2.1 This chapter addresses the issues faced by consumers and small
businesses when resolving disputes with financial service providers through the
justice system, in particular the court system and through the Australian
Financial Complaints Authority (AFCA).
This chapter begins by examining the Code of Banking Practice
(Banking Code), and discusses ways in which financial service providers have
allegedly misused the justice system and the call by many submitters for banks
to act as model litigants in an effort to address such practices. This chapter
also discusses the accessibility of the court system, the legal assistance and
financial counselling sectors, and the way in which financial disputes are
resolved through AFCA. The chapter concludes by examining the issue of a
compensation scheme of last resort (CSLR).
The Code of Banking Practice
The Banking Code is integral to the resolution of disputes
between banks and their customers through 'both internal dispute resolution
(IDR) and external dispute resolution (EDR) processes'.
The current, 2013 voluntary code Banking Code is described as 'the
banking industry's customer charter on best banking practice standards'.
Provisions of the code address the resolution of disputes with customers.
The current Banking Code was finalised in 2013 and sets out the purpose
of the code—namely, to set the standards of good banking practice for banking
services 'to follow when dealing with persons who are, or who may become, our
individual and small business customers and their guarantors'.
Breaches of the code are investigated by the Code Compliance Monitoring
The current code applies to:
banking services we provide to you on or after that date;
Guarantees we take from you on or after that date; and
we do on or after that date in respect of some pre-existing banking services
In July 2016, and as part of an industry initiative 'announced in April
2016 to raise banking standards', an independent review of the Banking Code was
conducted by Mr Phil Khoury.
As a result of the review, in December 2017 the Australian Banking
Association (ABA) submitted a new Banking Code to the Australian Securities and
Investments Commission (ASIC) for review.
On 31 July 2018, ASIC approved the new Banking Code and noted the
following about its development:
ASIC’s approval of the Code follows extensive engagement with
the ABA, following a comprehensive independent review and extensive stakeholder
consultation. The ABA made additional significant changes to the Code in order
to satisfy ASIC that it met our criteria for approval.
The new, enforceable Banking Code 'sets out the standards of practice
and service in the Australian banking industry for individual and small
business customers, and their guarantors'.
The new Banking Code also addresses resolution of complaints through internal
and external dispute resolution processes.
The new Banking Code will commence operation on 1 July 2019
and signatory banks will have until this date to implement the code.
As compliance with the code is a condition of membership of the ABA, 'banks
with personal or small business customers in Australia will be required to sign
up to the new [code] if they wish to be members of the ABA'.
The ABA has identified that the new code includes initiatives such as proactive
contact with customers deemed at risk of financial difficulty, improved protections
for guarantors in order 'to ensure they understand their obligations', and '[a]
new independent body who will investigate breaches and apply sanctions as
Despite these claimed improvements, some submitters identified
shortcomings with the new Banking Code. For example, Financial Counselling
Australia (FCA) submitted that, during the review of the current Banking Code,
consumer advocates requested that ASIC Regulatory Guide 209 (RG209)—'which
contains detailed guidance on how the responsible lending provisions'—be
included in the new Banking Code.
FCA noted that the request for the inclusion of RG209 in the code was 'never
recommended or implemented'. 
In its submission, the Consumer Action Law Centre (CALC) noted that the
current code 'imposes very few requirements on signatories in relation to the
sale of debts to debt buyers'.
CALC also noted that the ABA rejected Khoury's recommendation that 'banks be
required to monitor compliance by their debt assignees' with legislation, the code
and the ASIC Debt Collection Guideline.
The new Banking Code will be subject to formal review every three years.
Alleged misuse of the legal system
The committee received evidence that financial service providers will
sometimes seek to use their vastly superior resources to resolve legal disputes
with customers in a way that is neither fair nor proportionate.
For example, the Office of the Australian Small Business and Family
Enterprise Ombudsman (ASBFEO) referred to its 2016 Inquiry into small
business loans, which 'found that banks do not seek to resolve disputes in
a fair or proportional manner'.
