Banking industry hits out at AFCA’s proposed rules

In their submissions to the consultation of the Australian Financial Complaints Authority (AFCA) on the draft rules, released earlier this month, banking industry stakeholders have cautioned that the rules contain material changes to the jurisdictions of the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal and the Credit and Investments Ombudsman that need to be reassessed.

Commencing on 1 November 2018, AFCA is the amalgamation of these three external dispute resolution (EDR) schemes that will allow for consumers and small businesses to access “free, fast and binding dispute resolution” at a single destination.

The consolidated EDR scheme will deal with individual complaints arising from the financial services sector, including grievances about banks, credit providers, insurance companies and brokers, financial advisers, managed investment schemes and superannuation trustees.

Capping AFCA’s powers

The ABA has communicated concerns around a number of AFCA’s proposed rules in its submission, including rule A.17.4, which would give AFCA the power to request financial services entities to do or refrain from doing acts that it considers necessary to investigate and/or refer systemic issues for remediation.

The banking industry body suggested that AFCA is treading too far from its primary purpose of resolving individual disputes, noting that there is “no equivalent provision” in antecedent EDR schemes.

“Such broad powers go beyond AFCA’s primary purpose to resolve individual disputes, and are more appropriately the domain of regulators such as ASIC, which already provides comprehensive guidance on completing remediations in RG 256,” the ABA wrote in its submission.

The ABA said that it believes the new power is “inappropriate” because AFCA’s judgments as to what constitutes a systemic issue and what is the appropriate action will not be subject to judicial review.

“This contrasts with decisions made by regulators, such as ASIC, who are subject to review pursuant to the Corporations Act and are also closely scrutinised by Parliament,” the banking industry body said.

ANZ Bank expressed the same concerns with rule A.17.4, similarly arguing for its removal. The major bank said in its submission that rule A.17.3 — which states that systemic issues will be referred to the relevant financial firms and monitored on an ongoing basis until a resolution is achieved — should suffice.

Westpac also recommended the removal of the rule, arguing that requiring a “complex organisation like Westpac” to take or refrain from taking an action could have “broad-reaching impacts” on bank operations and have cost implications.

“However, if AFCA does not accept this request, then we consider that there must be exceptions to this rule; for example, where the request could cause the [financial firm] to breach other legal obligations, cause a waiver of legal professional privilege, could harm other customers or where the request would be impossible or unreasonably burdensome for the [financial firm] to comply with,” Westpac wrote in its submission.

It further noted that AFCA enforcing an action or inaction for the purpose of remedying any “loss or disadvantage suffered by consumers or small businesses”, as stipulated in rule A.17.4 (c), could lead to directions being provided that are “impossible for [financial firms] to comply with, or require the [financial firms] to breach other legal obligations in order to comply, or require disproportionate resources to be expended in order to identify all potentially affected consumers or small businesses”.

Sharing sensitive information

The ABA has additionally called for a reassessment of rule A.10.1, which states that AFCA will generally share information provided by a complainant to other parties.

According to the banking industry body, this rule lacks qualifications that are present in FOS’ Terms of Reference, such as complainants or financial firms being able to not consent to certain information being shared.

“The ABA is concerned about the lack of a similar qualifier in the draft rules given the potential for commercially sensitive information being shared among the parties,” the ABA stated in its submission.

ANZ shared the same concern, arguing that the right to request commercially sensitive information to not be shared is an “important” one that it believes should be “preserved to ensure firms can openly share information with AFCA without risking the disclosure of confidential internal material (such as credit risk policies)”.

Westpac suggested in its submission that a qualifier be added to rule A.10.1, similar to one in FOS’ Terms of Reference, that would mean that if consent is not provided for the sharing of sensitive information, AFCA will not use that information to reach a decision “adverse to the party to whom the confidential information is denied unless AFCA determines that it is appropriate to do so”.

The ABA and Westpac also questioned why AFCA requires the ability to share information upon the closure of a dispute, as all relevant information should be shared prior to a decision being made unless special circumstances apply such as health and safety issues.

Accepting AFCA’s final decision

Further, under the FOS’ Terms of Reference, complainants are required to give a binding written commitment to accept the EDR scheme’s decision, which the ABA noted is not the case in AFCA’s proposed rules.

Under rule A.15.3, financial services firms can “request” (not “require”) the complainant to provide a binding release, leaving open the possibility for complainants to pursue further legal action, the peak banking body said.

“This is a significant change that has the potential to impact on a firm’s ability to prevent further legal action in relation to a matter previously dealt with by AFCA,” the ABA wrote in its submission.

“We are particularly concerned about this because AFCA will be dealing with higher value and more complex disputes than FOS.

“We are not aware of the policy basis to support this shift in approach.”

The banking industry body further recommended that a period of time be stipulated in rule A.17.2 (a), which requires AFCA to present the opportunity for financial services firms to conduct internal investigations and respond to accusations.

The ABA suggested that the period of time be at least 30 days, as it aligns with the period recommended in the ASIC Enforcement Review Taskforce report for firms to report significant breaches.

Consumer advocates such as the Consumer Action Law Centre (CALC) have also suggested tweaks to the rules, but they are generally more supportive AFCA’s proposed framework than banking industry stakeholders.

For example, among its recommendations are the inclusion of a detailed definition of “enforcement action”, an amendment to rule A.9.1 that would allow documents to not be withheld on confidentiality grounds if confidential aspects can be redacted, and a removal of a cap to the amount AFCA can recover from a financial firm, which is currently proposed at a maximum of $5,000.

AFCA is currently in the process of reviewing submissions before finalising the rules, which is slated for release in September.

In its initial stage, financial services businesses and superannuation funds will be levied to pay for AFCA, similar to the APRA levy. However, AFCA is currently consulting future funding arrangements. 

The new EDR scheme will commence in November with around 550 staff.

[Related: AFCA appoints new chief ombudsman and CEO]