Discussion of Approval Criteria

34. The Act's requirements for a dispute resolution scheme to be approved are at a fairly high level. This document now discusses in more detail possible approaches a dispute resolution scheme might consider in order to meet the various matters within its control that the Minister will have regard to in making a decision on approval. This is intended as guidance material only. As noted earlier, it is not intended as a manual or a type of prescriptive instruction. The Minister will consider all applications and any different approaches to those set out here in any specific application.

35. An applicant scheme must have undertaken consultation with affected parties. Section 52(1)(b) requires that the Minister has regard to whether the scheme has undertaken consultation with parties likely to be substantially affected, including industry and consumers.

Purpose, Objective and Scope of the Dispute Resolution Scheme

Purpose and Objective

36. Section 52(1)(a) requires that the Minister has regard to whether the scheme has an appropriate purpose.

37. As a minimum, it is suggested a scheme clearly states that it will consider complaints with respect to a particular type of financial provider who may be a member of the scheme. Other matters that could appropriately be covered in the scheme's purpose include, but are not limited to:

• Providing advice to members of the scheme on dispute resolution; and
• Providing information to potential users of the scheme and community agencies.

38. Documents such as the scheme's constitution, terms of reference or charter would likely set out the purpose and the types of financial service providers who may be members of the scheme. Section 63(a) of the Act requires the scheme to accept all providers of that type. This is to avoid having multiple schemes for the same types of financial service provider.

Scope

39. Intertwined with the purpose of a scheme is the scope of a scheme. The scope of a scheme is generally defined by two factors:

• The classification of consumer complaints; and
• The monetary claims limit or cap.

A scheme needs to clearly state which consumer complaints may be considered by the scheme and the amounts of money that complaints lodged with the scheme may be about.

Classification of Consumer Complaints

40. The Act does not define "complaint". Rather, section 63(g) specifies that the scheme must have a rule that complaints can be made about:

• Breaches of contract;
• Breaches of statutory obligations;
• Breaches of industry codes; and
• Any other matters provided for in the rules.

41. Similar to the Act, a scheme could consider not defining complaint and instead rely on the scope of the scheme's rules to provide general guidance on the type of complaint that can be considered.

42. Typically, complaints made seek redress related to cost, timeliness, fairness, contractual matters, business practice, poor service or interpretation of service/product rules, terms and conditions.

43. A scheme might want to consider noting what would not be covered as a complaint, for example, that "complaint" does not include dissatisfaction with commercial decisions, prices or interest rates where no actual "harm" requiring redress has been suffered. Generally, dispute resolution schemes do not consider complaints about decisions made in the exercise of the commercial judgement of a member organisation, although it is suggested the scheme rules should provide that the scheme can consider complaints about commercial judgement which involves an act or omission contrary to or not in accordance with a duty owed at law, in a code of practice, or pursuant to the terms (express or implied) of the contract between the scheme member and the consumer. The scheme should also consider investigating administrative matters about how that judgement is effected.

44. A disputed transaction handled by a scheme may also involve matters that are disciplinary complaints. A disciplinary complaint is one related to conduct or competence and is an expression of dissatisfaction or concern that a financial service provider has not acted competently or ethically, or has acted negligently. These complaints are handled by the relevant industry disciplinary body. Disciplinary procedures do not normally involve compensation for consumers. A consumer dispute resolution scheme, however, is aimed at providing redress for consumers. Schemes should include procedures for information sharing with the appropriate disciplinary bodies for their members.

45. The important principle is that consumers are clear which complaints can be taken to the scheme. While categories can be used to demarcate the scheme's jurisdiction, it is suggested there should not be an obligation on a complainant to frame their complaint according to the relevant category.

46. A scheme wanting to define complaint could consider a definition such as the one in the Australian Standard on Complaints Handling (AS ISO 10002-2006), as follows:

47. With respect to "Any other matters provided for in the rules", the important principle to observe is that the scheme rules should not unnecessarily limit complaints. There are many bases on which complaints can be laid. The Disputes Tribunal, for instance, has jurisdiction over claims based on contract, quasi-contract, and certain torts. Other possible bases include unfairness or unconscionable conduct.

When Complaints can be taken to the Disputes Scheme

48. It is expected that the rules of a dispute resolution scheme will provide that in the first instance a consumer's complaint will need to be taken up with the FSP member who provided the product or service. The rules will then need to be clear when the complaint can be taken to the dispute resolution scheme. For example, this may be along the lines that:

• redress has not been offered to the consumer or the redress offered was considered unsatisfactory or the parties have agreed they are in deadlock and the complaint was lodged within a specified time period of deadlock being reached (and the member had informed the customer of this time limit); or
• it has been a specified time period (say 2 months) since the complaint was lodged, and the complaint has not been resolved, even if the member has not advised the matter is in deadlock.

49. Essentially, the dispute resolution scheme rules need to provide clear timeframes for when a complaint can be taken to the reserve scheme. The aim should be to provide a suitable period for the complainant and the FSP to resolve the matter; yet also to allow the complainant an avenue for alternative consideration of the complaint if he or she feels that the complaint is not being fairly processed.

