Submission by AFA Pty Ltd on the development of new Terms of Reference for the Financial Ombudsman Service

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1 Submission by AFA Pty Ltd on the development of new Terms of Reference for the Financial Ombudsman Service Preamble AFA Pty Ltd does not operate as an insurer in its own right, but offers its products as an agent of certain underwriters of Lloyd s Australia and as an agent of The Hollard Insurance Company Pty Ltd. AFA has in the past operated as an insurer in its own right. The policies it now offers are similar products as were offered when it operated as an insurer in its own right. AFA ceased operating as an insurer in AFA operates in a relatively narrow segment of the general insurance market. The products sold by AFA are sickness and accident policies, offered to individual, retail customers and to group customers where defined groups of people are provided with cover for sickness and accident or non-medicare medical expenses. Because its operations are conducted in a narrow segment of the general insurance market as set out above, it is not relevant for AFA to make submissions on all aspects of the issues paper. AFA s submissions are in respect of those aspects of the issues paper and the future FOS Terms of Reference as they directly affect AFA s business and its relationships with its customers. The terms and conditions of the policies offered by AFA are set out in Product Disclosure Statements that have been prepared by leading law firms. They have been prepared on the basis of the relevant law firm s understanding and interpretation of the law. Proportionate to its book of business, AFA, historically, has not had and currently does not have, a large number of complaints referred to the IOS/FOS. AFA has a highly developed and sophisticated internal dispute resolution system in place. The number of claims that are referred to the IOS/FOS after consideration by the IDR panel is small in relation to the number of claims that are considered by the IDR panel. All disputes considered by AFA s Internal Disputes Resolution panel are solely in respect of a request for a review by an individual. Whilst group policies are sold to employers and institutions such as universities, all complaints considered by the IDR panel are only in respect of non-payment of claims to individuals. In AFA s opinion, it is very much on point where in the opening paragraphs of the Message from the Financial Ombudsman Service it is stated: The aim of that decision (to merge the three EDR schemes) was to retain the advantages of direct industry and consumer involvement in EDR in the financial sector, while at the same time delivering the benefits that consumers, government and financial services provider stakeholders have been seeking from a larger, more professional scheme. These benefits include higher profile, consistent accessibility and best practice processes and decision-making. AFA s comments that follow are numbered according to the numbering of the List of Questions in Appendix B to the document Developing New Terms of Reference for the Financial Ombudsman Service. Not all questions are responded to. Those

2 - Page 2 that are responded to address the strong views AFA has about issues raised and the future FOS Terms of Reference, with the intention that the quality of services provided by the FOS be maximised. It is hoped that by putting forward its concerns, a better more professional standard of resolution of complaints may indeed be delivered to consumers and members of the new merged scheme. Submission Issue C 8 Should FOS refer disputes to the IDR if the complaint has been raised with any area of the financial services provider and the dispute remains unresolved (rather than requiring the consumer to do this themselves)? No. Not necessary. Cost of the review process, both internal and external is a significant factor for AFA s business operations, as, it is suggested, it would be for most insurers. AFA can foresee that the proposal above would result in additional costs to the financial services provider (and concomitant increase in FOS revenues). It is for this reason that AFA continues to support the Internal Dispute Resolution process as the first line in any dispute resolution process. Many claims, which may otherwise be referred to the FOS at a considerable cost, can and are routinely settled at the IDR level. Settlement is not always because the assessing process was flawed in any way, but often a claim is settled purely as a matter of commercial expediency. The IDR model adopted by AFA obviates the dispute fatigue discussed in Issue C. The AFA Internal Disputes Resolution Panel is comprised of two senior AFA assessors, neither of whom are the claim manager, and an external chairman who is legally qualified and who has had many years experience in the insurance industry. It is AFA s opinion that this is a model which should be adopted as the standard IDR model, for all financial services providers, with the obvious exception that in many cases, assessors would not be the appropriate panel members and the external chairman should have appropriate experience. By adopting this model as the standard, it would never be difficult for the consumer to find their way from the relevant business area to the IDR area (panel). It would simply be a matter of dissemination of information within the business entity so all disputed decisions are immediately referred to the IDR panel. This IDR model would also obviate the difficulties identified with the twotiered approach. There would not be any two tiers of internal dispute resolution. The IDR panel being the only internal resolution process, with appropriate and visible, independence and quality of decision-making. AFA rejects the assertion that the ideal scenario for the consumer that has received a No from the financial services provider, irrespective of from which area, is that they should be able to lodge a dispute with FOS. In every case, AFA is firmly of the opinion that any dispute arising out of services provided by a financial services provider, should be first reviewed by an IDR panel with appropriately constituted members with at least one member having relevant expert training and experience.

