AFA Submission Independent Review of the Financial Ombudsman Service

Transcription

1 11 October 2013 Mr Phil Khoury Cameronralph Navigator Pty Ltd Dear Mr Khoury, AFA Submission Independent Review of the Financial Ombudsman Service The Association of Financial Advisers Limited ( AFA ) has been serving the financial advising industry for over 65 years. Its aim is to provide members with a robust united voice, continually improve practices and focus firmly on the exciting, dynamic future of the financial advising industry. The AFA also holds the client to be at the centre of the advice relationship and thus support policies that are good for consumers and their wealth outcomes. With over six and a half decades of success behind us, the AFA s ongoing relevance is due to our philosophy of being an association of advisers run by advisers. This means advisers set the agenda, decide which issues to tackle and shape the organisation's strategic plan. Thank you for the opportunity to provide feedback on the Financial Ombudsman Service (FOS). The AFA strongly supports the availability of External Dispute Resolutions (EDR) services, which have an important role to play in the financial services marketplace. The AFA also appreciates the positive role that FOS plays in the financial services industry and their efforts to engage with the industry. It is fair to say, however, that an exercise of this nature tends to bring out a reasonable level of negativity towards FOS from the financial advice industry. This review is a good opportunity to highlight some of these concerns and also to clarify the structure of the EDR model and some of the factors behind the current environment. We firstly need to recognise that the FOS Terms of Reference are highly dependent upon ASIC Regulatory Guide 139 Approval and Oversight of External Dispute Resolution Schemes. In fact some of the key concerns that the financial advice industry have are directly related to RG 139: Complaints are free to consumers, and that Financial Service Providers (FSP) pay for complaints, whether they win or lose the case (RG ). The EDR service is expected to provide assistance to complainants to draft their complaints (RG ) That FOS can hear complaints up to $500,000 and make awards of compensation up to a cap of $280,000 per claim (RG ). Separate claims by the same complainant are subject to the separate application of the $280,000 cap (RG ). 1

2 Outcomes of the EDR process are binding on FSPs, but not on the complainants (RG and RG ). The FSP has no avenue of appeal, even when there is a fundamental error. In addition to the $280,000 cap, EDR s can also award interest payments (RG ). Determinations are to be based upon not only the relevant legal principles, but also the concept of fairness and relevant industry best practice (RG ). It is some of these key structural issues along with other key factors, which has resulted in the level of concern within the financial advice industry. Feedback from stakeholders suggest that the following two issues are the most important factors: There is a reduced level of confidence in the system. FSPs feel that there is inadequate predictability in the EDR process, which serves to undermine the overall confidence. We have received feedback from some of our members that there is enough doubt about the process that they will sometimes settle cases that they would firmly expect that they should win. We will address this issue in further detail below. The recent 1 January 2012 increase in the compensation caps to $280,000, when considered in the context of the FOS rule on evidence (Clause 8.1 FOS is not bound by any legal rule of evidence), has taken FOS cases into a space where the industry now questions the level of equity and procedural fairness. To some extent the design of the system around a quick and efficient claims process, is no longer appropriate, when claims can now represent such significant financial exposures. In looking at alternative examples of compensation powers, we note that magistrates in Australia are typically limited to a capacity to award payments of a maximum of $100,000. The compensation arrangements for Australian consumers of financial services has been subject to a lot of review over recent years, including the report by Richard St. John of April That review, which was focussed upon consideration of a Statutory Compensation scheme, highlighted some of the issues in the Australian EDR system, including those raised above and the consequential problems being experienced with the Professional Indemnity Insurance (PII) market. It is the close linkage between the compensation arrangements and the cost of PII premiums that makes this collectively such an important issue for the financial advice industry. In our submission, we do not address all the points in the Terms of Reference for the FOS review, however we address the items where we can provide feedback. to the FOS Independent Review Terms of Reference Question 1b On this point, there are three key pieces of feedback: The current experience on timeframes for complaints, does not suggest that the efficient and timely objective is being met. Cases staying open for an extended period of time has significant implications for FSPs, including additional costs and complications for PI insurance (including increased premiums). The industry now questions, whether in the context of large scale claims, that a principle of minimum formality and technicality is still appropriate. Where claims are being considered and compensation awards of up to $280,000 (or more if split into multiple claims) are 2

