11oct financialdisputeresolution hero2 default

Financial dispute resolution

There are now 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.

×

Choose what’s right for you with confidence

Join today and get instant access to all test results and research.

New regulation

At last our "lightly" regulated financial sector has been reined in with increased regulation and protection for consumers, through the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Financial advisers must now demonstrate a higher level of competency by being trained, registered, and signed up to a formal dispute-resolution scheme.

A raft of law changes has been introduced to improve quality in the industry, through the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
A raft of law changes has been introduced to improve quality in the industry, through the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

The Financial Markets Authority (FMA) was formed in 2011 and replaced the Securities Commission. One of its roles is to police the tougher rules – and it got off to a quick start by taking action against Bernard Whimp and his low-ball share offers. Whimp specialised in making written offers to shareholders to buy their shares at prices well below current market value.

Since April 2011 financial advisers must put your interests first, which includes having an internal complaints system that's promoted and accessible to customers, and also belonging to one of 4 approved financial dispute-resolution schemes.

Deborah Battell, who heads the Banking Ombudsman scheme (one of the 4 approved schemes, see below), says the financial dispute-resolution schemes aim "to make justice accessible to the public". The schemes are free and cut down on the time, expense and effort of going through the legal system and are much more informal than the courts.

The director of Financial Dispute Resolution, Stuart Ayres, believes providers should encourage complaints: "Usually complaints stem from miscommunication. Dispute resolution can really change relationships between consumers and financial service providers".

The schemes

There are 4 schemes providing financial dispute-resolution services:

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

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 (FDR) was the government Reserve scheme. It was being disestablished from 1 July 2014 but the current scheme operator, FairWay Resolution Ltd, was approved to continue with it under the same name. FairWay Resolution Ltd is a Crown-owned company.

Financial Services Complaints Ltd (FSCL) is a not-for-profit organisation established under the new legislation to provide a scheme for those organisations and people outside the banks and insurance companies. It was the first scheme approved and has the largest number and widest range of members.

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: FDR 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.

“Negligent” advice

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.

Scheme complaints

Complaints to financial dispute schemes are on the rise but awareness of the schemes remains low. Our June 2014 article investigates.

Learn more

16jun assert your rights clp need more help promo default

Got a problem?

The Consumer Advice Line is available to all our members for support on any consumer-related issue. Our expert advisers can explain your rights and help you resolve problems with a retailer. Become a member now from just $9.95 and let us help you get a resolution.

Learn more

×

Password reset.

Thanks for requesting to reset your password. We've sent you an email with instructions on what you need to do. If you haven't received the email within the next five minutes please call us on 0800 266 786.

Thanks

We just need to verify that this email address belongs to you. Please check your inbox. There should be a message from us where you can verify and activate your account.