50. "Deadlock" refers to the situation where a complaint reaches an impasse in the member's internal complaints scheme. The consumer is unsatisfied with how the complaint is being dealt with, but the member has not referred the complaint to the external dispute resolution scheme.

51. Section 63(e) of the Financial Service Providers Act requires the scheme's rules to specify a period after which the scheme, if asked by a complainant, must investigate a complaint that has been made directly to a member. This is to avoid the situation where a complaint remains deadlocked at the internal scheme level. In order for a deadlock provision to operate effectively, a complainant must know that an external scheme exists and that they have a right to access it after a certain period.

53. Schemes imposing a time limitation on claims should do so in a way that is consistent with the principle of accessibility. It is suggested consideration is given to a limitation period of 6 years for money claims, or 3 years after the "late knowledge date". The late knowledge date is the date on which the person making the claim ought to have known of the facts on which the claim is based. It is also suggested there is a 15 year longstop. This places an ultimate time limit of 15 years on all money claims. These suggestions are in line with the proposed Limitation Bill.

54. The proposals being considered for the Limitation Bill are similar to aspects of the current ASIC proposals to require all schemes to introduce a 6 year time limit from the date that the consumer first became aware, or should reasonably have become aware, that they suffered the loss the complaint is about. The ASIC proposals do not contain a longstop.

55. A scheme should also establish clear rules about when it becomes effective and about retroactive application. For new schemes, it is not expected it would have jurisdiction over complaints arising from an act or omission which occurred prior to the scheme's establishment. An exception would be where the complainant could not reasonably be aware of the act or omission until after the establishment of the scheme. Schemes also need to provide rules for when a scheme should have jurisdiction over complaints about new members to the scheme.

Dual Access

56. The scheme rules may also want to set out whether its members may refer complaints to the scheme. Dual access is not a requirement in the Act and dispute resolution schemes are established primarily for the benefit of consumers. However, there is some merit in allowing a member to refer a complaint to the scheme in some circumstances, such as when the member's internal scheme is unable to resolve a dispute with a particularly vexatious complainant or if access to an independent dispute resolution scheme would be useful for resolving a complaint that is complex and potentially contentious in a timely and independent manner.

57. ASIC recently consulted on dual access for their guidelines for dispute resolution schemes; in other words a financial service provider has the ability to access the scheme if they so choose, not just a consumer who has an unresolved complaint. It is anticipated that this will be useful when a provider is involved in an intractable dispute and wishes it to be resolved independently. The provider, rather than the complainant, could then refer the matter to the scheme.

58. If a scheme provides dual access, the rules should identify the circumstances in which it can be invoked by a member, and perhaps any specific fee requirements.

Who can make a Complaint to the Scheme?

59. Section 63(c) of the Financial Service Providers Act requires an approved dispute resolution scheme must have a rule stating that consumers and businesses with 19 or less full time equivalent employees may lodge complaints with the scheme. "Business" is defined in the Act to include any profession, trade, or undertaking, whether or not carried on with the intention of making pecuniary profit. This definition is wide-ranging and captures small businesses through to kindergartens, sports groups and community organisations. A scheme might find it useful to provide a clear description to better assist potential users of the scheme.

60. The scheme may wish to extend access to the scheme to other classes of complainant. This is neither a requirement of the Act; nor is it precluded. For example, a scheme might provide that all primary schools may use the scheme on the basis that some primary schools will have 19 or less employees but others are larger.

61. The scheme rules ideally should not limit the classes of complainant to "past or present customers". Consumers who have been refused a service, or who have received a service without actually being a customer of the financial service provider should not be excluded from accessing the scheme.

Amount Claims may be About

62. The Act does not specify a monetary limit in respect of complaints that may be considered by an approved dispute resolution scheme. In order for a scheme to be approved the amount of money that complaints lodged with the schemes may be about must be reasonable and appropriate (s52(f)). It is suggested schemes should specifically set either a limit or a cap. In choosing the limit or cap amount, the scheme should be guided by the nature, extent and value of consumer transactions in the relevant industry.

63. A compensation limit usually states the maximum value of a claim that can be brought to the scheme. In such a case, if the value of the transaction at the centre of the claim is above the limit, then the claim can not be lodged. A cap usually means that consumers may bring a dispute to the scheme where the value of the transaction in question is above the cap; however, awards may only be made to the cap. A consumer waives the excess of their claim in order to have access to an external dispute resolution scheme.

64. The current Banking Ombudsman Scheme and Insurance & Savings Ombudsman Scheme can consider claims to the value of $200,000. The expectation is that any limit or cap is not less than the Disputes Tribunal claims limit. The National-led Coalition Government has introduced to Parliament a Disputes Tribunal Amendment Bill which proposes to raise this limit to $15,000 and $20,000 with the consent of both parties. The Motor Vehicle Disputes Tribunal has a limit of $50,000, and it is proposed to increase this to $100,000 based on the price of commonly bought new vehicles. A limit of $100,000 is proposed for the Reserve Scheme.

65. In Australia, ASIC recently consulted on a proposal to replace monetary limits with compensation caps when approving external dispute resolution schemes in the financial sector. ASIC proposes to specify an amount for compensation caps, which will be adjusted every three years using the higher of the increase in the Consumer Price Index or the male total average weekly earnings. Schemes may want to consider indexing their compensation cap or limit. Adjustments to the cap or limit could also be built in as a consideration in each 5-yearly independent review.

