Is FOS too big for its boots?

Heidi Nash-Smith and Jack Geng explore the controversy surrounding the Financial Ombudsman Service and how ASIC can redress the power imbalance. 

The Financial Ombudsman Service (FOS) has attracted significant criticism of its dispute resolution system, including systemic bias against financial service providers (FSPs), and its continuing lack of accountability.  

Although such criticisms have been well articulated, FOS has shown surprisingly little interest in addressing those concerns. This is particularly apparent from the recent 2013 Independent Review of FOS’ operations and procedures conducted by CameronRalph Navigator. The review, which was commissioned by the FOS Board, assessed FOS’ operations against the Australian Securities and Investments Commission (ASIC) Regulatory Guide 139 benchmarks of accessibility, independence, fairness, accountability, efficiency and effectiveness. The key recommendations from that review focus on the need for FOS to eliminate dispute backlogs and reduce the time taken to resolve new disputes. There is no proper debate about the appropriateness of FOS’ ever-expanding role and the level of accountability required.  

In our view, the existing semi-regulatory approach has failed to strike the correct balance between efficiency and accountability. ASIC must now seriously consider the ever growing chorus of discontent about FOS and its role as an External Dispute Resolution (EDR) scheme. It is time for ASIC to act to redress the imbalance.  

FOS and EDR schemes 

FOS is an EDR scheme designed to resolve complaints between consumers and FSPs. The stated purpose of the EDR system is to ensure “access to timely, independent and cost-effective dispute resolution when things go wrong for consumers of these types of products and services”. Accordingly, EDRs are designed to facilitate quick and efficient dispute resolution outcomes for both consumers and FSPs.   

Unlike other alternative dispute resolution processes, participation in an EDR scheme is mandatory for Australian Financial Service Licensees and Australian Credit Licensees. The constitution of each EDR scheme must be approved by ASIC in accordance with ASIC Regulatory Guide 139.   

Monetary jurisdiction  

Unlike other EDRs such as the Telecommunications Industry Ombudsman (TIO), and the Energy and Water Ombudsman (EWO), FOS has significant monetary jurisdiction to hear and determine complaints against FSPs in relation to financial services advice. Under their respective constitutions, both TIO and EWO only have the power to make binding decisions of up to $50,000. Contrastingly, FOS can award compensation up to $280,000 (plus interest and costs).   

In practice, it is not unusual for FOS to hear and determine complaints well above its jurisdictional limit by splitting the complaint.   

Given that FOS’ monetary jurisdiction clearly exceeds the jurisdictional limit of other comparable Australian EDR schemes, and even some Australian courts, the question must be asked: 'what independent review mechanisms are currently in place to ensure FOS remains accountable for its decisions’? Surprisingly little is the answer.  

Discretionary powers  

FOS, like other EDRs, exercises wide ranging discretions to resolve disputes.  This is to ensure and enable the quick and efficient disposal of disputes.  

Under its terms of reference (TOR), FOS is only required: 

•  To “do what in its [FOS] opinion is fair in all the circumstances” ; and  
•  To “have regard to” the law, good industry code and practice, and its own previous decisions.  

The result is that FOS is conferred with the power to make adverse findings against FSPs under its TOR so long as FOS considers its decisions to be 'fair in all the circumstances’ notwithstanding the fact that situations may arise where neither the law nor FOS has previously imposed such duties or liabilities on FSPs. This is particularly significant given that FOS determinations are binding on FSPs and cannot be reviewed or appealed regardless of any errors in facts or law.  

There have been several instances where FSPs and complainants have tried to appeal or seek review of a FOS decision without success. Because the basis of the relationship between FOS and FSPs is contractual in nature and based on FOS’ TOR, the courts are reluctant to step in. 

ASIC reform 

Given the lack of available legal avenues for FSPs to challenge FOS’ wide discretionary powers, the only remaining option is for the FSPs to agitate for regulatory reform, since the TOR must be approved by ASIC.   

Maintaining FOS’ discretionary powers are clearly desirable for reasons of public policy, as doing so will continue to promote flexibility and accessibility for consumers. However, flexibility and accessibility must be balanced against other equally important public policy considerations such as consistency of decision making and predictability.  

As such, it is only appropriate that FOS’ monetary jurisdiction match its level of accountability.  

In our view, FOS’ monetary jurisdiction should be brought in line with other comparable Australian EDRs at $50,000. This will strike the appropriate balance between efficiency and accountability by ensuring smaller disputes can be quickly determined, whilst larger disputes are settled by alternative dispute resolution processes.  

Ultimately, the costs associated with FOS’ lack of accountability under the existing regulatory regime will be borne by the economy, as FSPs continue to grapple with the vague meaning of “what in¨ [FOS’] opinion is fair in all the circumstances”.  

Heidi Nash-Smith is a partner, and Jack Geng, an associate at Wotton + Kearney.