ASBFEO explained that its inquiry also found that in disputes over loan
...will aggressively seek to cover their risk moving rapidly to
place a loan into default and engage insolvency practitioners to sell assets to
recover funds. Banks procure these services to enable their own decision-making
with regard to the loan security. Disputes over these services often end up
with no access to justice as the banks say it is nothing to do with them as the
third party is a representative of the business.
Ms Dana Beiglari of Legal Aid NSW informed the committee that, based on
Legal Aid's casework experience, lenders may misuse the legal system when
dealing with elderly guarantors:
[T]here can be a tendency for lenders to act quickly to use
their legal rights, often in court, but to act slowly when entering into
practical hardship arrangements that fit the needs of the individual consumer
in the dispute.
CALC informed the committee that, based on its casework experience, the
debt recovery process—the most common reason it identified for the use of the
legal system to resolve financial disputes—tends to target the most vulnerable
people involved in financial disputes:
People who are struggling with problem debt who do not engage
[with IDR, hardship or EDR processes] are most at risk of having homes
repossessed by banks through the legal system, or having debts sold to external
debt collectors which sometimes use the legal system as part of debt recovery.
CALC expressed concern with a number of other practices undertaken by
financial service providers that involve the use of the legal system, and court
processes in particular, to the detriment of consumers. These practices include
the use of legal action 'to pressure consumers into unaffordable repayment
plans or repaying debts that might not be legally owed'.
Other submitters also discussed what they consider the misuse of the
legal system by financial service providers in resolving disputes. For example,
the Consumer Credit Legal Service WA (Inc) (CCLSWA) raised concerns that some
financial service providers are not acting in accordance with the requirements
of the National Consumer Credit Protection Act 2009 (NCCP Act)
and the National Credit Code (NCC), which provide that consumers are entitled
to certain documents.
Mrs Anita Shannon informed the committee about their experience with the
misuse of the NCC:
[I]t would appear in reality a consumer under a loan
agreement and mortgage with trustee Credit Provider under a non-bank /
securitisation scheme has limited (if any) legal rights with regard to the
relationship with the trustee Credit Provider, even when the loan agreement and
mortgage fell under the previous Consumer Credit Codes (UCCC), now the National
Credit Code (NCC) and is therefore disadvantaged further than a borrower who
went to a Bank.
The trustee Credit Provider contracts with others to
originate loans and mortgages on its behalf and refuses to take any form of
responsibility for those entities misconduct in the origination of the loan despite
the non‑contracting out provisions of the Consumer Credit Codes (now
S.191 of the NCC).
The enforcement of the NCC has recently been strengthened by the Treasury
Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act
2018, which received Royal Assent on 12 March 2019. That Act implemented
certain recommendations of ASIC's Enforcement Review Taskforce,
by amending the Corporations Act 2001 (Corporations Act), the Australian
Securities and Investments Commission Act 2001, the NCCP Act and the Insurance
Contracts Act 1984 in order to introduce a stronger penalty framework for
corporate and financial sector misconduct.
On a related issue of concern, AFCA acknowledged that the failure to
provide documentation relevant to AFCA, or the provision of misleading
information about the existence of such documents, is 'completely unacceptable'.
Dr June Smith, the Lead Ombudsman at AFCA, expressed the organisation's support
for legislative amendments to the Corporations Act that would
address this issue:
[W]e are fully supportive of the [Royal Commission's
proposed] amendment to section 912A in relation to cooperation with AFCA and a
firm having to use reasonable means to provide documentation and to cooperate
with the service—and we would use that not only in relation to documents in the
dispute but also in relation to the provision of documentation associated with
the professional indemnity insurance policy that may be in place, the current
levels of that and whether or not there have been notifications of claims.
Model litigant obligations
The committee received evidence that one way in which to address the
alleged misuse of the legal system by financial service providers is to impose
an obligation on these providers to act as model litigants.
