Regulation and oversight of the current consumer protection system
Australian financial services licensees are required by law to meet
particular product and service standards, such as disclosure of terms and
conditions and their own remuneration structures, as well as to ensure, in particular
instances, that they are working in a client's best interests. In instances
where consumers believe that an entity has engaged in misconduct or behaved
unethically, financial services licensees must have their own internal dispute
resolution procedures in place that meet particular regulatory requirements,
and they must be members of an approved external dispute resolution (EDR)
This chapter outlines the key legislation that provides consumer
protections in the banking, insurance and financial sectors. It also discusses
the government bodies responsible for oversight and the features of
government-approved EDR schemes to which consumers can turn should they be
unhappy with the resolution of complaints via the internal dispute resolution
schemes of financial services licensees. The chapter ends with the view of the
committee concerning the EDR system.
It should be noted that the three EDR schemes that existed for most of
the course of this inquiry merged and were replaced by the Australian Financial
Complaints Authority on 1 November 2018.
Australia's consumer protection system for the banking, insurance and
financial sectors is underpinned by legislation intended to regulate the
relevant industries. This legislation sets out:
how entities are required to engage and interact with consumers;
how disputes between consumers and entities should be resolved;
the powers of government-established bodies responsible for
oversight and external dispute resolution.
The primary pieces of Commonwealth legislation setting out consumer
rights and obligations for entities include, among others, the Corporations
Act 2001 (Corporations Act) and the Australian Consumer Law, as set out in
the Competition and Consumer Act 2010.
The Corporations Act requires financial services licensees with retail clients
to have an internal dispute resolution system in place, to hold adequate
professional indemnity insurance and to be a member of at least one EDR scheme
approved by the Australian Securities and Investments Commission (ASIC).
Other legislation that sets out consumer protections in specific
industries or areas of the banking, insurance and financial sector includes:
National Consumer Credit Protection Act 2009, which also
includes the National Credit Code
Superannuation (Resolution of Complaints) Act 1993
Superannuation Industry (Supervision) Act 1993
Insurance Contracts Act 1984
Insurance Act 1973
Life Insurance Act 1995.
Government bodies responsible for oversight
Three government-established bodies are responsible for ensuring that
industry complies with legislation and regulations governing the banking,
insurance and financial services sector. Two of these, ASIC and the Australian
Prudential Regulation Authority (APRA), were established in 1998 in response to
the 1997 Financial System Inquiry, which proposed the creation of a dual regulatory
system with APRA responsible for prudential regulation and ASIC responsible for
regulating corporations, financial market integrity and financial consumer
The third body, the Australian Taxation Office, is responsible for regulating
self-managed super funds.
It should be noted that the Australian Competition and Consumer
Commission (ACCC) is responsible for promoting competition and fair trading and
provision of consumer protection in financial markets as a whole.
Primary responsibility for oversight and regulatory activities in relation to
consumer protections in the corporate, credit and financial services sector
rests with ASIC. Because of the overlap of their activities, ASIC and the ACCC
have a memorandum of understanding in place to share information and consult
where appropriate on 'recent judgements, current law reform, policy issues,
media releases and other matters of mutual interest'.
Australian Prudential Regulation
APRA is the prudential regulator of the Australian financial services
industry – that is, its role is to ensure that financial entities are able to
manage risks and have sufficient capital to meet their obligations.
APRA is responsible for prudential supervision of all authorised deposit-taking
institutions (including banks, building societies and credit unions), private
health insurers, life and general insurance companies, and most of the
superannuation industry, excluding self-managed superannuation funds.
Australian Securities and
Investments Commission (ASIC)
ASIC was established under the Australian Securities and Investments
Commission Act 2001. ASIC described itself as 'Australia's corporate,
markets, financial services and consumer credit regulator'. Its primary purpose
is to monitor and promote 'market integrity and consumer protection in relation
to the Australian financial system'.
ASIC's functions include:
protecting consumers from poor conduct;
sanctioning or removing individuals or firms that breach the law
in ways that harm consumers; and
providing consumers with information that will help them to make
better financial decisions.
ASIC requires the internal dispute resolution procedures of financial
services entities to meet particular standards or requirements that ASIC sets,
such as maximum timeframes to resolve disputes.
Where ASIC discovers breaches of the law and misconduct on the part of
entities, it may negotiate outcomes with industry, such as an enforceable undertaking,
or 'a written undertaking...that an entity or person will operate in a certain
way'. It is also able to take the following measures:
enforcement action, including criminal action;
civil action, such as civil penalty proceedings; and
administrative action, such as banning or disqualifying
individuals from the financial services sector.
ASIC is empowered to take compensatory action, or recover compensation
on behalf of consumers. However, ASIC stated in its submission that 'recovery
of compensation is ordinarily left to private litigation and class actions'.
