Financial Ombudsman Service Terms of Reference response to submissions New South Wales / ACT Queensland NT / SA / Tas / WA Victoria

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1 28 May 2009 Mr Phil Khoury The Navigator Company Pty Ltd c/- Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Phil.khoury@thenavigator.com.au Financial Planning Association of Australia Limited ABN Level 4, 75 Castlereagh Street Sydney NSW 2000 GPO Box 4285 Sydney NSW 2001 Tel: Fax: Member Freecall: Consumer Freecall: Fax: Dear Mr Khoury Financial Ombudsman Service Terms of Reference response to submissions The Financial Planning Association of Australia (FPA) 1 welcomes the opportunity to respond to submissions received by the Financial Ombudsman Service (FOS) on its new Terms of Reference for the merged scheme. In its response to other submissions, the FPA has also taken into account the new Regulatory Guides for dispute resolution RG 139 and RG165 and accompanying Class Orders - recently released by the Australian Securities and Investments Commission. The FPA would welcome the opportunity to discuss these issues further with the FOS. If you would like further information on the issues raised in this submission, please contact Gerard Fitzpatrick, General Manager, Policy and Government Relations ( ; gerard.fitzpatrick@fpa.asn.au) or myself ( ; deen.sanders@fpa.asn.au). Yours faithfully fpa@fpa.asn.au Deen Sanders Deputy CEO General Manager Professionalism 1 The FPA is the peak professional organisation for the financial planning sector in Australia. With approximately 12,000 members organised through a network of 31 Chapters across Australia, the FPA represents qualified financial planners who manage the financial affairs of over five million Australians with a collective investment value of more than $630 billion. New South Wales / ACT GPO Box 4285 Sydney NSW 2001 Ph: Fax: nsw@fpa.asn.au Queensland 433 Logan Rd Stones Corner Qld 4120 Ph: Fax: qld@fpa.asn.au NT / SA / Tas / WA Suite 20, Carrington House Carrington St Adelaide SA 5000 Ph: Fax: sa@fpa.asn.au Victoria PO Box 109, Collins St West Melbourne Vic 8007 Ph: Fax: vic@fpa.asn.au

2 Terms of Reference response to submissions Submitted to the Financial Ombudsman Service 28 May 2009

3 1. Introduction The Financial Planning Association of Australia (FPA) is the peak professional organisation for the financial planning sector in Australia. With approximately 12,000 members organised through a network of 31 Chapters across Australia, the FPA represents qualified financial planners who manage the financial affairs of over five million Australians with a collective investment value of more than $630 billion. While the FPA reviewed a large number of submission, our comments respond to the recommendations made in the following submissions: Consumer Action Law Centre Joint consumer submission Insurance Council of Australia Melbourne Compliance Managers Forum 2. Consumer Action Law Centre Joint consumer submission Understandably, concerns raised and examples provided in the submission from the consumer advocates all relate to either credit or general insurance, with no concerns raised about advice. However, the consumer advocates recommend changes to the draft Terms of Reference applicable to all FOS members, with no consideration given to the practicality and implications of their changes on areas outside their stated areas of concern. This position goes to the heart of our concerns about the need for differentiated application of rules for difference sectors covered by FOS. A position also supported by ASIC. ASIC states in its new Regulatory Guide (RG ): The application of these guidelines will nevertheless recognise legitimate differences between industries or between schemes. We believe that a consistent approach to regulation does not necessarily imply identical standards in all cases. The following consumer advocate recommendations cannot practically apply to advice and pose significant and unwarranted implications for planners. 2.1 Disputes to be lodged by phone Consumer advocates have called for FOS to accept complaints to be lodged by phone, citing the Energy and Water Ombudsman statistics for justification. While lodging a complaint by phone for an electricity outage, or disputes relating to bank transactions or insurance policies, may be a simple process, it is not practical to accept advice disputes by using the same medium. Advice disputes are often complex and subjective and open to interpretation by parties to the dispute and the FOS call centre operator. Advice disputes also require significant documented evidence to consider, even to determine whether the dispute falls within the jurisdiction of the Service. The FPA recommends FOS does not permit disputes to be lodged by phone. Should FOS accept the consumer advocates proposal, the FPA recommends advice disputes be excluded from the provision. 2.2 Forum of first choice Consumer advocates have called for the inclusion of a new provision - "FOS aspires to be forum of first choice for the majority of consumer complaints relating to financial services". If a forum of first choice principle were adopted, the FOS jurisdiction would need to be open to any and all claims from any and all consumers, including claims that would be better dealt with under an alternative jurisdiction. FOS does not have a role and it should not seek to limit the legal remedies available to Service participants. An EDR scheme cannot and should not stop access by either party to legal remedies in the marketplace. 1/7