The content and application of model litigant obligations vary between
the Commonwealth, states and territories.
At the Commonwealth level, the model litigant obligation is part of the Legal
Services Directions 2017, issued by the Attorney-General pursuant to
the responsibility vested in this officer for the maintenance of proper
standards by the Commonwealth in litigation.
CALC considered that the obligation to act as a model litigant that applies to
government agencies is integral to the rule of law.
The ABA advised the committee that it 'has not developed an industry
position across all of its member banks on behaving as model litigants'.
The ABA further explained that, in its view, there is:
...merit in each bank considering what that means for their
bank in their approach to litigation and dispute resolution, and making a
determination [about behaving like a model litigant] individually.
However, the committee received evidence that this approach does not
serve the interests of consumers and small businesses. Indeed, CALC took the
committee to a key observation of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry (Royal Commission)—that
there exists an 'asymmetry of power and information between financial
institutions and their customers'—to illustrate this point.
CALC considered this asymmetry of power to be similar to the 'imbalance of
power when someone is in dispute with a government'.
Similarly, Mr Josh Mennen of Maurice Blackburn Lawyers (Maurice
Blackburn) considered the model litigant obligation on government agencies a
'reasonable standard' which 'ought to be applied to financial services
providers dealing with consumers'.
In its submission, Maurice Blackburn argued that a requirement for financial
service providers to act as model litigants would:
...place an onus on them deal with claims or disputes promptly,
pay legitimate claims or compensation without litigation, act consistently in
the handling of claims and litigation, and keeping the need for litigation to a
Although conceding that there may be an 'enforcement issue' with respect
to government agencies complying with the obligations, Mr Mennen considered
that 'the rules themselves look sound'.
In their submission to the inquiry, the Australia and New Zealand
Banking Limited informed the committee that it will publish principles that
...aimed at giving retail and small business customers an
understanding of the steps we will take to ensure that we respond to their
complaint against us in a respectful and fair way. The principles extend to
setting out standards of conduct we will adopt if a matter ultimately involves
Notably, Mr David Locke, the Chief Ombudsman and Chief Executive Officer
of AFCA, stated that AFCA is 'open' to making adjustments to its rules, remit and
processes 'to ensure that we meet community expectations', including by acting
in accordance with model litigant rules.
Mr Locke opined that AFCA and financial firms should both conduct themselves in
accordance with model litigant responsibilities.
Accessibility of the court system
There was general consensus amongst submitters and witnesses to this
inquiry that the court system is seldom the best forum in which consumers and
small business owners can resolve disputes with financial service providers.
For example, CALC submitted:
The court system is rarely the most suitable forum to resolve
financial services disputes fairly, particularly for consumers experiencing
vulnerability and disadvantage. The process is slow, legalistic, complex and
expensive. Courts expose consumers to serious costs risks, and present significant
barriers to accessing justice. The resources required to run a case via the
court process, as opposed to EDR, are significant and the process is daunting
and entirely inaccessible for participants without access to legal advice and
CALC suggested that, in contrast to the court system, 'EDR is better
equipped to support unrepresented consumers as processes are less formal'.
In CALC's experience, most disputes between financial service providers
and consumers are dealt with in the first instance 'via providers' [IDR] or
In the event that a dispute is not resolved to the satisfaction of the
consumer, the consumer may abandon their complaint, or look to an EDR process,
such as AFCA.
In its submission, Legal Aid NSW identified circumstances in which court
action is a necessary and preferable approach to resolving legal disputes.
However, in its experience, 'the court system can be an impractical,
inefficient and costly means of resolving financial disputes'.
Another issue that goes to the accessibility of the court system is the
ability of a bankrupt party to pursue a cause of action against a financial
service provider, an issue discussed in detail by Maurice Blackburn.
Maurice Blackburn identified the 'perverse outcome' that, in situations
involving financial service providers, an irresponsible lender causing
bankruptcy 'may have an interest in the cause or action against itself'.
