Financial disputes resolution

Where to turn when financial matters go pear-shaped.

11oct financialdisputeresolution hero2

There are 4 approved schemes to which consumers can take their financial grievances. We spoke to the head of each one to find out what they can help with, what they can't, how the process works and how to access the scheme when a problem comes up.

The schemes

The 4 schemes providing financial dispute-resolution services are:

  • Banking Ombudsman (BOS)
  • Insurance and Financial Services Ombudsman (IFSO)
  • Financial Services Complaints Ltd (FSCL)
  • Financial Dispute Resolution Service (FDRS)

The Banking Ombudsman (BOS) and the Insurance and Financial Services Ombudsman (IFSO) schemes have existed since the 1990s. They started out as self-regulatory schemes established by the banking and insurance industries and over that time have considered thousands of complaints.

Financial Dispute Resolution Service (FDRS) is an independent dispute resolution service operated by FairWay Resolution Ltd, New Zealand's largest specialist dispute resolution organisation.

Financial Services Complaints Ltd (FSCL) was established in 2009. Its members include non-bank lenders, finance companies, brokers and other financial advisers.

All financial advisers and financial services providers must belong to one of these schemes. Your complaint is then heard by the scheme to which your adviser or provider belongs. You must use the scheme your provider is signed up with – you can’t take your dispute to another scheme.

Tip: You can find out which scheme your provider belongs to by asking them, or by checking the register on the Companies Office website.

What they do

The schemes can investigate these types of complaints about their members:

  • any breach of contract with a consumer
  • not following industry codes of practice (which may include not dealing fairly or responsibly with a consumer)
  • conduct that is not fair or reasonable in the circumstances
  • breaking the law.

A scheme can terminate the membership of any provider who refuses to comply with its final decision – which also stops a provider from joining another scheme until the existing complaint is settled. A provider who doesn’t belong to a scheme is no longer authorised to give financial advice and can be prosecuted by the Financial Markets Authority for continuing to act as an adviser.

What they don't do

A scheme can't award compensation for more than $200,000 – although both parties to the dispute can agree to extend this limit.

As well, it can’t investigate:

  • a provider's commercial judgement (for example, whether an investment is suitable for you) unless this breaches a code of practice that the provider was bound by
  • a provider's interest rates or standard fees and charges
  • a product's investment performance
  • events that took place before the establishment of the scheme or before a provider belonged to the scheme (with the exception of FSCL which can hear complaints from April 2010 even if a member didn’t belong to the scheme at that point) or more than 6 months prior to the complaint.
  • complaints that could be better dealt with by another body (such as the Commerce Commission) or that’s already been made to another body (such as the courts) or that’s already been investigated by the scheme (although Banking Ombudsman scheme members can agree to a complaint being re-investigated and can also agree to waive the time limitations).

A scheme won't accept complaints it regards as "frivolous" or "vexatious".

Making a complaint

The 6 steps of the complaints process:

Step 1

You must use your provider’s internal complaints process first. Many problems are minor misunderstandings that can be resolved directly. Your provider has a set time to respond to your complaint – about 3 months.

If your provider hasn’t responded within this time – or if you can't agree on a solution – you've reached what’s called deadlock. Your next step is to contact your provider’s dispute-resolution scheme.

Tip: FDRS suggests contacting your provider's dispute-resolution scheme before you try the internal complaints process. Having taken basic details, the scheme will refer you back to your financial service provider so the complaint can be processed through the provider's internal complaints process. This makes the scheme aware of possible upcoming complaints and any wider industry issues.

The scheme can also check after the 3-month period to see what’s happened to your complaint – which is particularly useful if your provider hasn’t responded and the deadlock time has passed.

Step 2

Before you can lodge your complaint with the scheme, you must show you have used your provider's internal complaints process. However, if your provider hasn’t responded then the scheme can decide to start the process on your behalf.

Tip: You must take your complaint to a dispute-resolution scheme within 2 months of deadlock occurring.

Step 3

You can lodge your complaint with the scheme over the phone. All the schemes will tell you what info they need and how the process works. All have staff with legal training, so you don’t have to know the legal ins and outs.

Tip: It helps to have as much documentation as possible when you take your complaint to a scheme, such as relevant correspondence, loan documents or financial plans. This will speed up the investigation.

Step 4

The scheme gathers information from you and the provider. Your dispute may be resolved at this stage – but if it’s not, it goes on to the next step.

