may not have been
aware of their ability to complain about a debt or the availability of FOS as an avenue of
further complaint. Consumer advocates report that many consumers seeking advice and
assistance in relation to mortgage foreclosure proceedings indicate that they are now able to
meet their repayments as they fall due and to make up any arrears, but that they cannot
afford to pay the legal fees that have been added to the loan as a result of the FSP initiating
legal proceedings. While it clear in the current economic client that some foreclosures will be
inevitable, whether a particular person or family can maintain their mortgage despite a period
of financial hardship or not should not turn on whether they knew about EDR. As
recommended above, consumer advocates submit that any default notice issued by an FSP
or any letter of demand from an FSP or its agent or assignee in relation to a debt to an FSP
should include information about a consumer’s right to make a complaint to FOS.

Consumer advocates further believe that the ToR should place an obligation on an FSP to
put a hold on litigation and defer to FOS in the first instance. It is noted that a similar
procedure operates through COSL, whereby if it is apparent that court or tribunal
proceedings have commenced, COSL will write to the FSP and ask them to consent to the
proceedings being stayed while COSL deals with the complaint.29 While this will assist
where the FSP consents, it does not appear that COSL can require the FSP member to stay
the proceedings and defer to the EDR scheme.

Consumer advocates believe that an FSP’s membership of FOS should require them to stay
legal proceedings until FOS has had an opportunity to deal with a dispute.30 Such a
requirement would implement the principle that FOS is a forum of first choice for consumers.
In addition FOS should require FSPs who want to issue legal proceedings against a
consumer to first inform the consumer of the existence of FOS and give them a period of
time (perhaps 21 days) in which they can lodge a complaint with FOS before legal action can
be commenced. If proceedings that are commenced are stayed so that a consumer can
make a complaint to FOS, and FOS resolves the complaint to the satisfaction of the parties,
the FSP should be required to withdraw those proceedings and to not seek a costs order
against the consumer.

It is acknowledged that in some cases there may be a reason why a consumer should not be
able to have the proceedings stayed, including if there is no substance to their complaint.
Consumer advocates believe that the most appropriate way to deal with this would be for
FOS to have the discretion to reject to hear the complaint, thereby not requiring the FSP to
stay the legal proceedings. As such, the FSP would not be penalised by a frivolous

29
  COSL Rules, r 34(o).
30
  It is noted that FOS, under clause 3.6 of its constitution, has the power to impose conditions on an
FSP’s membership of the scheme.

                                                                                                     36
complaint to FOS. FOS could prepare a guideline as to how its discretion is to be exercised.
It should be noted, however, that many consumers facing debt collection and enforcement
activity, including in relation to home mortgages, may be in financial hardship. The fact that
FOS ultimately decides that a hardship variation is not appropriate in the circumstances, or
that the FSP has in fact complied with its obligations under a relevant industry Code of
Practice, should not be taken to imply that the complaint was frivolous in intent.

Consumer advocates note that this issue needs to be considered in the light of the
impending move of regulation for consumer credit from the states and territories to the
Commonwealth Government, as described above. It appears likely that, if this occurs,
access to low-cost tribunals (such as the Victorian Civil and Administrative Tribunal (VCAT)
or NSW’s Consumer, Trader and Tenancy Tribunal) will be removed. Instead, jurisdiction
over credit would be vested in a federal court. At the same time, it is likely that all credit
providers will be required to be members of an EDR scheme as a licence condition. In
Victoria, VCAT currently has exclusive jurisdiction under the UCCC. That means that if
repossession proceedings are brought in the Supreme Court, a consumer can seek a stay of
those proceedings on the basis that they have a claim under the UCCC (for example, a right
to seek a hardship variation or to have the contract re-opened on the grounds of unjustness).
Consumer advocates believe that once national credit regulation is implemented, consumers
should not be disadvantaged by having to challenge repossession proceedings in the
Supreme Court. Instead, a consumer should be able to stay those proceedings and have
any application under the UCCC be considered by the EDR scheme. If this did not occur,
consumers would be significantly disadvantaged.

Consumer advocates also note that there are a range of types of complaints that, although
relate to proceedings that are underway, are not directly related to those proceedings and
therefore should be able to be considered by FOS. Examples include complaints about
unfair or inappropriate collection practices or credit reporting. While there may be a court or
tribunal proceeding underway about whether a debt is actually owed, there is no reason why
FOS can not consider these ancillary matters if they give rise to a complaint.

For completeness, consumer advocates note that if it is the consumer that initiated legal
proceedings, and they were not aware of the existence of FOS or their ability to make the
complaint to FOS, consumers should be able to stay their own proceedings and have the
matter dealt with by FOS. A consumer should also be able to commence proceedings to
protect their rights under statutes of limitation, but put those proceedings on hold and refer
the complaint to FOS.31

         ii. Proceedings underway in an EDR scheme

Consumer advocates agree that if another EDR scheme is considering the matter, then FOS
should not be able to consider the complaint. However, this should be limited to ASIC-
approved EDR schemes. The Issues Paper suggests that this might also be appropriate
where a consumer has been involved in an independent conciliation process such as that
offered by state government consumer affairs departments. Consumer advocates strongly
contest this view.

31
     It is noted that FICS rule 23 allows for a similar mechanism for FSPs.

                                                                                            37
While state government consumer affairs departments do provide conciliation processes, the
service provided is very different from that provided by an ASIC-approved EDR scheme.
This is because consumer affairs departments do not have any power to make a binding
determination upon an FSP. This lack of binding power considerably changes the nature of
the bargain during the conciliation process and consequently, the nature of any settlement
reached. Consumer advocates in fact believe that should a complaint that FOS can
consider be made to a state government consumer affairs department, then that office
should refer the matter to FOS as the dispute resolution forum of first choice. FOS should
actively work with these agencies to ensure all relevant disputes are appropriately referred to
FOS.

      iii. Proceedings subject of arbitration or decision

Consumer advocates acknowledge that, generally, if the complaint has been dealt with, or
has been the subject of an arbitration or a decision of a court, tribunal or another EDR
scheme, then FOS should not re-consider the matter. However, consumer advocates do not
accept that a default judgment means that a matter has been dealt with or considered by a
court. A default judgment is a binding judgment in favour of a plaintiff (the FSP) where a
defendant (the consumer) has not responded to the complaint or appeared before the court.
There are many reasons why a default judgment might be issued despite the consumer
having a valid defence. These relate not only to the vulnerability of the consumer who may
not understand the court proceedings or their rights to complain to FOS, but also the
practices of those seeking default judgments and the nature of the default judgment process
itself.

