House of Representatives

Treasury Laws Amendment (Putting Consumers First-Establishment of the Australian Financial Complaints Authority) Bill 2017

Revised Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and the Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)
This memorandum takes account of amendments made by the Senate to the bill as introduced.

Chapter 5 Regulation impact statement

5.1 On 9 May 2017, the Government announced its response to the Ramsay Review, which was the first comprehensive review of the financial system's EDR framework. The Ramsay Review was commissioned by the Government in April 2016 and led by an independent, expert panel comprising Professor Ian Ramsay, Ms Julie Abramson and Mr Alan Kirkland.

5.2 Treasury has certified that the Ramsay Review and subsequent consultation as a process and analysis equivalent to a Regulation Impact Statement.

Policy objective

5.3 The Government's reforms to the EDR framework are intended to address problems with the dispute resolution arrangements in the financial system, primarily EDR. EDR is used when a consumer or small business has a complaint with a financial service provider and wishes to use an impartial out-of-court process to settle the dispute. EDR should provide low cost, fast and flexible access to redress to consumers.

5.4 The current EDR arrangements in the financial system consist of FOS, CIO and the SCT. In 2015-16, FOS, CIO and SCT received 41,223 disputes in total, with FOS receiving 34,095 disputes (83 per cent), CIO receiving 4,760 disputes (12 per cent) and SCT receiving 2,368 disputes (6 per cent).

5.5 The Ramsay Review was the first comprehensive review of the financial system's EDR framework. It found that the current framework is the product of history rather than design and a number of features of the current system mean that it is not producing the best possible outcomes.

5.6 Firstly, the Ramsay Review found the existence of multiple EDR schemes with overlapping jurisdictions means: it is difficult to achieve comparable outcomes for consumers with similar complaints; it is difficult for consumers to progress disputes involving firms that are members of different schemes; and there is an increased risk of consumer confusion. The Ramsay Review also found that multiple EDR bodies resulted in duplicative costs for industry and for the regulator.

5.7 The Ramsay Review also found that allowing competition between schemes, as currently occurs between FOS and CIO, creates the risk that schemes compete in relation to benefits provided to Financial Firms, rather than on achieving better outcomes for consumers.

5.8 The Ramsay Review found that the monetary limits and compensation caps of the schemes have fallen behind what is required to ensure access to justice for consumers and small business. FOS and CIO's current monetary limit of $500,000 and compensation cap of $309,000 are no longer fit-for-purpose and bear little relationship to the value of some financial products (for example, mortgage balances, home insurance policies and some investments), which results in a gap in EDR coverage.

5.9 The Ramsay Review also identified that small businesses do not have adequate access to EDR because the existing monetary limits of $500,000 for the value of the claim under dispute, and $2 million in relation to credit facilities and the existing compensation cap of $309,000, preclude many small business disputes from being able to be brought to the schemes.

5.10 Finally, the Ramsay Review found that the dispute resolution arrangements for superannuation require improvement. Although SCT has a highly professional staff and Chairperson, the Ramsay Review found it was unable to resolve disputes quickly, in contrast to FOS and CIO. For example, in 2015-16, for disputes that reached determination, it took an average of 796 days for the dispute to be resolved.

5.11 The Ramsay Review found that the problems facing SCT could be attributed to a lack of flexibility in its funding - there is no link between SCT funding and the level of complaints it receives - as well as outdated governance arrangements and limited flexibility to determine its dispute resolution processes. Additionally, there was a lack of focus on achieving system-wide improvements and the existing accountability mechanisms were passive and indirect. The Ramsay Review considered that these issues could not be addressed through retaining and reforming the SCT and a shift to an ombudsman scheme was required.

5.12 The Ramsay Review found that these problems of the existing framework are significant and cannot be seen as self-correcting. Market forces will not resolve the above problems, necessitating Government action.

Implementation options

Alternative Option: Maintain the status quo

5.13 This option would essentially maintain the current arrangements of multiple EDR bodies.

5.14 The Ramsay Review found that the pressures on SCT would increase as the superannuation system matures and an increasing proportion of the population moves from the accumulation to the drawdown (retirement) phase.