4 The new dispute resolution regulatory guide states: An approved EDR scheme does not have to deal with all complaints that a retail client may make about a particular financial service or the conduct of a financial service provider. (RG ) The role of External Dispute Resolution (EDR) is to provide a cost effective mechanism to address small claims, not to replace the role of other jurisdictions. EDR must be fair and affordable. The FPA considers this proposal to be unsustainable and running counter to the EDR principles described in ASIC s new RG139 (see table below) and the role of an EDR scheme. In particular, the FPA questions the adherence to the principles of fairness and efficiency if FOS were to aspire to be a forum of first choice. Accessibility Independence Fairness The scheme makes itself readily available to customers by promoting knowledge of its existence, being easy to use and having no cost barriers. The decision-making process and administration of the scheme are independent from scheme members. The scheme produces decisions which are fair and seen to be fair by observing the principles of procedural fairness, by making decisions on the information before it and by having specific criteria upon which its decisions are based. Accountability Efficiency Effectiveness The scheme publicly accounts for its operations by publishing its determinations and information about complaints and highlighting any systemic industry problems. The scheme operates efficiently by keeping track of complaints, ensuring complaints are dealt with by the appropriate process or forum and regularly reviewing its performance. The scheme is effective by having appropriate and comprehensive terms of reference and periodic independent reviews of its performance. Source: Regulatory Guide 139, Attachment 1: DIST Benchmarks, page 36 The FPA recommends FOS adhere to the principles required under RG139 and not adopt the forum of first choice proposal. 2.3 Monetary limits increase On page 6 of the submission, consumer advocates claim that professional indemnity implications are not a valid reason not to increase to compensation limits to $500,000. However, the current regulatory requirements for consumer compensation in Australia have professional indemnity insurance at its foundation. We have consistently supported better consumer compensation but the FPA questions how a consumer compensation claim will be paid if professional indemnity insurance is not available. The lack of appropriate insurance will have a detrimental impact on consumers as it will reduce their capacity to access compensation, as well as reducing the number of advisers in the market and therefore the availability of advice for consumers. It is unconscionable that an EDR scheme should require something that is not available in the marketplace. As stated in previous submissions to FOS, the FPA strongly believes that monetary limits (at any level) must be sustainable within the broader consumer compensation system underpinned by professional indemnity insurance. The FPA considers that any increases to FOS monetary limits should be set on a firm, justifiable and measurable basis with a methodology transparent to both consumers and providers and specifically not linked to market events. The FPA would like to reiterate the Insurance Council of Australia s statement that ILIS disputes should remain at $150,000 because of professional indemnity implications. 2/7