Maurice Blackburn submitted that it was 'essential to rectify this
Section 116(2)(g) of the Bankruptcy Act (1966)
excludes from property divisible among creditors ‘any right of the bankrupt to
recover damages or compensation for personal injury or wrong done to the
bankrupt’ and any damages or compensation recovered in respect of such injury
or wrong. However that does not appear to assist in the case of irresponsible
lending as the question of what is a ‘wrong’ has been judicially considered,
and cases indicate this will extend to claims arising from the person compared
to claims arising from property interests.
One way to remedy this is to legislate an exception in
section 116(2) Bankruptcy Act (1966) such that actions against
[financial service providers], including those taken under the National
Consumer Credit Protections Act (2009) and National Credit Code, are not
divisible among creditors but remain the property of the consumer. That is,
causes of action against any creditor should be quarantined under bankruptcy
Some witnesses also discussed the issue of home repossession, and possible
changes to this process that could reduce the hardship faced by customers subject
to home repossession.
The committee heard that it was preferable to address the issues
pertaining to home repossession before engaging with the court system, owing to
the difficulties faced by consumers who are engaged in court proceedings.
For example, Ms Rebekah Doran of the Law Council of Australia (Law
Council) informed the committee about the challenges faced by consumers with
respect to proceedings regarding home repossession in New South Wales:
There have been a lot of challenges with that process once
the person is at the stage of a judgement being entered against them and the
home repossession process being underway. That is because of the centralisation
of that through the Supreme Court. Particularly for people in regional and remote
areas, engaging with the court in the Sydney Supreme Court is incredibly
Ms Mary Walker of the Law Council referred the committee to the example
of farm debt repossession, where 'there are a lot of possession matters' that
are brought into the EDR scheme 'very early on':
I think we need to be mindful not only that we need to be
accessing capacity to resolve disputes early but that they may very well need
to be accessed outside of the court stream and dealt with internally through
the ombudsman schemes or otherwise. However, one of the other problems is: if
you have too many barriers to entry for someone who actually needs to be in the
Supreme Court then what you're doing is creating more burden. It's a real
balance about how these things are dealt with.
In Ms Walker's experience of alternative dispute resolution schemes that
are set up to target particular issues are 'often very effective'.
Mr Gerard Brody of CALC also considered that 'lenders should use
repossession only as a very last resort', and prior to pursuing this end, 'should
take all steps—as they are obligated to do under their own codes of practice—to
offer assistance to people in financial difficulty'.
Mr Brody opined that a system need to be created 'where people are
pushed into a fair dispute resolution process to resolve [the dispute] before
it escalates to repossession'.
Mr Brody suggested how and at what point dispute resolution could be offered:
I think that any time any credit provider is using a court
process to recover debt—it doesn't really matter what sort of debt it is—they
should be required to inform the customer of their right to go to the ombudsman
service. But, more than that, I think the court should be creating a process to
facilitate that being transferred to that system. At the moment, of course,
credit providers are required to inform people, but people tend not to read
everything. So I think it needs a more interventionist approach, which would
mean the court could actually assist. That would benefit the courts as well.
They have enough cases as it is. They would probably prefer that matters not
proceed through the courts. They could take an interventionist role to make
sure that before a case goes too far down the court pathway it is stayed and
referred to somewhere like AFCA to be resolved, if it's possible to resolve it,
before it advances to any sort of court process.
The legal assistance and financial counselling sectors
The committee heard from the Law Council that the legal assistance and
financial counselling sectors provide assistance to people engaged in disputes
with financial service providers in a range of circumstances:
Financial counsellors, community legal centres and legal aid
services, and often pro bono services provided by law firms, work incredibly
collaboratively to try to cover the field of legal assistance to the extent
that we can. Often that requires us to match the level of service with the need
of the consumer. For example, it might be that, if the matter is simply that a
person is in temporary hardship and they need a temporary arrangement, a
financial counsellor would be best placed to do that. I guess there's a range
in the level of assistance someone might need. For example, perhaps advice is
sufficient. In the cases that I deal with as a legal aid solicitor, we're
dealing with vulnerable clients who will require ongoing representation much of
the time. To turn to the small business question, there is certainly a distinct
lack of assistance available for small business. There's no question about
that. To some extent advice is able to be provided by financial counsellors,
particularly where they're sole traders. Legal aid does that on occasion. But
ongoing representation is not available.