Step 5

This is the investigation/mediation stage. If they’re needed meetings are arranged, either face-to-face or by video (or telephone) conference, with a representative from the dispute-resolution scheme acting as a mediator. The goal is to reach an agreement. If this doesn't happen or the meetings don't take place, the scheme will recommend a settlement based on the information that it’s collected. If you don't accept this settlement, the dispute goes to the final step.

Step 6

The scheme imposes a final decision. If you accept this decision, then it’s binding on the provider. If you don’t, then the case is closed and you can pursue your complaint further through a disputes tribunal or through the courts.

Disclaimer: Sue Chetwin, Consumer NZ chief executive, is on the board of the Banking Ombudsman.

Best practice

Dispute-resolution schemes are guided by 6 "international best practice" principles.

  • Accessibility: The schemes must be well promoted to consumers, easy for them to access and free.
  • Independence: Financial service providers fund the schemes, but aren’t involved in the schemes’ administration or decision-making.
  • Fairness: The schemes make their decisions based on the information before them. One of their major differences from the courts is that one case doesn’t set a precedent. This allows investigators more flexibility to consider each case individually.
  • Accountability: The schemes publish case studies in their annual reports and monitor industry-wide problems. They can bring these to the attention of the FMA. The rules of each scheme are independently reviewed every 5 years.
  • Efficiency and effectiveness: Each scheme’s processes and performance are regularly reviewed. Records are kept of investigated cases so these can be assessed.

The Church case

A High Court decision could prove useful for consumers pursuing cases through the new financial dispute resolution schemes.

The High Court has found financial adviser Carey Church breached her duty to provide competent advice by recommending an “imprudent concentration” of investments in finance companies. The ruling is being seen as another wake-up call for an industry still to shake off its tarnished reputation.

The Church case stemmed from an action initiated by Neil Armitage, a retired Wellington public servant. Armitage sought financial advice from Church, a director and shareholder of Turangi-based Moneyworks. The relationship began in 2005 and was terminated by Armitage in 2007.

The crux of the case was whether Church was negligent in the advice she gave her client on investing his money and that of his family trust. On two counts, the court found she was. But it also held that Armitage had to take some responsibility for the losses he incurred.

Church had recommended putting money into finance companies that later failed. These companies included Bridgecorp, Hanover Finance, MFS Pacific, North South Finance Limited and Strategic Finance. Armitage calculated he had capital losses of just over $198,000 from the company failures.

The court didn’t fault Church for recommending investment in the companies, given what was known about them at the time. But it did find she was wrong to recommend a narrow range of fixed-interest investments that focused on finance companies to the exclusion of other options such as government bonds.

In his decision, Justice Dobson stated: “I consider it was negligent of Mrs Church not to identify at any stage the much wider range of fixed interest investment options that were available.” The fact that Church did not do so left Armitage “ill-equipped to make a fully informed decision” on which investment to make.

The court also found Church was negligent in recommending investment in an ING Credit Opportunities Fund. This fund included investments in speculative “collateralised debt obligations” – repackaged high-risk loans that have been fingered as a leading cause of the global financial crisis.

Justice Dobson allowed Armitage’s claim for losses in the ING fund – but considered he could only claim a proportion of losses from the finance-company failures. The judge said Armitage had an “unrealistically high” expectation of returns and held there was no more than a “40 percent” chance he would have followed competent advice if it had been given.

Commissions still an issue

Consumers hunting for advice also need to be aware that advisers can still earn commissions from the investment products they recommend.

The High Court judgement reports that Church received a commission on each of the finance company investments she recommended to Armitage. The judge quantified her take as 1.5 percent per annum of the sum invested for the length of that investment.

We’ve previously called for commissions to be phased out and for the industry to move to fees-based remuneration. But recent law changes haven’t gone down this route. While advisers have to disclose whether they’re being paid commissions, they’re not required to be independent from any product supplier.

The potential for commissions to distort financial advice has led the UK Financial Services Authority to ban commission payments from January 2013. The Australian Government is proposing to follow, with a ban on commissions intended to take effect from July 2013. But nothing similar is planned here.

Our view

  • Apart from pursuing court action, consumers have had limited avenues for challenging bad financial advice. The new dispute resolution schemes should provide a more accessible means of seeking justice.

  • The jury’s still out on whether revamped rules for the financial advice industry will improve the quality of advice. Our concerns about commissions still stand. Until they’re phased out, the risk remains that investors will continue to receive skewed advice.

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