3 - Page 3 9 What steps should FOS take when using its discretion to commence investigation of disputes that have been with IDR for longer that the ASIC prescribed time limit. None. The current system under the IOS Terms of Reference is efficient and adequate. AFA accepts and supports that there should be audit processes in place to ensure IDR panels are complying with their obligations under any legislation/code of practice or EDR agreement. Any failure to comply could be dealt with by appropriate coercive measures. AFA s view is that the 45- day period for which a substantial response should be provided is too long. It is AFA s view that 21 days is sufficient time for any financial services provider to provide a substantial response to any complaint recognising that that a substantial response may not be a definitive response. A definitive response may often require the acquisition of addition information, a situation encountered by AFA on occasion. AFA s view is that a system involving an IDR panel and where the FOS does not become involved until there is substantive evidence that the complaint has not been dealt with by an IDR panel within the ASIC designated time limit, efficiently deals with complaints and does not require any changes. Issue D 11 Are there any other circumstances in relation to the provision of a banking, investment or insurance product where the dispute should be considered by FOS even though the consumer is not a customer or client of the financial services provider? It is our position that FOS should not consider a dispute where the consumer is not a customer or client of AFA Pty Ltd. 12 Are there any difficulties that arise from FOS jurisdiction to consider disputes about privacy or confidentially in relation to investments or insurance disputes? AFA does not agree that it is appropriate for the FOS to have any jurisdiction to consider disputes about privacy or confidentiality in relation to investments or insurances disputes. Privacy issues are the exclusive domain of the Privacy Commissioner who has the experience and expertise to make determinations, awards, declarations, orders or directions under the privacy legislation. Extending these powers to the FOS is an unwarranted and unnecessary extension of the FOS authority. The legislation under which the Privacy Commissioner has been given his powers is legislation passed by the Commonwealth Parliament after extensive debate in the Parliament. If the FOS is to have such powers it must only be after full consideration by the Parliament and the Australian public. To extend the powers of the Privacy Commissioner under section 52 of the Privacy Act would be, in AFA s opinion, grossly improper. Further, this will add to the costs to members that are funding FOS whilst only mirroring powers that are already held with the appropriate body (the Privacy Commissioner).

4 - Page 4 In the proposal under Issue D, it is proposed that the Ombudsman may consider disputes between financial services providers and consumers that arise from a contract formed or an obligation arising under Australian law. This proposal brings to the forefront the fundamental concerns AFA has about the extent of and the exercise of jurisdiction. The proposal is that the FOS considers disputes arising from a contract. This, in AFA s view, does not and must not extend to reviewing the terms and conditions of the contract and depending on the Ombudsman s personal view, changing those terms and conditions, to comply with the Ombudsman s personal views. Such a situation is particularly concerning where there is no avenue for appeal from such a decision or proper quality controls for FOS and the decision makers. Issue E 14 Are there any reasons why a single time frame of six years from the date of the cause of action or from where the consumer should have reasonably known of all the facts, should not apply to FOS. There are compelling reasons why a limitation period less than six years should apply to complaints referred to the FOS in life and disability claims. Prejudice to the insurer has often been the basis for refusal of an insurer to accept a claim. In most cases the prejudice has arisen because it is impractical or impossible to investigate and assess a claimant s medical condition when a long period of time has elapsed. Further there is severe impact on insurers and re-insurers reserving and accounting. If a limitation period of six years is applied to life and disability claim disputes, a significant degree of unfairness will be imposed on the insurer. AFA s view is that a maximum limitation period of 12 months should apply to life and disability claims or causes of action. Issue F AFA agrees with the Proposal s under Issue F Issue G 18 Do you support a common monetary limit for lump sum disputes across the FOS jurisdiction? 19 If a common monetary limit is not applied to FOS disputes jurisdiction, what policy basis should be used to establish and maintain differential limits for sectors or products? AFA does not support a common monetary limit for lump sum disputes across the FOS jurisdiction. Cost of dispute resolution is as important to an insurer as it is to a consumer. If it is to be assumed that the FOS fees and charges for investigating and determining a dispute are settled in an amount representing FOS cost recovery for a claim at the higher end of the monetary limit, then smaller insurers would be disadvantaged in have to pay higher fees. It would be more appropriate to have a sliding scale of FOS fees and charges based on the amount in dispute, which in most cases would approximate the complexity of the matter being investigated.