ASIC can undertake a class action to obtain compensation for a group of
consumers or investors who have suffered loss from the same type of misconduct,
if it determines that it is in the public interest to do so.
ASIC emphasised that its 'regulatory role does not involve preventing
all consumer losses or ensuring full compensation for consumers in all
instances where losses arise'.
In some instances, ASIC may make a determination requiring a firm to pay
compensation for consumer losses, but the firm may be insolvent and unable to
Until 1 November 2018, with the establishment of the Australian
Financial Complaints Authority, ASIC was also responsible for oversight of two
EDR schemes: the Financial Ombudsman Service and the Credit and Investments
Ombudsman. These are outlined later in this chapter. ASIC's oversight of these
schemes did not extend to reviews of individual cases or scheme decisions.
Australian Financial Services
ASIC administers the Australian financial services (AFS) scheme, which
requires all businesses providing financial services to hold an AFS licence,
except authorised representatives of AFS licensees and those with exemptions.
As outlined above, all AFS licensees, as well as credit licensees and
trustee companies, must have in place:
- a dispute resolution system, which includes an IDR
[internal dispute resolution] procedure and membership of an ASIC-approved EDR
- arrangements for compensating retail clients and
consumers for loss or damage due to breaches of the financial services or
credit laws. Unless the licensee is exempt (i.e. because they are prudentially
regulated) they must generally hold adequate professional indemnity insurance
External dispute resolution schemes
The two non-government ASIC-approved EDR schemes, prior to November
2018, were the Financial Ombudsman Service (FOS) and the Credit and Investments
Ombudsman (CIO). A third scheme, the Superannuation Complaints Tribunal (SCT),
was not subject to ASIC oversight.
In the second half of 2018, existing EDR schemes shifted to the Australian
Financial Complaints Authority, which began receiving complaints on 1 November
2018. The evidence received in this inquiry concerned the prior schemes; as
such, the following section begins by describing the functions of FOS, CIO and
the SCT, before outlining the details of the new scheme.
The ability of consumers to make a complaint to a particular scheme
depended on which scheme the particular financial services provider or credit
service provider had joined.
Between them, FOS and CIO dealt with around 40,000 disputes each year.
ASIC's oversight of the two schemes focused on determining whether 'they
operate[d] in accordance with the principles of independence, fairness,
efficiency, effectiveness, and accountability', and did not involve ASIC reviewing
individual cases or scheme decisions.
Financial Ombudsman Service (FOS)
FOS, as of April 2017, handled 87 per cent of complaints lodged with the
three EDR bodies. Its jurisdiction covered 99 per cent of the categories of
FOS was based on an industry Ombudsman model and funded by industry,
with an independent board of consumer representatives and financial services
industry representatives monitoring its performance.
FOS outlined in its submission to the 2016 Review of the Financial System
External Dispute Resolution Framework that industry Ombudsman models aim to
provide 'independent, impartial and fair resolution of disputes arising from
contracts and transactions between consumers and private businesses'. Such a
model, FOS argued, provided consumers with accessible and free alternative
sources of dispute resolution to courts.
FOS only dealt with disputes valued $500,000 or less. Its compensation
cap as of 1 January 2018 was $323,500 for all disputes except general insurance
broking ($174,000), income stream life insurance ($8,700 per month) and
uninsured third party motor vehicle claims ($5,000). There was also a cap on
consequential financial losses of $3,500 per claim and a cap on non-financial
losses of $3,000.
Mr Shane Tregillis, the Chief Ombudsman of FOS, emphasised that in the
first instance, customers dealt directly with internal dispute resolution
systems of the financial entities with which they had a dispute:
It is sometimes forgotten that FOS is not the primary
resolver of customer complaints in the financial sector. This is the role of
the financial services firms dealing directly with their customers. We continue
to subscribe to the view that it is better for both parties if firms can
resolve disputes and problems directly with their customers. Of course, it is
even better to deal with the root causes of customer problems to avoid them
occurring in the first place.
FOS outlined on its website that between 1 January 2010 and 31 December
2016, 35 financial service providers were unwilling or unable to comply with
143 FOS determinations, affecting 203 customers. Consumers received no payments
at all from 105 determinations that FOS made in their favour. Slightly more
than $13 million of unpaid determinations remained outstanding. More than half
(57 per cent) of non-compliant financial service providers were financial planners and advisers, followed by operators of
managed investment schemes (11 per cent) and credit providers (9 per cent).
Mr Tregillis noted in the April 2017 hearing that the inability of firms
to pay compensation to victims of misconduct as determined in FOS decisions
affected the reputation of the entire EDR system:
...we have something like $13 million of unpaid determinations,
largely because the firms involved have gone into administration or insolvency.
It undermines credibility in the system if you are able to access dispute
resolution and get compensation in your favour but you do not get paid.