In consumer caseworkers’ experience, many default judgments in relation to debts owed to
FSPs are actually sought by third parties after debts are sold. The sale of debt is a common
transaction which produces a number of errors and anomalies. Debts that have been repaid
are sometimes sold and pursued, inadequate information is given to the buyer so that the
buyer pursues the whole of the debt notwithstanding that the consumer has repaid a
substantial portion of it. Sometimes, debt collectors initiate proceedings (and attain default
judgments) against parties who have the same name as the debtor, but who have never had
any dealings with the creditor. Further, no proof of debt (and in too many cases, no proper
pleading) is required before default judgment is entered. This means there is inadequate
examination of the merits of the claim, and that many baseless proceedings are initiated in
the expectation that no defence will be filed.32

Given this, consumer advocates believe it is entirely appropriate for FOS to be able to
consider a matter even though a default judgment has been entered. This could be
facilitated by requiring FSPs that are members of FOS to undertake not to pursue
enforcement proceedings (or take related action such as list a default on a credit report) if a

32
  It is noted that the High Court decision in Wren v Mahony (1972) 126 CLR 212 adopted similar
reasoning in a case about bankruptcy. That case held that a court would, in general, accept the
existence of a judgment debt as proof of liability, but always retained the power to ‘go behind the
judgment’ where the original order was made without adequate consideration of whether the debt was
actually owed (as is the case with default judgments).

                                                                                                38
consumer makes a complaint about the default judgment. It should also be noted that,
generally, a consumer can have a default judgment reversed if they can show the court that
they have a defence to the claim and they had a reason that they did not respond to the
original complaint. There are many difficulties in consumers doing this, not least the
requirement for legal advice and assistance as well as the risk of increasing the debt owed
due to adverse costs orders. To overcome this, consumer advocates believe that the
obligations on an FSP not to pursue enforcement proceedings could be invoked where a
consumer satisfies FOS that they have a valid defence to the claim and that they have a
reason that they did not respond to the initial complaint or appear before the court. This
would ensure that where there is a genuine complaint about the subject of the default
judgment, that this complaint could be considered by FOS as the forum of first choice. If the
consumer’s complaint is upheld, the FSP should then be required to set aside the default
judgment by consent.

     iv. Parties have agreed to settlement

Consumer advocates agree that, generally, FOS should not be able to consider a complaint
once the parties have agreed to settle. However, consumer advocates submit that FOS
should be able to consider a complaint about the settlement (that is, the process) itself. This
would recognise the facts that consumers and FSPs do not have equal bargaining power
and, sometimes, settlements are reached that are not fair and reasonable in all the
circumstances. Consumer advocates believe that consumers should be able to complain
about a settlement on grounds that the settlement is oppressive, it was reached under
duress, that the consumer was not properly advised or that the settlement was not fair and
reasonable in all the circumstances. If FOS did make a finding, FOS should also be able to
reopen the substantive matter.

     v. FOS discretion to refer to more appropriate forum

Consumer advocates do not support a broad open-ended discretion for an EDR scheme to
refuse to consider a claim if there is a more appropriate forum. Given that FOS wants to
establish itself as world’s best practice in terms of dispute resolution and that FOS should be
a forum of first choice, consumer advocates question the need for such a broad discretion.
Consumers should be able to feel confident that FOS will consider their complaint and not
feel that there is a risk that FOS will decide that their complaint should be dealt with
elsewhere.

Consumer advocates are not opposed to the discretion per se, but submit that there must be
principles which guide FOS as to its use. For example, it is submitted that written reasons
must be provided to a consumer as to why FOS believes the complaint should be dealt with
by another forum.

Further, consumer advocates report that, in some cases, EDR schemes will refuse to
consider a matter because of its view that there is a more appropriate forum without
considering all the issues raised by the complaint. Consumer advocates submit that FOS
should be required to consider all matters related to the complaint to determine whether
there are issues that are appropriate for FOS to consider, before determining that there is a
more appropriate forum.
                                                                                            39
It is recognised that an FSP may be a member of more than one EDR scheme. However,
consumer advocates believe that, generally, a consumer should be able to choose which
EDR scheme to complain to if the FSP about which the complaint is made is a member of
that scheme. That said, consumer advocates recognise that in some limited circumstances
it may be more appropriate for the complaint to be dealt with by another EDR scheme. This
might be the case where there is more than one FSP involved in the transaction and
complaint, and that second FSP is not a member of FOS but of another scheme. In such a
circumstance, consumer advocates believe that the complaint could be referred to another
scheme, but only with the agreement of both the consumer and the FSP. There should also
be an obligation on FOS to be of the opinion that it is in the consumer’s best interests to
have the complaint dealt with by another EDR scheme.

Consumer advocates also support the proposal to allow FOS to refer a matter to a court as a
test case on the basis of criteria proposed by the Issues Paper, being:
    • an issue which may have important consequences for the business of the FSP or
        FSPs generally; or
    • an important or novel point of law.

Consumer advocates also support the proposal that the FSP should pay the consumer’s
costs in relation to the initial proceedings and any appeal on a solicitor/client basis. These
criteria appear reasonable, and there should be some similar criteria in relation to FOS’s
discretion to refer the matter to another forum where it is not a test case.

It is noted that the current FICS rules require the Panel Chair, the Chief Executive and the
relevant industry association must all agree that a complaint is of such significance for it to
be treated as a test case.33 Consumer advocates submit that the consent of a leading
consumer organisation (such as the Consumers’ Federation of Australia or Choice or
Consumer Action Law Centre) should additionally be required to consent to a matter being
treated as a test case. Further, consumer advocates submit that consumer organisations
should have standing to make a complaint to FOS with the view to having the complaint be
referred as a test case or for FOS to issue a guideline about its approach to such
complaints. This is discussed further below in section 6 on systemic issues.

           Consumer advocates recommend:
              • That the ToR include a principle that FOS be a forum of first choice
                for both FSPs and consumers in the resolution of complaints.
              • That an FSP’s membership of FOS should require them, to stay
                legal proceedings until FOS has had an opportunity to deal with a
                complaint.
              • That a consumer should be able to commence legal proceedings if
                it is required to protect rights under statutes of limitations and put
                that matter on hold so that FOS can consider the complaint.
              • That an FSP be required to advise a consumer of its right to make
                a complaint to FOS before any legal proceedings are commenced.


33
     FICS rule 18.

                                                                                            40
            •   That the ToR provide that FOS cannot consider a complaint, where
                it is already being considered by another ASIC-approved EDR
                scheme.
            •   That the TOR make it clear that FOS is able to consider a
                complaint afer a Statement of Claim has been issued and before
                any judgment has been given with FOS requiring the FSP not to
                enter default judgment while the dispute is being considered by
                FOS.
            •   That the ToR make it clear that FOS is able to consider a complaint
                even though a default judgment has been entered. This could be
                facilitated by requiring FSPs that are members of FOS to undertake
                not to pursue enforcement proceedings (or take related action such
                as list a default on a credit report) if a consumer makes a complaint
                about the default judgment.
            •   That the ToR enable a consumer to make a complaint about the
                process of reaching a settlement with an FSP with a power for FOS
                to reopen the settlement if it finds the process was unfair or
                prejudicial etc.
            •   That FOS’s discretion to refer a complaint to a more appropriate
                forum be subject to certain criteria, including the provision of written
                reasons as to why the complaint is referred and that FOS consider
                all issues raised by the complaint before making a determination to
                refer to a more appropriate forum.
            •   That FOS have the power to refer to a court as a test case, in line
                with the proposal set out in the Issues Paper, but with the consent
                of a leading consumer organisation.

