Are financial planners getting value for money from their EDRs?

Financial planners are required to be members of an approved external disputes resolution service but they may not always know whether they are getting value for money.

It will have been lost on no one working in the Australian financial planning industry that there exists a distinct difference between complaints directed at financial planners and those directed at superannuation funds.

While it is true that, in both instances, both planning companies and superannuation funds ought to seek first to resolve the issue via their internal disputes resolution process, thereafter superannuation funds have the advantage of being able to access more extensive avenues of appeal.

If internal disputes resolution mechanisms fail in the case of financial planning practices, the issues in dispute are referred to the Financial Ombudsman Service (FOS) – an organisation financed via the compulsion imposed on planners to subscribe to an Australian Securities and Investments Commission (ASIC)-registered External Dispute Resolution (EDR) scheme.

If internal disputes resolution mechanisms fail in the case of superannuation funds, in most cases they end up being handled by the Superannuation Complaints Tribunal (SCT) – a statutory body funded by the Commonwealth by way of Budget outlays.

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The other crucial difference between the SCT and EDR schemes such as FOS is that superannuation funds have the right to appeal the SCT’s decisions to the Administrative Appeals Tribunal, while financial planners have no similar recourse in the event they disagree with the findings of FOS.

It follows that while as a statutory authority the SCT is ultimately answerable to the Parliament for its performance, no similar measure of performance exists with respect to FOS, albeit that ASIC must both approve such EDRs and maintain a level of oversight.

However it transpires that while ASIC does, indeed, maintain a level of oversight, it acknowledges that it, in turn, relies on the EDRs to retain outside agencies to review their performance – albeit that the FOS review is currently overdue and will not now be held until around mid-2014.

How do we know all this? Because of questions asked of ASIC during the Parliamentary committees process by Tasmanian Liberal Senator, David Bushby.

Bushby earlier this year asked ASIC the following questions:

• What is ASIC’s role in the regulation of dispute resolution agencies (DRAs) which were established as part of the Financial Services Reform Act (FSRA)?
• What policy statement has ASIC formulated with regard to DRAs?
• What are the requirements for DRAs in disclosing information on their performance and operations?
• What has been the performance of these agencies in relation to disclosure of this information?
• What has been the performance of these agencies in relation to the objectives as set out in FSRA and ASIC policy?
• Does ASIC require these agencies to publish information on financial accounts and director and executive remuneration? If not, why not?

The answers provided by ASIC to Bushby’s questions are likely to prove illuminating for financial planners, if not particularly satisfying, because they make clear that there is little prospect of change with respect to the structure of the EDRs and how they are being run.

There are, of course, two EDR schemes approved by ASIC - FOS Limited and the Credit Ombudsman Service Limited, and if the regulator’s answers to Senator Bushby’s questions are a guide, then business has been brisk in recent years, not least because of the implementation of the Government’s new credit and consumer protection laws but also the fall-out from the global financial crisis.

According to ASIC, both schemes are meeting their reporting obligations in a timely manner and the regulator is “comfortable that they are meeting their ongoing reporting obligations under RG 139 and RG 165”.

“ASIC continues to liaise with the schemes and oversee whether the schemes are continuing to meet their obligations under RG 139 and RG 165. 

"We consider that the schemes are generally performing well in meeting their obligations under RG 139 and RG 165; however there are a number of current operational pressures on the schemes resulting in delays.

“We continue to work with each scheme on these issues. We are also in the process of reviewing a discrete area of the scheme’s jurisdiction over complaints where members commence debt recovery legal proceedings.

“These pressures are slightly different for each scheme. Generally speaking, however, they involve:

1. A significant increase in new members since the start of the national credit regime (some of whom are still adjusting to having to compulsorily join a scheme, how to best interact with their scheme, and also the policy rationale for having to do so);
2. The increase in complaints numbers that these new members bring, but also as a result of the GFC, a spate of significant natural disasters and an increase in the number of hardship cases; and
3. A higher number of complaints which are going to EDR without a member’s internal dispute resolution (IDR) system first addressing them.

But financial planners have been left none the wiser as to what those working within FOS and its sister EDR are being paid, because ASIC confirmed to Bushby that it “does not require the schemes to publish information on financial accounts and director executive remuneration”.

It said this was because “these are primarily corporate governance issues which are currently regulated by the Corporations Act”.

“We understand that reporting on these matters may be further refined as part of the reforms to the not-for-profit sector and the introduction of an Australian Charities and Not-for-Profits Commission,” ASIC said.

“These reforms are currently under consultation, and if introduced, may apply to not-for-profit Limited by Guarantee companies, ie, FOS and COSL.”

For the record, superannuation funds will have little difficulty in finding what the chairperson of the SCT, a statutory office-holder, is paid or how much the tribunal spends.