Kelly O'Dwyer (Higgins, Liberal Party, Minister for Revenue and Financial Services) Share this | Hansard source

I present the explanatory memorandum to this bill and move:

That this bill be now read a second time.

This bill amends the Corporations Act 2001 and other related legislation to radically overhaul the financial system dispute resolution framework by establishing a new one-stop-shop dispute resolution body—the Australian Financial Complaints Authority—to ensure that consumers and small businesses have access to free, fast and binding dispute resolution.

The bill forms part of the Government's broader commitment to ensuring that the banks and other financial institutions are held to account when they fail to meet community expectations.

The financial sector plays a vital role in the Australian economy by meeting the needs of its users, including consumers and small businesses.

Its role in the economy and the lives of all Australians continues to grow and evolve.

Given the crucial nature and role of the financial sector, Australians expect high standards from financial institutions.

Where these expectations are not met and consumers wrongfully suffer a loss, it is critical that those who have been wronged have access to redress in a timely manner.

External dispute resolution (EDR) plays a critical role in providing consumers and small businesses with access to an alternative, out-of-court dispute resolution service to hear and determine their complaints about financial firms.

The government is committed to having a world-class financial dispute resolution system.

That is why in April 2016 the government commissioned an independent comprehensive review of the dispute resolution framework (the Ramsay review), which was led by an expert panel comprising Professor Ian Ramsay, Julie Abramson and Alan Kirkland. I would like to place on record my deep appreciation for their hard work and the intellectual rigor that they applied to this very important issue.

The Ramsay review undertook a rigorous consultation process and received 187 submissions in response to its issues paper and interim report.

The Ramsay review found that the current dispute resolution framework is a product of history rather than design and, in significant areas, reform is needed.

The review made 11 recommendations to strengthen and futureproof the dispute resolution framework, all of which the government has accepted.

The review's central recommendation was to establish a new one-stop shop dispute resolution body for all financial disputes, including superannuation disputes.

In line with this recommendation, the government committed to establishing the Australian Financial Complaints Authority, or AFCA, which will be based on an industry ombudsman model, with additional statutory powers where required.

This approach combines the strengths of both a statutory tribunal and an industry ombudsman scheme.

AFCA will replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT) and will reduce the unnecessary duplication and consumer confusion that has been characteristic of the current framework.

This simplification of the system has been welcomed by Gerard Brody, CEO of the Consumer Action Law Centre who has commented that:

Currently if you have a problem with a bank or finance provider, it is incredibly confusing to fix the problem. The people who call our services just want to get their lives back on track—the Government can help them by simplifying the system and giving it teeth.

CHOICE likewise welcomed the announcement of AFCA, stating, 'It will provide consumers with a single, accessible complaints resolution service when something goes wrong.'

AFCA will have higher monetary limits and compensation caps than those of FOS and CIO, and it will maintain the SCT's unlimited monetary jurisdiction for superannuation complaints. The new monetary limits and compensation caps are double and, in the case of small business credit facility disputes, almost triple the limits and caps currently in place. This will significantly improve access to justice for consumers and small businesses.

The creation of AFCA will also address recommendations of the House of Representatives Standing Committee on Economics' Review of the four major banks (also known as the Coleman report) and the Carnell Inquiry into small business loans.

The Coleman report recommended that the government replace the three existing EDR schemes with a one-stop banking and financial services tribunal. The report noted that it would: reduce confusion for consumers; enhance small businesses' EDR scheme coverage; help ensure consistent outcomes for complainants; and eliminate unnecessary duplication. The AFCA will fulfil all of these requirements.

The Carnell report likewise recommended the establishment of an industry funded external dispute resolution one-stop shop with appropriate small business expertise to hear disputes relating to credit facilities of up to $5 million. The AFCA will meet this recommendation by significantly expanding small business access to redress through monetary limits and compensation caps that are almost triple the existing limits and caps.

Small business has welcomed the establishment of AFCA. Peter Strong, CEO of the Council of Small Business Australia (COSBOA), commented that:

Too often, small business owners are shafted by the actions of big banks and these business owners have little option but to take their medicine in the face of the overwhelming power of the big banks. But this new Authority will provide business owners with a clear mechanism to seek redress where they have been unfairly done by.

The bill introduces a new legislative framework which sets out the standards that AFCA must adhere to. Under the legislative framework, AFCA will be accessible to consumers and small businesses, who will be able to have their disputes with financial firms heard and determined by AFCA for free.

All financial firms, including superannuation funds, will be required by law to be members of AFCA.

AFCA will be a not-for-profit company governed by a board comprising an independent chair and equal numbers of directors with industry and consumer backgrounds. It will be funded by industry.

The legislation will ensure that AFCA will provide fair, efficient, timely and independent dispute resolution services and that it has the relevant expertise to resolve the disputes it hears. The legislation also includes a number of statutory provisions to ensure that AFCA has the necessary powers to effectively resolve superannuation disputes. Additional statutory provisions are required because of the complex nature of some of the superannuation disputes that involve third parties, such as death benefit disputes.

AFCA will have the power to join third parties to a dispute, require parties to attend conciliation and require the production of documents.

The statutory provisions available to AFCA will allow timely decisions to be made to enable prompt payment of death benefit amounts by superannuation funds to those who may be in need.

The framework does not dictate the way in which AFCA should deal with complaints. This will enable AFCA to adapt to change and to be flexible and innovative in its approach to resolving disputes.

To ensure that AFCA meets community expectations for free, fast and binding dispute resolution, it will be subject to a comprehensive accountability regime.

