AFCA: Old wine in a new bottle?


Advisers have frequently complained about the Financial Ombudsman Service and campaigned for its reform. AFCA, like a classic Twilight Zone episode, delivers exactly what they demanded but in a form they’re unlikely to appreciate.


You may have noted that the Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Bill 2017 (‘the AFCA Bill’) was introduced into the Senate on 14 September 2017. Apart from being burdened with an equally aspirational and bureaucratic subtitle, the central plank of the Act is the establishment of a single not-for-profit external dispute resolution (EDR) body with a broad jurisdiction.

Freed from the limitations that restrained FOS, AFCA will consider a wider range of consumer claims and financial disputes from consumers and small businesses. This new super-EDR will hear complaints against financial institutions including Australian Financial Services Licensees, credit providers and credit representatives, superannuation funds (other than self-managed superannuation funds), approved deposit funds, life insurers and general insurers.

It’s an ambitious plan that was described in a second reading speech as being:

…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…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.
— Senator James McGrath

Commentators may suggest that AFCA is a poor substitute for a Royal Commission and one even less likely to resolve endemic conduct and cultural failures, but it does at least reduce duplication and promote efficiency. From 1 July 2018, AFCA will replace the existing EDR framework for financial disputes, including the Financial Ombudsman Service (FOS), Credit Investment Ombudsman (CIO) and Superannuation Complaints Tribunal (SCT).

The proposed consolidation has not thrilled everyone. While the Australian Bankers Association is supportivesome industry associations and commentators, have criticised the decision and argued that

… the ‘one stop shop’ will undermine the fabric of external dispute resolution…in the financial services sector because, as the weight of evidence submitted by industry suggests, the continued and separate existence of FOS, CIO and the SCT is vital in ensuring accountability, innovation and cost control in EDR.

It may very well be ‘old wine in a new bottle’ but it does show a willingness to provide consumers with a better, and less costly, option than litigation to resolve complaints. While we should all anticipate transition issues, we should also acknowledge that, since the early 1990s, private industry ombudsmen have had a significant, and largely positive, impact in the Australian consumer landscape.  

AFCA will be slightly different because the current statutory framework of the SCT, and all of the strengths and protections it provides, will be shoehorned into a private ombudsman structure.



AFCA will have higher claim and compensation limits than those which currently exist within both FOS and the CIO (the SCT has no monetary limits). A new monetary limit of $1 million (up from $500,000) and compensation cap of $500,000 (up from $309,000) will apply to financial and small business disputes (other than credit facility disputes).

For credit facility disputes, small businesses will be able to lodge a complaint where the credit facility is up to $5 million (up from $2 million) and may receive compensation up to $1 million (up from $500,000).

These caps are far greater than those of private financial services ombudsman in commensurate jurisdictions such as in the U.K., Canada, Singapore and New Zealand. Treasury has mandated that with these increased caps, AFCA will have greater accountability through regular independent reviews and an independent assessor to review its decisions but how this will work in practice is yet to be settled.

It’s also important to recognise that rights of appeal to the Federal Court will only be available for superannuation claims.



A number of submissions during the AFCA Bill consultation raised concerns about how a single EDR scheme would work in practice. A degree of cynicism is evident from a number of submissions not only in relation to how AFCA will operate, but also how current EDR schemes operate. Key concerns are that:

  • past decisions of existing EDR schemes had applied notions of fairness inconsistently and without adequate definition, and it was unlikely that would change;

  • the lack of consistency in the application of notions of fairness, coupled with higher compensations caps and a lack of any effective right of appeal to the Federal Court for non-superannuation disputes would result in unjust outcomes;

  • higher compensation caps coupled with that lack of consistency in decision making would lead to significant increases in the cost of professional indemnity premiums;

  • there was a lack of any industry input into the AFCA terms of reference which will govern how it will operate; and

  • a single EDR scheme would be less accountable because membership will be mandatory.

Industry associations who represent smaller licensees showed the greatest cynicism with EDR services past and proposed. That is not surprising because larger institutions have greater resources to deal with their EDR obligations. We can help with that.



AFCA will play a significant role in the evolution of the financial services industry and current participants should be concerned about who will be appointed as the new EDR Czar. While there will be both teething and legacy issues, we believe that the creation of a single EDR scheme to deal with financial disputes is a step in the right direction. It simplifies the complaint process for consumers and reduces the amount of EDR schemes with whom a current Licensee may need to deal with.

