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Financial dispute scheme complaints

Complaints to financial dispute-resolution schemes are on the rise but awareness of the schemes remains low. And finding out which companies have had complaints made against them isn’t easy: only one of the schemes routinely names names.

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Goodsense Investments was ordered to refund over $1m in 2013 to out-of pocket consumers. But the company never paid and has since shut-up shop. Financial Dispute Resolution, which ordered the refund after investigating complaints from offshore investors, was powerless to do anything more.

The case is among one of over 800 complaints that were accepted for investigation by financial dispute-resolution schemes in 2013. Since 2010, all financial service providers who have retail clients – “mum and dad” consumers – have been required to belong to a dispute-resolution scheme. They’re also required to run their own internal complaints-handling process.

Complaints to the four schemes have increased each year. But it’s likely they represent just the tip of the iceberg.

Public awareness

Awareness of the dispute-resolution schemes was measured by the Ministry of Business, Innovation and Employment (MBIE) in 2013.

When asked to name a legal service that would “hear and rule” on a financial dispute, 10 percent of survey respondents mentioned the Banking Ombudsman and 1 percent or less mentioned the other three schemes. Prompted awareness was better but still below 50 percent.

Awareness was significantly lower among people under 40 and those with an income below $40,000. Only 4 percent of those with a personal income of $40,000 or less could identify at least one scheme, compared with 18 percent of those earning over $40,000.

The problem

The schemes agree their low profile is a real issue and means many consumers don’t know where or how to complain. The existence of four schemes further complicates matters.

The MBIE review concluded the low levels of consumer awareness of the schemes was “limiting progress in increasing trust in financial markets”. It recommended the schemes “take a more active role” in promoting and improving understanding of their role.

Common complaints

The majority of complaints that are getting through to the dispute-resolution schemes involve everyday financial products and services.

Lending and insurance problems are among the most common complaints received across the four schemes. The Banking Ombudsman also deals with regular complaints about bank accounts and payment systems (such as internet banking). 34 percent of disputes handled by the scheme in 2013 fell into this category.

While the schemes publish information about the types of complaints they receive, the names of the providers involved in disputes aren’t usually revealed. This usually occurs only when providers have been deregistered for a breach of the scheme’s rules and their membership terminated.

The Banking Ombudsman scheme is the exception. It lists the number of complaints it receives about each of its members. In 2013, the majority of investigated cases (92 percent) involved the four big banks. Of those that were settled or resulted in a formal recommendation, just over half (57 percent) were in the customer’s favour.

2012/2013 Banking Ombudsman Insurance & Savings Ombudsman Financial Services Complaints Ltd Financial Dispute Resolution
Total enquiries/complaints/disputes 3033 3399 1870 714
Cases accepted for investigation 274 274 162 109
Total compensation payments $597,831 $1,430,179 $514,786 $910,323

Guide to the table
Our data are from schemes’ annual reports for 2012/2013.

  • Total enquiries/complaints/disputes includes cases which the consumer has not lodged with the provider’s internal complaints process. In these cases, the consumer will be directed back to the provider.
  • Cases accepted for investigation shows the number of cases which make it through to investigation.
  • Total compensation payments shows the total amount of compensation awarded by the schemes to consumers.

Consumer outcomes

Some consumers have had significant wins through the schemes. In 2013, around $3.5m was paid out as a result of complaints made to the schemes.

In a dispute involving a mortgage break fee, a complainant to the Banking Ombudsman was awarded an $8600 refund plus a $500 goodwill payment from his bank. The highest amount it awarded last year was $160,000 on a life insurance policy.

A Christchurch resident got an extra $173,000 added to the payout for his earthquake-damaged home after he took his case to the Insurance and Savings Ombudsman.

Limitations

But things don’t always work well for everyone. Consumers can only take their case to a dispute-resolution scheme if they’ve reached “deadlock” with the company or the scheme itself decides it is deadlocked. Delays by companies in responding to complaints can mean this is a drawn-out process – a problem the schemes raised with the ministry during its 2013 review.

Another weakness of the schemes is the way their enforcement powers were set up by the legislation that established them. A scheme’s ultimate sanction is to suspend a provider’s membership of the dispute-resolution scheme if it doesn’t comply with a final decision about a complaint. In theory, this is a powerful incentive for a provider to fall into line: not belonging to a scheme means that the provider can no longer operate their financial services business here. But it was irrelevant to Goodsense Investments – which was an offshore business that appeared to operate from New Zealand. Rather than pay out more than $1 million in refunds ordered by Financial Dispute Resolution, Goodsense Investments simply stopped operating here.

An online survey of the industry carried out by the ministry also indicated providers were “not necessarily enthusiastic” about the disputes process.

Satisfaction with the schemes is yet to be independently reviewed. While the schemes’ own surveys show a high level of satisfaction with the complaints process, the ministry held off making a judgment in its review because it wasn’t able to tell whether the surveys “adequately capture complainants’ views”.

The ministry is proposing a further review of the schemes in 2015. Legislation also requires the schemes to provide a review of their operations to the Minister of Consumer Affairs by early 2015. It’s unlikely any rule changes will occur before then.

Offshore providers

Over half (55 percent) of the complaints made to the Financial Dispute Resolution Scheme in 2013 involved NZ-registered but foreign-owned companies offering online forex margin trading and investment platforms.

A third of complaints were from consumers outside New Zealand who had invested with Goodsense Investments. Goodsense Investments and another company, IB Capital NZ, had their membership of the scheme terminated because of suspected fraudulent activities.

Both companies have since been struck off the Companies Register. New rules in the Credit Contracts and Financial Services Law Reform Bill are designed to crackdown on offshore financial service providers who register in New Zealand to take advantage of our “good reputation”.

Our view

  • Both the industry and the dispute-resolution schemes need to do more to promote awareness of the complaints process. The schemes will only improve consumer protection if people know they exist. Reducing the number of schemes might improve public recognition.
  • We’d like to see all schemes name companies that have complaints upheld against them. Publicity about poor practices is an important incentive in improving behaviour.
  • The loophole where an offshore financial service provider can pretend to be operating from here, and then shut down its New Zealand operation to avoid remedying complaints, should be closed off.

Disclosure: Sue Chetwin, Consumer NZ CEO is a director of the Banking Ombudsman scheme.

Who's who

There are 4 financial dispute-resolution schemes. You can find out which scheme a provider belongs to by asking them, or by checking the register on the Companies Office website. The schemes are free to use.

The Banking Ombudsman scheme was established in 1992. It has 17 participants covering the main banks, one credit union and one building society.

The Insurance and Savings Ombudsman scheme was established in 1995. It has 4244 participants. They include insurers, individual advisers, adviser businesses, finance companies, superannuation schemes, credit contract providers, and other financial service providers.

The Financial Services Complaints scheme was established in 2010. It has 5650 participants. They include individual advisers, finance companies, superannuation schemes, credit unions, transactional service providers, insurers, brokers and registered charities.

The Financial Dispute Resolution scheme was established in 2010. It has 1570 participants. They include mortgage and insurance adviser organisations or individuals, credit providers, small finance companies, insurance companies and other financial service providers.