Key issues
Mandatory participation by financial providers
23. In order to provide effective coverage of the financial sector, I propose that membership of an approved dispute resolution scheme be mandatory for financial providers who are required to be registered and who transact with consumers.1
24. The accompanying paper entitled "Review of Financial Products and Providers: Registration of Financial Service Providers" sets out the categories of entities which will be required to be registered. They are:
- banks;
- friendly societies;
- credit unions;
- building societies;
- industrial and provident societies;
- finance companies;
- issuers of equity and debt securities;
- issuers of collective investment schemes;
- trustees supervising these issuers;
- insurers;
- platform and portfolio service providers and custodians.
- lending businesses;
- financial leasing businesses;
- money or value transfer services (eg money remittance);
- money and currency changers.
25. I also propose that the dispute resolution system will also apply to financial advisers covered by the accompanying paper entitled "Financial Advisers – A new regulatory framework".
26. The registration requirements are aimed at establishing a comprehensive supervisory framework for financial service providers. On the other hand, the dispute resolution system is aimed at promoting consumer confidence in the financial system. Therefore, it is not necessary for all financial service providers to belong to a dispute resolution scheme, but only those financial service providers which transact with "consumers".
27. The definition of consumer may be different depending 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. For example, in the area of securities, the Securities Act provides consumer protection (through disclosure requirements) for "members of the public". Under the proposal in this paper, the requirement for a financial provider offering securities to belong to a dispute resolution scheme would be referenced to the Securities Act, ie those issuers who offer securities to a member of the public must belong to an approved dispute resolution scheme. Likewise, this would also set out which "consumers" may access the dispute resolution system; in this case, it is "members of the public" as defined under the Securities Act.
28. As another example, in the area of credit, 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. Under the proposal in this paper, the requirement for credit providers to belong to a dispute resolution scheme would be referenced to the Credit Contracts and Consumer Finance Act, ie those creditors who provide consumer credit contracts must belong to an approved dispute resolution scheme.
29. In other sectors, for example non-bank deposit takers or financial advisers, it may be appropriate to recognise that information and power imbalances apply to small businesses, as well as consumers. In these sectors therefore, it may be appropriate to allow small businesses access to dispute resolution.
30. I have asked the Ministry of Economic Development to give further consideration to the detailed definitions that will be required and I will report back to EDC by 31 August 2007.
31. However other financial providers may also voluntarily choose to join a scheme. Similarly, a scheme may provide in its rules that other persons are entitled to have a complaint heard by the scheme.
Approval of dispute resolution schemes
Why approve schemes
32. In order to ensure that dispute resolution schemes promote consumer confidence, it will be necessary to have a mechanism to ensure that schemes meet appropriate standards. Most submissions considered that there will be a need for a process for approval of dispute resolution schemes by government, however, some submissions said that oversight by an independent body (such as the current independent commissioners overseeing the Banking Ombudsman and Insurance & Savings Ombudsman) is appropriate.
Who will approve schemes
33. Those submissions which supported approval by government were split on whether approval should be by the Minister of Commerce or by a regulatory body such as the Securities Commission. As there will be a split in regulatory responsibility across the financial industry (ie Securities Commission and Reserve Bank will each have specific areas of oversight), I propose that responsibility for approving dispute resolution schemes lie with a Minister. In addition, the regulators' focus is on the financial system as a whole, rather than individual consumers.
34. Dispute resolution relates to financial markets, therefore, it is within the responsibility of the Minister of Commerce. However, taking into account the importance of financial markets to economic policy, and the particular role of consumer protection, I propose that legislation provide for the approval of dispute resolution schemes by the Minister of Commerce in consultation with the Minister of Consumer Affairs and Minister of Finance.
35. 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.
Approval criteria
36. Recognising that what is appropriate for one sector of the financial industry may not be appropriate for another, there will need to be flexibility in the criteria for approval of a scheme. I propose that legislation set out broad principle-based approval criteria of accessibility, independence, fairness, accountability, efficiency, and effectiveness.
37. In addition to the principle-based approval criteria, the legislation will establish some mandatory considerations that the Minister must have regard to in deciding whether to approve a scheme.
38. To assist affected parties in complying with the new regime, the Ministry of Economic Development will produce educational material for dispute resolution schemes to help them meet their obligations in order to obtain approval, and for financial providers, to inform them of their obligation to join a dispute resolution scheme.
