A recent NSW Supreme Court decision has illuminated some key issues financial firms must confront when dealing with customers and AFCA both prior and during the EDR process.

Further, AFCA’s funding model will likely change from 1 July 2022, impacting the majority of members to the scheme. Financial firms should closely consider the proposed changes and assess their likely contributions moving forward.

AFCA’s expectations

The recent NSW Supreme Court decision in Australian Capital Financial Management Pty Ltd v Australian Financial Complaints Authority Limited [2021] NSWSC 1577, has highlighted the importance of:

• providing all relevant materials to AFCA at the outset of a complaint; and
• following good industry practice, including relevant codes - such as the Banking Code of Practice - even if you are not contractually bound to do so.

The complaint involved the lender’s actions in the taking of a guarantee. Neither of the guarantors could read or understand English, and while they were not provided with translated documents, they were provided with a summary document that was translated into their native Mandarin. However, they were not provided an opportunity to obtain legal advice.

AFCA determined that as a result of the guarantees being ‘unfairly obtained’ they were invalid and therefore not enforceable. 

In AFCA’s reasoning, it said:

“In relation to obtaining guarantees, the lender, having regard to the size and purpose of the proposed loan, and good industry practice at a minimum must meet the following conduct standards:

• The lender to provide a prominent notice to the proposed guarantor that:
  • they should obtain independent legal advice on the effect of the guarantee
  • there are financial risks to providing a guarantee
  • they can refuse to enter into the guarantee
• The lender must provide to the proposed guarantor a copy of the related loan contract and related security contracts.
• The lender must permit the proposed guarantor until at least the next day to consider the guarantee and related loan and security contracts, unless the guarantor is legally advised. Where the proposed guarantor is a director of the borrowing entity, the lender must permit sufficient time for the director to consider these documents unless the director waives this requirement
• The lender must not give the guarantee to the borrower (or someone acting on behalf of the borrower) to arrange for the signing of the guarantee
• The lender must ensure the guarantee is signed by the guarantor in the absence of the borrower." 

The lender challenged the decision in court on the basis that it was denied procedural fairness and there should have been a hearing and the ability for the lender to cross examine the witnesses.

The court dismissed the claim by the lender and instead held that:

1. AFCA is not bound by rules of evidence, and must consider all the circumstances having regard to the legal principles, applicable industry codes and good practice;
2. AFCA is not required to conduct hearings and allow cross examination but rather it can determine disputes by reference to the facts available to it;
3. Both parties were given the opportunity to provide written submissions.

This matter serves as a good reminder that when dealing with an AFCA complaint, all relevant information should be provided to AFCA as early as possible in the process. We recommend, particularly for more complex and subjective matters, that these are escalated to internal or external legal as soon as possible once a complaint is lodged.

Further, given AFCA will take into account industry codes as an example of best practice, even if you are not subscribed to a code, a review of whether your processes are likely to stand up to scrutiny is worthwhile.

Proposed changes to AFCA’s funding model

AFCA recently hosted its first of five webinar’s regarding the proposed overhaul of their current funding model. These changes were the result of a Treasury-led independent review of AFCA in November 2021. In its report, the Treasury recommended an investigation into AFCA’s funding model and how it may act to disincentivise financial firms from defending complaints, while calling for an increase in transparency of fees and how they are being used to support AFCA’s activities.

The proposed funding model, developed in consultation with members, favours a ‘user-pays’ fee structure, benefitting those members who have historically dealt with a low number of complaints.

The most substantive changes under the proposed model are as follows:

• Most members will receive 5 free complaints cases per year (renewed annually).
• Complaint fees have been simplified and reduced, only becoming payable from the 6th complaint onwards.
• Introduction of a triage system which will aid the removal of complaints that have no merit or cause no loss.
• All members (excluding Authorised Credit Representatives (ACRs)) will be subject to a single annual registration fee of $376. ACRs will be subject to an annual fee of  $66.
• Removal of the superannuation levy and super funds now subject to the same fee structure as other AFCA members.
• User charges will increase from 8% to 42% of total funding of the scheme, minimising the cross-subsidisation currently occurring across sectors. To put this into  perspective, 2.5% of AFCA members will pay for 66% of fees, reflective of the 66% of complaints those members are involved in.
• It is projected that only 1.2% of AFCA members will be liable for complaint fees, compared to 4% under the previous model.

AFCA’s Chief Ombudsman and CEO, David Locke, has heralded the model as “fair, transparent and equitable”, citing the apportionment of fees based one’s use of AFCA’s services.

This structure is highly advantageous for mortgage broker members, and it is predicted that 99.6% of these members will only pay annual registration fees. Mike Felton, CEO of the MFAA, has regarded the proposed changes as “a positive outcome for our industry” due to its traditionally low interaction with AFCA’s dispute resolution scheme.

Conversely, those members who experience a high number of complaints will pay more into the scheme to subsidise reductions in fees for others. AFCA have forecasted roughly 10% of members will experience an increased cost that more accurately reflects their usage.

Currently, banking & finance, insurance, and superannuation members experience the highest number of complaints across all sectors. Although fears of higher fees for these sectors are not unfounded, AFCA is confident that 86% of Banking & Finance members and 92% of Insurance members will either experience reduced or the same total annual fees under the new model. Likewise, the removal of the super levy is forecasted to result in 82% of Superannuation members experiencing a reduction in fees.

The model will be put to AFCA’s independent board in May, with any changes taking effect from 1 July 2022.