Financial service providers were unable to pay for a range of reasons.
For example, some were in administration or liquidation, or had insufficient
funds to meet their obligations. FOS stated that 'Our experience is that
professional indemnity insurance isn't an adequate compensation mechanism for
consumers where companies have gone into administration or are insolvent'.
Credit and Investments Ombudsman
CIO operated mainly in the credit sector, as insurers and banks were
generally members of FOS. Like FOS, CIO was funded by industry membership and
fees levied on its members. CIO's members included mortgage brokers, non-bank
lenders, small amount lenders and time share operators, most of which were sole
traders and small businesses.
Similarly to FOS, CIO had a claim limit of $500,000, and its monetary
compensation limits for complaints, as of 1 January 2018, was $323,500.
As of November 2016, CIO had unpaid determinations worth approximately
CIO noted in its submission to the Review into Dispute Resolution and
Complaints Framework that over 80 per cent of its unpaid determinations
resulted from two determinations against a single mortgage broker.
Superannuation Complaints Tribunal
The SCT dealt with complaints against trustees and particular insurers
as outlined in the Superannuation (Resolution of
Complaints) Act 1993. It reviewed decisions and the conduct of
superannuation providers of regulated superannuation funds, annuities and
deferred annuities, and retirement savings accounts.
There was no limit on the monetary value of claims brought to the SCT. 
The SCT was not required to provide ASIC with regular operational and
disputes data, as ASIC was not responsible for oversight of the SCT, although
ASIC noted that it did regularly meet with the SCT.
An issues paper released by the Treasury in September 2016 stated that
because of 'the nature of prudential regulation in the superannuation system,
the SCT does not have any unpaid determinations'.
Australian Financial Complaints
In March 2018, the Treasury Laws Amendment
(Putting Consumers First – Establishment of the Australian Financial Complaints
Authority) Act 2018 was enacted to create the Australian Financial
Complaints Authority (AFCA). The AFCA replaced the SCT, FOS and the CIO and, as
of 1 November 2018, deals with all consumer complaints about products and
services provided by financial entities. AFCA is regulated by ASIC.
AFCA has the following monetary limits on complaints:
a monetary limit of $1 million per complaint except for
complaints concerning superannuation, credit facilities provided to a small
business where this complaint is lodged by a borrower (see below), and
complaints to set aside a guarantee supported by security over the guarantor's
primary place of residence; and
a monetary limit of more $5 million for complaints about a small
business credit facility.
AFCA has the following monetary limits that may be awarded for
complaints other than superannuation complaints, which will be subject to indexation
on 1 January 2021 and every three years after:
Claims on life insurance or general insurance concerning income
stream risk or advice about such a contract: $13,400 per month;
General insurance broking: $250,000;
Uninsured motor vehicle: $15,000;
Credit facility: variable, depending on the type of complainant
and the type of loan;
All other direct financial loss claims, excluding superannuation complaints:
Claims for indirect financial loss: $5,000; and
Claims for non-financial loss: $5,000.
There is no monetary limit on the amount that may be awarded to a
complainant who has made a superannuation complaint.
The evidence provided to this inquiry about consumers' experiences with
external dispute resolution (EDR) schemes concerned the three prior EDR schemes
that existed when the inquiry took evidence: the Financial Ombudsman Service
(FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation
Complaints Tribunal (SCT). Most submissions outlining issues with the current
EDR system were related to FOS determinations.
The committee notes that in response to the recommendations of the 2017
Ramsay review of the external dispute resolution and complaints framework in
the financial system, the government has established the Australian Financial
Complaints Authority, which began receiving complaints on 1 November 2018.
The effectiveness of this new body, combining the work of FOS, CIO and
the SCT, remains to be seen. The committee reserves its opinion, but notes that
multiple previous inquiries, as well as much of the evidence in this inquiry,
outlined significant concerns regarding the prior EDR schemes. It is hoped that
the new scheme has taken steps to prevent similar concerns arising.
It should be remembered that if the financial sector as a whole were
more robust in terms of its consumer protections, and if non-compliance with
regulatory requirements and unethical behaviour were rare exceptions to a
culture of putting the interests of the consumer first, demands for any EDR
body would be reduced. The work of this committee and of the Financial Services
Royal Commission indicates the extent of misconduct and unethical behaviour on
the part of financial service providers over the course of many years, despite
reassurances to the contrary. EDR schemes are often a last resort for consumers
unable to afford legal proceedings, and the evidence provided to this inquiry
suggested that most consumers, when faced with the resources of large financial
entities, do not choose to initiate legal proceedings in any case. EDR schemes
should not work as a 'band-aid' to patch up a leaky broken system, but rather
work effectively with regulation and penalties to ensure that financial
entities are behaving ethically and according to the requirements of the law,
and are incentivised to do so.
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