Regulatory Impact Statement
Executive Summary
There is currently a problem for some consumers in accessing appropriate dispute resolution and redress mechanisms in those parts of the financial sector where voluntary, simple dispute resolution mechanisms do not exist. Consumers experience problems because of lack of knowledge about where to go, and because of complicated and expensive dispute resolution processes that make it not worthwhile to pursue complaints.
Voluntary industry-based dispute resolution schemes currently cover most banks and insurance companies, as well as many managed funds. The main gaps in the financial sector where consumers do not have access to industry-based dispute resolution include finance companies, building societies, credit unions, financial advisers and some superannuation schemes. In these areas, consumers must use the court system to seek redress.
The proposal is to require that all financial providers join an industry-based dispute resolution scheme which has been approved by the Minister of Commerce.
This option will ensure that, as an alternative to the courts, consumers have access to simple, low cost dispute resolution. Industry responsibility for funding and operating the dispute resolution schemes will provide incentives for financial providers to maintain appropriate customer service standards and ensure customers are treated fairly and reasonably.
Adequacy Statement
The Regulatory Impact Analysis Unit has reviewed the RIS and considers the RIS is adequate according to the adequacy criteria.
Status Quo and Problem
Under the status quo, there are two voluntary industry-based dispute resolution schemes, the Banking Ombudsman and Insurance & Savings Ombudsman. While these schemes work very well in providing a simple, low cost dispute resolution service, access to these schemes is only available for consumers who are customers of these schemes' member firms. Other consumers must use the court system for dispute resolution and to obtain redress.
Banks, managed funds and insurance companies make up a large proportion of the New Zealand financial sector. The majority of these financial institutions are members of one of the existing schemes. However, while these schemes are available to a large number of consumers, dispute resolution is not available to consumers in all parts of the financial sector. The main gaps in the financial sector where consumers do not have access to industry-based dispute resolution include finance companies, building societies, credit unions, financial advisers and some superannuation schemes. These sectors are more fragmented and lack the cohesion present in the banking and insurance sectors which facilitated the establishment of the voluntary schemes.
While the court system (including the Disputes Tribunal) generally works well for most types of consumer disputes, it does have some disadvantages in the case of financial services. For example, the time, cost and complexity of initiating court action may dissuade some consumers from standing up for their rights. The Disputes Tribunal addresses these issues of cost and complexity; however, the monetary limit of $7,500 (or $12,000 with the agreement of the parties) for Disputes Tribunal claims will exclude many financial disputes.
Although the existing schemes have the capacity to take on new members, it is not expected that they will further extend their coverage without regulatory intervention. Voluntary industry-based dispute resolution provides a competitive advantage for member firms by enhancing their reputation and promoting consumer confidence in those firms. It is expected that there would be reluctance from those firms which are currently members of a voluntary scheme to extend coverage of the scheme to other parts of the financial sector.
In August 2006, the Ministry of Economic Development released a discussion paper which noted results from the National Consumer Survey on Awareness and Experience of Consumer Legislation (conducted by National Research Bureau Ltd on behalf of the Ministry of Consumer Affairs, October 2005) which showed that, while the level of consumer problems with misleading or unfair treatment by financial providers is relatively low, consumers experience problems in seeking and obtaining redress. Common reasons given by consumers included "did not know who to complain to", "did not think it would make a difference", and "couldn't be bothered".
There are problems in relation to both consumer knowledge of, and ability to access, dispute resolution mechanisms. For example, the National Consumer Survey found that 30 per cent of respondents believed that there is a problem about taking a case to the Disputes Tribunal or about the way that the courts work. Common comments by respondents included "costs, direct or indirect may be involved", "time frame to get heard would be too long", "time and effort required would not be worth it for such small amounts", "not knowing where to start or how to go about it, or how to contact them", and "intimidating experience".
Some submissions to the discussion expressed the view that there was not a problem in relation to consumers' access to dispute resolution. For example, one submission noted that consumer decisions to borrow or invest are not made because of the existence, nature or form of dispute resolution or redress procedures; decisions are made for more positive reasons often in ignorance of the existence of such procedures.
On the other hand, low financial literacy means that New Zealand consumers have limited ability to properly compare competing options offered by financial providers. If consumers do not have access to effective redress if things go wrong, this means that there are limited incentives for financial providers to treat customers in a fair and reasonable manner.
On balance, submissions on the August 2006 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.
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