5 The FPA strongly recommends that FOS must guarantee the availability of appropriate and affordable professional indemnity insurance for all participants of the scheme prior to any increase in the monetary limits. This responsibility should be included in the FOS Terms of Reference. the compensation limit is not increased to $500,000 as requested by consumer advocates. 2.4 Disputes about fees and charges Consumer advocates have proposed FOS consider allowing the following disputes about fees and charges within the EDR jurisdiction: a fee is in excess to that which is allowed in the contract between the consumer and the FSP; a fee that is imposed is unconscionable (ie, under section 72 of the UCCC or pursuant to Part 2B of the Fair Trading Act 1999 (Vic) a fee is excessive and is considered to be a penalty at law; a fee is unfair. While consumers' concerns relate to credit, the harmonised Terms of Reference would require that these provisions apply across the FOS membership. Determining the appropriateness of planning fees is very subjective as a client is paying for professional expertise and knowledge, rather than a transaction service as in credit. Advice services also vary depending on the need of each client, the complexity of the advice, and fees are determined accordingly. The FPA considers it would be inappropriate for FOS to assess planning fees. It would be an encroachment into potential market manipulation should the Service take on the setting of fees for the industry. Should FOS adopt the consumer advocates recommendation to include complaints about the appropriateness of fees and charges, the FPA strongly recommends it be limited to credit and/or exclude investment and financial advice. 2.5 Ombudsman versus Panel decision model Consumer advocates have proposed criteria for a matter to be determined by a Panel (rather than a single Ombudsman). While the FPA supports the intent of this proposal, we would emphasis the need for, and our commitment to, a conciliatory and consultative approach to the Recommendation stage of the EDR process, prior to a dispute being referred to a Panel for Determination. As detailed in our previous submissions to the Terms of Reference consultation, there are a variety of industry practices that are acceptable ways of fulfilling financial planning objectives, resulting in significant variability in how good and appropriate financial advice is provided to consumers. This variability and the diverse and in-depth nature of financial advice can result in very complex disputes that may turn on subjective judgements. The FPA suggests a panel of appropriate and diverse expertise is required to effectively consider and make decisions on financial planning disputes. The FPA considers the Ombudsman model, where one individual is responsible for decision making, is insufficient for determining financial planning disputes. Such disputes should always be determined by a Panel. Only advice disputes with a low maximum monetary threshold should be referred to Ombudsman over a Panel (such as the Adjudicator system in previous FICS Rules). 3/7

6 The FPA notes that consumer advocates have asked for disputes above $50,000 to be referred to a Panel. As planning disputes are complex, variable, and subjective, irrelevant of the amount of the claim, the FPA does not support a monetary benchmark to be reached for to a dispute to be able to be considered by a Panel instead of an Ombudsman. All financial planning disputes should be considered by a Panel, not a single Ombudsman. The FPA recommends that any criteria developed for disputes to be determined by a Panel, explicitly include investment and financial advice disputes, irrelevant of the amount of the claim. 2.6 Informing consumers about FOS Consumer advocates have requested the inclusion of provisions to require FSPs to inform consumers about the existence of FOS, their right to refer the matter to EDR through FOS, and contact details for the Service, when advising clients of the IDR decision. In addition, consumer advocates have specified the wording FSPs should be mandated to use to inform consumers about the EDR Sheme. The new RG139 includes the following requirements: Scheme members must advise consumers and investors of their right to take their complaint to an EDR scheme if they are not able to provide a final response to a complaint at IDR within 45 days (see RG 165). (RG139.42) Similar requirements were also contained in the previous RG139 (RG139.91). In addition, AFS licensees and Authorised Representatives must include details of their EDR scheme membership in the Financial Services Guide provided to clients, as required under s942b(2)(h) and 942C(2)(i) of the Corporations Act, respectively (also stated in RG ). The Act and RG139 already place significant requirements on FSPs to inform consumers about EDR. The FPA supports the recommendation to inform consumers of the existence of FOS with contact details for the Service, at the time of providing an IDR decision. However, the FPA does not support mandating the wording to be used by FSPs to inform clients about FOS. 2.7 Fraud referee The FPA acknowledges consumer advocates recommendation to apply the role of the current general insurance Fraud Referee to all appropriate disputes across all FOS divisions. The FPA offers in principle support for this idea but has found it difficult to ascertain how and when the Fraud Referee fits into the FOS process, the matters it would consider, and how fraud claims would be determined. The FPA is also concerned about the appointment of an appropriate fraud expert to consider such matters, as the Fraud Referee selection criteria detailed in the Insurance Ombudsman Service (IOS) Terms of Reference are very broad and do not specifically relate to fraud matters. As fraud is illegal, the FPA also considers it important to understand how FOS and the Fraud Referee would interact with law enforcement officials should fraudulent activity be identified. It is also currently unclear as to whether the Fraud Referee is treated as a running cost of the Service, as Panel members, Ombudsman, and Adjudicators are considered; or whether the Fraud Referee is considered an external expert and therefore an FSP would incur additional costs as a result. The FPA recommends FOS provide clarity around the Fraud Referee prior to making a decision on its Terms of Reference. Should the jurisdiction of the Fraud Referee be expanded to all FOS disputes, it should be part of the running costs of the Service with transparent processes commencing at the investigation of the complaint (not following a Determination) and equitable access for both complainants and FSPs. 4/7

