Deliberately delaying compensation payouts, strategising ways to reduce remediation bills, using members’ money to pay for refunds and ignoring requests from the regulator to pay up are just some of the ways financial institutions have been caught doubling down on poor behaviour.
It has prompted calls in some quarters for an independent oversight of remediation programs as well as the introduction of a compensation scheme of last resort for those who fall through the cracks when a licensee closes or the professional indemnity insurance cover is inadequate.
Remediation is included in the royal commission’s terms of reference and to date hasn’t had much airplay. It will likely be raised in the final round of hearings of chief executives next month. External dispute resolution (EDR) bodies also need to be scrutinised.
Given the weight of money involved – at least $1 billion remediation in the fees for no services scandal, hundreds of millions of dollars in dodgy financial advice, misleading advertising, shoddy life insurance clauses and irresponsible lending – and the need to restore trust, the right remediation programs and EDRs is paramount.
In July, AMP told the market it would put aside $290 million for a “potential advice remediation” fund. Late last month Westpac estimated it would cost $235 million to refund customers for bad service and advice to half its adviser pool. Others are also trying to crunch the numbers.
The brutal reality is most remediation schemes lack transparency, lack proper scrutiny, vary from institution to institution and drag on too long.
Earlier this month the Australian Securities and Investments Commission (ASIC) released a damning report on breach reporting and remediation. It looked at institutions including AMP, NAB, CBA, Westpac, ANZ and Macquarie, and found it takes an average 2145 days – or almost six years – between a breach and the first compo payout.
It estimated that the breaches amounted to a $500 million loss to 5 million consumers and that the institutions considered remediation a “distraction from core business”.
Given Commissioner Kenneth Hayne concluded in his interim findings that greed and “the pursuit of short term profit at the expense of basic standards of honesty” is at the heart of financial misconduct, remediation isn’t any different.
This culture of greed has influenced the institutions’ attitude toward regulators, how they remediate customers and interact with external dispute resolution bodies.
In the sixth round of hearing into life insurance, the public was given an insight into the contemptuous way the Commonwealth Bank viewed the external dispute resolution body Financial Ombudsman Service (FOS). CBA’s life insurance arm CommInsure was found to have misled FOS in order to deny the payout of a trauma insurance claim. It also repeatedly challenged FOS’s jurisdiction, ignored deadlines and was “adversarial”.
It prompted council assisting Rowena Orr QC to say “by sending this email, the group customer relations officer misled the Financial Ombudsman Service into thinking that CommInsure did not have a medical report on whether the insured would satisfy the updated heart attack definition. Do you accept that?” CommInsure boss Helen Troup could only answer “yes”.
On November 1, a new external dispute resolution body, the Australian Financial Complaints Authority (AFCA), will open for business.
It is the amalgamation of three separate bodies, FOS, the Superannuation Complaints Tribunal (SCT) and the Credit and Investments Ombudsman (CIO), and comes on the back of the Ramsay Review into EDRs for the financial services sector.
AFCA was one of a number of initiatives from the Coalition in an attempt to rebuild trust in the sector and stave off a royal commission.
The new mega ombudsman is superior in that it is a one-stop-shop and lifts the cap on the size of complaints it can investigate to a monetary limit of $1 million and compensation of up to $500,000. Previously, the limit under FOS was $500,000 and a maximum payout of just over $300,000, which wasn’t enough. There are no caps on superannuation complaints or compensation.
It also addresses other issues such as resourcing, which resulted in a backlog of complaints, particularly in the SCT.
But protracted delays aren’t just about funding. According to barrister Noel Davis, who was a member of the SCT for 13 years and completed his last case a few months ago, cases could drag on for three to four years due to long delays in an insurer and trustee’s decision making, and delays in the tribunal.
He made the point that in disability claims, the complainant often can no longer work and is, therefore, without income except for social security payments, while trustees and insurers drag their heels.
He said in cases were insurers are allowed to take so long to make a decision, often asking for more and more medical evidence, trustees are failing in their duty to act in the best interests of the members.
“The tribunal does not have the same power that a court has to award damages against trustees and insurers who delay making decisions,” he said. “It cannot, therefore, do what the NSW Supreme Court did in one case of an extensive delay, where it ordered a trustee to pay damages of $290,000, in addition to the disability benefit payable, because of a delay of more than three years in making a decision on the disability claim.”
Davis makes an important point that the royal commission needs to consider. It should also consider recommending naming and shaming institutions.
Davis said in his final decision as a member of the SCT, he directed a trustee to refund fees of 5 per cent that had been debited to each contribution and lump sum rollover the member had made, where the 5 per cent fees were paid as commissions to financial planners the member hadn’t heard of.
He said because of evidence given in the royal commission subsequent to his decision, in relation to commissions paid to financial planners who provided no services, it was likely there will be more of those types of complaints to AFCA.
But he warned because of the legal issues involved, it would test the abilities of the EDR to determine the outcome.
Then there is the thorny issue of a compensation scheme of last resort. Professor Ian Ramsay was asked by the government to review and make recommendations for such a scheme, including who should fund it and whether it should be retrospective. That report was completed more than a year ago but its recommendations have been kept secret and the report itself has been gathering dust in the relevant minister’s draw.
A broad and retrospective scheme could cost the industry billions of dollars. Modelling from Cadence Economics, commissioned by the Financial Services Council, estimated it would cost the industry $105 million a year if it was limited to bad financial advice and $310 million a year if it included product failures. The FSC argued the scheme wouldn’t fix the problem of smaller firms being undercapitalised and under-insured.
Undercapitalisation and under-insurance is an important issue that the royal commission will need to address and the government will need to legislate, particularly as more “independent” advisers set up shop.
A scheme of last resort also has a place in an era of financial institution rehabilitation. As consumer advocate group Choice wrote in its submission to the royal commission: “We maintain that in a properly functioning financial services sector the focus should be on harm prevention and empowering regulators as a first resort. However, when the system fails the sector as a whole should be responsible, through the funding of a last-resort compensation scheme, to ensure consumers are not left financially ruined and without remedy.”