66. In addition, under the ASIC proposals consumers could be entitled to claim interest, which may mean that the total amount of compensation is over the cap. Schemes may want to consider including in the rules whether a consumer's claim for interest can be allowed over and above a cap or limit.

Complaint must be Free of Charge

67. As required by section 63(l) of the Financial Service Providers Act, the rules of the scheme must provide that there will not be a fee charged to any complainant to investigate or resolve a complaint.

Unacceptable Actions by Complainants

68. A scheme may wish to consider having a process for responding to complainants who are abusive or unreasonable in order to remain effective and efficient. Unreasonable complainants may absorb resources that could be used for meritorious cases. Unreasonable complainants, however, should not be confused with complainants who require sensitivity, for instance in areas of mental capacity. If the scheme has a process for responding to unacceptable actions by complaints, the details of complainants that have been rejected should be recorded for accountability and audit purposes.

69. Vexatious complainants may also skew the number of complaints against a member, in particular if that member is a small entity. This could have important ramifications for the funding burden placed on the member (funding is discussed in a later section). The UK Financial Ombudsman Service allows 4 free complaints a year in recognition of this possibility. A free complaint allowance may not be possible in this instance, given the smaller scale of New Zealand's operations, but a scheme may want to consider mechanisms to recognise the effect of vexatious complainants.

Membership Requirements and Obligations

70. The scheme rules need to clearly specify the requirements and obligations of membership to the scheme. Typically, these would be contained in participation agreements between the scheme and the member organisations.

Scheme Membership

71. Section 63 of the Act requires the following rules regarding scheme membership to be included in the scheme's rules:

• the types of financial service providers that may be members of the scheme, and all providers of that type must be eligible (section 63(a));
• how to become a member of the scheme and how membership may be terminated (section 63(b); and
• that membership is not open to a FSP who has not taken remedial action imposed on it by another approved dispute resolution scheme or the reserve scheme (section 63(k)).

72. Financial service providers should only be a member of one scheme.

Obligation to Comply and Co-operate

73. It is important that the scheme rules address members' obligations to comply and co-operate with the scheme, and any relevant code of practice. It is suggested that to demonstrate commitment to the scheme, there should be as a minimum an obligation on every member to comply with a recommendation for compensation made by the scheme decision-maker.

74. There should also be an obligation on members to provide the scheme with the necessary information to enable effective investigations by the decision-maker, except where disclosure of such information is prohibited by law. In such an instance, the member may take reasonable measures to protect information that is confidential and/or subject to privilege, such as making deletions to the provided material.

75. Schemes may also like to impose an obligation for scheme members to co-operate with each other.

Effective Internal Complaints Handling

76. Front-line internal complaints staff are critical when it comes to recognising complaints, assisting complainants and avoiding the unnecessary escalation of complaints.

77. A scheme may look to include as a basic requirement of scheme membership that there is an effective internal complaints handling process. Suggested options for this requirement include approaches such as:

• Requiring a basic defined level of training of staff handling complaints;
• Requiring a system is in place for recording details of the complaint (and for any particular complaint that is taken up by the dispute resolution scheme details in the system may be accessed by the scheme); and
• Requiring a common system for internal complaints handling by scheme members. It is important though that if this is a condition of membership it does not create an unnecessary barrier to entry for eligible members of the relevant provider type. The scheme could then co-ordinate the training of all members' complaints staff.

Consumer Accessibility Requirements on Members

78. Section 63(r) of the Act requires that schemes have a rule that members must inform consumers and businesses who may access the scheme about the scheme.

79. An effective disputes resolution scheme is one that people know exists and when someone wants to use it, its processes are accessible. In order to achieve this, the commitment of scheme members to its promotion is crucial.

80. Schemes should demonstrate commitment to accessibility. As such, a scheme may want to impose some promotion obligations on members, such as requiring promotional material available at the point of sale of financial products, and the continued provision of information on bills or disclosure statements. Another suggestion is that a scheme requires its members to have accessible internal processes, such as a clearly labelled "complaints" section on their websites. Consideration could also be given to promotional information targeted both at individual consumers and at the organisations they are likely to go to for help with a complaint, such as Citizens' Advice Bureaux.

81. A major obstacle to accessibility for consumers in dealing with FSP members can be the manner in which members classify communications from consumers as queries or complaints. As discussed earlier, schemes need to decide whether they will define "complaint". Consumers need to be clear about which complaints can be taken to the scheme. The suggested good practice is that a scheme has a common definition of complaint on all members' internal schemes, and in addition educates members about the need to investigate all queries even if the word "complaint" is not used by the consumer.

82. A further accessibility problem at the scheme FSP member level can be the number of complaints left at deadlock stage within the internal complaints procedure. As discussed earlier, schemes should have in place a rule about when complaints can be referred to the dispute resolution scheme. One approach may be for all members of a scheme to commit to a certain process for handling complaints and when to pass them to the dispute resolution scheme.