5 - Page 5 Issue H 24 If an Ombudsman model is adopted rather than a Panel model, what arrangements would best give the Ombudsmen access to industry/consumer expertise? 25 If you have experience of both systems do you think that the Ombudsman model or the Panel model would best deliver fair and consistent decision making in the most time and cost efficient manner? AFA is of the view that the Ombudsman model offers greater efficiencies, both in cost and decision making over the Panel model. However the Ombudsman model would require additional checks and balances to ensure procedural fairness and principles of natural justice are scrupulously followed. It is the current absence of an appeal regime that is of greatest concern to AFA. AFA only has experience with the Panel system under the General Insurance model. However, in all of the matters in which AFA has been involved there has never been any advice or information on who has comprised the panel 9apart from the Chair). Further AFA has never been advised that a Case Manager has prepared a draft determination for consideration by the appropriate decision maker. AFA has never been provided with a copy, for comment, of any such draft determinations. This raises the fundamental concern AFA has with the processes that have operated under the General Insurance model being a lack of procedural fairness, accountability and transparency. There have been Determinations issued in which the policy provisions of the AFA policies have been altered to represent an interpretation which is more in keeping with what the Panel thinks is appropriate. This has been done in an environment where there was no discussion, and no redress from the final determination. AFA s experience with the Panel system is that it does not provide any stakeholder confidence in the objectivity of the decision-making. It has been obvious to AFA that on many occasions IOS has been exercising the powers under section 9 of the Contracts Review Act 1980 (NSW). This is a judicial power that the IOS clearly does not have and can never have under the Australian Constitution. It is important to the industry and consumers that the new FOS terms effectively exclude and remedy this type of decision making. AFA supports an Ombudsman model with the following features: a) Senior staff analyse the merits of a complaint and provide both parties with a written assessment setting out the findings of fact and the compensation that should be paid. Compensation should be defined to include whether a claim should be paid and whether further investigation undertaken. Compensation may be the incorrect term to use. More appropriate may be: and the action that should be taken, which would include any payments that should be made. This process would give effect to attempts to settle the complaint by negotiation, conciliation, recommendation or determination (Issue I). b) FOS staff must obtain expert advice from industry advisors, consumer advisors and legal counsel where necessary. In the interests of procedural fairness these advisors must not be employees or contractors to the FOS, but must be truly independent advisors who are seen to provide independent advice.