4.6    Agreement to jurisdiction

Consumer advocates agree with the proposal that the ToR should provide jurisdiction if there
is agreement from the parties to consider the dispute. It is noted that agreement should not
mean that FOS is required to consider a dispute if there are reasons that it inappropriate to
do so (for example, a complaint involving a large commercial matter).              In these
circumstances, FOS could rely on its discretion to refer a complaint to a more appropriate
forum.

        Consumer advocates recommend:
           • That the TOR should provide jurisdiction if there is agreement from
             the parties to consider a dispute.

4.7    Monetary limits

Consumer advocates submit that a common monetary limit for lump sum complaints across
the FOS jurisdiction is appropriate. Given recent concerns about the current limit of the




                                                                                           41
BFSO of $280,000 being inadequate,34 consumer advocates submit that the figure should be
increased. In 2007, the House of Representatives Economics, Finance and Public
Administration Committee recommended that the monetary limit for the BFSO be increased
to $500,000. The committee was concerned that the BFSO could not consider all
complaints related to loans that were guaranteed by property.

A higher threshold is also justified by the fact that the value of investments and assets held
by consumers has increased in recent years. As noted by ASIC in its consultation paper on
the review of RG 139 and RG 165, as at June 2007 the average self-managed
superannuation fund had assets valued at $800,561, with the average balance per member
of $417,694.

Consumer advocates submit that the monetary limit for lump sum disputes should be
$500,000. As outlined below, we acknowledge there are some obstacles to be overcome in
achieving this, and would support a staged implementation of this limit. That is, we submit
that the monetary limit should be increased to:
    • $350,000 on 1 January 2010 (upon the implantation of the ToR);
    • $425,000 on 1 January 2011; and
    • $500,000 on 1 January 2012.

Consumer advocates recognise that for smaller FSPs, particularly brokers and financial
planners, the limit may impact on their ability to obtain professional indemnity insurance to
meet EDR scheme awards. However, consumer advocates would agree with the
Productivity Commission’s comments that:

      …ongoing difficulties in securing insurance should not be a basis for setting a lower
      standard of consumer protection. Rather, the appropriate responses are better supply-
      side risk management and rationalisation of any excessively risky suppliers.35

Consumer advocates also submit that a consumer should not be disadvantaged by the size
of the FSP they use. On this basis, it is submitted that a common monetary threshold should
not be prevented by its impact on smaller FSPs. One way of approaching an increased limit
for smaller FSPs could be a staged implementation.

In relation to the monthly income stream limit for income protection insurance complaints,
consumer advocates support this being increased to $7,500 per month. Given that most
income protection insurance products provide coverage for 75% per income, this would
mean that a consumer with an income of $100,000 who has purchased such a product
would be able to make a complaint to FOS. Given that only a small proportion of the
population earns more than this amount, it would appear that this amount would be an
appropriate monthly income stream limit. Consumer advocates also support linking the
monthly income stream limit with the lump sum monetary limit in some way. This would
ensure that the monthly income stream limit did not erode in value compared with the lump
sum limit, when the latter was increased.

34
   House of Representatives Economics, Finance and Public Administration Committee, Inquiry into
home lending practices and processes, September 2007, recommendation 3.
35
   PC, 2008, at 208 (april 2008).

                                                                                                   42
Consumer advocates also strongly support the proposals about replacing monetary limits
with compensation caps. This approach is more flexible and would ensure more consumers
have the option of making a complaint to FOS, thereby improving access to the scheme.
This approach should also significantly improve efficiency in that it will help reduce the time
taken to resolve disputes by removing lengthy up-front considerations as to jurisdiction and
disputes about whether a complaint fits within the monetary limit.

It is noted that this approach would require a consumer to waive the excess of any
compensation claim by having the dispute heard by FOS. This is because FOS would only
be able to make an award up to the compensation cap (or higher amount if this was agreed
to by the FSP). However, this approach should not bind a consumer to making such a
waiver. It is a fundamental principle of EDR schemes that determinations are binding on
industry members but not on consumers. Consumer advocates would not support any
approach that amended this principle. Instead, it is submitted, that if the consumer agreed
with FOS’s decision, they could accept a compensation award up to the cap as full and final
satisfaction of their claim. This would require the consumer to waive any rights in relation to
excess compensation thus preventing the consumer from pursuing the balance of their claim
in a court. However, a consumer could also reject FOS’s decision, even if it was in their
favour, and pursue their rights and litigate the whole claim in a court. Given the times
frames involved, the exposure to high legal costs and a potential adverse costs order, not to
menion a possible adverse outcome, we think it would be highly unlikely that any consumers
would do so. The experience of the UK supports this view.

Consumer advocates also submit that, in relation to complaints about guarantees, that there
should be no monetary limit. Guarantees, particularly in relation to large loans for property
or business, are often taken out by family members. Consumer advocates believe that
consumers that provide guarantees are often vulnerable, and enforcement of guarantees
can place family homes at risk. It is our view that the proposed approach with compensation
caps should facilitate this, as complaints about guarantees usually request a remedy that the
guarantee is not enforceable, rather than any award of compensation. A consumer who has
a complaint about a guarantee should not be prevented from making a complaint to FOS
merely because the amount of the guarantee is more than the compensation cap monetary
limit.

In relation to the review of the compensation cap (or monetary limits), consumer advocates
support an approach that provides for automatic CPI indexation annually as well as a regular
(three yearly) review by the Board of FOS. Automatic indexation would ensure the real
value of compensation caps are maintained over time. It is noted that some that indexation
can raise difficulties about ensuring there is ease in understanding compensation limits (ie,
indexation can result in an odd figure being the limit). However, if FOS undertook to
publicise its current limit widely, including making it available on its website and in initial
correspondence with consumers, this should not cause a problem. Consumer advocates
also submit that a regular board review of the compensation cap would also be appropriate –
to ensure that the cap was still appropriate and relevant considering current market
conditions.



                                                                                            43
        Consumer advocates recommend:
           • That the lump sum monetary limit for all complaints to FOS be lifted
             progressively to $500,000 by 1 January 2012, with an initial
             increase to $350,000 on 1 January 2010 and to $425,000 on 1
             January 2011.
           • That the monthly income stream limit for income protection
             insurance complaints be increased to $7,500 per month.
           • That the lump sum monetary limit be replaced by a compensation
             cap.
           • That a consumer should maintain the right to reject a decision
             awarding them compensation and to make a complaint to a court.
           • That FOS should be able to consider complaints about guarantees
             notwithstanding that the amount of the guarantee is more than the
             compensation cap monetary limit.
           • That the compensation cap be indexed by CPI annually and be
             subject to a 3 yearly board review.