Remember that multiple financial services entities can be involved in, or be parties to, a single complaint. For example:

  • an adviser may provide advice to a consumer to implement an investment strategy for a period of time during which the adviser changes licensees;

  • an adviser may recommend a double gearing strategy which can involve issues of appropriate advice and responsible lending;

  • issues of responsible lending may involve multiple lenders, for example, where loans are refinanced;

  • a financial product may be purchased using funds from a related lender in which case issues involving the sale of the product and responsible lending may arise;

  • an adviser may provide advice in relation to insurance products which results in the denial of a claim and/or policy avoidance due to non-disclosure. In this case questions about the involvement of the adviser and the rights of the insurer need to be considered; and

  • issues about payment of a benefit under a life policy within super may need to consider both the obligations of the Insurer to make a payment to a Trustee and the obligations of the Trustee to make a payment to the Beneficiary (at present only the SCT can compel the Trustee to make that payment).

The CIO and FOS already have provisions in their terms of reference that allow them to join other members to existing disputes but they do not currently have any provisions dealing with complaints which involve both schemes’ members (or Superannuation Trustees subject to the SCT’s jurisdiction).

A single EDR scheme will fix this roadblock and enable a complaint to be considered against all relevant parties. They will all be able to provide evidence, make submissions and participate in settlement negotiations in those disputes. EDR decision makers will therefore be able to more fairly, and more comprehensively, consider claims and more transparently apportion liability between the responsible parties.



The government has indicated that AFCA will use expert decision‑making panels to resolve disputes and confirmed that the composition of the AFCA board will be made up of an independent chair and equal numbers of industry and consumer directors. These are great commitments, but we need to acknowledge that a diverse membership base will bring its own challenges.

The financial services industry is a broad church and the industry associations who made submissions to the AFCA Bill consultation don’t necessarily share common views. The reasons for their diverse and often divergent views is obvious when you consider that no association represents all participants. Some represent financial planners, others securities and derivatives advisers, others superannuation funds, superannuation trustees, stockbrokers, bankers, margin FX and contracts for difference providers, responsible entities, credit unions, credit providers, banks, timeshare operators, research houses, credit providers, finance brokers, accountants, insurers and insurance brokers. The list goes on.

This is the reality of a fractured financial services industry and one unlikely to be reconciled in the short term. So we shouldn’t expect that industry representation will necessarily address the biases and inconsistencies alleged by EDR critics.

There were some great submissions in the AFCA Bill consultation but one suggestion in particular, from the Association of Financial Advisers (AFA), rates a special mention, which is:

…stakeholder panels to be set up to report directly to the board on a quarterly basis, with there being separate panels for each interest to convey any concerns about trends or particular disputes and appointment to these panels be vested with the various representative bodies in the sectors (for example, a consumer representatives panel, a banking and finance industry panel, life and general insurance panel, financial advice firm panel, superannuation trustee panel, product manufacturer panel, etc.)

What a great idea.



It’s currently unclear what expertise and qualifications AFCA staff will have in different industry sectors. The AFCA Bill is silent on this.

The Association of Securities and Derivatives Advisers of Australia noted in its submission that none of the decision makers in the FOS Investment and Advice division have stockbroking experience and only two industry panel members have worked as stock brokers.

The Australian Retail Credit Association raised instances of FOS decision makers making decisions based on benchmarks their members had no obligation to benchmark against.

But these complaints only tell half the story bearing in mind that the majority of decisions are not panel decisions. In reality, the majority of complaints lodged with the CIO and FOS are resolved by agreement with input from EDR staff with less experience than decision makers, and often with little or no experience working in the industry sectors of specific complaints. The CIO says 84% of the complaints it can deal with are resolved by agreement and FOS has this figure slightly lower at 80%.

It is reasonable to expect that EDR staff should be aware of industry standards and common practices but at a time when the industry is being asked to raise its standards, there is no consensus on what these standards are or how AFCA staff will meet or even recognise them. For instance, there is no legislative requirement that AFCA staff will be, at least, RG146 compliant or even possess a relevant industry degree.

The Financial Planning Association argues that because financial planning complaints often involve complex issues of professional practice and standards, AFCA staff should have an appropriate understanding of, and regard to, professional practice and industry standards.

This is not an unreasonable position but in the absence of a definitive set of standards, whose principles should be applied.

We all act in an industry subject to frequent change, high levels of scrutiny and even higher levels of regulatory complexity. While we should be cautious about change, and alert to its (often unintended) consequences, we should not be unduly apprehensive about any changes designed to restore consumer confidence in our industry. But that design has to be informed by standards expected of industry.