As noted by Legal Aid NSW, some disputes are best resolved through the
court system, and for that reason, 'readily available legal assistance services
However, the committee heard that many consumers are unable to access this
legal assistance, creating 'real gaps in access to justice'.
CALC advised the committee that this is particularly true for the those
consumers who cannot afford to pay for their own lawyers, but are too wealthy
to qualify for legal assistance—that is, the 'missing middle' of consumers who
have disputes with financial service providers.
The strain on the legal assistance sector was highlighted in evidence to
the committee from Ms Walker of the Law Council. Ms Walker discussed one of the
significant findings of the Law Council's 2018 Justice Project, namely that 'only
a small number—less than three per cent—of means-tested legal aid grants for
legal representation and dispute resolution in 2016-17 were for civil law
The Law Council informed the committee that:
This places a notable burden on the broader legal assistance
sector, particularly on chronically under-resourced community legal centres,
which are left to address the void of legal assistance services for civil law
Many submitters to this inquiry referred to the evidence presented by the
National Association of Community Legal Centres (NACLC) and FCA in their joint submission
to the Royal Commission.
In that submission, NACLC and FCA outlined the levels of demand for legal and
financial counselling services with respect to the resolution of financial
disputes. In respect of the demand for legal services, that the NACLC and FCA
estimated that in 2018:
...at least 6.4% of the population (aged 15 or over), around
1.2 million people, will have experienced a credit or debt legal issue in a 12
month period. (These figures would be higher if they included insurance
matters.) A conservative estimate would suggest at least 20% of the group that
experienced a credit or debt legal issue - 240,000 people a year - would be
financially disadvantaged and therefore need access to free legal information
In respect of the demand for financial counselling services, it was
Community based financial counsellors assist approximately
120,000 clients a year, and the National Debt Helpline receives 170,000 calls a
year, and struggles to keep pace with this demand. Waiting times for financial
counselling are frequently up to four weeks, and many services have full
NACLC and FCA therefore called for 'funding of $157 million per annum to
create a properly funded network of community financial counselling and
community legal services'.
This would equate to '$1 million for the National Debt Helpline, $130 million
for 1,000 financial counsellors, and $26 million for an additional 200
community financial service lawyers located across Australia'.
Many submitters to this inquiry also wrote in support of NACLC and FCA's
call for specific funding for the legal assistance and financial counselling
and some submitters made their own recommendations with respect to funding for
CLCs and financial counsellors. For example, CALC recommended:
...there be a substantial injection into the resourcing of
financial counselling and community legal services to assist with disputes in
the finance sector, and for this to be paid for through an industry levy.
A large number of submitters also recommended increased, secure and
predictable funding to the broader legal assistance sector, as well as to
financial counselling services.
For example, Women's Legal Service Victoria recommended that the Australian
government also 'resource Legal Aid Commissions to broaden availability of
funding for priority clients to pursue small property matters, including joint
The committee heard evidence that there are gaps in the provision of
legal assistance for small business.
For example, Legal Aid NSW informed the committee that Legal Aid
Commissions focus primarily on consumers, rather than farm disputes or small
However, at times Legal Aid has had to address business issues that are tied up
with consumer issues, such as when an older person is a guarantor for a
The current state of play is that we have different scopes of
assistance that we can provide that have different guidelines attached to them.
So you could get advice for free from a Legal Aid service in respect of that
matter, and you might be able to get small scopes of assistance like contacting
the bank to try to advocate an outcome. But, if you were to be represented in
court or if you were to be represented in AFCA, you would need a larger scope
of assistance from Legal Aid.