4.8    Awarding compensation

Consumer advocates are strongly supportive of the approach proposed by the Issues Paper
to give FOS broad compensation powers. Consumer advocates agree that FOS should
have the ability to award compensation for non-financial loss and consequential loss, such
as interest and expenses incurred due to the complaint (ie, legal costs, reasonable costs of
attendance at any hearings, meetings etc).

Consumer advocates submit that a consumer should not be worse off due to a FSP’s
conduct and that they should be entitled to compensation that accords with what they would
have received had their complaint been taken to a court. Under general law, Australian
courts follow the test articulated in the UK decision of Hadley v Baxendale, which identifies
two types of losses for which contractual damages are recoverable:
   • losses which flow naturally from the breach;
   • losses which are, at the time of entering into the contract, contemplated by the
        parties as being a probable result of a breach of the contract.

The first limb of the test is often referred to as describing “general losses” and the second
limb as describing “special” or “consequential” losses. Despite this, to ensure clarity and
certainty, consumer advocates agree that FOS should set out detailed guidance as to its
approach in making awards for non-financial and consequential loss.

Consumer advocates also submit that FOS should have the capacity to make an award
similar to exemplary or punitive damages where an FSP’s conduct has been particularly
egregious or obstructive and has caused considerable unnecessary difficulty and distress for
the consumer.

It is noted that, under the current FICS rules, costs awards of up to $2,500 may be made in
respect of legal costs and/or the cost incurred in obtaining evidence, if it believes that the
consumer was required to incur those costs because of something the FSP did or failed to

                                                                                           44
do or that it should not have done.36 Given the fact that EDR schemes are intended to be
informal and to not require the use of lawyers or other expensive professionals, consumer
advocates support a general presumption not to normally award costs and the inclusion of
criteria similar to above on the making of awards for costs. However, consumer advocates
see no reason why any award, where it is appropriate, should be limited to $2,500. There
are some types of complaints that are very complex, and assistance from a professional
might be necessary to progress the complaint.

Consumer advocates are also of the view that compensation for non-financial losses should
be additional to the compensation cap. That is, should direct financial loss be in excess of
the compensation cap, then an award would be the amount of the compensation cap plus
claimed non-financial losses.

            Consumer advocates recommend:
               • That FOS have broad compensation powers, including the power
                 to make awards for non-financial and consequential loss.
               • That the ToR allow FOS to make costs awards in respect of legal
                 costs and/or costs in obtaining evidence, where it believes that the
                 consumer was required to incur those costs because of something
                 the FSP did or failed to do or that it should not have done.
               • That compensation for non-financial losses should be additional to
                 the compensation cap or lump sum monetary limit.



5.         Complaint resolution

5.1        Principles

Consumer advocates reiterate the importance of considering the six core benchmarks for
EDR schemes in any final decision about the most appropriate dispute resolution model.
These principles must be considered by ASIC in its approval of the scheme and are:
accessibility, independence, fairness, accountability, efficiency and effectiveness.

With respect to independence and accountability, consumer advocates are concerned that a
merged scheme might result in FOS taking a more bureaucratic approach to decision-
making. Consumer advocates are concerned to ensure that complaints are treated on their
merits and an approach to decision-making is not taken that would necessarily result in
insubstantial consideration being given to individual circumstances raised by particular
complaints. There is a concern that if a ‘business management’ approach to dispute
resolution is taken, as the ‘ombudsman model’ is described, then accountability and
independence will be reduced. This is because, in resolving a dispute, each complaint is
categorised as a “type” of complaint which would have a pre-determined response. Using
such an approach may mean that it is less likely that complaints are considered on the basis
of the individual circumstances of the case. While, given the large numbers of small-value



36
     FICS rules, rule 35.

                                                                                         45
routine complaints, this may be appropriate in some cases, there is a risk that for more
complex or costly complaints, a poor decision may be made.

With respect to efficiency, consumer advocates submit that it is imperative that the new ToR
does not set up arduous processes which means that the time frame in which decisions are
made are drawn out. Indeed, many consumer caseworkers including financial counsellors
believe that the EDR schemes do not provide efficient dispute resolution currently. A
particular concern raised is that some FSPs use delaying tactics and do not respond to
correspondence within appropriate time frames (as FICS statistics have repeatedly
demonstrated over a long period of time). There is also some concern that EDR schemes
do not provide any incentive for complying with time limits. Some caseworkers reported
preferring to access consumer tribunals (such as VCAT or the CTTT) as generally this
approach ensured that an FSP would respond to the complaint in a more timely fashion. If
decision-making processes result in the scheme being less timely, it would reduce
effectiveness and access to the scheme.

With respect to effectiveness, consumer advocates agree that the FOS ToR should set out
when FOS receives a complaint, it will investigate the matter and attempt to resolve the
dispute by mediation, conciliation, finding (or draft decision) and determination. Consumer
advocates agree that FOS should make use of as many appropriate dispute resolution
processes as possible to ensure that complaints are resolved in an effective and timely
manner. Further comments about mediation, conciliation and the decision-making model
are provided below. Importantly, however, consumer advocates believe that the ToR should
include a principle that consumers should not be discouraged from pursuing their complaint
to binding determination. While the process should be one that encourages conciliated
outcome, consumers should not be pressured into settling a complaint (particularly where
there is some merit to the complaint).

Relatedly, consumer advocates suggest that further consideration should be given to ways
in which consumers, particularly vulnerable consumers who have difficulty making their own
case (and who subsequently might accept poor outcomes), are supported through the
process. Consumer advocates are concerned that some vulnerable consumers agree to
conciliated outcomes early or worse, pull out of the process, as they find it difficult to comply
with requests from the scheme or the FSP. In our view, FOS should consider whether
processes to refer appropriate complaints to consumer legal or financial counseling services
should be formalised. Alternatively, FOS could consider the establishment of a fund that
could be used to provide assistance to such needy consumers. For this to assist consumers
with special needs, FOS would have to develop a process to identify those consumers.
Consumer advocates would welcome discussing this proposal further with FOS.

Consumer advocates note the proposal in the Issues Paper that FOS does not wish to set
out the detail of its processes in the ToR. FOS is concerned that this would unduly restrict it,
by preventing the flexibility it requires to ensure its dispute resolution services are
appropriate to the particular financial service or complaint. Consumer advocates agree that
the ToR does not need to be necessarily prescriptive about the decision-making model or
how FOS is to make decisions. That said, consumer advocates are not aware of any
concerns that current ToRs necessarily restrict flexibility. There are also good reasons why


                                                                                              46
some detail is required in the ToR, including to ensure that the scheme approaches its
dispute resolution function in a way that is procedurally fair.

Consumer advocates support the ToR being drafted in a way that is easy to understand and
accessible.

Finally, consumer advocates suggest that the approach to dispute resolution, including the
model for decision-making, be reviewed in three years time.

