AFCA: A common complaint (pt1)

Consumers can use AFCA for free to settle disputes, if they’re brought within six years after the consumer first became aware that they have suffered a loss or — if they’ve already complained directly to the financial business through its internal dispute resolution (IDR) process — within two years of getting an IDR response from the financial firm.

What’s the issue?

While the financial dispute body was brought about to consolidate and replace what its predecessors had been doing (providing a free and independent dispute resolution service for consumers), straight out of the gate, the body felt and operated differently.

The broking industry has long supported having an independent body that can act as an intermediary for financial disputes, but it has taken issue with how it goes about ‘finding’ these complaints.

For example, one of the first moves that marked AFCA out as different was the way it was proactively seeking complaints. Brokers reported seeing AFCA stands popping up in shopping malls as it actively promoted its services to aggrieved consumers — and helped guide them through the process of lodging a complaint — as part of its Financial Fairness Roadshow.

In the first year, more than 7,000 people talked to AFCA through the roadshow and may have contributed to the resulting surge in financial complaints. Indeed, AFCA had expected to receive 50,000 complaints within the first 12 months of opening its doors (akin to the volume its predecessors saw each year), however, it actually received 40 per cent more than that; at 73,272.

In its first year, it had awarded $185 million in compensation and resolved 77 per cent of all complaints; 70 per cent of which were resolved in favour of the complainant.

It expects to receive close to 100,000 complaints in the financial year 2023.

The roadshow continues to this day, with chief executive David Locke stating in October last year: “When people run into an issue with their financial provider, many don’t know they can actually make a formal complaint and get it fixed. If it’s something you’ve felt strongly enough to complain about to your friends and family, chances are you have a case to pursue.”

To date, it has rewarded more than $1 billion in compensation.

Broker complaints are nominal

However, despite the agitation for complaints, the number of complaints lodged against brokers makes up only a tiny fraction of all financial complaints.

According to AFCA, just 0.4 per cent of all complaints made in 2022 were about mortgage and finance brokers.

A total of 370 complaints were lodged in 2022; 175 complaints about mortgage brokers and 195 complaints about finance brokers.

While this is an 8 per cent increase from 2021 (when AFCA received 343 complaints from mortgage and finance brokers), overall mortgage and finance broker complaints have declined since 2020.

For example, in 2020, AFCA received 587 mortgage and finance broker complaints; 36 per cent more than in 2022.

A propensity to settle

But despite broker complaints being low, a common complaint from the industry is that AFCA pushes financial firms — that already pay a membership fee to the body — to settle disputes.

Indeed, on its website, AFCA states: “We will generally try to first resolve a complaint by informal methods and reach a settlement between [the complainant] and the financial firm through negotiation or conciliation…

“Sometimes, it may be appropriate for us to make a decision straight away, rather than try and reach a settlement through negotiation or conciliation.”

Several brokers have told The Adviser that they have been urged to pay amounts of around $1,000 to “make a complaint go away”, even without an investigation into any wrongdoing being conducted (which will be covered in future chapters of this feature in upcoming editions of The Adviser).

This not only costs the small-business owner money but can also have a wider impact on their business costs, for example, by increasing their professional indemnity (PI) insurance. Not to mention the emotional cost of having to pay for something when no wrongdoing has been found.

As Naveen Ahluwalia, head of policy and legal at the Mortgage & Finance Association (MFAA) recently told AFCA: “Not only does this raise questions of fairness to member firms, as well as issues of precedent in offering a settlement simply to resolve the matter, but may also impact on professional indemnity policies, which are becoming harder for financial firms (particularly small businesses) to obtain and maintain due to the cost.”

If settlement doesn’t work then AFCA then moves to “more formal methods”, where it may provide a preliminary assessment about the merits of a complaint or may make a decision (called a determination).

“If we make a determination that is in [the complainant’s] favour and [they] accept it, the financial firm is required to comply with the determination and any remedy that [AFCA] award[s],” AFCA says.

The costs of fighting a complaint through to determination do add up, though. A new fee schedule has come into effect for this financial year to align with the consumer price index (CPI).

As such, the following fees now apply:

According to figures provided to the Finance Brokers Association of Australia (FBAA), around a quarter were closed on registration between November 2021 and October 2022 while about 30 per cent went to case management.