39. It is proposed that legislation provide that the Minister may give his or her approval subject to conditions and/or may impose conditions on a scheme, or revoke the approval of a scheme, if the scheme experiences any major changes after approval, such as admission of new members from a different sector, changes in directors or senior management, or changes to the scheme's rules or terms of reference. Conditions might cover issues such as the type of cases or sectors where a scheme may operate, requirements for training, governance requirements, internal review, etc.
40. The proposal will have fiscal implications for the Ministry of Economic Development in order to provide advice regarding applications for approval. The fiscal implications of the proposals are discussed in the accompanying paper "Reviews of Financial Products and Providers and Financial Advisers – Overview Paper".
Mandatory considerations
41. The following paragraphs outline the mandatory considerations I propose that the Minister must have regard to in deciding whether to approve a scheme.
Governance of schemes
42. Schemes will have broad flexibility to develop their own governance arrangements. The Minister must have regard to the extent to which the scheme's governance arrangements ensure the independence and accountability of the scheme. For example, this will require a balance of industry and consumer representatives on the governing board.
43. The Minister must also have regard to the competency of the directors and senior management of the scheme. This could be achieved by "negative assurances", for example, a scheme certifying in its application for approval that its directors and senior managers have no criminal convictions, have not been bankrupt, disqualified as directors, etc.
Periodic reviews
44. Periodic review is an important element in ensuring that a scheme continues to fulfil its role. As discussed in paragraph 62 below, a scheme must undertake a review and seek renewal of its approval at 10 year intervals. In addition to this re-approval requirement, more frequent reviews will also be useful for schemes, particularly schemes which are newly established or which have taken on new members. These reviews could be internal reviews (ie conducted by the scheme itself) or an independent review by an outside reviewer. In deciding whether to approve a scheme, the Minister must have regard to whether the scheme's rules provide for periodic reviews of the scheme, and what type of reviews are required.
Funding of schemes
45. It is expected that the dispute resolution system will be fully funded by industry. In deciding whether to approve a scheme, the Minister must have regard to whether the scheme has adopted procedures to ensure that it has adequate funding to enable it to operate effectively.
Cost to consumers
46. The dispute resolution system is intended to be a low-cost complement to the court system. Therefore, access to the dispute resolution scheme is intended be free or low-cost for consumers, for example no more than the equivalent cost to lodge a claim in the Disputes Tribunal. In deciding whether to approve a scheme, the Minister must have regard to the cost to consumers to lodge a complaint with the scheme.
Membership restrictions
47. It will be important to ensure that all members of a scheme are committed to the success of the scheme. The Minister must have regard to 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
48. There are three broad types of likely complaints, which arise out of obligations with different legal force (1) complaints that could be the subject of litigation (eg breach of contract or statutory obligation); (2) complaints of general unfairness (eg maladministration); (3) complaints about breach of an industry code of practice.
49. In deciding whether to approve a scheme, the Minister must have regard to whether the scheme has adopted 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. Schemes will also be free to adopt a wider jurisdiction, covering complaints of general unfairness, if the scheme members so desire.
50. Recognising that in most cases where a large amount is at issue the participants are able to access legal advice, a scheme may provide in its rules for a monetary limit on the complaints it is empowered to consider. A monetary limit may also be important in order to limit the maximum potential exposure of a financial provider. As the appropriate amount for a monetary limit will depend on the particular sector, and will inevitably need to change over time, it is not appropriate to provide for this in legislation. I propose that it form part of the approval criteria, that is, in deciding whether to approve a scheme, the Minister must have regard to whether a proposed monetary limit is appropriate for the particular sector or type of business carried on by scheme members.
Evidence and processes
51. In order to provide a simpler and cheaper alternative to the courts, a scheme should adopt rules which provide for simplified processes for the resolution of disputes. In deciding whether to approve a scheme, the Minister must have regard to whether the scheme's rules provide that it is free to consider any information or make any enquiry as it sees fit and can have reference to what the scheme considers fair and reasonable in the circumstances, rather than strict adherence to legal rules.
Awareness, promotion and education
52. A scheme should take steps to promote awareness of itself amongst consumers. This means that the scheme should promote itself, and should also require member firms to inform their customers of the existence of the scheme. In deciding whether to approve a scheme, the Minister must have regard to the scheme's obligations under its rules to engage in awareness, promotion and education.2
Reporting to stakeholders
53. It is important that schemes report regularly to their members, the public and other stakeholders. This will help promote confidence in the scheme. In deciding whether to approve a scheme, the Minister must have regard to the scheme's obligations under its rules to report to stakeholders.