83. A scheme may also consider requiring members to tell all consumers making a complaint to a member's internal system at the outset that ultimately an external dispute resolution system is available. Best practice would be to provide the information on the internal and external complaints process when first entering into a contractual relationship with the consumer, and providing this information again when a complaint is laid.

84. The accessibility principle encompasses internal as well as external accessibility. Schemes must be easy to find, and easy to deal with once they are found. The process should be clear, simple and easy for the consumer to use. The scheme should impose requirements on its members that facilitate internal accessibility, such as the provision of information in a timely fashion, and co-operation with the decision-maker and his/her staff.

85. The underpinning principle is that accessibility cannot be achieved without a climate of commitment to the overall aims of the scheme.

When Membership can be Terminated

86. The scheme rules need to clearly state when and how there can be termination of membership. It is suggested that grounds for terminating membership include if the member:

• Fails to pay any fees or charges of the scheme without reasonable explanation;
• Fails to uphold remedial action recommended/required by the scheme's decision-maker without reasonable explanation; or
• Continually fails to comply with the rules of the scheme.

87. The scheme rules should also provide for termination of membership at the member's request, and for the notice period required for withdrawing from a scheme. FSP members should bear in mind that in order to be registered as a FSP, they must be a member of an approved scheme or the reserve scheme.

Governance Requirements

88. The Act does not specify an exact governance structure for schemes. It is left up to the scheme to determine which structure most adequately meets the needs of members and the benchmark principles.

89. The governance of the scheme should provide for clear independence of the scheme from the FSP members. It is suggested that to ensure independence, the decision-maker and/or the scheme's staff should be responsible for the handling and determination of complaints; be accountable only to the overseeing body; and be adequately resourced.

90. Independence is not just about actual arrangements and processes, but also about perceptions.

91. Schemes should aim for a governance structure that avoids industry-capture by interest groups, and prohibits industry from vetoing decisions made by the overseeing body.

92. Schemes may wish to consider having a body to act as a forum for industry members. All members of the industry would be eligible to join this forum. This body could appoint industry representatives to the governance board, and would help co-ordinate industry interests and settle on mandates for the industry representatives. It should not, however, be the rules decision-making body.

93. A further suggestion is that schemes separate the functions of setting the budget and allocating the costs amongst members. For example, an overseeing entity could set or approve the budget for the operation of the scheme, but a separate body such as the member forum could decide how the cost is to be divided amongst the members. Funding arrangements are discussed further in this paper.

Governance Board

94. Good practice suggests a scheme should have a governance board that has the responsibility and appropriate powers to oversee the operations of the scheme. If this approach is adopted, it is suggested that there is a balance of consumer and industry voices on the governance board. Generally, this equates to equal numbers. The governance board needs to represent the interests of both stakeholders to a scheme – the FSP members and the FSP customers.

95. Ideally, the representatives on the governance board are drawn from the top levels of management of the scheme's FSP members. From observing various schemes, top level commitment to a scheme at the governance board level seems to result in more overall commitment to the aim of the scheme by FSP members. There should also be an independent chair. The Minister is required to consider whether the scheme's directors and senior managers are competent to manage a dispute resolution scheme (section 52(d)).

96. The scheme rules should set out how representatives on the governance board are to be appointed. One option for consumer representatives is to use the Ministry of Consumer Affairs consumer representative network as a source of possible nominees³. Other options are to consult with respected consumer organisations, or invite the Minister of Consumer Affairs to make the appointments. The emphasis should be on achieving actual and perceived independence from industry.

97. The scheme rules should also set out the criteria for appointing industry representatives and the independent chair. One option is to task a members' forum with appointing the industry representatives, but the representatives should be people in whom consumers can have confidence. The Banking Ombudsman and Insurance & Savings Ombudsman schemes provide for a separate process for choosing an independent chair. In the telecommunications sector, the Telecommunications Dispute Resolution Service provides for more consumer than industry representatives with the chair elected from the consumer representatives.

98. The scheme rules should set out the functions for the overseeing body. It is suggested that the functions should be along the lines of:

• Appointing the decision-maker, who it is suggested is to have no relationship with the scheme members that fund or administer the scheme which would give rise to a perceived or actual conflict of interest. It is suggested that the decision-maker is accountable to the governance board rather than the scheme members;
• Agreeing on the budget;
• Recommending and promoting consultation about proposed changes to the rules and the terms of reference;
• Receiving and considering complaints about the operation of the scheme (the Governance Board could elect to consider the complaint itself or could seek advice from an independent person);
• Monitoring systemic issues from complaints lodged with the scheme, including complaints falling outside the terms of reference;
• Monitoring the reporting of systemic issues and / or serious misconduct by the scheme; and
• Monitoring the scheme's ability to manage its caseload and perform its functions.

99. It is suggested that the scheme rules set out the governance board's powers (such as recommendations) in the event that the scheme is not performing to the required standards. It is suggested that the scheme is required to respond in a timely and appropriate manner to any recommendations of the governance board addressing complaints about the operation of the scheme.

100. Another suggested function of the overseeing body is responsibility for appointing the person to manage the day-to-day operations of the scheme (normally this person is the decision-maker). That person could then be responsible for appointing, supervising and dismissing the scheme's staff.

101. The Minister is required to have regard to whether the scheme directors and senior managers are competent to manage a dispute resolution scheme.