The Law Council identified that there exists a 'significant gap' in
legal assistance for small business, as they have 'a very different set of
legal problems and a very specific need for legal assistance'.
The Law Council considered that small businesses 'would certainly benefit from
specialised legal services'.
Resolving disputes through AFCA
Generally, submitters and witnesses welcomed the establishment of AFCA,
and cautioned that as the statutory authority had only been in operation for a
short time, its efficiency and effectiveness cannot yet be accurately
However, other submitters also highlighted shortcomings with AFCA, and suggested
some improvements to its operations. This section will address the suggested
improvements most commonly raised by submitters and witnesses.
The accessibility and
appropriateness of AFCA
AFCA addresses the statutory requirement of accessibility
in two ways: first by increasing awareness of its existence; and secondly by
making its service easy to use.
In its submission, AFCA outlined the work it undertakes with respect to
such as working with the following key stakeholders as part of its outreach
...financial counsellors, community legal centres and financial
rights centres,...vulnerable and disadvantaged groups including culturally and
linguistically diverse communities, those experiencing family violence, elder
abuse or socio-economic disadvantage and Aboriginal and Torres Strait Islander
In its submission, AFCA also stated that it ensures there is ease of
access to its service for complainants: its 'processes aim for a minimum of
formality, with regular phone contact with complainants and financial firms and
appropriate flexibility to consider individual circumstances that arise'.
Legal Aid NSW spoke favourably of AFCA, which it considers 'the most
appropriate, fair and efficient way for Australian consumers to resolve their
dispute' in 'the vast majority of cases':
AFCA is a free and independent forum which is accessible.
Disputes are resolved on the papers—that is, via telephone, email or
letter—which is of great benefit to regionally based clients. AFCA can make a
decision based on what's fair in all the circumstances, and the strict rules of
evidence do not apply to this forum. AFCA also reports to the regulator about
systemic issues that are emerging, and it has a consumer liaison group which
can also report systemic issues. AFCA can conduct systemic issues
investigations where appropriate. For these reasons, we consider AFCA to be the
most appropriate and accessible forum for resolving disputes.
Although supporting the establishment of AFCA, CCLSWA suggested that
AFCA is 'operating within limitations not optimum to consumer outcomes' and
advocated for the expansion of AFCA’s role and resources.
In his evidence to the committee, Mr Locke conceded that:
...a lot more needs to be done to make sure that we are a more
accessible service, particularly to communities who have traditionally not used
AFCA, because of language needs, health needs, cultural backgrounds or other
Membership of AFCA
Many submitters to the inquiry advocated for the expansion of AFCA's
membership, the existing membership resulting in the reduction of access to
justice for customers of firms that are not members of AFCA.
Mr Brody expanded on this issue in his evidence to the committee:
...debt management firms, debt agreement administrators and
buy-now pay-later firms are not required to provide their customers access to
dispute resolution through AFCA. Our caseworkers see the harm caused by these
financial service providers and a lack of avenues to resolve disputes when they
CALC recommended that debt management firms, registered Debt Agreement
Administrators, ‘buy now pay later’ providers, FinTechs and emerging players, and
small business lenders should all be required to become members of AFCA.
CCLSWA also submitted that 'small business lenders should be required to
be a member of AFCA before being able to provide credit to small business
a recommendation also made by the FCA.
CCLSWA considered that such a change 'would provide small businesses and
guarantors for small business loans an [alternative] avenue for redress that is
not currently available to consumers'.
In its submission to the committee, ASBFEO proffered that '[a]ll
providers of financial services and third parties engaged by providers should
be required to have an external dispute resolution service', namely, AFCA.
In respect of third party membership of AFCA, Maurice Blackburn referred
specifically to the professional indemnity insurers of financial service
providers, recommending that they, too become members:
[P]rofessional indemnity insurers [for financial service
providers] should be members of AFCA so as to be subject to its determinations.
