Commencing on 1 November 2018, the Australian Financial Complaints Authority (AFCA) will amalgamate three external dispute resolution (EDR) schemes — the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal and the Credit and Investments Ombudsman — in a bid to enable consumers and small businesses to access “free, fast and binding dispute resolution” at a single destination.
However, several members of the finance and mortgage industry have said that the transition will result in some EDR members being “double-charged”, which could cost the industry millions of dollars.
All financial firms joining AFCA will need to pay a membership fee for their 2018–19 membership. This is the case whether they are new licensees or authorised credit representatives or they are current CIO members, superannuation trustees or former FOS members.
While all FOS memberships finish on 30 June, the CIO memberships run from the joining date and it is these members that could potentially face being double-charged.
A letter sent out from the CIO to financial service providers (FSPs) recently highlighted that CIO members must have a membership that is valid up to and inclusive of 31 August.
For FSPs whose membership lapses before this date, they will be obliged to pay a full annual membership on top of their new AFCA membership fee, despite the fact that AFCA will begin operating the CIO EDR scheme on 1 September.
AFCA is currently operating the FOS scheme and is arranging with the CIO to transfer the CIO scheme to AFCA. From 1 September, AFCA will operate the CIO scheme and will handle any open or new CIO disputes received up until 31 October 2018.
The CIO annual membership fee for a credit representative is $145 (inclusive of GST), while the cost for a credit representative under AFCA is $55.
The CIO annual membership for licensees start at $400 (with $110 for every additional representative), while licensees under AFCA will pay a base levy of between $87.50 and $250, depending on the size of their business and application date.
“A slap in the face”
Speaking to Mortgage Business, Jon Denovan, special counsel at law firm Dentons and a former CIO director, warned that some members of the CIO will therefore be charged for two separate EDR schemes despite one becoming defunct later this year.
Mr Denovan said: “This means that they are potentially double-charging people because a person whose renewal date happens to be 30 August 2018 will pay one year’s levy to the CIO and then at exactly the same time pay another year’s levy [to AFCA].
“For some aggregators that have a lot of credit representatives, that is hundreds of thousands of dollars that they will have to find, which they haven’t budgeted for and coming at time when the industry is under stress.”
Collectively, Mr Denovan said that this could result in the mortgage industry paying millions of dollars.
“The CIO have worked hard to get a better deal for the CIO members, but it is a terrible slap in the face for the CIO, which has done a tremendous job for the smaller financial institutions and for brokers.
“It’s a slap in face to not only lose the expertise that the CIO has, but also to be potentially be double-levied.”
In a statement to Mortgage Business, the CEO and Credit and Investments Ombudsman, Raj Venga, commented that the Ombudsman had decided not to charge members on a pro rata basis for the time remaining “to ensure there was equity as between members, with many of them having already renewed their membership earlier”.
Mr Venga said: “Renewals are due on the anniversary of a member joining the CIO. Accordingly, each CIO member has a different membership cycle.
“The payment of a full year’s membership fee was also necessary to allow the CIO to fund its operations until the transition date of 31 August 2018 and to meet its winding-up costs. Being a not-for-profit organisation, the CIO only maintains modest reserves which are not able to be used to offer its members pro rata membership fees.”
However, Mr Venga said that on the transition to AFCA (31 August 2018), the CIO will transfer to AFCA “an amount representing the unexpired membership fees”.
“AFCA will have all the information on fees paid by each member and will be able to take this into account in determining future fees for individual members to ensure equity and minimise over-payment,” Mr Venga said.
The Ombudsman added that the CIO will only retain “a fixed amount to allow it to wind up, whereupon any funds remaining will also be transferred to AFCA in accordance with the CIO’s constitution”.
Likewise, a spokesperson for AFCA told Mortgage Business: “The membership fees already paid (or payable) to the CIO are required by the CIO to help fund the handling of open CIO disputes and CIO disputes received up until 1 November 2018, as well as other runoff costs that will be incurred until the CIO is wound up. There are also one-off establishment and transition costs of AFCA that every member of AFCA is financially contributing towards, whether they were from the CIO, FOS or the superannuation industry.
“FOS members have already contributed towards these costs through the use of existing FOS accumulated reserves. CIO members will contribute through their 2018–19 AFCA membership fees, and the superannuation industry through their AFCA levy.
“The approach to CIO members paying membership fees to the CIO and AFCA is consistent with the superannuation industry, as superannuation entities are paying the APRA levy to fund the runoff of the SCT while also paying the AFCA levy.”
It added: “Should there be surplus funds after the runoff of CIO disputes and the wind-up of the CIO, then a rebate back to previous CIO members will be considered by AFCA at the end of 2018–19 following CIO scheme runoff.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.