Consumer Dispute Resolution and Redress
Background:
Effective dispute resolution and redress mechanisms are essential to encouraging consumers to participate in financial markets and promoting market discipline for financial providers.
The discussion paper put forward a number of options for improving consumer access to dispute resolution and redress. These options included improved consumer education, enhanced civil remedies and specialist courts/tribunals, and voluntary and/or mandatory industry-based dispute resolution schemes. Submissions on the discussion paper supported the view that there is sufficient evidence of a problem to warrant further government action to improve access to redress in order to promote consumer confidence in financial markets. Submissions were generally in favour of a mandatory industry-based dispute resolution system, however there were also arguments in favour of a voluntary dispute resolution system (status quo), and use of the courts as the appropriate place to resolve disputes.
Submissions were fairly evenly split between the single scheme and multiple schemes approaches, with a slight majority in favour of multiple schemes. The preferred option is the establishment of multiple schemes as submissions were not able to mount a convincing argument that the efficiency and economies of scale of a single scheme would be sufficient to outweigh the flexibility and greater industry involvement of a multiple schemes approach.
Participants in each sector should be free to choose the form of dispute resolution that best suits the particular characteristics of the sector, whether that be a sector-specific dispute resolution scheme or a wider scheme.
Key features include:
- the Minister of Commerce may approve a dispute resolution scheme if the scheme meets criteria of accessibility, independence, fairness, accountability, efficiency and effectiveness.
- Membership of an approved dispute resolution scheme will be mandatory for financial service providers who/that transact with consumers.
It is anticipated that more than one scheme will be approved, and financial service providers will have freedom to choose which scheme they wish to join. In the event of no schemes meeting the approval criteria or if there is not full coverage of the financial industry by those schemes which are approved, reserve powers will allow for a government-established scheme.
What are the objectives of Consumer Dispute Resolution & Redress?
The purpose of the dispute resolution system is to provide a simple, low-cost avenue for consumers to seek redress. The dispute resolution system will be fully funded by industry. Government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary, rather than involvement in the day-to-day operation of a scheme.
In the context of consumer dispute resolution and redress, three further policy objectives support the overarching aim of a robust and efficient financial sector:
- Promote consumer/investor confidence in financial markets.
- Reinforce market incentives, within a competitive environment, to encourage fair and reasonable behaviour by financial providers towards their customers;
- Maintain resilience and stability of financial markets.
Consumer confidence relies on three elements:
- Consumers' expectations of a transaction are met by suppliers;
- Consumers and suppliers have confidence in market rules and institutions;
- Consumers have effective access to redress.
How will customers be educated about this Act?
Officials will work with the industry to develop public information/ education about the new regime. Further details of such a campaign will be available at a later date.
How will customers know they can complain about a Financial Adviser?
The statutory disclosure obligations of Financial Advisers will require them to disclose to the customer, in writing, prior to advice being given, the nature and procedure of the dispute resolution process available to the consumer.
What changes are proposed?
The new regime will require that all registered financial service providers and financial advisers must join an approved dispute resolution scheme if they transact with consumers.
What will this mean for existing voluntary dispute resolution schemes?
The existing voluntary industry-based dispute resolution schemes, such as the Banking Ombudsman and Insurance & Savings Ombudsman, work very well. These schemes may choose to seek approval. However, voluntary schemes do not currently extend to building societies, credit unions, finance companies, financial advisers and some superannuation schemes. Establishing schemes to cover these sectors will improve access to redress and promote consumer confidence in financial markets.
How many approved dispute resolution schemes will there be?
The new legislation will not prescribe how many dispute resolution schemes there will be. Existing schemes are already operating efficiently. It would be counter-productive to tamper with them for the sake of creating a unified, cross-industry scheme. As each sector of the financial industry offers a distinct range of products and services, participants in each sector should be free to choose the form of dispute resolution that best suits the particular characteristics of that sector, whether that be a sector-specific dispute resolution scheme or a wider scheme.
Who is required to belong to an approved dispute resolution scheme?
Membership of an approved dispute resolution scheme will be mandatory for registered financial service providers and financial advisers who transact with consumers (see list p9).
What is the definition of "consumer" in the context of Consumer Dispute Resolution & Redress?
The definition of consumer will depend on the particular sector, and will need to be consistent with the other definitions of consumer that flow from the consumer protection and other regulatory requirements in that sector. MED is currently undertaking further work on these definitions. For example, the Securities Act provides consumer protection (through disclosure requirements) for "members of the public". The Credit Contracts and Consumer Finance Act applies to "consumer credit contracts", that is, where the debtor is a natural person and enters into the contract primarily for personal, domestic or household purposes.
