29 May, 2018
In February 2018, the Australian Parliament passed reforms1 to establish the Australian Financial Complaints Authority (AFCA) as a new one-stop-shop for resolving financial disputes from 1 November 2018. AFCA will replace the Credit and Investments Ombudsman (CIO), Financial Ombudsman Service (FOS) and Superannuation Complaints Tribunal (SCT).
What you need to know
The reforms affect all Australian financial services licensees, Australian credit licensees, regulated superannuation funds, and other financial firms.
Consumers and small businesses with fewer than 100 employees can make complaints to AFCA.
AFCA complaints will have implications for the way in which financial firms handle disputes, legal proceedings and settlements.
Complaints lodged with AFCA may potentially be reported to regulators and become the subject of investigations if AFCA considers that there has been a serious contravention of law or there is a broader systemic issue.
In most cases, AFCA may hear complaints up to a monetary limit of $1 million and a compensation cap of $500,000 (except for superannuation and small business credit disputes).
Background
These reforms implement the Australian Government’s response to the Ramsay Review, an independent comprehensive review of the financial services dispute resolution framework.
Amongst the recommendations made in the Ramsay Review were:
- the creation of a single external dispute resolution scheme for all financial complaints based on an industry ombudsman model;
- improved access to dispute resolution schemes for individual and small business consumers through higher monetary limits and compensation caps; and
- enhanced oversight and monitoring by ASIC and reporting arrangements.
When the AFCA commences and who will need to be a member of the AFCA
AFCA will commence accepting complaints from 1 November 2018. Complaints may be lodged with the CIO, FOS and SCT until AFCA commences. Financial firms required to become members of AFCA by law will need to do so by no later than 21 September 2018.2
Categories of financial firms required to become members of AFCA include all Australian financial services licensees, Australian credit licensees, regulated superannuation funds (except for self-managed superannuation funds), approved deposit funds, retirement savings account providers, annuity providers, life policy funds and insurers.3
The new framework
The way the AFCA scheme operates will be set out in terms of reference, rather than in legislation. This will allow the scheme to be flexible and for changes to be implemented more quickly than if legislative change were required.
AFCA’s terms of reference will set out its jurisdiction, including what complaints it can and cannot deal with. In this regard, ASIC released a Consultation Paper 298 and draft Regulatory Guide 139 in March 2018 for public comment (discussed further below).
AFCA's jurisdiction and impact on legal proceedings
Consumers and small businesses, defined as any business with fewer than 100 staff, can access AFCA.4 This is in contrast with the existing FOS scheme which defines small businesses as business that have fewer than 20 employees, or where the business which includes the manufacture of goods has fewer than 100 employees.
AFCA will have higher monetary limits and compensation caps than the existing schemes. The Australian Government has indicated that AFCA will commence operations with the following monetary limits:5
- a monetary limit of $1 million and a compensation cap of $500,000 for most nonsuperannuation disputes;
- unlimited monetary jurisdiction for superannuation disputes;
- no monetary limits or compensation caps for disputes about whether a guarantee should be set aside where it has been supported by a mortgage or other security over the guarantor’s primary place of residence; and
- a monetary limit of $5 million and a compensation cap of $1 million for small business credit facility disputes.
AFCA will undergo an independent review within 18 months of operation to examine the appropriateness of these monetary limits.
As to what impact an AFCA complaint will have on legal proceedings, ASIC’s draft regulatory guide proposes that AFCA’s terms of reference:
- prohibit financial firms from commencing legal proceedings when a complaint has been lodged with AFCA, unless the legal limitation period is about to expire, or there is a test case situation; and
- allow AFCA to accept a complaint even if a financial firm has already commenced debt recovery proceedings against the complainant, and in such circumstances, the firm will be required not to pursue legal proceedings beyond the minimum necessary to preserve its rights.6
Finality of AFCA decisions?
The new legislation provides that determinations by AFCA of a superannuation complaint are binding.7
For non-superannuation complaints, ASIC’s draft regulatory guide proposes that AFCA’s decisions are not binding unless the consumer accepts the decision at the end of the process and (where a compensation cap applies) waives the excess of their claim.8 Complainants would retain their legal right to reject an AFCA decision and pursue their complaint in court.
Oversight over AFCA
Whilst the AFCA scheme is independent and ASIC has no role in individual complaints handling, ASIC will have powers of oversight over AFCA. These include the power to:
- issue general directions to AFCA and directions to increase the limits on value of claims or remedies that can be made under the AFCA scheme;9
- issue regulatory requirements that AFCA must comply with;10 and
- approve material changes to the AFCA scheme.11 ASIC’s draft regulatory guide indicates that this could include changes to AFCA’s jurisdiction and time limits for accessing the scheme.
AFCA's reporting obligations
The AFCA is required to refer or report certain matters to ASIC, APRA and the Commissioner of Taxation (as appropriate).12
This includes complaints involving a serious contravention of law by financial firms, or systemic issues (such as multiple complaints of a similar nature, for example, where a financial product has been mis-sold).
ASIC’s draft regulatory guide envisages that, where AFCA refers a settled complaint to a regulator for investigation, AFCA should ensure (so far as practicable) that settlements do not preclude a complainant from referring the complaint to a regulator, or preclude a complainant from taking further action in relation to matters that are not the subject of the complaint.
For further information, please contact:
Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com
1. Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018
2. http://kmo.ministers.treasury.gov.au/media-release/044-2018/
3. Explanatory Memorandum, Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Bill 2017, page 7
5. AFCA Fact Sheet issued by the Treasury of the Australian Government (https://treasury.gov.au/consultation/c2017-232832/)
6. ASIC Draft Regulatory Guide 139 published 5 March 2018, at p25 (http://download.asic.gov.au/media/4661720/attachment-to-cp298-published-5- march-2018.pdf)
7. s1055D of the Corporations Act 2001 (Cth)
8. ASIC Draft Regulatory Guide 139 published 5 March 2018, at p35
9. s1052C and 1052B of the Corporations Act
10. s1052A of the Corporations Act
11. s1052D of the Corporations Act
12. s1052E of Corporations Act