The Labor and Greens Political Party References inquiry into 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,
(the Inquiry) has attempted to duplicate the work the Hayne Royal Commission
into Misconduct in the Banking, Superannuation and Financial Services Industry
(the Royal Commission) but has done so without meaningful effect and without
the resources and expertise available to the Royal Commission.
As with many politically-motivated Senate references inquiries, this one
raised questions regarding the intent behind the reference, bearing in mind
that reforms to the system have not had the chance to become operationally
effective. Government Senators note that the Royal Commission was conducted by
one of Australia's most eminent jurists, the Honourable Kenneth Madison Hayne
AC QC, from 14 December 2017 and 1 February 2019. Seven (7) rounds of public
hearings were held, each round consisting of approximately two weeks of
hearings. 10,323 written submissions were received. The Royal Commission handed
down its 530-page final report on 1 February 2019 and since then the Government
has accepted—and has begun the process of applying—all 76 recommendations made
in the final report. This References Committee Inquiry, by contrast, was
conducted from 14 February 2019 to 8 April 2019, with only one public
hearing and after receiving only 127 written submissions.
Government members of the committee endorse a collaborative approach to
the resolution of disputes with, and the dispensation of grievances against,
the financial services sector. Working towards outcomes that offer suitable
protections to consumers and lenders alike, and that promote economic activity,
growth and innovation should be the objective of all interested parties.
Government members of the committee make further remarks on the
recommendations of the Majority Committee Report.
Recommendation 1 calls on the Australian Government to 'establish
an industry levy, to apply to the largest financial institutions on the ASX,
that would raise funds for the legal assistance and financial counselling
sectors to enable these sectors to provide assistance to consumers and small
businesses that have disputes with financial service providers.'
Paragraph 2.3(a) of the Australian Financial Complaints Authority (AFCA)
constitution relevantly provides that:
The Company's (AFCA's) income is to be derived from
contributions made by Members in an amount and manner as determined by the
The 'Members' section of the AFCA website provides that:
All Australian financial services licensees, Australian
credit licensees, authorised credit representatives and superannuation trustees
are required to be a member of the Australian Financial Complaints Authority
(AFCA) under their financial services licence conditions, in accordance with
ASIC Regulatory Guide RG 165.
Our members include banks, insurers, credit providers,
financial advisers, debt collection agencies, superannuation trustees and many
more. We have over 35,000 members across the country, most will never have a
complaint lodged against them. For those that do, we offer fair, independent
and effective solutions for financial disputes facilitated by professional and
experienced staff. 
The 'What we do' page of the AFCA website provides that:
Our role is to assist consumers and small businesses to reach
agreements with financial firms about how
to resolve their complaints. We are impartial and independent. We do not act
for either party to advocate their position. If a complaint does not resolve
between the parties, we will decide an appropriate outcome.
Coalition members of the committee are satisfied that the financial
sector (that is, 'all Australian financial services licensees, Australian
credit licensees, authorised credit representatives and superannuation
trustees'—as above) contributes substantially to the cost of dispute resolution
through membership of AFCA. The scope of any further contributions that may be
contemplated, and the services to which such contributions should be devoted,
would require careful and consultative consideration.
Coalition members of the committee also note that Recommendation 1 is
vague, particularly regarding the architecture of the proposed levy scheme. The
recommendation is silent regarding the intended recipients of the funding that
would be raised by the levy, the proposed criteria for assessing and making
funding grants, and the proposed mechanism for distribution.
Recommendation 2 recommends that 'the Australian Government
improve access to legal assistance services for small businesses.'
It should be noted that in the 2019-20 budget the Government delivered a
baseline funding boost and guaranteed long-term financial commitments for
frontline legal services. This included the announcement of the development of
a single National Mechanism to deliver legal assistance funding.