Decision-making

102. The scheme rules need to set out:

• The powers for the decision-maker; and
• Matters the decision-maker is required to have regard to.

103. The decision-maker is to be responsible for the determination of complaints. The decision-maker's powers are to be set out in the rules, as required by section 63(i) of the Act, and may include the power to order compensation or to recommend a member takes certain actions.

104. Section 63(h) of the Financial Service Providers Act specifically requires rules providing that the decision-maker may consider any information in relation to a complaint and make any inquiry that is fair and reasonable in the circumstances. It is suggested that the scheme rules require that the decision-maker makes determinations based on what is fair and reasonable, having regard to good industry practice, relevant industry codes of practice and the law.

105. The two most common approaches regarding decision-making structure are: one commissioner/adjudicator; or a panel of decision-makers.

106. A scheme needs to outline the appointment process and criteria for decision-makers. Typically, decision-makers would have expertise in alternative dispute resolution and/or have a legal background, as well as the necessary attributes and experience to perform the functions of decision-maker.

107. A scheme may also choose to outline a removal process for decision-makers, or may deal with this aspect through the private employment contract.

Dispute Resolution Techniques

108. There are several techniques that a scheme may employ to resolve a dispute. The Arbitrators' and Mediators' Institute of New Zealand considers that the main methods are negotiation, facilitation, mediation, arbitration, adjudication, conciliation, investigation and expert determination. It is suggested that the scheme rules should provide that arbitration, adjudication and expert determination are only used after the other techniques have been attempted.

Reviews of Determinations

109. The Financial Service Providers Act does not require schemes to provide appeal rights to an outside forum, such as the District Court.⁴ There was some discussion of appeal rights by the Finance and Expenditure Committee which considered the Bill preceding the Act. A number of FSPs considered there needed to be some basic review rights. Accordingly, it is suggested that schemes might want to consider internal mechanisms for reviewing determinations on procedural grounds.

110. If any review processes are provided for in a scheme, it is important that there are clear rules for refusing reviews based on the substantive merits of the case, as allowing such reviews may lead to an unnecessarily protracted process. This would undermine the purpose of dispute resolution schemes as a simple, low cost method of resolving complaints.

111. It may be possible for complainants to seek judicial review of the decision on the complaint. Private organisations can be susceptible to judicial review if they are exercising a public function. For instance, the Institute of Chartered Accountants has been subject to judicial review even though it is a privately funded organisation, as it exercises regulatory powers and functions that are statutory. Approved schemes under the Financial Service Providers (Registration and Dispute Resolution Act) are considered to be analogous.

Natural Justice

112. Schemes are required by section 63(f) of the Financial Service Providers Act to include in the scheme rules that complaints about members must be investigated in a way that is consistent with natural justice.

113. Natural justice imposes a duty on the scheme to act fairly towards both consumers and FSP members. The fairness principle in section 52(2) encompasses many aspects of natural justice. In particular, natural justice requires:

• Adequate notice to be given to both parties of important steps and decisions;
• The opportunity for both parties to be heard and for their views to be considered before the decision is made.

Remedial Action

114. As required by section 63(i) of the Financial Service Providers Act, the scheme rules must provide for the types of remedial action that the scheme can impose on a member to resolve a complaint, and when different remedies might be appropriate. The examples given in the Act are a requirement to change systems and monetary compensation.

115. According to the British and Irish Ombudsman Association it is vital that schemes offer a range of redress options. Suggested options that a scheme should have within its toolbox are: apology, remedial action by a member i.e. "putting things right" and financial redress. These different tools can be used in isolation or in combination.

116. It is not expected that schemes will impose punitive or exemplary damages. Schemes, however, may want to consider providing for name and shame as a form of penalty.

117. The scheme rules must also provide for how remedial action may be enforced against members, including after members have left a scheme (section 63(j)). The rules must state that a resolution is binding on the member concerned (section 63(m)) and that a resolution is also binding on the complainant, if the complainant accepts the resolution (section 63(n)).

118. As previously noted under membership requirements, the rules must also state that a FSP who has not taken remedial action imposed on that provider by another approved scheme or the reserve scheme cannot join the scheme (section 63(k)).

Complaints where a member ceases to carry on business

119. The scheme's rules need to address the situation when a complaint is received about a scheme member that subsequently ceases to carry on business. Of interest is that ASIC is currently proposing to harmonize such rules amongst all schemes, to require all schemes to investigate complaints about a member that has ceased to operate.

120. In the instance where a scheme member has ceased to carry on business and where the scheme has recommended a compensation award, the consumer may not be able to receive any compensation as there is no entity against which the compensation award can be enforced. In addition, liquidators are not bound by the decisions of external dispute resolution schemes. However, the consumer may still receive some benefit from laying such a complaint, for instance where the scheme member has been placed in administration and subsequently recovered and resumed trading. In this scenario, the complainant would be able to enforce the compensation award against the member.

Compliance Monitoring of Members

121. Schemes also should have mechanisms to monitor compliance, and some form of sanction for when there is non-compliance with a rule of the scheme (rather than a ruling of the decision-maker). As previously suggested, schemes may wish to impose an obligation to co-operate with the scheme as a condition of membership.

