We take a look at how the Australian Financial Complaints Authority came to be as well as its scope and remit, and what it means for both accountants and SMEs.
The new Australian Financial Complaints Authority (AFCA) went ‘live’ on 1 November with an expectation of receiving more than 1,000 complaints per week concerning financial companies.
AFCA replaces three complaints mechanisms: the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).
It is a consolidated external dispute resolution (EDR) scheme to resolve complaints about products and services provided by financial firms.
It is borne out of an in-depth inquiry, the Ramsay review, conducted in 2016, which suggested, along with 10 other recommendations approved by the government, that overlaps and gaps that existed between ombudsmen would be better addressed by the creation of a single organisation.
CHOICE chief executive Alan Kirkland was one of the three members of the original review panel. He feels the new authority can provide the solutions needed.
“The establishment of AFCA represents a huge improvement in access to dispute resolution for consumers and small businesses,” Mr Kirkland says.
“Having a single scheme covering all types of financial services and credit firms will make it easier for people who have a dispute to work out where to go and encourage greater consistency and quality of decision making.”
The IPA was core part of the lobby to restructure and consolidate dispute resolution mechanism in Australia, in line with the success of others overseas.
“Our members and their clients within the SME arena rely on and are heavily dependent upon the effective operations of a financial system, including prompt and streamlined resolution if and when isputes arise, large or small,” the IPA said in its submission to Treasury last year.
“The proposal to set up a single complaints authority as a public company limited by guarantee is supported along with the consequential winding up of the other complaints authorities that will no longer have a role.
“The decision to merge the schemes over time is to be commended given that there are duplications in complaints processes that would be removed once the new regime is in place.”
Broadly, the accounting profession and its representative voices are unanimous in their willingness to work with the new authority to ensure its success. So what are the considerations AFCA will face?
While AFCA’s scope has been broadened to include a wider range of complaints, its punitive abilities remain focused on reconciliation and compensation. Its power to enforce its resolution upon a non-compliant member is restricted to expelling that member or reporting them to ASIC.
In light of the scathing criticism ASIC received from the interim report of the royal commission for its inaction in bringing criminal proceedings against the big banks for unlawful activities, it’s questionable whether any large financial institution intent on engaging in sharp practices will view AFCA as much of a deterrent.
However, there’s optimism at the helm for a culture of compliance across all participants.
David Locke, former assistant commissioner of the Australian Charities and Not-for-Profits Commission, commenced as AFCA’s chief ombudsman and CEO on 25 June.
Mr Locke points out that AFCA intends to build strong relationships to ensure positive results for all involved and that the intention is to work with all stakeholder groups – including consumer, small business and community groups, financial firms, industry associations, regulators and government, in providing its service.
He says that the aim is to improve outcomes through the use of informal resolution methods such as conciliation and negotiation to facilitate agreement between parties to a complaint.
“An important priority for AFCA will be to work with financial firms to improve internal practices to avoid disputes coming to AFCA in the first place,” Mr Locke says.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, agrees with this approach. She says its own research shows that financial penalties don’t discourage unlawful behaviour; instead her approach will be to foster appropriate behaviour within the industry.
“Our focus is not so much on penalty but on the process and how it can drive change in behaviour and achieve the correct outcome for complainants and small businesses. The new funding structure and transparency of AFCA is to try and drive that change,” Ms Carnell says.
The role of funding
AFCA’s funding is based on a combination of three components:
1. A membership levy based on the size and type of business;
2. A user charge based on the number of complaints; and
3. Complaint fees based on complaint complexity and the resolution stage reached.
Therefore, the more complaints brought against it, the more a firm will have to pay in fees. The idea is to encourage firms to avoid behaviour that would lead to a claim and to improve their own internal dispute resolution (IDR) processes.
Adequate funding is a concern for the Institute of Public Accountants, which feels that industry is already paying enough and is worried that it will represent a dramatic increase in fees. In the 2018 federal budget, the government allocated just $1.7 million as a contribution to AFCA’s 2018-19 establishment costs.
Looking to the future
Having a single, unified complaints authority will certainly simplify the procedure for both consumers and small businesses.