5.15 In addition, the Ramsay Review found that this option would not address problems arising under a multi-scheme framework with overlapping jurisdictions (consumer confusion, inconsistent outcomes for comparable disputes and duplicative costs). Therefore, this was not one of the recommendations of the Ramsay Review and was not one pursued by Government.

Alternative Option: Reform SCT only

5.16 Under this option, there would be some targeted reforms to the SCT to increase the way the SCT is funded (for example, volume based funding) and improved governance arrangements.

5.17 However, the Ramsay Review found that there was inherent inflexibility in retaining a tribunal structure, which could only be addressed through migrating superannuation disputes from a tribunal to an ombudsman structure.

5.18 In addition, reforming only the SCT would also not address the problems with other aspects of the EDR framework.

Recommended Option: Establish the AFCA as an industry based scheme based on Ramsay Review recommendations

5.19 This option would switch to a single EDR body to replace the FOS, CIO and SCT with a one stop shop dispute resolution body based on an industry ombudsman model.

5.20 The shift to a single EDR body will address a number of problems with the existing framework. It will improve outcomes for consumers by:

increasing consistency in processes and outcomes for similar complaints;
making it easier to pursue disputes involving multiple Financial Firms; and
decreasing consumer confusion.

5.21 A single EDR body will also eliminate duplicative costs for industry, the regulator and other stakeholders.

5.22 The Ramsay Review found that an ombudsman model carried advantages over the existing framework. For superannuation disputes in particular, a single EDR body based on an ombudsman model carries large benefits as it will provide flexibility and increase responsiveness to improve the timeliness of superannuation disputes. Ombudsman schemes provide complainants with an alternative to the judicial system. The traditional court system, which relies on lawyers, the rules of evidence and specific processes and procedures can be complex and intimidating for consumers. In this regard, a benefit of ombudsman schemes is that they provide claimants with a relatively simple process, led by the ombudsman, negating the need for formal legal representation. Furthermore, ombudsman services are not restricted to resolving legal issues; rather, they have scope to consider a broader range of factors.

5.23 Where there is a general problem in an industry affecting multiple consumers and a number of similar complaints are received about a particular issue, ombudsman schemes have the capacity to instigate and conduct investigations to identify systemic issues.

5.24 Ombudsman schemes are also able to promote access to justice through their ability to adapt and innovate in response to changes in the external environment. This has been particularly relevant in the financial system, which has seen rapid changes in the types of products being sold and the types of consumers purchasing them.

Assessment of impacts

5.25 Consumers and small businesses will be the primary beneficiaries of the new framework. The primary benefits will be increased access to justice and easier access to dispute services.

5.26 Increased limits and decreased confusion caused by multiple schemes will mean that consumers and small businesses will save more time and be able to bring higher value disputes to the schemes. Having a single dispute resolution body will also promote consistency of outcomes, which will provide industry and consumers with greater certainty as to what the outcome of a complaint will be when it is lodged with AFCA.

5.27 For superannuation complaints, the new scheme will reduce the time taken for complaints to be resolved. This will benefit both consumers and industry.

5.28 The Ramsay Review noted that a single dispute resolution scheme would have a greater ability to shift resources from those areas experiencing a reduction in dispute volumes to those areas experiencing higher dispute volumes.

5.29 There will be a number of costs associated with the transition to the new scheme. Impacts on industry include paying membership and dispute resolution fees to AFCA, having to update disclosure documents, and having to account for increased IDR reporting to ASIC. The increased monetary limits will also likely result in more disputes being lodged with AFCA, which will require additional funding from industry.

5.30 Superannuation funds will also need to be members of AFCA, meaning they will need to pay membership and dispute resolution fees and will also incur costs to update disclosure documents.

5.31 Treasury considers that the benefits to consumers, small businesses and industry will outweigh the costs associated with implementing the new framework.