6 - Page 6 c) If either party wished to do so, this assessment would be reviewed by a single person decision maker an Ombudsman who could issue a determination binding upon the scheme financial services provider. d) This determination must be subject to further appeal if there is an error of law on the face of the determination. Errors of law would be determined according to judicial precedent. e) AFA does not suggest that a determination of an Ombudsman be subjected to judicial review, although it may be appropriate for a retired judicial officer to exercise such review authority. However, the ramifications of a flawed determination can be profound, and if an Ombudsman makes such a flawed determination, it must be subject to review in the same way as any flawed decision of a decision maker. f) AFA s proposal is that, in such circumstances, there be an independent review panel, similar to those constituted by the various Legal Services Boards in the various Australian states, to review and adjudicate on Ombudsman s determinations where errors of law are arguable. Whichever of the parties who seek this level of review should be required to pay the predetermined fee. g) AFA also proposes that greater accountability and quality controls in the decision making standards must be introduced irrespective of whether an appeal process is available. In short, even if a decision is binding on the member there must be transparent monitoring and investigation of the decision making process in disputes where members or consumers have legitimate concerns. Issues of training must be identified. Performance improvement introduced. If best practice is to be encouraged, FOS must be seen as acting transparently with the aim of their own continual improvement. After all, this is in the interests of the consumer as well as the members. In this regard we believe that concerns can be lodged with an external consultant who reports in writing to the Board of FOS, the members and other relevant parties on the concerns raised, objective findings and recommendations. The consultant must be highly experienced in the relevant area of practice (such as Income Protection insurance). It is imperative that concerns are given proper and fair consideration for FOS to claim best practice processes and decision-making. This also reflects remedy for the conflict of interest between - hearing disputes; - charging for the deliberation; - charging a higher amount where the decision is against the member AND -reducing disputes in the industry and giving members certainty (i.e. encouraging better decision making by the members thereby reducing disputes referred to them). h) AFA does not support simply the appointment of the current panel chairs of the Insurance Ombudsman Service Limited. The positions should be advertised nationally and a panel of external consultants with expertise in insurance (such as Income Protection) should interview applicants and make recommendations to the board of FOS.

7 - Page 7 26 Should there be a different dispute resolution process for General Insurance fraud disputes? AFA does not believe there should be a different dispute resolution process for General Insurance fraud disputes. The ramifications to the consumer of proven insurance fraud are considerable. Such findings of fraud should only be made after exhaustive examination of the facts by an appropriately skilled Case Manager and Ombudsman. The Ombudsman model proposed above would provide the structure necessary to investigate and adjudicate on issues of fraud. Issue I AFA generally agrees with the proposals given in Issue I, with the exception that an additional criterion should be added to the Criteria for decision making: v) Where a contract is in existence between the parties, or the subject of the complaint, the terms and conditions of the contract are paramount. Issue J 30 Should FOS have the ability to award compensation for nonfinancial loss? 31 Should FOS have the ability to award compensation for consequential loss? AFA does not agrees that the FOS should have the ability to award compensation for non-financial or consequential loss. AFA is of the view that awards of compensation for non-financial and consequential loss are judicial functions that should not be within the scope of the FOS operations. If it is intended as a matter of public policy for the FOS to have such powers, it is the parliament that should empower the FOS with them. The FOS should not empower itself with judicial type powers. It is AFA s view that in seeking such powers, the FOS is going beyond the purpose for which it was brought into existence. Issue K AFA generally supports the proposals put forward in Issue K. In many respects the proposals are consistent with those put forward in Issue H. As discussed in Issue H however AFA s view is that there should be a final avenue of appeal on errors of law in a determination made by an Ombudsman. Representations or submissions from all parties to a dispute are important in that they give all parties to a complaint the opportunity to present their arguments at all stages of the resolution process. This is consistent with the principles of procedural fairness and natural justice. Everyone has a right, enshrined in law, to be heard. AFA does not agree that the FOS should have the discretion to modify anytime limit. If time limits are set out in the Terms of Reference, then they should be the fixed time limits until such time as the Terms of Reference are changed. Too much discretion in the hands of any administrative body is not public policy.

8 - Page 8 Issue L AFA does not have a firm opinion of the issue of Test Cases. As proposed a test case has more of the attributes of a stated case more widely recognised by the law. AFA does agree that there should be provision in the Terms of Reference for a stated case to a court of competent jurisdiction in addition to the procedural processes discussed in this submission. In other words a provision for a stated case should not be in addition to and not in place of any of the processes proposed by AFA. AFA s view is that all matters that end up being considered by the FOS are really significant matters. Issue M AFA s opinion is that if the FOS forms the view, by any means, that any financial services provider has any systemic issues or is engaged in misconduct it should report those issues and that misconduct to the ASIC. AFA would welcome the opportunity to be further involved in the process of developing the Terms of Reference for the merged FOS.