Government members of the committee are conscious of the challenges
faced by small businesses in court proceedings involving large financial
institutions and agree with the sentiment of Recommendation 2. The
recommendation is, however, as vague as Recommendation 1 in that it calls for a
course of action without providing context, costing, meaning or any
Recommendation 3 recommends that the Australian Government 'require
Australian Credit Licence holders to comply with model litigant obligations
throughout the internal and external dispute resolution processes, as well as any
proceedings in the courts.'
Government members of the committee agree with the sentiment of the
recommendation, however, the Model Litigant Rules, or Model Litigant
Obligations, are guidelines for how a government body ought behave before,
during, and after litigation with another government body, a private company,
or an individual. Application of the Model Litigant Rules or Model Litigant
Obligation to non-government legal entities would require a re-assessment and
adjustment of settled areas of the justice system, which re-assessment and
adjustment was not canvassed in the conduct of the Inquiry or in the Inquiry
Recommendation 4 calls on the Australian Government to 'immediately
implement recommendation 4.11 of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry.'
Recommendation 4.11 of the Royal Commission reads:
Section 912A of the Corporations Act should be amended to
require that AFSL holders take reasonable steps to co-operate with AFCA in its
resolution of particular disputes, including, in particular, by making
available to AFCA all relevant documents and records relating to issues in dispute.
It is noted that the Government introduced and passed the Treasury
Laws Amendment (AFCA Cooperation) Regulations 2019 that implement
recommendation 4.11 of the Royal Commission. As such this recommendation is
Indeed, in the Budget Speech on April 2, 2019 the Treasurer remarked:
We also provide additional resources to our financial
regulators following the Banking Royal Commission. This will strengthen the
financial system and deliver better outcomes for all Australians.
Recommendation 5 recommends that the Australian Government 'amend
the Bankruptcy Act 1966 to prevent causes of action relating to consumer credit
protections from vesting in the trustee of bankruptcy.'
Government members of the committee found the evidence presented to the
Inquiry by Maurice Blackburn to be persuasive and would suggest that this issue
be referred to the Attorney-General’s Department for further inquiry and
consideration, and that an advice be provided to Government on the implications
of this evident ambiguity. The ambiguity in question relates to a bankrupt who
pursues a cause of action against an 'irresponsible lender' for contributing to
or precipitating the bankruptcy. According to s116(2)(g) of the Bankruptcy
Act 1966 'any right of the bankrupt to recover damages or compensation for
personal injury or wrong done to the bankrupt is excluded from the property
that is divisible among creditors. If the entity from which a remedy in damages
is sought is, however, a creditor of the bankrupt, then this entity will have
an interest in the cause of action against itself. The 'irresponsible lender',
as both a defendant and a creditor in this scenario, could exert influence upon
the trustee in bankruptcy as to whether such a cause of action should be
pursued at all. As submitted by Maurice Blackburn and noted in the majority
This means that the wrongdoer, for example the irresponsible
lender that caused the bankruptcy, may have an interest in the cause or action
against itself, which it may use to influence the determinations of the trustee
in bankruptcy including whether the cause of action should be pursued or
This legal ambiguity requires resolution.
Recommendation 6 recommends that the Australia Government ‘improve
home repossession processes by requiring that creditors engage with customers
at an earlier stage. This could involve:
- establishing a new mediation section at the Australian Financial
Complaints Authority (AFCA) to conduct farm debt mediations, and a new bank-initiated
mediation stream for consumer and small business loans;
requiring banks to initiate a mediation through this new AFCA
process before bringing repossession proceedings against a family home; and
requiring banks to give preference and due consideration to
reasonable proposals put forward by customers to restructure debts, pay down
parts of debts and/or trade out of temporary financial difficulty when a
customer is in financial difficulty and a loan secured by or guaranteed by a
family home is in default.'
Government members of the Committee agree that engagement between
borrowers and lenders should occur at the earliest possible time where such
engagement has the potential to preclude or delay repossession. As the Law
Council remarked in evidence to the Inquiry:
..the more that can be done at that front end and at that
early point, the less we will see at that very difficult end when somebody is
in the Supreme Court.
This was a feature of the new AFCA regime and Government members suggest
the recommendation is premature.