7 2.8 Legal proceedings Section of the consumer advocates submission recommends:.fsp should, within 21 days of having commenced legal proceedings, be required to advise consumers of the option to access FOS The FPA considers it entirely inappropriate and unfair to require FSPs to notify consumers of an option to access FOS after legal proceedings have commenced as: a) the FSP is already required to notify the consumer about their option to access FOS in the FSG and at the time of providing an IDR decision; b) the decision to pursue legal action would only have arisen after FOS avenues have been considered; c) FOS does not have a role and it should not seek to limit the legal remedies available to Service participants; and d) the FSP would have already incurred legal and other costs to commence legal proceedings. The FPA is also concerned that the reasoning and examples provided for this recommendation relate solely to credit, yet the implications for the proposed provisions would stem the breadth of the FOS membership. The decision for a financial planner to pursue a client through a court is not taken lightly as this would significantly alter the foundation of the client/planner relationship. The FPA is also unsure of the intent underlying the consumer s proposal as 5.1(k) of the proposed Terms of Reference excludes disputes in relation to which either party commenced legal proceedings before the dispute was lodged with FOS. Such an exclusion is fundamental for natural justice - an EDR scheme cannot and should not stop access by either party to legal remedies in the marketplace. The FPA suggests being required to again notify a consumer of FOS after legal proceedings have commenced would create confusion for the consumer as the dispute would be excluded from the Service under 5.1(k). The FPA recommends FOS not adopt the proposal to require notification of a consumers ability to access FOS within 21 days after legal proceedings have commenced. 2.9 Excluding and referring disputes to other jurisdictions Consumer advocates propose that a dispute must be "fully considered" to ensure there are not issues within the dispute FOS can consider, prior to referring disputes to another jurisdiction; and that FOS must ensure the alternative jurisdiction will "consider the dispute in its entirety". The FPA considers the introduction of the Jurisdiction Decision and the exclusion provisions in the proposed Terms of Reference appropriately and sufficiently enable FOS to determine whether a dispute would be more appropriately considered by an alternative jurisdiction. These provisions set clear perimeters for the FOS jurisdiction. The additional requirements consumer advocates propose to place on FOS would be burdensome, create uncertainty, and unconstitutionally seek to limit participants legal remedies. The FPA does not support the consumer advocate proposal as it would significantly and inappropriately increase costs for FSPs should FOS be required to fully consider a dispute to determine whether it falls within the jurisdiction of the Service. This would equate to a dispute progressing through the FOS dispute resolution process, only to be referred to an alternative jurisdiction rather than to a FOS Panel for Determination. The FSP would incur the cost for the dispute to be considered by both FOS and the alternative jurisdiction. Due to the complexity and subjectivity of advice disputes, the FPA believes financial planners would be more likely to be affected by the inclusion of such provisions. 5/7