5.2    Mediation and conciliation

Consumer advocates note that many complaints to EDR schemes are resolved by simple
exchange of information or what might be termed “shuttle mediation”. Often exchange of
information can crystallise issues in dispute and contribute to a speedy resolution. That
said, consumer advocates have raised concerns about an EDR scheme merely being a
“post box”, particularly at the beginning of a complaint. Consumer advocates submit that the
FOS staff responsible for exchanging initial correspondence between the consumer and the
FSP must undertake some consideration about the appropriateness of that correspondence.
In some cases, initial correspondence provided by an FSP has shown that the FSP merely
denies allegations without any serious consideration of the issues in complaint. In these
circumstances, we believe that FOS should not provide this correspondence to the
consumer but require the FSP to provide a substantive response.

If “shuttle mediation” does not succeed in quickly resolving a complaint, consumer advocates
believe that FOS should undertake a more inquisitorial investigation in order to reach a
conciliated outcome. Indeed, we believe that where advocates are acting for a consumer it
might be more beneficial to go directly to this stage. FOS should, as a matter of course,
obtain a copy of the FSP’s file or other documentation in relation to the complaint. Where a
consumer has an advocate, then this information should be provided to that advocate.
Exchange of information is not only important to the speedy resolution of complaints, but can
also contribute to procedural justice given that EDR schemes are not bound by rules of
evidence. Ensuring all information relevant to a complaint is available to both parties can
ensure both parties can frame the issues pertinent to the complaint with clarity. That said,
there is also concern that an unrepresented consumer is not bombarded with too much
information which may result in them not pursuing their complaint due to complexity.

Consumer advocates submit that if information is not provided promptly by an FSP to FOS,
then that information should not be able to be relied upon in the decision-making process. In
relation to making a determination, the ToR should include a provision that the decision-
maker can make an adverse finding in absence of relevant information being provided.
While this might impinge upon the rights of the party, consumer advocates believe it is a
necessary process to ensure complaints are resolved in a timely and efficient manner.

Conciliation should involve the case manager providing some comment about the strengths
and weaknesses of each party’s position as well as guidance as to possible resolutions to
the complaint. Some consumer advocates have raised concerns that some schemes (such
as the IOS) do not make sufficient use of vigorous conciliation and are quick to move a


                                                                                          47
complaint to a determination stage. There is a concern that this can sometimes prevent a
conciliated outcome, which would be a more speedy and efficient resolution.

Consumer advocates are also strongly of the view that the primary skill of conciliators and
case managers should be complaint handling and resolution, not industry knowledge. There
is a concern that some staff that are drawn from industry do not have sufficient
understanding of consumer issues and that they may come with industry ‘biases’.

5.3    Decision-making model

Consumer advocates are not wedded to any particular decision-making model, but submit
that there is an opportunity in developing the new ToR to establish a uniform best practice
approach. This does not mean that the ToR should not allow for flexibility in determining
which decision-making process can be utilised for a particular complaint. However,
consumer advocates would not be supportive of an outcome which merely instituted the
same decision-making models that currently operate in each of the three schemes. One
impetus for the merger of the scheme was to create efficiencies – consumer advocates are
concerned than unless the scheme adopts a consistent decision making model across all
sectors, opportunities for efficiencies may be reduced.

That said, consumer advocates are concerned that the Issues Paper appears to prefer what
is termed the ‘ombudsman model’ over other models of dispute resolution, without
considering the benefits of other models in any detail. Consumer advocates are also
concerned that the decision about which decision-making model to adopt should not be
dichotomised into a debate about ‘ombudsman’ versus ‘panel’. Consumer advocates
acknowledge there are advantages and disadvantages with each model. For example, a
panel model:
    • is perhaps more independent, given there is a separation of powers between the
       decision-maker and the management of the scheme;
    • provides for quality decision-making, by involving a robust exchange of ideas
       amongst independent, external experts;
    • suits more complicated or higher value claims have proved more resource intensive
       in the BFSO case-managed environment;
    • ensures ongoing external input and thinking in the process, by the panel being made
       up of an industry representative, a consumer representative and an independent
       chair.

An ombudsman (or individual decision maker) model has the following features:
   • a management style decision-making process, where there is constant ongoing
      interaction between decision maker and internal legal team, industry advisor and
      ombudsman;
   • efficient and cost-effective decision making, in that ensures similar matters are dealt
      with in a consistent way.

Given these features, consumer advocates recommend that a mixed approach would be
appropriate and can ensure that FOS can deliver on the six core benchmarks. This model
would consist of the following:

                                                                                         48
Step 1:
   • FOS logs complaint but refers back to FSP’s IDR processes where appropriate (as
       discussed in detail in section 3 of this submission)

Step 2:
   • Where FOS accepts a complaint (FSP has had opportunity to consider complaint but
       it remains unresolved), FOS must make use of mediation and conciliation as
       described in section 5.2. If a conciliated outcome is not achieved through initial
       mediation and conciliation, the complaint would progress.
   • A case manager would be responsible for ensuring that all evidence is gathered by
       directly requesting this from both parties and then issue a preliminary view, in a
       further attempt to conciliate the matter. The preliminary view would be in writing,
       include reasons for the view and include details about how the complaint could be
       resolved.
   • If either party does not accept the preliminary view, they may ask FOS to make a
       binding determination.
   • Where the case manager is of the belief that the complaint is of such a nature that a
       binding determination is necessary (it is perhaps complex or costly), then the
       complaint could be progressed to binding determination stage without having a
       preliminary view.

Step 3
   • A binding determination is made by FOS as either a single-decision maker or panel
       (consisting of an independent chair, industry representative and consumer
       representative).
   • Whether a complaint is determined by an ombudsman or a panel should depend
       upon the complexity of the complaint (ie, it relies on technical or legal interpretation)
       or its of special significance to a consumer.

In regard to step two consumer advocates strongly prefer the case manager being
responsible for issuing a “preliminary view” rather than a “written decision”, as proposed by
the Issues Paper. In consumer advocates’ experience, a written finding from a case
manager is often viewed as determinative by a consumer. While the written finding might
state that the finding is not binding and a consumer can seek a further binding determination,
our experience is that the language and tone of such a letter often connotes a sense of
finality so that a consumer will not seek further review of their matter. While we strongly
support the intent of the preliminary view, that is, for it to form a further attempt to achieve a
conciliated resolution, it should not act as a block to a consumer seeking a binding
determination. We also recommend that all standard letters from case managers be
reviewed to ensure that they do not contain any implication that a party cannot seek a
binding determination should they not accept the view.

Additionally, in light of the lack of transparency of this step in the process, we submit that two
enhancements are necessary to ensure ongoing confidence in the step. We submit that 1)
publication of preliminary views that are accepted by the parties and 2) regular satisfaction
surveys of matters resolved at this stage should occur and the results regularly published

                                                                                               49
would be useful to build confidence in this stage of the process. These are discussed further
below.

Consumer advocates believe that, as a general rule, the value of complaint might be used to
guide whether a complaint is referred to a Panel. The appropriate value might vary
depending upon the type of complaint (ie, a higher threshold might be appropriate for a
complaint about an investment compared to a complaint about insurance or banking).
Nevertheless, there may of course be other criteria which take priority over the use of the
value of a complaint as a determinant. For example, an insurance complaint about a vehicle
might only have a value of $4,000; but, for the consumer concerned this may be of such
serious impact if it was their only vehicle and they relied upon it to transport their family.