Recommendation 7 calls on the Australian Government to:
increase the current compensation cap available to consumers
through the Australian Financial Complaints Authority (AFCA) to $2 million,
including for credit, insurance and financial advice disputes; and
remove the sub-limit on compensation available to consumers
through AFCA for indirect financial loss and for non-financial loss.
AFCA has been in place since November 2018 and the Government has
announced that a review will take place at eighteen months from that time. The
call at paragraph 3.28 of the Committee majority's Report for a review to take
place now, rather than at the pre-arranged juncture, is premature and
Government members of the committee support a fulsome review of AFCA's
operations, including compensation caps and sub-limits, at eighteen months from
November 2018 as planned.
It is noted—as it was in evidence to the Inquiry—that AFCA compensation
limits impact directly on the professional indemnity insurance costs of small
businesses who represent an overwhelming percentage of AFCA's 35,000 members.
Recommendation 8 recommends that the Australian Government 'extend
the membership of the Australian Financial Complaints Authority to:
debt management firms;
registered Debt Agreement Administrators;
'buy now pay later' providers;
FinTechs and emerging players;
Small business lenders; and
Professional indemnity insurers of financial providers.'
Government members of the Committee agree in principle that AFCA
membership should be as wide as is useful and practicable but caution that
proper consideration should be given to the financial and administrative
burdens that are placed upon AFCA members before making any formal proposal to
expand membership. Many of the entities captured by the list in Recommendation
8 are likely to be small or even individual operations that may not be able to
absorb the additional costs associated with membership. Government members are
mindful that most operators in the financial services space conduct their
businesses lawfully and fairly and do not take undue advantage of their
customers, suppliers or competitors. It is important to acknowledge the
distinction between oversight and over-regulation.
Financial sector reforms have been implemented by the Government to
encourage fin-techs and start-ups, and to remove barriers to entry for new
businesses. Many jobs in Australia exist in new sectors and new businesses. It
would be unfortunate if attempts to regulate financial services were to have a
cooling effect on other aspects of the economy, costing jobs and economic
activity. It would also be undesirable to reduce competition and see only large
financial services providers able to operate because they are the only ones who
can afford to do so under the applicable regulatory scheme.
Recommendation 9 calls on the Australian Government to 'consider
extending the loan facility limits for small businesses and farmers who wish to
make a claim through the Australian Financial Complaints Authority (AFCA), in
consultation with AFCA and other relevant stakeholders.'
Once again, the AFCA review will take place at the allotted time.
Any change to the risk profile of lenders must be managed with great
caution lest it impacts either the flow of credit, or the cost of credit.
The Government manages changes to the financial sector, and regulation
of the financial sector, very carefully due to the potential for any misstep to
have economy-wide implications. Any proposed changes may have complex impacts
and must be considered with caution and only following extensive consultation.
Recommendation 10 recommends 'the establishment of a
retrospective compensation scheme independent of the Australian Financial
Complaints Authority to allow victims of alleged misconduct by banks who
received a past external dispute resolution determination or court judgement
that was manifestly unjust to apply to the scheme to have the matter reviewed
with the consent of the bank.'
This recommendation is convoluted and ambiguous. It appears to be
calling for a compensation scheme, a review/appeal mechanism, and a
collaborative mediation scheme (between lending institutions and aggrieved borrowers)
all at the same time.
It is of concern that the recommendation calls for a retrospective
scheme without offering any detail as to the extent of this retrospectivity. It
is also concerning that the term 'manifestly unjust' is used without any
suggestion as to what might constitute a 'just' or 'unjust' determination, or
whom may be called upon to make such a judgement.
Government members of the Committee would point to remarks from the
Australian Banking Association which highlight the importance of the Rule of
...where there has been a determination made by a court, we
believe that any process to reopen those cases would need to be considered very
carefully, with particular regard to the community's trust and confidence in
the certainty of court determinations and the process of appeal that's
available to citizens under our justice system.
Senator the Hon Ian Macdonald
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