Regulatory burden

5.32 Treasury has estimated the costs for business using the governments Regulation Impact Framework as required by the Office of Best Practice Regulation. The costs are shown below.

Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community organisations Individuals Total change in costs
Total, by sector $43.85 million $ $ $43.85 million


5.33 In the course of the Ramsay Review, the Panel conducted multiple rounds of consultation:

The Ramsay Review published an Issues Paper, which was released for public consultation for a period of four weeks from 9 September 2016 to 7 October 2016. The Panel received 127 submissions to the EDR Review Issues Paper, 33 of which were marked as confidential and 1 anonymous.
The Ramsay Review published an Interim Report, which was released for public consultation for a period of seven weeks from 6 December 2016 to 27 January 2017. The Panel received 56 submissions to the EDR Review Interim Report, four of which were marked as confidential.
The Ramsay Review invited parties to make submissions by 3 March 2017 on Recommendations 11 and 13 of the Australian Small Business and Family Enterprise Ombudsman's report on the Inquiry into small business loans. The Minister for Revenue and Financial Services wrote to the Ramsay Review Panel asking them to take particular account of these recommendations as they prepared their final report. Four submissions were received on these recommendations.
The Panel held many roundtables and meetings with individual stakeholders as part of these consultation processes. The Panel also undertook site visits of each of the bodies: CIO (14 September 2016); FOS (16 September 2016) and SCT (16 September 2016).

5.34 Following the release of the final report and Government response, the Government consulted on exposure draft legislation (draft Bill and regulations) from 17 May to 14 June 2017. As part of this consultation, a range of consultation materials were published including a consultation paper on the new dispute resolution framework, draft explanatory memorandum, fact sheet and consultation note on the Ministerial authorisation process.

5.35 In the course of finalising the regulatory costings, Treasury has undertaken targeted consultation with key stakeholders to inform the parameters and assumptions used.

Conclusion and recommended option

5.36 The recommended option will involve:

establishing a new one-stop-shop dispute resolution body -AFCA which will replace FOS, CIO and SCT and handle all financial complaints, including superannuation complaints;
ensuring AFCA will be overseen by a board comprising an independent Chair and equal numbers of directors with consumer and industry backgrounds;
requiring AFCA to be industry funded;
requiring all Financial Firms (including superannuation funds) to be members of AFCA; and
making ASIC responsible for overseeing AFCA to ensure that it meets the standards set out in the legislation. To fulfil this role, the legislation will provide ASIC with the ability to set regulatory requirements that AFCA must adhere to and also provide ASIC with a general directions power to compel AFCA to comply with standards in the legislation and in regulatory requirements.

Implementation and evaluation

5.37 AFCA will be established as part of the Treasury Laws Amendment (Putting Consumers First-Establishment of the Australian Financial Complaints Authority) Bill 2017. Following passage of the legislation, a not-for-profit company will be authorised as AFCA by the Minister. AFCA will commence operations on 1 July 2018 and will receive all financial disputes, including superannuation disputes.

5.38 ASIC will be responsible for ongoing monitoring of AFCA to ensure that it meets the standards set out in legislation. In addition, AFCA will be subject to periodic independent reviews. AFCA will also be required to establish an independent assessor who will assess the processes by which AFCA makes decisions.

5.39 As an industry body, key elements of AFCA's operations will be set out in its operating rules or 'terms of reference'. The Minister for Revenue and Financial Services established a transition team, chaired by Dr Malcolm Edey, to lead the creation of AFCA. Dr Edey will provide advice to the Minister on the terms of reference, governance and funding arrangements, as well as transitional arrangements and the authorisation process. The transition team will consult extensively with ASIC, the existing EDR bodies, industry and consumer groups, thereby ensuring a smooth transition from the existing framework to AFCA.

5.40 The SCT, as a statutory body, will continue operation for an additional two years to resolve all legacy complaints. The legislation also makes provisions to allow FOS and CIO to continue operations for up to an additional 12 months to resolve legacy complaints.

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