122. The greatest incentive for compliance is the fact that a FSP must be a member of an approved dispute scheme or the reserve scheme in order to be registered. Without registration, the FSP cannot legally operate in the market. It is suggested a scheme has a scale of sanctions from name-and-shame through to termination of membership for breaches of the membership rules. Schemes may wish to include information on member compliance in the Annual Report.

123. The rules should include a mechanism to enable the scheme to meet its obligation under section 67 to report to the relevant licensing authority where there is a series of material complaints about a particular licensed provider or class of licensed provider.

Alternative Legal Action

124. The scheme rules must provide that the complainant may take alternative court action against the member at any time (section 63(o)). Once this occurs, the scheme may cease investigating the complaint (section 63(p)).

125. The accessibility of consumer dispute resolution schemes can be undermined by allowing members to take alternative court action once a complaint has been lodged. However, there are two situations where a scheme may consider it important to allow a member to pursue the matter before the general courts:

126. The first situation is where a limitation period is about to end. Scheme members should be allowed to preserve their legal rights by taking court action, however, it is suggested the scheme rules should provide that only the minimum necessary action is to be taken. Under this scenario, it is suggested the rules provide that once a complaint is resolved by the scheme decision-maker, the member will discontinue any aspect of the legal proceedings that is inconsistent with the agreement or determination.

127. The second situation where alternative legal proceedings by the member would be appropriate is in test cases concerning an important legal issue for the industry.

Procedural Rules

128. Section 63 of the Financial Service Providers Act provides that a scheme must have procedural rules that:

• specify how a consumer may make a complaint to the scheme (section 63(d));
• provide that a complaint can be lodged free of charge (section 63(l));
• provide for a specified deadlock period after which complaints to a member which remain unresolved can be investigated by the scheme (section 63(e));
• provide, in resolving a dispute, the decision-maker may consider any information and make any inquiry that is fair and reasonable in the circumstances (section 63(h)); and
• provide complaints must be investigated in a way that is consistent with natural justice (section 63(f)).

129. These have all been discussed above. In addition, the Act requires that the procedural rules are adequate in terms of the benchmarks. Some suggestions on how the benchmark principles can be reflected in the procedural rules follow.

Accessibility

130. As already discussed, the scheme's process should be easy to use and have no cost barriers (they must be free to consumers). Approaches that demonstrate accessibility might include, but are not limited to, whether the scheme:

• Uses an informal, non-adversarial approach;
• Has adequate funding allocated in the budget to use on achieving an internally accessible process, such as for promotional materials;
• Has processes that are simple for complainants to use and understand;
• Has flexibility in the way complaints can be made, for example, allowing oral complaints and providing for the scheme to record the complaint and send it to the complainant for confirmation;
• Has a toll free number for consumers to contact the scheme;
• Provides interpreters if needed;
• Allows complainants to use support persons;
• Allows complainants to authorise a person to represent them in respect of a dispute, if the complainant is a child, seriously ill, mentally handicapped, frail, elderly or non-English speaking;
• Utilises a range of techniques such as conciliation, mediation and negotiation before arbitration is considered;
• Provides for the scheme member to pay the legal costs of complainants where the scheme member is the first party to request to be legally represented and the decision-maker agrees to that request;
• Has measures in place to help customers with special needs, be they socio-economic, cultural, language, geographical or physical needs, to access the scheme and use it effectively;
• Provides material which is easily accessible and simple to use, explaining: how to access the scheme; how the scheme works; major areas the scheme deals with; and limits on the scheme's powers;
• Does not require complainants to attend hearings or meetings; and
• Employs other methods to resolve complaints, such as emails, phone calls and online forms.

131. Accessibility issues may be a result of capacity or circumstance. In particular, the information asymmetries and complex nature of financial transactions and products require extra measures to ensure accessibility for consumers.

132. Section 64 of the Financial Service Providers Act requires that the person responsible for an approved dispute resolution scheme must make copies of the scheme's rules available to the public.

Independence

133. The scheme's processes and administration should be independent from scheme members. Approaches that demonstrate independence might include, but are not limited to, whether the scheme:

• Has a decision-maker who is responsible for the determination of complaints, who is not answerable to scheme members for determinations;
• Has a decision-maker who has no relationship with the scheme members that fund or administer the scheme which would give rise to a perceived or actual conflict of interest;
• Has staff which are not selected directly by scheme members, and are not answerable to scheme members for the operation of the scheme;
• Is overseen by a separate entity with a balance of consumer and industry interests; and
• Has sufficient funding to enable its caseload and other relevant functions necessary to fulfil its terms of reference to be handled in accordance with the principles in section 52(2) and the rule requirements in section 63.