That would be consistent the common law doctrine of 'direct recourse' and the
statutory regimes which enable a claimant to look beyond the insured wrongdoer
and seek recovery directly from the relevant professional indemnity insurer...
Mr Locke acknowledged the existence of 'clear regulatory gaps' in AFCA's
membership which 'need to be addressed', reasoning that:
...by requiring all of these firms and providers to be members
of AFCA, and also having a proper licensing and regulatory regime in respect of
some of these unlicensed parts of the sector, much greater protections could be
provided to consumers and small businesses.
Further, in response to a question on notice about the recommendation made
by Maurice Blackburn, AFCA noted that professional indemnity insurers are
required by section 912A of the Corporations Act 'to be members of AFCA if they
hold a financial services licence which enables them to offer products and
services to retail clients'.
AFCA noted that for those professional indemnity insurers that do not hold a
licence, this is 'usually because it is limited to wholesale clients'.
AFCA informed the committee that any changes to membership 'would require a
change to the operation of the Corporations Act as well as to the AFCA Rules',
but considered that 'it would be appropriate for this to reviewed'.
Eligibility criteria and
Many submitters suggested that AFCA's eligibility criteria and its
powers to award compensation could be expanded to ensure access to justice for
a greater number of consumers. For example, Legal Aid Queensland observed that
'the current AFCA jurisdictional caps may exclude many farmers'.
Other submitters objected to an increase in these thresholds. For
example, the Customer Owned Banking Association (COBA) expressed concern with expanded
eligibility criteria and compensation thresholds, warning that 'it is important
for any deliberation on changing these to be undertaken with a careful
assessment of the potential impact on stakeholders'.
COBA argued that:
...increasing AFCA’s eligibility criteria and compensation
thresholds may inadvertently lead to higher professional indemnity insurance
premiums (and/or excesses) or higher contingent funding requirements for
financial firms, including COBA member ADIs.
The financial impact associated with such operational cost
increases would add to the regulatory compliance burden that weighs more
heavily on smaller players in the market than major banks due to a high fixed
costs component. This handicaps the capacity of challenger banking institutions
to grow and expand into new markets and hence reduces competitive pressure on
major banks. High regulatory costs ultimately hurt consumers because resources
are diverted away from investment in product innovation, better service and
Any increase in AFCA’s eligibility criteria and compensation
thresholds may also operate to expand AFCA’s remit and inadvertently move away
from the original intent of EDR as a mechanism for those without the financial
means to pursue a claim through the court process.
Table 2.1 sets out AFCA's eligibility criteria and compensation
Table 2.1 Monetary limits—eligibility
criteria and compensation
AFCA, Operational Guidelines to the Rules, p. 189.
Although '[t]he compensation cap has increased by more than threefold in
the last decade',
the majority of submitters who addressed this issue advocated for an increase
in AFCA's compensation caps.
For example, CALC considered that an increase in the compensation caps:
...will incentivise all [financial service providers] to act
appropriately in the first place, and resolve customers complaints in a timely
manner, which should reduce the number of AFCA complaints over time.
In respect of AFCA's existing sub-limits on compensation, which it
submitted are 'too low', CALC referred to the findings of the Royal Commission:
The Banking Royal Commission revealed the stress, anxiety,
and hardship caused by irresponsible loans. Despite these impacts, AFCA can
only award $5000 compensation.
Increasing these limits will incentivise all [financial
service providers] to act appropriately in the first place, and resolve
customers complaints in a timely manner, which should reduce the number of AFCA
complaints over time.
Both CALC and the Financial Rights Legal Centre (FRLC) proposed the
following recommendations in respect of AFCA's compensation scheme:
Table 2.2 Proposed caps
for AFCA compensation
CALC, Submission 29, p. 13; FRLC, Submission 42, p. 2.
In its submission, Legal Aid NSW also supported an increase in compensation
caps, including sub‑limits; a position that was 'informed in particular
by our casework with victims of disasters who are making home insurance claims'.