But as Rachel Burgess, research fellow at the IPA-Deakin SME Research Centre, points out, AFCA now has a broad remit so it will be vital to ensure it is staffed by the right people who can deal with the complaints that come in.
Ms Burgess also points out that the $1 million compensation cap on small business loans of up to $5 million is still too low.
“It is frustrating for small businesses who have everything on the line, to not have anywhere to go to effectively resolve their issues,” she says.
“If this works, and small businesses can get to the point where adequate compensation is being paid and being resolved quite quickly, then it should be a good thing, and we can then roll it out in other sectors.”
Encouragingly, the AFCA board comprises a balance of consumer representatives and financial services industry representatives.
Out of the 11 members, there are three consumer rights’ advocates, Carmel Franklin, Elissa Freeman and Erin Turner, two former ASIC advisers, Johanna Turner and Catriona Lowe (Ms Lowe is also the current chair of the ACCC Consumer Consultative Committee) and one lawyer, mediator and advocate for small and medium businesses, Alan Wein.
However, Ms Burgess is encouraged by the transparency requirements being made of AFCA.
The new body will be required to have appropriate financial transparency, will have to report quarterly to ASIC, be subject to independent reviews and have an independent assessor who will be appointed by the board.
Moreover, it is required to provide transparency of its determinations to be made public in a deidentified way.
“If banks receive a determination against them in a particular set of circumstances and the determination is publicly available on the AFCA website, then a small business with a similar issue is in an improved position to negotiate an outcome with the financial service provider,” Ms Burgess says.
What AFCA means for accountants and SMEs
As well as helping to ensure the industry’s transition to the new complaints authority is a successful one, the IPA is focused on raising awareness of AFCA with members and explaining what it means for them.
The IPA has been invited by AFCA to participate in a number of seminars and is also planning an extensive outreach program for members.
“We have been and will continue to use all available channels to get the word out to members,” says IPA executive general manager, advocacy and technical, Vicki Stylianou.
“Through our fortnightly technical newsletter, through social media channels, through our website and by inviting AFCA to present at our conferences around the country.”
While it’s full steam ahead, there are some hurdles the ASBFEO has raised for its base, including:
– A lack of clear guidelines concerning turnaround times for each stage of the dispute. Lengthy delays can put a significant financial strain on small businesses;
– The refer back mechanism. This refers a complainant who has received an unsatisfactory result from the financial firms’ IDR, straight back to that IDR for reconsideration;
– A request that the independent assessor, appointed to monitor AFCA’s processes and decisions, be appointed by ASIC rather than the AFCA board in order to ensure proper independence; and
– A requirement that membership by fintech companies should be compulsory.
In an open letter to AFCA back in June, ASBFEO Kate Carnell requested the first two issues be addressed prior to AFCA’s inauguration. At this stage, neither of these recommendations have been adopted.
Ms Carnell assures that she will be keeping a close eye on the quarterly reporting from AFCA to ASIC, monitoring both turnaround times and decision outcomes, and advises accountants and small businesses to open a dispute at the earliest possible stage to avoid delays.
On a positive note, Ms Carnell highlights the early indication from Mr Locke that AFCA is prepared to take a broader overview when assessing disputes and will not be restricted by adopting a purely ‘legalistic approach’ to its decisions – something its predecessor, FOS, was criticised for doing.
“Early conversations with David and his staff indicate they are very focused on keeping timelines to a minimum and on not being too driven to follow the letter of the law. FOS had a tendency to do that, whereas AFCA understands that’s not their role,” Ms Carnell says.
Ms Carnell has also raised concerns that just six fintech firms have voluntarily joined AFCA.
She points out that, as banks tighten up their small business lending requirements, more small businesses are turning to fintechs for funding, and that this is a relatively unregulated area.
“It’s important for accountants and advisers in this space to get their head around how fintechs operate, because it’s a very different market and a fast-changing part of the financial sector,” Ms Carnell says.
“They should check which fintechs have signed up to the code of conduct and also check our website for a recent paper on understanding fintech lending.”
So, the table is laid and the legislation is set.
For the IPA’s Ms Stylianou, it’s a waiting game: “For now, all we can do is watch and wait. With any new agency, there’s always going to be teething problems but we each play an important role in making it a success.”