Questions mount over AFCA's resourcing
By David Ross
As the Australian Financial Complaints Authority’s caseload rapidly increases, questions are mounting about whether the banking arbitrator is resourced enough to manage its mission.
Since it started taking cases in November last year, AFCA has received 23,681 complaints, up 42% on predecessor schemes. It has settled 49% of these with an average resolution time of 29 days and has awarded more than A$54 million in damages.
Sold by the government, banks and regulators as the “one-stop-shop” arbitrator of financial misconduct cases, AFCA has been given a big remit.
And last month it was announced that its workload would increase further. Between July 1, 2019 and June 30, 2020, it will need to accept eligible financial complaints back to 2008, up from its limit of considering cases no more than six years old.
Last week the Housing Standing Committee on Economics and the Committee on Legal and Constitutional Affairs discussed AFCA’s work, debating funding, membership and services offered, with legal, finance and consumer groups calling for the remit to be even wider and for AFCA to be given more money.
Gerard Brody, CEO of the Consumer Action Law Centre, said he was supportive of AFCA but it was unclear whether it would live up to its mission.
“It’s got an independent board, and the independent board is tasked with ensuring its got enough resources,” Brody said. “It needs to have sufficient resources.”
Melbourne University director of banking and finance law studies Andrew Godwin said the question remained about whether a single body system might be more or less costly than breaking some of the duties off to other bodies.
“There are economies of scale, bigger bodies chew up more resources,” Godwin said.
Godwin said he supported a “single integrated approach” but that AFCA needed to be able to respond by having access to relevant experts and by having a good matter management process.
“So that the disputes and issues are appropriately identified and the right people get involved,” Godwin said.
At yesterday's AFR Banking and Wealth Summit AFCA chair Helen Coonan put the onus back on banks and said she would love AFCA to "ultimately make ourselves a redundant organisation in terms of handling complaints". She reminded banks that AFCA should be a last resort for complaints.
Coonan said many banks were failing to scale up their internal dispute resolution functions and "settle issues that should have been settled earlier".
She acknowledged banks might have been overwhelmed by trying to find records post the royal commission, but thought those pressures could be countered by "greater resourcing, greater prioritisation [and] by taking complaints seriously".
When asked directly whether AFCA had the resources it needed, Coonan skirted around the questioned, but said the number of "times you go back to the well has to be carefully measured".
"We are a members-based organisation and we very carefully calibrate what's necessary by way of a levy to run AFCA," Coonan said.
"I have to say ... of our 38,000 members... of those members it's only about 10% who are the so called culprits, the ones who are complained about.
"A lot of financial institutions operate within the law and act appropriately."
How is AFCA funded?
AFCA received an initial grant of A$1.7 million when it was set up in late 2018. It is mostly funded through membership levies, user charges and complaint fees received from member financial firms.
In contrast, the Office of the Australian Information Commissioner received A$12.91 million.
By law all Australian financial firms must be members of AFCA and are required to pay a membership levy and other complaint-related charges to contribute to our operating costs.
Gaps in AFCA’s remit include legal services, caps on compensation payments and holes in membership.
The Consumer Action Law Centre recommended in its submission to the economics committee that AFCA membership be made compulsory for debt management firms and credit repair firms, small-business lenders and buy now, pay later providers.
Firms against whom a complaint is made must pay an individual complaint fee. However, services are free of charge to small businesses and consumers who make a complaint.
AFCA’s funding model is similar to that of the Telecommunications Industry Ombudsman and almost identical to the previous funding model of the Financial Ombudsman Service Australia.
FOS’s funding model consisted of a base levy, a user charge and case fees, which FOS said was “designed to distribute the costs of running FOS fairly between our members”. A description vividly similar to AFCA’s.
Tracey Mylecharane, solicitor and law lecturer at Australian National University, told Australian Banking Daily she had serious concerns about AFCA’s funding model give how close it was to FOS.
“Funding is something that was one of the underlying issues around FOS,” she said.
“Having a very similar model for a larger organisation doesn’t seem like the answer.”
Mylecharane said the reticence of FOS to increase its fees to members created an organisation that lacked the resources to do its job, with frequent delays and a ‘box ticking’ culture.
“FOS were supposed to be independent but were funded by the banks,” she said.
“I’m not quite sure that this bigger vessel is able to deliver the efficiency we need.”
AFCA said its 2018-19 budget was about A$83 million and that it would release its full figures in its annual review.
It told Australian Banking Daily it was recruiting extra staff, adding to its existing 550 staff, to cover its workload “in a timely manner”.
To track which serial offenders of banking are chewing up the most resources, AFCA said it would be including the names of the financial firms in published determinations.
“We will also be releasing comparative tables that outline the complaints we have received by financial firm later in the year,” a spokesperson said.
How do we compare?
Melbourne University’s Andrew Godwin said it was interesting Australia had chosen to create AFCA when its nearest neighbours New Zealand had decided against such a move in its own financial regulation.
“One of their arguments is that having separate bodies increases specialisation,” Godwin said.
“Some people say it results in duplication...and that was one of the issues that were identified by the Ramsay review.”
New Zealand’s financial regulators are made up of several bodies. These include the Insurance and Financial Services Ombudsman, funded through levies and complaints fees to the tune of NZ$2.26 million (A$2.19 million) in 2018, the Commerce Commission of New Zealand, The Financial Markets Authority, The Banking Ombudsman and the Financial Dispute Resolution Service.
ANU’s Tracey Mylecharane said New Zealand’s split model had shown itself to be more efficient and effective than Australia’s previous split bodies.
“Their financial services complaints model should be aspired to,” Mylecharane said.
“Our three bodies didn’t perform - I query whether it was a funding issue, or if it was about workload and funding.”
She said Australia’s three bodies, prior to AFCA, could all have been reformed by increasing their power, funding and capacity to award higher damages.
“It seemed to me that it would’ve be a better way to go. It’s got greater efficiency and greater specialisation,” Mylecharane said.
“I’m not seeing anything that a single body is dealing with that it could have been dealt with individually.”
Internationally, many countries have multiple bodies for their financial complaints mechanisms.
The UK has a Financial Ombudsman Service to help with most financial services – including banking, insurance, PPI, loans, mortgages, pensions and investments. This ombudsman is funded via case fees and statutory levies on financial businesses regulated by the Financial Conduct Authority.
The UK FOS budget in 2018/2019 is projected at £285.2 million (A$528.6 million) expenditure, of which £227.1 million (A$420.9 million) is raised income.
The UK's Financial Conduct Authority (FCA) regulates more than 56,000 firms that undertake a wide range of financial activities, including 18,000 firms they regulate prudentially.
The FCA monitors which firms and individuals are able to enter the financial markets and supervises how firms work and can stop those that don’t meet FCA standards from carrying out the activities they regulate.
There’s also the Lending Standard Board in the UK, funded by registered firms, which regulates the lending of those firms to consumers and small business.
The US has tens of bodies related to financial complaints, both at state and federal levels.