First, the AFCA scheme will be authorised by the government. I, as Minister for Revenue and Financial Services, will not authorise the AFCA scheme unless I'm satisfied that it has robust systems and processes in place to meet community expectations and the rigorous standards set out in the legislation. And where the scheme, once authorised, fails to meet these standards, I will have the ability to revoke authorisation.

In addition, I will have the ability to impose conditions on authorisation. This ability to set conditions will allow the government to ensure that AFCA is accountable to both consumers and member firms, for example, through requiring AFCA to report and provide reasons to the government on an annual basis in respect of any changes AFCA makes to its membership fees.

The AFCA board will comprise an independent chair and equal numbers of directors with consumer and industry backgrounds. At the establishment of AFCA I will make a one-time appointment of the minority of AFCA's board, including the independent chair, to ensure that it has an appropriate mix of skills and experience.

The AFCA board will include at least one director with a superannuation background and who will not be representing any particular segment of the superannuation industry.

The Australian Securities and Investments Commission, or ASIC, will be responsible for ensuring that AFCA meets the standards set out in the legislation on an ongoing basis.

To fulfil this role, the bill provides ASIC with the ability to set regulatory requirements that AFCA must adhere to and also provides ASIC with a general directions power to compel AFCA to comply with the standards set out in the legislation. ASIC will also have a specific directions power that can be used to require AFCA to increase its funding in the event that it is insufficiently financed.

The enhanced accountability that AFCA will be subject to under the new regime represents a significant improvement over the existing regime, under which ASIC has limited powers to require dispute resolution bodies to improve their practices.

In the course of passage through the Senate, the government moved a small number of amendments to provide additional certainty in relation to the handling of superannuation disputes and to enshrine in legislation the requirement that the AFCA chair be independent.

Additionally, the government will commission an independent review of the new arrangements 18 months after AFCA commences operations. This review will take into account feedback from consumers and small businesses regarding whether AFCA resolved their complaint in a way that was fair, efficient, timely and independent.

The review will also specifically examine the appropriateness of the monetary limits applying to complaints relating to credit facilities provided to primary production businesses. The government has announced that a primary production business with a dispute relating to a credit facility of $5 million or less will have access to compensation of up to $2 million.

The bill also strengthens the internal dispute resolution reporting processes within firms.

Internal dispute resolution is a financial firm's internal complaints handling process. That is, its initial response to a complaint. An effective internal dispute resolution process plays an important role in enabling financial firms to quickly resolve genuine complaints, without an EDR or court process.

To provide firms with an incentive to have best practice internal dispute resolution procedures, the government is implementing a new internal dispute resolution reporting regime.

Under the new regime, ASIC will be empowered to create a legislative instrument that will determine the internal dispute resolution data that financial firms will need to report to the regulator. ASIC will then have the ability to publish this data at both the aggregate and the firm level.

Publishing internal dispute resolution data will drive financial firms to improve their internal dispute resolution practices by providing industry benchmarks on how long it takes to resolve disputes and highlighting poor-performing firms.

Given the significance of these reforms, the government understands the importance of having a smooth transition from the existing dispute resolution bodies to AFCA.

That is why the government has created a transition team, led by Dr Malcolm Edey, a former Assistant Governor of the Reserve Bank, to drive the establishment of the AFCA.

The transition team will advise the government on AFCA's terms of reference, governance and funding arrangements. It will also make recommendations on the transitional arrangements required to appropriately resolve legacy disputes of the three existing schemes.

The AFCA transition team has held targeted workshops with key industry and consumer bodies and has undertaken a public consultation process to inform and seek feedback on these matters.

In particular, the AFCA transition team has had detailed discussions, including with representatives from the superannuation industry and the not-for-profit and retail sectors, as well as targeted discussions with the Law Council of Australia and individual funds and administrators.

The AFCA transition team will continue to engage closely with all interested parties, including all sectors of the financial industry, as well as the three existing schemes to facilitate an orderly transition to AFCA.

The bill also provides for the winding down of the SCT, which will cease to accept new complaints once AFCA commences operations. The AFCA transition team is working closely with the SCT to ensure a smooth transition between the SCT and AFCA. The government will ensure that the SCT is sufficiently funded to get through its backlog of complaints by the time AFCA commences operations.

Following passage of the legislation in the Senate in December 2017, I announced that AFCA would commence operations in the second half of this year.

In line with advice received from Dr Edey and the transition team and in order to facilitate an orderly transition to AFCA, it is my intention that AFCA will commence accepting disputes no later than 1 November 2018.

Once the legislation is passed by parliament, I will be seeking an application for authorisation. Following an assessment of that application, I'll be authorising a company as AFCA and making my formal appointments to the AFCA board. It is my intention to do this as swiftly as possible to ensure that the AFCA board has the maximum time available to secure membership and funding and to have appropriate staffing and dispute resolution procedures in place.

Following authorisation, the AFCA board will undertake public consultation on its terms of reference and funding arrangements, ahead of AFCA's commencement.

The new EDR regime will result in significant benefits for consumers and small businesses, with less confusion and an increase in access to redress and greater accountability for financial firms.

As the Consumer Action Law Centre stated, 'Australians need one high-quality service to resolve their disputes against financial institutions quickly and fairly. The one-stop shop announced today is a sensible move that can help Australians get justice.' This bill achieves this outcome and ensures Australian consumers and small businesses get free, fast and binding access to redress and compensation.

Full details of the measure are contained in the explanatory memorandum.

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