Introduction and background
On 14 February 2019, the Senate referred the issue of the resolution of
disputes with financial service providers within the justice system to the
Legal and Constitutional Affairs References Committee for inquiry and report by
8 April 2019. The terms of reference for the inquiry are as follows:
The ability of consumers and small businesses to exercise
their legal rights through the justice system, and whether there are fair,
affordable and appropriate resolution processes to resolve disputes with
financial service providers, in particular the big four banks considering:
- whether the way in which banks and other financial service
providers have used the legal system to resolve disputes with consumers and
small businesses has reflected fairness and proportionality, including:
- whether banks and other
financial service providers have used the legal system to pressure customers
into accepting settlements that did not reflect their legal rights,
- whether banks and other
financial service providers have pursued legal claims against customers despite
being aware of misconduct by their own officers or employees that may mitigate
those claims, and
- whether banks generally have
behaved in a way that meets community standards when dealing with consumers
trying to exercise their legal rights;
- the accessibility and appropriateness of the court system
as a forum to resolve these disputes fairly, including:
- the ability of people in
conflict with a large financial institution to attain affordable, quality legal
advice and representation,
- the cost of legal
representation and court fees,
- costs risks of unsuccessful
- the experience of participants
in a court process who appear unrepresented;
- the accessibility and appropriateness of the Australian
Financial Complaints Authority (AFCA) as an alternative forum for resolving
- whether the eligibility
criteria and compensation thresholds for AFCA warrant change,
- whether AFCA has the powers
and resources it needs,
- whether AFCA faces proper
accountability measures, and
- whether enhancement to their
test case procedures, or other expansions to AFCA's role in law reform, is
- the accessibility of community legal centre advice
relating to financial matters; and
- any other related matters.
Conduct of the inquiry
Details of the inquiry were advertised on the committee's website,
including a call for submissions to be received by 1 March 2019. The committee
also wrote directly to a number of individuals and organisations inviting them
to make submissions.
The committee received 153 submissions, including 23 accepted in
confidence. Public submissions are available on the committee's website. A list
of all submissions received is at appendix 1 of this report.
The committee held a public hearing in Sydney on 21 March 2019. A full
list of all witnesses who gave evidence to the committee at this hearing is at
appendix 2 of this report.
Structure of the report
There are three chapters in this report:
This chapter outlines the administrative details of the inquiry,
and provides an overview of previous inquiries relevant to the terms of
reference of the committee's current inquiry;
Chapter 2 addresses the issues raised with the committee during
the inquiry; and
Chapter 3 sets out the committee's view in respect of these
Previous inquiries into financial disputes
There have been a series of recent reviews and inquiries into the
financial system, including by Senate committees.
However, none of these inquiries have focused exclusively on the particular
issue of consumers and small businesses exercising their legal rights when
resolving disputes with financial service providers.
There are two recent independent inquiries that provide significant
context to this Senate inquiry: the review of the financial system external
dispute resolution and complaints framework, chaired by Professor Ian Ramsey (the
Ramsay Review), which completed its work in 2017; and the Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal
Commission), which tabled its final report in the Parliament on 4 February
The review of the financial system
external dispute resolution and complaints framework
The Ramsay Review was the first comprehensive review of the external
dispute resolution framework for the financial system.
The terms of reference of the review were released on 8 August 2016, and
subsequently amended by the government on 2 February 2017 to consider a
compensation scheme of last resort (CSLR), 'and to consider the merits and
issues involved in providing access to redress for past disputes'.
The final report of the review was published in April 2017, and contained
The final report discussed two forms of alternative dispute
resolution—tribunals and ombudsman schemes. It was identified that, when
compared with ombudsman schemes, tribunals can be less accessible, less
flexible and dynamic, can apply a 'black letter law' approach, and can be
focused on specific decisions rather than systemic change.
In contrast, in providing an alternative to the judicial system,
ombudsman schemes were said to offer a number of benefits to complainants, such
as a simple process, an examination of non‑legal issues, a capacity to
investigate systemic issues, and the promotion of access to justice.
The final report discussed the merits of the then three external dispute
resolution (EDR) bodies in the financial system framework—the Financial
Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO), and the
Superannuation Complaints Tribunal (SCT).