In response to questions on notice, AFCA conceded that its 'compensation
caps for non-financial loss and indirect loss are probably too low and need to
be reconsidered', and that ' there are inconsistencies across the product lines'.
In terms of changes to the compensation caps, AFCA recommended 'the removal of
the monthly Income Protection limit', but noted that precise caps are 'a matter
for Government to determine'.
As seen in the table above, CALC and the FRLC also recommended increasing
the threshold for eligibility criteria.
Further, FCA recommended enabling AFCA to consider disputes where the
financial service provider has obtained a default judgment in court; removing
the two‑year limitation period on an IDR dispute; and removing AFCA Rule
C.2.2.(d), which excludes complaints that are 'lacking in substance'.
Other submitters also recommended changes to AFCA's eligibility
criteria. For example, Dr Smith of AFCA outlined the practical limitations of
the existing eligibility criteria thresholds:
There have been many conversations around the compensation
caps, for example, in relation to life insurance matters. We can see that the
cap related to monthly income protection insurance, for example, is $13,400 per
month for that stream of products. We have had only two that have been outside
that limit in their time at AFCA...
At the moment we have one complaint we are looking at where
the amount is about $1.25 million. The complainant has income protection cover
and that started on 3 October 2015. The amount of benefit he is entitled to
receive each month would mean that currently his dispute stands at $882,954.
However, that accumulates every month, so, if we extrapolate it out, based on
those amounts his claim will be worth $2.25 million by August 2023, when he
turns 65. So, indeed, the $13,400 cap is quite limiting and even the $1 million
cap does preclude some people who may even be on the average monthly earnings
from raising and then pursuing their claim before AFCA.
The committee also heard about other financial disputes that may exceed
the $500 000 cap:
If we also look at financial advice disputes that we see and
assess, there are many related to self-managed superannuation fund advice, for
example, and investment in property. There are also many who are moving towards
retirement who may have investments that are well over that $500,000. In
remediation programs that we've conducted with financial firms, those caps are
usually waived, and, whilst we haven't seen many matters that have been outside
of our terms of reference in relation to the caps, we do feel that might be
because consumers are self-selecting. They know what the cap is and, therefore,
they don't come to AFCA.
In his evidence to the committee, Mr Locke noted that eligibility
criteria compensation thresholds were put in place before the Royal Commission,
that is, before 'the nature and extent of some of the issues that we've been
exposed to through that inquiry' were understood.
Mr Locke suggested that 'there could be fresh consideration of those levels now'.
A compensation scheme of last resort
As discussed in chapter 1, the review of the financial system external
dispute resolution and complaints framework (Ramsay Review) recommended the
establishment of a CSLR.
The Royal Commission recommended the implementation of these
The three principal recommendations to establish a
compensation scheme of last resort made by the panel appointed by government to
review external dispute and complaints arrangements made in its supplementary
final report should be carried into effect.
The Australian government accepted the recommendation to establish a
CSLR, noting that it would establish a 'forward-looking' scheme within AFCA.
The government explained that it would also:
...require AFCA to consider disputes dating back to 1 January
2008 — the period looked at by the Royal Commission, if the dispute falls
within AFCA’s thresholds as they stand today.
The committee heard that this scheme was too limited. For example,
Maurice Blackburn submitted that '[t]he CSLR should also cover those consumers
who made complaints to one of AFCA’s predecessors', but that were undetermined
due to the insolvency of the financial services provider, such as those
complaints lodged with the former Credit and Investments Ombudsman.
In considering the establishment of a retrospective compensation scheme,
Mr Locke considered that 'there are challenges if you are reopening
matters that perhaps have gone to court or perhaps have been dealt with through
the ombudsman scheme'.
However, Mr Locke noted that, fundamentally, the starting point should be 'what
is fair for consumers...If things were got wrong then I think they should be set
The following chapter sets out the committee's view in respect of
changes that can be made to the justice system to ensure that, in future,
consumers and small businesses engaged in disputes with financial service
providers are able to exercise their legal rights.
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