Reserve powers to establish a scheme by regulation
54. Given that membership of an approved scheme is to be a mandatory requirement for financial providers under the proposed new regime, I anticipate that one or more existing dispute resolution schemes will seek approval under the new regime. In addition, I anticipate that those sectors which are not currently covered by a voluntary scheme will also seek approval for a scheme or schemes. Officials have had discussions with the existing voluntary schemes (Banking Ombudsman and Insurance & Savings Ombudsman), which have both indicated that they are likely to seek approval under the proposed regime. Officials have also had discussions with those bodies which are likely to seek approval as an Approved Professional Body under the financial advisers regime, and those bodies have indicated that they will participate actively in the proposed dispute resolution system.
55. However, I propose that the legislation allow for reserve powers under which the Minister may, by regulation, establish a dispute resolution scheme (the "reserve scheme"). The reserve powers will be able to be exercised if there are no approved schemes, or if there is not full coverage of the financial industry by those schemes which are approved. I expect that any gaps in coverage would become apparent through discussion with industry during the transition period for implementation of the new legislation. This would allow sufficient time for establishment of a reserve scheme, if necessary.
56. 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.
57. 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.
58. This paper seeks Cabinet's in principle agreement to legislation providing for a reserve scheme, similar to the powers contained in the amendments to the Telecommunications Act. I will report back to Cabinet by 31 July 2007 with a more detailed proposal covering the powers of the reserve scheme, calculation of the levy and the process for establishment of the reserve scheme.
Binding decisions and appeals
59. To alleviate negative consumer perceptions about an industry-based scheme, consumers should have an opportunity to take alternative action through the court system if unsatisfied with the decision of the scheme. The scheme's rules must provide, subject to a limited exception, that a decision of the scheme is binding on the member in relation to whom it is made, but do not preclude a consumer from rejecting the scheme's decision and taking alternative court action against a financial provider. As discussed in paragraph 50 above, in order to limit the maximum potential exposure of a financial provider, a scheme may choose to impose a monetary limit on claims.
60. A member's limited right to appeal from a decision of a 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.
Funding of the dispute resolution system
61. It is expected that the dispute resolution system will be fully funded by industry. However, there will be fiscal implications for the Ministry of Economic Development in providing guidance and working with schemes prior to approval, possibly including a need for seed funding for the establishment of some schemes until they are in a position to accept members. The fiscal implications of the proposals are discussed in the accompanying paper "Reviews of Financial Products and Providers and Financial Advisers – Overview Paper".
Monitoring and supervision
62. It is proposed that government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary. There will be no government involvement in the day-to-day operation of a scheme. A scheme must undertake a review and seek renewal of its approval at 10 year intervals. The review and renewal will involve a full re-assessment of the scheme against the approval criteria, and will also take into account previous reporting by the scheme. If a scheme fails to obtain re-approval, a grace period will be available for members to join a new scheme.
63. Regulations will set out the frequency and content of reporting. I propose that the regulations 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, etc), 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. I propose also that the Minister be empowered to seek further explanations from a scheme regarding the matters included in an annual report.
64. There will also be an obligation for schemes to maintain a list of members and to immediately notify the Registrar of Financial Service Providers3 if a member is expelled from the scheme.
65. The Retirement Commissioner is empowered 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 and, if appropriate, to make recommendations to any person. It is proposed that the Retirement Commissioner retain this function.
66. Although the Retirement Commissioner's monitoring role will be independent from the supervision of approved schemes through their annual reports and the 10 year renewal, it is expected that any findings or recommendations made by the Retirement Commissioner will be useful in informing the Minister's decision on whether to renew a scheme's approval.
Relationships between multiple schemes
67. While there may be some overlap if a complaint involves firms who are members of different schemes, it is expected that schemes will develop procedures to cooperate with each other, for example by coordinating cases and learning from each other.
68. It is in each scheme's own interests to operate efficiently. Therefore, I anticipate that schemes will, if it is appropriate, voluntarily cooperate to share resources and/or establish a single entry point (eg a shared call centre and/or website) for consumers to access the various schemes. Therefore, it is not necessary to impose a regulatory requirement on approved schemes to cooperate with each other.
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