Only 6 per cent went to preliminary view while 13 per cent went all the way through to decision.

Speaking to The Adviser, FBAA managing director Peter White AM said: “It becomes very expensive once it hits the investigation stage. If you have made a mistake, it’s in your own interest to settle it sooner.”

For example, a broker may be asked to pay less than $1,000 to a client to resolve the complaint but then be charged over $8,000 in AFCA determination costs.

However, Mr White noted that it wasn’t just the pecuniary expense that brokers had to bear in mind but also the cost on their time and mental health.

He flagged that it takes an average of 155 days — approximately five months — for AFCA to resolve a mortgage broker complaint.

“If you think that you may have made a mistake, the more proactive you are about fixing it, the better it pans out. As well as the cost of the investigation, you have to think about how much your time costs, too. And this process places a lot of stress from a mental health point of view,” he said.

“But while closing a complaint by settling might be faster, personally, I can see how it would be hard to settle with a client if you feel that your position is correct.

“In my mind, if your governance is top-notch, your processes and policies are appropriately in place, and you’re doing the right thing — and you think you have done nothing wrong — it is within your rights to fight it,” urging brokers who are facing complaints to talk to their PI insurer “right from the beginning” to ensure they take the appropriate steps.

5 free complaints a year

Several changes have been coming in recently, however, which should better protect brokers from the cost and emotional burden of complaints.

In July 2022, AFCA’s new funding model came into effect, including the introduction of five free complaints. This means that brokers will not be charged for the first five complaints that are received each year, even if those complaints go all the way to determination.

The MFAA’s head of policy and legal told The Adviser: “While AFCA complaints against the industry are low, we understand that when a complaint is made against a small broking business, it can feel unsettling and overwhelming. We heard from our members they sometimes feel pressured to settle a complaint even where they have no wrongdoing. This is why the MFAA advocated for our members and secured five free complaints per year (per licensee) from AFCA.”

AFCA also recently launched a consultation on proposed changes to its official rules and operational guidelines, putting forward 14 recommendations to ensure that the body can develop and improve its procedures.

They include:

• Excluding complaints lodged by professional or sophisticated investors unless exceptions apply
• Enabling AFCA to exercise discretion not to consider a complaint from a ‘paid representative’ (acting for a complainant) if they do not have an ACL/AFSL, where required or are not acting in the complainant’s best interests and excluding them for up to 12 months, where appropriate
• Excluding a complaint, if the nature and subject matter are substantively the same as a previous complaint that has been discontinued
• Excluding a complainant who has submitted one or complaints that AFCA has decided to close or not consider
• Discontinuing complaints because of threatening, intimidating, abusive, bullying, discriminatory, or otherwise unreasonable conduct
• Ensuring only unresolved issues in dispute are progressed and that matters do not progress to case management or decision status, where appropriate offers of settlement have already been made
• Enabling AFCA to decide that it is not appropriate to continue to consider a complaint if the complainant has suffered no loss

It is expected that the approval process will be finalised by 31 December and the new Rules and Operational Guidelines will then commence on 1 July 2024.

In a response to the consultation, the MFAA’s Ms Ahluwalia said: “For the reasons of fairness and efficiency, AFCA’s first step should always be to identify if the complaint has merit or substance and if it does not, it should close.

“An effective early triage system is crucial to the efficiency of the EDR scheme, [to] streamline the process and alleviate a lot of time, effort, and resource…

“It is only where the complaint has merit that through an effective and early triage system should there be contemplation of settlement offers by the parties involved.”

The MFAA said it was also important that AFCA “does not inadvertently allow for the scheme to be utilised to lodge unmeritorious complaints simply to obtain a settlement offer and that its staff are independent, experienced, and unbiased in managing conciliations and settlements”.

Like the FBAA, the association noted that brokers had flagged instances where AFCA case managers had tried to influence the financial firm to make a settlement offer where there was no evidence of wrongdoing, simply to allow for the complaint to close.

As such, the MFAA said it hopes AFCA and the broking industry can “work together to ensure fair and efficient outcomes with regards to conciliations and settlements”.

Stay tuned for more in this feature series, AFCA: A common complaint, in future editions of The Adviser.