This approach would ensure that for most low-value, low-complexity disputes, a single
decision maker could make the final binding determination meaning efficient and cheaper
dispute resolution. However, where the dispute is complex or high value, there is a better
case for requiring extra mechanisms in the decision making process to ensure accountability
and independence. Consumer advocates submit that a three person panel made up of an
industry and consumer representative and an independent chair would contribute to
achieving these outcomes for these types of cases. This panel could be referred to as “the
Ombudsman’s Panel”. It is noted that complaints about investments and insurance disputes
might be more likely to have the features which give rise to a panel decision making model.
That said, there is no reason why a panel decision making model couldn’t apply to complex
or high value banking complaints, such as those relating to guarantees.

Consumer advocates are strongly supportive of the current processes whereby the persons
responsible for binding determinations (that is the panel members or the single decision-
maker, as the case may be) are appointed by the FOS board. This process contributes to
the independence of decision-making. Given the larger scope of the new organisation,
consideration should also be given to whether there is a need for further mechanisms to
support independent decision-making, including whether there should be further separation
between decision-making and other management functions of FOS. This could be achieved
through decision-makers being part of a separate unit within FOS (noting that some
decision-makers, especially consumer and industry representative panel members, come
from outside the scheme).

Where a single decision-maker model is adopted, consumer advocates submit that improved
arrangements must be established to ensure the decision-maker has access to consumer
expertise. Consumer advocates acknowledge the role of the banking and legal advisors in
the current BFSO, in that they provide technical assistance about the industry and the law
that is of value in the decision-making process. Consumer advocates recommend that FOS
could employ a ‘consumer advisor’ to provide input into FOS’s decision-making processes.
The consumer advisor could be seconded from a consumer organisation for a particular
length of time and could provide guidance about FOS’s complaint handling processes, not
just at determination stage, but also in relation to processes such as lodgment of complaints,
mediation and conciliation.

Whichever decision-making model is adopted, consumer advocates believe that decisions
must be published by FOS. Publication of decisions is not only important in terms of
                                                                                           50
transparency and openness, but it can contribute to public understanding about why
decisions are made. It can also ensure a body of jurisprudence can be developed at which
academic and legal commentary may be directed. While it is acknowledged that FOS
decisions do not have precedent value, they do provide guidance as to how similar
complaints may be dealt with in the future.

It is noted that the UK Financial Ombudsman Service is currently undertaking a work
program aimed at improving the publication of its complaints data. Currently the UK FOS’s
position is that rather than all decisions being published, in the view of the number of routine
decisions, it should only publish selected leading decisions which illustrate key principles.37
This approach appears to be taken on the basis that that scheme makes thousands of
routine decisions each year, and the administrative burden of publishing every decision
would be high. That problem does not appear to be an issue in relation to the three
schemes merging into FOS and, as such, consumer advocates submit that all binding
decisions should be published.

Consumer advocates submit that there should be some publication requirements for
preliminary views as well as binding determinations, where the preliminary view has been
accepted by the parties. This is because experience with EDR schemes that have two
levels of decision making has been such that a binding determination is rarely made. For
example, the majority of complaints at the BFSO that reach a finding only reach the
‘recommendation’ stage. In fact, consumer advocates are not aware of a binding decision
being made by the BFSO. Considering this, consumer advocates consider it appropriate for
the scheme to publish this first level preliminary view.

Further, consumer advocates recommend the implementation of regular external satisfaction
surveys of users of FOS. Satisfaction surveys should increase transparency as to the
process and outcome for consumers who have received a conciliated outcome. For such
consumers, this survey should focus on levels of satisfaction with that outcome. If
consumers were not satisfied with the process or outcome, the survey should seek to
understand why a consumer did not pursue the complaint to the next level. The results of
these satisfaction surveys should be reported on publicly.

As outlined further in section 6, consumer advocates believe that FOS should make regular
use of guidelines (similar to the BFSO bulletins) which would set out how FOS approaches
certain particular issues or complaints.

5.4       Complaints alleging fraud

Consumer advocates strongly support retention of the fraud referee for general insurance
disputes that involve allegations of fraud, and believe that a similar model of complaint
resolution should be considered for the other areas of the scheme (investments, life
insurance and superannuation, and banking and finance).

Recognising that fraud is a serious allegation, the ability for the fraud referee to take oral
evidence ensures that there is proper consideration of all facts in complaints. Further, our

37
     UK Financial Ombudsman Service, Our strategic approach to transparency, July 2008, para 31.

                                                                                                   51
experience is that the fraud referee has been able to develop expertise about fraud related
complaints, including the necessary standards of proof. This has resulted in fairer outcomes
for consumers who make complaints where an insurer has alleged fraud.

Consumer advocates also note that the level of complaints in which insurers allege fraud has
decreased since the introduction of the fraud referee (from 28% of complaints in 1991-93 to
5% of complaints in 2008). We believe that this is an indicator of the success of this model
for dispute resolution – insurers are less likely to raise fraud in complaints if they know there
is a separate, robust process for determining whether fraud has occurred. Our concern is
that if the fraud referee was removed, the level of complaints in which insurers raise fraud
(and thus argue that the scheme should not consider the matter) would increase.

That said, consumer advocates believe that improvements can be made to the processes of
the fraud referee. In our view, there is currently an imbalance in the way in which an insurer
and a consumer are treated in oral examinations by the referee. In such interviews, the
insurer is entitled to be represented at the interview by an experienced employee of the
insurer. Consumers, conversely, are not allowed to have legal or other representation at
such hearings. It is our view that a consumer should have a right to representation and
assistance when they participate in oral examinations by the fraud referee.

Consumer advocates also note that allegation of fraud can arise in matters other than
general insurance including, for example, life insurance matters and credit related matters.
We would welcome further consideration as to whether the fraud referee model can be
applied to those areas of complaint.

5.4    Criteria for decision making

Consumer advocates support the proposed decision-making criteria, being:
   • law;
   • applicable industry codes and guidelines;
   • good industry practice; and
   • fairness in all the circumstances.

Consumer advocates do have some concerns about how these criteria are weighed by
decision-makers. For example, there is a significant concern that the criteria “fairness in all
the circumstances” is in some circumstances not actively considered in the dispute
resolution process, and in some recent FICS decisions has been applied to discount
compensation claims on the basis of what is “fair to the FSP”.

Consumer advocates believe that more rigour must be introduced to how fairness is applied
by a decision-maker. Fairness is more than procedural fairness, and substantive fairness
considerations should also be considered. One way of addressing this would be for the
scheme to provide policy guidance about how it intends to apply the criteria relating to
fairness. This would provide certainty and clarity both to consumers and FSPs that
participate in the scheme.