3 Question 1d 1f 2b being made, there is a need for a higher level of formality. FSPs would like to be kept informed throughout the process on the expectations of the case and the likely cost of the case. The increase in the caps, alongside some of the other issues, has been a major factor driving concern in the financial advice industry. Whilst some of the rules are appropriate in the context of a small claims tribunal, they are no longer appropriate for much larger complaints. There needs to be a process of triage, which recognises the differential levels of complexity and financial exposure that each case presents. This can help streamline simpler cases and enable more experienced/skilled resources to be allocated to the complex cases. We are conscious of the increased volume of complaints that FOS has experienced since 2008, and we are aware that in the financial services industry and the financial advice profession in particular, that some of this is directly related to the Global Financial Crisis. This complicates matters from a resourcing perspective as the resourcing requirement may be shorter term, which will make it more difficult to increase resourcing levels. We are aware of expectations that a case going to panel can take up to 2 years. This is obviously not consistent with the principles for FOS. As stated above, these delays have significant negative implications for FSPs. As discussed above, there is an elevated level of concern about the consistency of decisions. Our feedback on this issue is based upon feedback from a number of our partner organisations, and thus is based upon a number of individual experiences. Some of the key factors are as follows: The outcome depends upon the quality of the case managers. Some are great, but others are not at the same level. This plays out in terms of their understanding of the industry and their attitudes towards the financial advice industry. There is a perception that some are strongly focused on driving the best outcome for the consumer. The quality of training and the level of cross fertilisation of knowledge is important. We have been advised of complaints where the case manager intended to assess the case under the obligations of the new Future of Financial Advice legislation. Whilst this suggests that FOS is confronting this in a proactive manner, the FoFA obligations only apply to advice provided after 1 July FOS staff need to follow their processes in all case, including the opportunity for the issue to be resolved between the FSP and the clients before it is dealt with by FOS. There appears to be a need for greater controls around jurisdictional certainty. We hear of cases which should never have been heard by FOS, but then proceeding to a decision against the FSP. Some examples that we have been advised of include: A case where the financial adviser was undertaking activity of a non-financial product nature, which was not authorised by the FSP 3

4 Question and completely unrelated to the FSP s activity. A case where the financial adviser was not yet authorised by the FSP when the event occurred. There are concerns in the industry about the extent to which the claims of complainants are actually tested. It is noted that FOS cases are considered on the basis of the papers, however there is concern that where the scale of the claim is high, that there should be some ability to test the claims. We have received feedback that the statements of complainants are often accepted without question. A client may deny that they have received an advice document or a specific warning, which when tested, might not prove to be correct. We have received feedback that some frivolous and vexatious claims are being allowed into the FOS process when there are adequate grounds to reject them at the initial stage. Another important issue about the decision making process is the ability for other parties to be joined to a case. It seems that much of what went wrong in the GFC has been attributed to financial advisers, when often there are a number of parties involved. A case of product failure, has a product provider involved, along with a research company and others. It now seems that certain legal firms are taking an increased interest in the financial services industry, with a strong focus upon actions against financial advisers. The ability to join other parties to an action at FOS is an important consideration. 4 The AFA has an effective working relationship with FOS, and we have been appreciative of the responsiveness of FOS and the willingness of FOS to present at AFA events and conferences. 7 The industry is enthusiastic about improved reporting from FOS at both an aggregate and an individual FSP level. FSP s are seeking greater flexibility and increased user friendliness in the reporting provided to them. Other Feedback In addition to the points raised above, we would also like to address the following: Issue Expectations of reviewing clients on the change of licensee. Financial advisers typically are authorised by a financial services licensee and can move from one licensee to another. When they move from one licensee to a new licensee, there is some expectation that client files will be reviewed within a certain period of time. In our view, it is unreasonable to expect that all clients would be reviewed prior to a point six to twelve months after the change of licensee. We are hearing expectations that some FOS case managers expect reviews to be undertaken as quickly as within a month of the change of licensee. Clarity on this, including clear communication is required. 4

5 Complaints when a licensee is no longer operating Conciliation Stage Timeframes for Responding to FOS On an issue that is related to the point above, cases do arise where a complaint is raised with respect to an adviser or an advice business, where the licensee at the time the advice was provided is no longer in business. Questions have been raised about the treatment of these complaints and examples have been raised where the claim is being attributed to a new licensee. In some cases this is being argued on the basis that the client should have been reviewed since the move to the new licensee. Where they have not been reviewed, some of the blame for the loss is attributed to the new licensee. Guidance is required on this issue. We have received feedback from some of our stakeholders that it appears that FOS is always seeking to get the FSP to agree to make a payment. In reality it is possible that this relates to the conciliation stage and that it might be a lack of understanding as to the purpose of this stage. Nonetheless this points to a communication and clarity issue. We have been advised that the timeframe for expecting FSPs to provide information to FOS can be unrealistic. This is particularly the case for requirements that involve complex loss calculations, where the involvement of experts is required. The discomfort with this is often compounded if FOS then takes a number of months to respond to the additional information that has been provided by the FSP. Conclusion We thank you for the opportunity to provide feedback on the operation of the Financial Ombudsman Service. The role played by FOS in the financial services industry is critical. Now is a good time to think about some of the factors that are impacting upon the ability of FOS to achieve their objectives. We value the role of FOS and are appreciative of our relationship with them. The effective operation of an External Dispute Resolution Service, that strikes an appropriate balance between a fair process, the right outcomes for clients and affordable PI Insurance, is critically important for the financial advice profession. We look forward to the feedback from this review and the opportunity to continue working with FOS in a constructive manner. Should you have any questions, please do not hesitate to contact me on Yours sincerely, Philip Anderson Chief Operating Officer 5