In its report, the review panel identified that the current arrangements
for superannuation disputes are in need of fundamental reform through an
industry-based EDR body.
The panel's 'central recommendation' was therefore 'the establishment of a new
single EDR body for all financial disputes (including superannuation disputes)
to replace FOS, CIO and SCT'.
A Supplementary Final Report was published in September 2017, and went
directly to the issue of a CSLR. The Supplementary Final Report made four
recommendations on the establishment of a 'limited and carefully targeted' CSLR
'to cover future unpaid compensation in parts of the financial services sector
where there is evidence of a significant problem of compensation not being
On 14 February 2018, as a result of the recommendations arising from the
Ramsay Review, the Parliament passed legislation to establish the Australian
Financial Complaints Authority (AFCA), a body that would:
...provide a one-stop shop to ensure consumers get a fair deal
in resolving disputes with banks, insurers, super funds and small amount credit
providers, without the expense, inconvenience, and trauma associated with going
AFCA commenced operations on 1 November 2018.
The Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry
The Royal Commission, led by Commissioner Kenneth Hayne, was established
on 14 December 2017 to examine ten subjects of inquiry, set out in
the terms of reference.
The final report of the Royal Commission was tabled in the Parliament on
4 February 2019, and contained 76 recommendations.
One of the terms of reference of the Royal Commission was to examine
whether any further changes to the legal framework 'are necessary to minimise
the likelihood of misconduct by financial services entities in future (taking
into account any law reforms announced by the Commonwealth Government)'.
In its final report, the Royal Commission examined access to
professional legal advice and financial counselling services. The report
identified the 'asymmetry of knowledge and power between consumers and
financial services entities',
and commented on the 'very valuable work' undertaken by the legal assistance
sector and financial counselling services.
It was noted that legal advice and counselling services assisted claimants to
identify that they had a financial dispute and engage with alternative dispute
It was also noted that 'the difference between the result the [consumer]
ultimately achieved and the situation that they initially faced' prior to
receiving legal assistance was often 'very large'.
Commissioner Hayne considered the role of the legal assistance sector
and financial counselling services to be 'complementary' to the recommendations
in the report, designed to hold financial institutions to account.
Commissioner Hayne concluded that law reform and reform to practices of
regulators and entities will not eliminate the need for legal advice or
financial counselling services, 'though they will properly aim to reduce it'.
Commissioner Hayne considered that:
...there will likely always be a clear need for disadvantaged
consumers to be able to access financial and legal assistance in order to be
able to deal with disputes with financial services entities with some chance of
equality of arms.
Although Commissioner Hayne acknowledged that '[t]he legal assistance
sector and financial counselling services frequently struggle to meet demand',
no specific recommendations were made in the final report about funding for
these services. Rather, Commissioner Hayne commented on 'the desirability of
predictable and stable funding for the legal assistance sector and financial
counselling services', and suggested that there should be 'careful
consideration' regarding the delivery of such funding.
The role of AFCA in the resolution of financial
AFCA is 'a free and independent alternative to the courts',
established pursuant to the Treasury Laws Amendment (Putting Consumers
First—Establishment of the Australian Financial Complaints Authority) Act 2018 (the
AFCA Act) to replace the FOS, CIO and SCT.
The operational requirements of AFCA are outlined in the AFCA Act, as
- the complaints mechanism under the scheme is
appropriately accessible to persons dissatisfied with members of the scheme;
- complaints against members of the scheme are resolved
(including by making determinations relating to such complaints) in a way that
is fair, efficient, timely and independent; and
- appropriate expertise is available to deal with
- reasonable steps are taken to ensure compliance by members
of the scheme with those determinations; and
- under the scheme, determinations made by the operator of
the scheme are:
- binding on members of the
- not binding on complainants
under the scheme; and
- for superannuation complaints, there are no limits on:
- the value of claims that may be
made under the scheme; or
- the value of remedies that may
be determined under the scheme.
The AFCA Act also implements 'an enhanced [internal dispute resolution]
framework to deal with all consumer financial disputes about products and
services provided by financial firms, including superannuation disputes'.
AFCA's role, and issues of concern with the way in which AFCA is a means
by which disputes with financial service providers can be resolved, will be
examined in more detail in chapter 2.
The following chapter addresses the issues raised with the committee in
respect of this inquiry.
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