8 The FPA recommends the consumer advocate proposal (3.1.1) that a dispute must be "fully considered" by FOS prior to referring dispute to another jurisdiction, and that FOS must ensure the alternative jurisdiction will "consider the dispute in its entirety", not be adopted Frivolous and vexatious claims The FPA is concerned by the consumer advocates proposal to remove "or lacking in substance" from provision 5.2(e) of the Terms of Reference. The inclusion of this statement in provision 5.2(e) enables FOS to exclude a dispute that lacks evidence, which is a fundamental requirement under the principle of natural justice. The removal of this wording from 5.2(e) would enable unsubstantiated claims to be made which, because of the costs incurred by the FSP, could prove uneconomical for the FSP to defend. FOS must be fair in its treatment of claimants and FSPs. This provision is from FICS Rules and its removal would dilute the already loose clauses for vexatious and frivolous claims. The FPA also considers provision 5.2(e) should be mandatory, not discretionary, as recommended in the submission by the Insurance Council of Australia. The FPA recommends provision 5.2(e) include "or lacking in substance", be moved to section 5.1 Mandatory exclusions, and that FOS consider developing guidelines for determining vexatious and frivolous claims Requirement to provide or procure information Provision 7.2 of the Terms of Reference requires a party to a dispute to provide or procure any information that FOS considers necessary. Consumer advocates have suggested the removal of the requirement to procure information. The FPA considers it a fundamental requirement that FOS should have access to all relevant information to appropriately consider a dispute. As such, it is appropriate to require either party to the dispute to source information from third parties. The FPA recommends provision 7.2 of the proposed ToR remains unchanged and include the requirement of a party to a dispute to provide or procure any information that FOS considers necessary Test Case Consumer advocates have called for the FOS Terms of Reference to permit Consumers Federation of Australia and CHOICE to treat a dispute as a test case on behalf of consumers. The FPA considers it should be a responsibility of the party requesting the test case to pay for the expense incurred. The FPA recommends that, should FOS agree to include in its Terms of Reference the ability for the Consumers Federation of Australia and CHOICE to treat a dispute as a test case on behalf of consumers, reciprocal provisions under 10.1(b) in the proposed ToR be included for cases instigated by consumer advocates to ensure the party instigating the test case pays for the costs incurred Systemic issues Consumer advocates have called for FOS to provide systemic and serious misconduct reports naming the FSP to members of ASIC s Consumer Advisory Panel or the Consumers Federation of Australia. The FPA questions to the intent of providing such information and the potential for reputational damage to the FSP. ASIC and industry bodies have legal and professional obligations (respectively) by which FSPs must adhere or face compliance action by the Regulator and/or professional association. Neither ASIC s Consumer Advisory Panel nor the Consumers Federation of Australia have an industry or regulatory mandate to fulfil such a role and therefore the FPA considers it completely inappropriate for non-public FOS reports to be provided to consumer advocates. 6/7

9 The FPA recommends ASIC s Advisory Panel or the Consumers Federation of Australia are not given access to non-public FOS reports it is required to provide to ASIC and industry bodies. 3. Other submissions 3.1 Consequential loss As stated in the Insurance Council of Australia submission, insurance policies generally exclude cover for consequential loss. Professional indemnity insurance policies do not offer cover for consequential loss. If professional indemnity insurance is not available to pay consequential loss, the FPA questions how FOS can include it in the Terms of Reference. The FPA supports the Insurance Council s recommendation that FOS should not be permitted to award consequential loss to complainants. 3.2 Defamation claims D.J Carmichael Pty Limited suggests the FOS provision 13.3 restricts the ability of an FSP to file a defamation claim for information provided / comments made by complainant to media and other parties. The FPA consider the defamation restriction as states in the provision applies only in relation to comments made and information provide to FOS and not other party. For clarity, the FPA recommends explicitly stating in either the guidelines or commentary that provision 13.3 is not intended to restrict any parties of the dispute from pursuing a defamation claim against another party to the dispute for comments made to media and other parties external to the dispute, other than FOS. 3.3 FOS fee structure and members costs Both the Insurance Council of Australia and the Financial Industry Council of Australia submissions raised concerns about the lack of detail provided to date about the fee structure FOS will be using and the cost of the Service to FSPs. The FPA supports recommendations made in submissions by other FOS stakeholders that FOS should release its fee structure and costs to members prior to finalising its Terms of Reference. 3.4 Privacy and confidentiality complaints The FPA supports the Insurance Council s concern that the monetary limits and omission of a cap on the award of compensation for loss or damage in the FOS remedies, would lead to consumers choosing FOS over the more appropriate specialised jurisdiction for privacy disputes, namely the Office of the Privacy Commissioner The FPA recommends FOS refer all privacy and confidentiality disputes to the Office of the Privacy Commissioner. 7/7