Fairness

134. The scheme's processes should be perceived as promoting decisions which are fair and are seen to be fair. Approaches that demonstrate fairness might include, but are not limited to, whether the scheme:

• Advises complainants of their rights to access the legal system or alternative redress mechanisms at any stage, including if the complainant rejects the resolution of their complaint by the scheme;
• Allows both parties to put their case to the decision-maker;
• Informs each party of the arguments and case of the other party;
• When making a decision, relies only on information available to both the parties (i.e. not confidential documents) unless special circumstances apply;
• In making determinations or recommendations, has regard to what is fair and reasonable in all the circumstances; and regard is also given to any relevant industry codes and established legal principles;
• Has procedural guarantees of due process;
• Informs parties of the reasons for a determination, and the procedure by which a recommendation of the decision-maker may be accepted by the parties to the complaint;
• Advises a complainant why a complaint is outside the jurisdiction of the scheme;
• Encourages but does not compel a complainant to provide information relevant to a complaint, but has the ability to compel information disclosure from members, subject to confidentiality and other legal restrictions on disclosure;
• Insures any provided sensitive and confidential information is kept confidential by the decision-making body and its staff, unless disclosure is required by law or in order to meet one of the other benchmark principles; and
• Overall, the process is transparent to both parties.

Accountability

135. The scheme should publicly account for its operations and should highlight systemic industry problems. Approaches that demonstrate accountability might include, but are not limited to, whether the scheme:

• Regularly provides written reports of decisions (with names deleted) to members and other interested parties;
• Publishes a detailed and informative annual report, which is available to the public. Regarding the annual report, it is suggested this contain information such as:
  • information about how the scheme works
  • results of the internal review
  • statistics on caseload, resolved cases, cases rejected on jurisdictional grounds, the amount of time taken to resolve complaints
  • results of feedback surveys
  • some examples of typical cases
  • information on compliance with the benchmark principles
  • the list of members
  • information on performance standards
  • the results of the independent review, if any independent review has been conducted that year
  • financial statements which sufficiently illustrate how the funding is being utilised
  • a list of scheme members who committed substantial breaches of their membership obligations
  • any systemic issues arising from complaints, and how those issues have been dealt with
  • information about new developments or key areas in which policy or education initiatives are required; and
• Requires the governance board to report on member compliance.

Efficiency

136. The scheme should operate efficiently by keeping track of complaints, having a process for ensuring complaints are considered appropriately and regularly reviewing its performance. Approaches that demonstrate efficiency might include, but are not limited to, whether the scheme:

137. Deals only with complaints within its scope, and has procedures for referring other complaints to the appropriate forum. Approved schemes are under a statutory obligation to co-operate with other approved schemes, the Registrar, and the Reserve Scheme; and

138. Keeps track of complaints by using systematic records, having time limits for the resolution of complaints, and provides complainants with receipts indicating acceptance of their complaint and the projected timeframe for resolving the complaint.

Effectiveness

139. The scheme should operate according to appropriate and comprehensive terms of reference or objectives and provide for independent review. Approaches that demonstrate effectiveness might include, but are not limited to, whether the scheme:

• Has clear scope, and that scope is sufficient to deal with the majority of consumer complaints about its FSP members;
• Grants clear powers to the decision-maker;
• Has mechanisms in place to refer systemic industry problems to the overseeing entity;
• Has the power to make monetary awards of sufficient size, according to the nature, extent and value of customer transactions in the financial services industry;
• Requires the scheme to respond in a timely and appropriate manner to any recommendations of the governance board addressing complaints about the operation of the scheme.

Managing Expectations

140. The overall effectiveness of a scheme is particularly dependent upon managing expectations. It is anticipated that if complainants are kept informed of the progress of their case and feel they are being treated fairly, then overall satisfaction with the scheme will increase even where financial compensation has not been granted.

Discussion of Particular Procedures

Written Decisions

141. In order to satisfy the fairness and accountability benchmarks, decision-makers have an obligation of a degree of consistency and openness in decision-making. One way consistency can be achieved is through issuing written decisions. This does not amount to a requirement to be bound by previous decisions (as in a court when faced with a binding precedent). Fairness and accountability also require that parties to a dispute are able to ascertain the reasons for the decision-maker's determination, and identify the evidence that has been relied on in reaching that conclusion.

142. Written decisions can be used in two ways:

• To provide parties to a dispute with a clear understanding of the decision-maker's reasoning; and
• As a publicly available education tool.

143. International good practice is that written decisions are made widely available to the public in an anonymous and/or summarised form. Examples are the Banking Ombudsman and the Insurance & Savings Ombudsman Case Notes. Providing case notes allows FSP members of a scheme to educate themselves and adjust their practices, as well as educating consumers. In the long run, this will avoid many trivial or systemic disputes. Written decisions allow schemes to contribute to the development of law in the financial sector. One option may be for case notes to be accessible on the scheme's website.

144. The ASIC guidelines recommend the provision of written reasons for decisions. To enhance transparency, one suggestion is to include with the written decision advice specifying the documents relied on, which can be provided to parties upon request. The ASIC guidelines also recognise that endangerment to a third party or security reasons may preclude the sharing of documents.

Legal Representation and Support Persons

145. In the list of approaches that could be considered for demonstrating a scheme meets the accessibility principle, the following were noted:

• If a scheme member is the first to request legal representation and the decision-maker agrees to it, then the scheme member is required to pay for legal representation for the consumer; and
• The scheme allows for support persons for those consumers who are disadvantaged or vulnerable due to capacity or circumstance.