Who will approve the dispute resolution schemes?
Approval of dispute resolution schemes will be by the Minister of Commerce in consultation with the Minister of Consumer Affairs and Minister of Finance. The legislation will provide for appropriate checks and balances in the approval process, including a requirement for the Minister to be satisfied that the scheme has undertaken appropriate consultation, timeframe for decisions, method of notifying approval, and other matters. There will be principle-based approval criteria and mandatory considerations.
What are the principle-based approval criteria for dispute resolution schemes?
The broad principle-based approval criteria for dispute resolution schemes are accessibility, independence, fairness, accountability, efficiency, and effectiveness.
What are the mandatory considerations for approval of dispute resolution schemes?
- Governance of schemes: independence, accountability, competency, negative assurance checks.
- Periodic reviews: renewal at 10 year intervals; annual reporting; internal or independent periodic reviews.
- Funding of schemes: procedures in place to ensure adequate funding.
- Cost to consumers: free or low cost to consumers to lodge a complaint with the scheme.
- Membership restrictions: the extent to which a scheme's members cover a particular sector or sectors, however, each scheme will be free to set restrictions or qualifications on membership of the scheme to ensure that the scheme operates in an efficient and effective way.
- Jurisdiction of schemes: a minimum jurisdiction covering breach of contract or statutory obligation, and breach of an industry code, as this reflects the jurisdiction available to consumers through the courts; whether a proposed monetary limit is appropriate for the particular sector or type of business carried on by scheme members.
- Evidence and processes: a scheme be based on rules which provide for simplified processes for the resolution of disputes.
- Awareness, promotion and education: the scheme should be promoted to consumers. Member firms will be required to inform their customers of the scheme's existence.
- Reporting to stakeholders: scheme management will be expected to report regularly to their members, the public and other stakeholders.
How will gaps in coverage of the financial industry by dispute resolution schemes be addressed?
The legislation will allow for reserve powers under which the Minister may, by regulation, establish a reserve dispute resolution scheme (the "reserve scheme") if there are no approved schemes, or if there is not full coverage of the financial industry by those schemes which are approved. The reserve scheme would be subject to the same regulatory requirements as an industry-based scheme and would be required to meet the principles of accessibility, independence, fairness, accountability, efficiency, and effectiveness.
Financial providers would be able to satisfy their mandatory membership obligation by joining either the reserve scheme or an approved scheme. The reserve powers will also permit a levy to be imposed on members of the reserve scheme to fund the establishment and operation of the reserve scheme.
What are the funding arrangements for the approved dispute resolution schemes?
It is expected that the dispute resolution system will be fully funded by industry. The Ministry of Economic Development will support the establishment of the schemes through providing guidance and working with scheme owners prior to approval.
What monitoring and supervision arrangements are there for the approved dispute resolution schemes?
Government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary. Regulations will require an annual report to the approving Minister, setting out basic information about the activities of the scheme (eg number and type of complaints considered, promotional activities undertaken), as well as identifying any issues which may have a wider impact on the financial sector and which the scheme considers require regulatory review by government.
There will also be an obligation for schemes to maintain a list of members and to immediately notify the Registrar of Financial Service Providers if a member is expelled from the scheme.
It is proposed that the Retirement Commissioner retain the power under section 83(e) of the New Zealand Superannuation and Retirement Income Act 2001 to monitor the effectiveness of persons who have been appointed (other than under statutory authority) to consider complaints and disputes about savings and investments.
What happens when a complaint involves firms who are members of more than one approved dispute resolution scheme?
It is expected that schemes will include procedures allowing voluntary cooperation. This could include sharing resources, establishing a single entry point (eg a shared call centre and/or website) for consumers, coordinating cases and learning from each other.
If consumers are dissatisfied with the approved dispute resolution scheme's decision, what can they do?
The proposed industry-based dispute resolution system is intended to operate as a complement to the courts. This means that consumers will still retain their right to take court action if they wish. The scheme's rules will not preclude a consumer from rejecting the approved dispute resolution scheme's decision and taking alternative court action against a financial provider if he or she is dissatisfied with the decision.
What is a member's right to appeal against a scheme's decision?
A member's limited right to appeal from a decision of an approved dispute resolution scheme will be similar to rights available under the Disputes Tribunal Act for appeals against an order of a Disputes Tribunal. That is, an appeal is only allowed on the grounds that the proceedings were carried out in an unfair manner.
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