                                                                                              52
Consumer advocates are also concerned about the proposed division between “applicable
industry codes and guidelines” and “good industry practice”. Consumer advocates submit
that the term “good industry practice” would include industry codes and guidelines, where
they provide a level of consumer protection that is appropriate to the sector. There is a
concern that some industry codes and guidelines do not provide adequate consumer
protection and, in some cases, provide protection that is lesser than required by law. For
such industry codes and guidelines to be a factor in decision-making is inappropriate and
would result in FOS not achieving world’s best practice in terms of complaint resolution.
Consequently, we do not support applicable industry codes and guidelines appearing in the
ToR as a criterion for decision making.

5.4    Appeals

Consumer advocates do not support a party being able to appeal a decision of FOS. It is
noted that the Issues Paper considers an appeal to be in the context of a first level written
decision not being accepted and a binding determination being made by the Ombudsman.
Given our comments above about the preferred dispute resolution model, consumer
advocates do support a model which has two tiers – that of first level written decision, which
if is not accepted by the parties, is progressed to binding determination. However, consumer
advocates do not see this as an “appeal” per se, but merely another layer in the dispute
resolution process. Consumer advocates recommend this final decision being termed a
“binding determination”, so as to distinguish itself from a first-level draft decision. Consumer
advocates would not support a scheme which allowed an appeal from a binding
determination. Ongoing appeals will result in the scheme not providing efficient decision-
making.

5.5    Extensions of time

Consumer advocates note the Issues Paper’s proposes that FOS should have the discretion
to modify any time limit set out in the ToR (or the guidelines to the ToR) provided neither
party is prejudiced by the modification of time. Consumer advocates do not support such a
broad discretion. As outlined above, there are significant concerns about the time EDR
schemes take to resolve complaints, particularly where issues are complex or responses
from FSPs are not forthcoming. Consumer advocates submit that more must be done to
ensure that parties to a complaint comply with time frames required by the EDR scheme. As
noted above, some consumer caseworkers indicate that they prefer to take a complaint with
a FSP to a consumer tribunal (such as VCAT or CTTT), because this will generally “focus
the mind” of the FSP in providing a response to the complaint. There is a strong concern
that some FSPs delay the processes at EDR schemes resulting in the scheme not being
efficient or effective.

        Consumer advocates recommend:
           • That FOS should consider all of the six core benchmarks of EDR
             schemes in finalising its approach to the dispute resolution
             process.
           • That the ToR provisions relating to dispute resolution be drafted in
             plain English and be drafted so as to allow for flexibility, but not to

                                                                                             53
    lack the detail required to ensure the approach to dispute resolution
    is procedurally fair.
•   That the ToR set out FOS’s approach to mediation and conciliation,
    including obliging FOS to take an inquisitorial approach to
    conciliation through, for example, obtaining the consumer’s file
    from the FSP to fully understand the facts of the complaint.
•   That where information is not provided promptly by an FSP to FOS,
    then that information should not be able to be relied upon in the
    decision-making process and a decision-maker can make an
    adverse finding in absence of relevant information being provided.
•   That the primary skill for case managers should be complaint
    handling and resolution, not industry knowledge.
•   That the dispute resolution process should accord with the
    following:
    Step 1:
         • FOS logs the complaint but refers back to FSP’s IDR
            processes where appropriate (as discussed in detail in
            section 3 of this submission)
    Step 2:
         • Where FOS accepts a complaint (FSP has had opportunity
            to consider complaint but it remains unresolved), FOS must
            make use of mediation and conciliation as described in
            section 5.2.
         • If a conciliated outcome is not achieved through initial
            mediation and/or conciliation, the complaint would progress.
         • A case manager would be responsible for ensuring that all
            evidence is gathered by directly requesting this from both
            parties and then issue a preliminary view, in a further
            attempt to conciliate the matter. The preliminary view would
            be in writing, include reasons for the view and include
            details about how the complaint should be resolved.
         • If either party does not accept the preliminary view, they
            may ask FOS to make a binding determination.
         • Where the case manager is of the belief that the complaint
            is of such a nature that a binding determination is
            necessary (it is perhaps complex or costly), then the
            complaint could be progressed to binding determination
            stage without having a draft decision.
    Step 3
         • A binding determination is made by FOS as either a single-
            decision maker or panel (consisting of an independent
            chair,      industry    representative     and     consumer
            representative).
         • Whether a complaint is determined by an ombudsman or a
            panel depends upon the complexity of the complaint and/or
            the significance of the complaint to the consumer. There is
            very strong support among consumer advocates for a

                                                                            54
                         complaint to be determined by the Panel for
                         complex/significant complaints.
            •   That all binding determinations and preliminary (which are
                accepted by the parties) be published on FOS’s website.
            •   That regular satisfaction surveys of users of FOS be conducted,
                particularly in relation to those parties that have accepted
                conciliated outcomes.
            •   That the fraud referee be maintained for general insurance
                complaints that involve allegations of fraud. Consideration should
                also be given to whether this model should be implemented for
                other non-general insurance complaints that involve allegations of
                fraud.
            •   That the ToR require FOS to prepare and issue regular guidelines
                on how it handles various issues. A guideline must be issued giving
                guidance as to how it intends to apply the criteria of fairness in the
                resolution of complaints.
            •   That industry codes and guidelines are not a decision making
                criteria in the ToR.
            •   That the term “appeal” not be used in relation to FOS complaint-
                handling.
            •   That FOS should not have a broad discretion to extend time limits
                set out in the ToR (or related documents), but take action to ensure
                complaints are resolved in a timely manner.



6.     Reporting externally

6.1    Reporting to ASIC

Consumer advocates are generally supportive of the Issues Paper’s proposal that the ToR
should oblige FOS to:
   • use its complaints handling experience to identify possible systemic issues and
       serious misconduct;
   • raise identified matters with FSPs concerned and investigate to determine the extent
       of any problems; and
   • report systemic issues and serious misconduct to ASIC.

It is noted that these obligations generally accord to the requirements of ASIC’s RG 139.

Despite this support, consumer advocates are concerned that the current processes for
reporting systemic issues and serious misconduct are ineffective. In particular, consumer
advocates are concerned that:
   • EDR schemes are not required to identify the particular FSP when reporting to ASIC,
        limiting the ability of the regulator to follow up systemic issue or serious misconduct
        reports;



                                                                                            55
      •   there is no obligation on either the EDR scheme or ASIC to provide for ongoing
          compliance monitoring in relation to a systemic issue or serious misconduct that has
          been identified; and
      •   there is a lack of public understanding about an EDR scheme’s role in systemic issue
          and serious misconduct reporting.

These factors have meant that the current approach to systemic issue and serious
misconduct is not one that is as effective as might be hoped.

Consumer advocates submit that additional requirements or processes could be adopted to
ensure that systemic issue and serious misconduct reporting is effective. These include:
   • a requirement that all systemic issue and serious misconduct reports to ASIC identify
       the FSP involved;
   • a requirement that systemic issue and serious misconduct reports are provided to
       members of ASIC’s Consumer Advisory Panel or the Consumer’s Federation of
       Australia;
   • an obligation being placed on ASIC to conduct further investigations necessary in
       relation to issues raised by such reports, and to report on actions taken.