146. Whether or not those taking or defending a complaint should be allowed legal representation is a difficult issue. Industry-led dispute resolution schemes are similar to the Disputes Tribunal, which does not allow for legal representation. Accordingly, the suggested principle is that legal representation should be discouraged, as it may undermine the aims of a simple, quick and inexpensive method of dispute resolution. However, due to the prevalence of in-house legal teams it may be hard to avoid. A blanket ban on legal representation may simply encourage members to "bury" the legal advice that they have received. A good decision-making process should alleviate the problem, as it is the scheme's and not the complainant's responsibility to test the member's case. Legal representation for the consumer therefore becomes less important if the decision-maker is respected.

147. Identifying vulnerable or disadvantaged consumers is often a matter of common sense. For many people, even writing a letter or engaging in a telephone conversation may be intimidating. An accessible and fair process, and an accessible and fair culture amongst the members' staff and the scheme's staff, will help many consumers. Schemes should be aware that vulnerability may be caused by the complexity of information involved in the financial sector.

148. A good rule of thumb for deciding what accessibility requirements are necessary is to consider what might remedy the underlying imbalance between the complainant and the member.

Funding Requirements

149. Section 52(1)(c) of the Financial Service Providers Act requires the Minister to have regard to whether the applicant seeking scheme approval has adequate funding to enable it to operate the scheme according to the scheme's purpose and rules. Accordingly, applicants will need to provide details of their funding arrangements.

150. One suggestion is that the members' forum sets the funding mechanism, subject to approval by a governance board. The governance board would then be required to ensure that the funding mechanism:

• Has a user pay component which encourages robust internal complaints mechanisms;
• Ensures efficient and effective resolution of complaints.

151. Suggestions for demonstrating the adequacy of funding and that it will enable the effective operation of the scheme include, but are not limited to:

• Transparency and fairness – the funding details should be clearly set out in the rules, including ongoing fees, one-off fees to establish the scheme, and any per-complaint charges or pro rata charges;
• Amount to be included in the rules, so that any changes to the funding arrangements must comply with the rule change procedures under the Act. This is to avoid a scheme from later undermining its effectiveness by lowering the fees to an unviable level;
• User pay component as an incentive for the improvement of members' internal schemes;
• Any incentives to promote efficiency;
• Avenues for members to dispute the amount they have been charged by the scheme;
• Independence of the scheme from its members should not be compromised by the funding arrangements – both actual and perceived independence;
• Sufficient funding secured to enable the scheme to operate in accordance with the benchmarks, i.e. scheme must not compromise on its effectiveness in order to lower the fees to members; and
• Adequate funding, and adequate mandate, to carry out promotional activities.

Performance Monitoring of Schemes

152. The performance of approved schemes will be monitored and assessed through a number of avenues:

• The scheme's rules must require an independent review of the scheme at least once every 5 years, and that review is to be supplied to the Minister. (section 63(q));
• The scheme must supply the Minister with an annual report containing prescribed information (section 68); and
• The Minister may also ask for further information in order to assess compliance with the principles of fairness, independence, accountability, efficiency, effectiveness and accessibility.

153. It is suggested that schemes look at monitoring their performance through a mix of objective and subjective data. Objective measures might include collecting data on the number of complaints received, the average time per complaint, demographic information on the complainants accessing the scheme, the range of complaints and the types of product or service being complained about. To round out the impression of the objective data, information such as user satisfaction could be helpful.

Setting Performance Standards

154. The Act does not explicitly describe or require performance standards for approved schemes. It is suggested, however, that schemes consider having some performance standards. These can be particularly important when reviewing a scheme. Performance standards should enable third parties to determine that the scheme is operating according to the principles.

155. Members of the various sectors are best placed to develop their own performance standards that reflect the complexities of their business. Scheme applicants are expected to apply their institutional knowledge with the benchmark principles. For example, a scheme may set a time period for resolving disputes based upon a balance of the efficiency, effectiveness and fairness principles. Performance standards could also include broader issues such as the overall accessibility of the scheme.

156. ASIC is currently proposing that financial service providers should provide a final response to complaints to their dispute resolution scheme within a maximum of 45 days, but within 30 days if possible. If the financial service provider cannot respond within 45 days, it should inform the complainant of the reasons for the delay and their right to refer the complaint to the EDR scheme.

Performance Monitoring

157. Apart from setting performance standards, performance monitoring consists of three aspects – developing programmes to achieve goals, measuring performance to see if it meets the goals, adjusting and implementing new programmes to ensure continued high performance.

Independent Review

158. Schemes are required by s63(q) to have a rule that an independent review of the scheme will take place every 5 years. Section 63(q) also requires that the independent review is supplied to the Minister of Consumer Affairs within 3 months of completion.

159. Schemes might wish to consider appointing the independent reviewer through the governance board, following consultation with the Ministry of Consumer Affairs. The terms of reference for the review could be determined using a similar process.

160. A further suggestion is that schemes make copies of the independent review available to relevant stakeholders. A summary of the review may be included in the Annual Report for that financial year. It is a requirement in the Financial Service Providers Act that annual reports are made available to the public (section 70).

³ Network members are primarily from non-governmental organisations, and are:

⁴ Although a consumer can take court action at any time, this is as an alternative to the dispute resolution scheme process, rather than to review a scheme decision.