Objectives
A robust and efficient financial sector, where the public has a strong basis for being confident in the sector, is an essential prerequisite for a strong and dynamic economy. 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. 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;
- 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.
Alternative Options
Consumer education and information This option would address the problem by building capability of consumers to make informed choices so that consumers will avoid unsuitable products, thus reducing the number of disputes. This option is seen as a long-term solution, rather than achieving immediate improvements in consumer confidence. This option would not address problems which occur after a contract has been entered into, such as maladministration or financial providers not properly following their own policies, or misrepresentation by financial providers prior to the transaction taking place.
Note that the benefits of improved consumer education will not be evenly distributed across all consumers. Education and information will have a proportionately bigger benefit for those consumers who have better ability to make use of information in their financial decisions, as well as those consumers who have access to a wide range of options in choosing financial products or providers
This option would be difficult to implement, for example it would be difficult to compel firms to provide effective generic education, rather than product-specific information. The financial sector consists of a large number of providers offering a wide range of products. If the obligation to provide consumer education falls on industry, firms will have an incentive to focus their education/information efforts on information specific to the products they offer. This will not assist consumers in making choices between competing products and suppliers or whether a product meets their return and risk needs.
Enhanced civil remedies and specialist courts/tribunals This option would involve adopting simplified court procedures (for example, through a specialist Disputes Tribunal) to improve consumer access to courts to seek redress. 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. Cost and complexity may dissuade some consumers from initiating court action. These disadvantages were identified by the Financial Intermediaries Task Force, and include: evidential difficulties, particularly where advice or recommendations are given orally, and the factual background is complex; difficulties in establishing and/or quantifying loss, particularly where other factors, such as market fluctuations, have contributed to loss; disputes often focus on a highly specialised area of knowledge; and limitation issues – it may take a significant amount of time for problems with financial advice and information to become evident, so that claims may fall outside limitation periods.
A specialist tribunal would allow the accumulation of specialist expertise, and allow for setting monetary limits appropriate for financial disputes. However, as it would still be part of the court system, a specialist tribunal would still face the same problems currently experienced by courts, such as evidential difficulties and time limitations.
The main disadvantage of this option is that it would not encourage industry commitment, particularly because it would not leverage off the goodwill of the existing industry-based dispute resolution schemes.
This option would involve significant costs to government in establishing a new branch of the Disputes Tribunal. It is expected that this would increase the number of consumers taking court action and, while there would be a drop in the number of District Court cases as these claims could be heard in the new tribunal, there is likely to be a net increase in the costs for government in operating the court system.
Under this option there would be no costs to industry in establishing the new tribunal. It is expected that simplifying consumer access to a dispute resolution mechanism will result in an increase in consumers seeking redress, and this will mean increased costs for industry in defending complaints.
There will be some benefits to consumers under this option as it will enable consumers to take disputes to the specialist Disputes Tribunal rather than the District Court regardless of the amount in dispute. This will make dispute resolution easier and probably increase the number of complaints made by consumers. This option would retain existing Disputes Tribunal processes, such as a $50 filing fee.
Single industry-based dispute resolution scheme which all financial providers would be required to join. The main advantage of this option is that a single scheme may be cheaper to operate due to efficiencies of scale, producing advantages for both financial providers and consumers. This is particularly significant given the relatively small size of the New Zealand financial industry and number of consumer complaints.
A single dispute resolution scheme would create a level playing field in terms of regulatory treatment. This would provide coverage across all sectors of the financial industry. This option would also address unnecessary barriers to entry that may hinder access for some firms to membership of a dispute resolution scheme. However, a one-size-fits-all approach may lack specialization or be too blunt to effectively deal with varying industry practices
This scheme would require the greatest degree of government involvement. This could have implications for industry commitment to the success of the scheme, for example, if firms come to see themselves as "regulated entities" rather than "members".
There are a wide range of types of financial providers, from small businesses through to large banks and insurance companies. It may be difficult to achieve industry cohesion or a common understanding of the rules to be followed. This suggests that this option would require a greater degree of government intervention than the other options.
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