Further and as described above, consumer advocates believe that consumer organisations
should have standing to make complaints about systemic matters that they identify in their
work. It is submitted that the ToR should require FOS, upon receipt of such a complaint, to
respond through either:
   • issuing guidance, similar to the bulletins currently released by the BFSO, about
       issues raised by the complaint; or
   • referring the matter as a test case under the test case provisions of the ToR

It is noted that, in its review of RG 139, ASIC has proposed to allow it to compel an EDR
schemes to provide information identifying the FSP that is the subject of a systemic issue or
serious misconduct report.38 Consumer advocates support this approach, but see no reason
why all reports to ASIC do not identify the FSPs involved. Consumer advocates agree that
these should be provided to ASIC on a confidential basis. However, if ASIC is unable to
further investigate an FSP that is the subject of a report, consumer advocates question the
value of such reporting at all.

With respect to the requirement that systemic issue reports be provided to members of
ASIC’s Consumer Advisory Panel, this proposal emanates from a similar practice of the
Energy and Water Ombudsman Victoria (EWOV). EWOV is a member of the Victorian
energy industry regulator’s, the Essential Services Commission’s (ESC), Customer
Consultative Committee. At each quarterly meeting of this committee, EWOV presents a
confidential report about its activities, including details of systemic issues raised with the
ESC. By having this report presented to the committee, other committee members are able
to question the ESC as to their action in relation to issues raised. This process can increase
consumer confidence in the systemic issue reporting system, by ensuring the regulator is
accountable to acting on the issues raised by such reports.


38
     ASIC, above n 1, proposal G3.

                                                                                           56
In relation to systemic complaints made by consumer organisations, consumer advocates
see this as an additional process which should ensure that FOS considers and responds to
systemic issues. We are not suggesting that FOS should take over the role of the regulator
in enforcing the law against particular FSPs. However, we see that FOS can play an integral
role, particularly through the issuing of guidance about particular issues, in driving
improvement in industry conduct.

Consumer advocates are also generally supportive of the proposed definitions of systemic
issues and serious misconduct proposed by the Issues Paper, noting that these are based
on the definitions set out in RG 139. That said, consumer advocates submit that the ToR
should make it clear that several complaints about the same conduct is not required to
identify a systemic problem, but that an issue can be identified as systemic from a single
complaint because the effect of the issue will clearly extend beyond the parties to the
complaint.

6.2       Reporting publicly

Consumer advocates are concerned that the Issues Paper does not consider other issues
relating to external reporting, especially those related to public reporting. Public reporting of
scheme activities is essential for the scheme to be transparent and accountable.
Accountability, being a guiding principle for industry EDR schemes, is a priority that has
been identified by consumer advocates in the drafting of this submission.

As outlined above, consumer advocates believe that FOS should publish binding
determinations as well as first level written decisions, where they have been accepted by the
parties.

Consumer advocates also submit that FOS should undertake regular public reporting about
its complaint handling services. In its review of RG 139, ASIC similarly proposes that EDR
schemes should publish an annual report containing statistical information about the number
or complaints received and the number of complaints upheld for each FSP.39

It is submitted that the model currently adopted by EWOV is best practice and that FOS
should adopt a similar model to this for public reporting. EWOV’s model has the following
features:
     • a six-monthly bulletin, which details enquiry and complaint statistics broken down by:
           o industry sector;
           o scheme member;
           o issue raised by complaint; and
           o complainant region;
     • a two-page summary of the bulletin, highlighting key statistics; and
     • an annual report, providing further statistical trends about complaints.




39
     ASIC, as above, proposal G4

                                                                                              57
The six-monthly bulletin is released by the end of the third month following the reporting
period. The bulletin also includes detailed information such as:
    • how enquiries and complaints are finalised;
    • what were the outcomes for consumers;
    • the time period taken to resolve complaints;
    • common issues raised in complaints; and
    • systemic issues referred to the regulator, including actions taken to the address the
       issue.

In our view, the six-monthly bulletin could also include the regular guidance about FOS’s
approach to particular complaints or issues, as described above.

Given FOS’s stated aspiration to be a world leading industry-based EDR scheme, consumer
advocates strongly submit that it must adopt public reporting protocols that are similar to or
better than that provided by EWOV.

        Consumer advocates recommend:
           • That all systemic issue and serious misconduct reports provided to
             ASIC should include details of the relevant FSP.
           • That FOS be required to table systemic issue and serious
             misconduct reports with ASIC’s Consumer Advisory Panel and/or
             the Consumers’ Federation of Australa.
           • That the ToR should require FOS to issue regular guidance about
             its approach to particular complaints and/or issues.
           • That the ToR allow standing for consumer organisations to make a
             systemic complaint. Upon receipt of such a complaint, FOS should
             be required to respond through either:
                  o issuing guidance, similar to the bulletins currently released
                     by the BFSO, about issues raised by the complaint; or
                  o referring the matter as a test case under the test case
                     provisions of the ToR
           • That FOS should have a public reporting regime that accords with
             EDR scheme best practice, identified by this submission to be that
             of EWOV.



7.     Other matters

7.1    Relationship with Industry Code Monitoring and Compliance

One area not considered by the Issues Paper but raised by consumer advocates in
consultations is the relationship between FOS as a provider of dispute resolution services
and the related function of industry code compliance and monitoring. Consumer advocates
submit that the FOS ToR must spell out how FOS is to operate in relation to other bodies
responsible for industry code compliance and monitoring.



                                                                                           58
Consumer advocates note that the joint consumer submission to the review of the Code of
Banking Practice addressed the relationship between FOS and the Code Compliance
Monitoring Committee. We note further that these issues are the subject of ongoing
discussions amongst various stakeholders. Consumer advocates believe that this issue
needs further consideration before a position can be finalised. We ask that FOS, together
with the bodies responsible for the relevant codes of conduct, to jointly consult further with
consumers and industry about the relationship between FOS and code monitoring and
compliance

           Consumer advocates recommend:
              • That the ToR detail the relationship between FOS’s complaint
                handling function and code monitoring and compliance functions of
                related organisations.
              • That FOS, together with the bodies responsible for the relevant
                codes of conduct, to jointly consult further with consumers and
                industry about the relationship between FOS and code monitoring
                and compliance.

7.2       Scheme reviews

Consumer advocates note that the Issues Paper does not make any comment about regular
reviews of the ToR. Consumer advocates strongly support regular independent reviews of
the ToR, which can provide valuable feedback about how the scheme is working and any
areas of its operations and procedures that should be changed or improved.

ASIC, in its consultation paper on its review of RG 139 and 165, propose to require an EDR
scheme to commission an independent review of its operations and procedures three years
after the scheme is initially reviewed by ASIC and thereafter every five years or sooner if
required by ASIC.40 Consumer advocates support this proposal and submit that the FOS
ToR should require an independent review of the ToR as such.




40
     Proposal G2

                                                                                           59

				
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