Preferred Option
Multiple industry-based dispute resolution schemes. Membership of an approved dispute resolution scheme will be mandatory for all financial institutions that are required to be registered, and financial advisers, who provide products or services to consumers; however, they are free to join any scheme. This means that the dispute resolution requirements would apply to the following financial institutions:
- 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;
as well as financial advisers.
Further work will be undertaken on the definition of "consumer" in particular sectors, with a report back to Cabinet by 31 August 2007.
An approved dispute resolution scheme is one that has satisfied the Minister of Commerce (following consultation with the Minister of Consumer Affairs and Minister of Finance) that it meets criteria of accessibility, independence, fairness, accountability, efficiency and effectiveness. In deciding whether to approve a scheme, the Minister must give regard to some mandatory considerations relating to the governance of the scheme, periodic reviews, the scheme's funding, the cost to consumers, membership restrictions, the scheme's jurisdiction, limits on liability of scheme members, evidence and processes, awareness, promotion and education, and reporting to stakeholders.
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. Re-approval is to be obtained by schemes at 10 year intervals. Periodic reporting is to be annual and set 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 systemic issues which the scheme considers require attention by government.
The scheme approval process will include appropriate checks and balances, including a requirement for the Minister of Commerce to be satisfied that the scheme has undertaken appropriate consultation, timeframe for decisions, method of notifying approval, and other matters.
The Minister may impose conditions on the approval of a scheme or on an existing scheme if the scheme experiences any major changes after approval, or revoke the approval of a scheme. Conditions might cover issues such as the type of cases or sectors where a scheme may operate, requirements for training, governance requirements, internal review and other matters.
Under this option, the dispute resolution system is fully funded by industry. By allowing the various sectors of the financial industry to establish their own schemes, this option provides for the greatest degree of industry involvement and commitment, as well as taking advantage of the skills needed to address a particular part of the financial sector.
This option also provides that, 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.
A decision of a scheme will be binding on the member in relation to whom it is made, but will not preclude a consumer from rejecting the scheme's decision and taking alternative court action against a financial provider.
Risks of not implementing the preferred option
If this option is not implemented, there will continue to be many consumers who are unable to access simplified dispute resolution mechanisms and must resort to the courts to seek redress. This runs the risk of not achieving the key objective of promoting investor/consumer confidence in financial markets. It also would not establish any mechanisms for reinforcing market incentives to encourage fair and reasonable behaviour by financial providers towards their customers. The absence of a comprehensive industry-based dispute resolution system would also hamper the ability for government to monitor and obtain the necessary information (for example, information about levels of compliance with the law, increased complaints about a firm as an indicator of potential collapse) so as to maintain resilience and stability of financial markets.
Impacts on government
There would be costs to government in approving schemes and monitoring the dispute resolution system, however these are not anticipated to be large. The proposals in this paper will result in additional roles and functions for the Ministry of Economic Development in providing advice to the Minister on approval of dispute resolution schemes, as well as liaising with, and producing educational material for, dispute resolution schemes, industry participants and consumers. These costs are estimated at $0.3m per annum for the first two years and $0.1m per annum thereafter.
If a reserve scheme is necessary, there will be some costs for government in establishing the scheme. However, a levy would be imposed which would allow for full cost recovery from financial providers who become members of the reserve scheme. A report back to Cabinet on the details of the reserve scheme, including the power to set a levy, is due by 31 August 2007.
Impacts on industry
It is anticipated that financial providers would incur three types of costs:
- Costs for internal complaints handling
- Internal costs incurred in responding to complaints through the dispute resolution body
- Membership fees levied by the dispute resolution body – whether fees are levied on a "per case" basis or consist of a general membership levy.
Costs might be incurred if a dispute resolution scheme requires, as a condition of membership, that its members establish internal complaints handling procedures. Note that not all financial providers will incur these costs, as many will already have internal complaints handling processes in place. A study in the United Kingdom indicated that the cost of an internal complaints handling system ranged between GBP50 and GBP1700 per case, depending on the size of firm and the type and volume of business it does (Financial Ombudsman Service (UK), Complaints handling arrangements: feedback statement on CP33 and draft rules, May 2000 [external link], page 51). The August 2006 discussion paper requested comments (on a confidential basis if requested) from financial providers, however no submissions addressing this point were received.
The proposal does not impose additional costs for firms' internal costs incurred in responding to complaints through the dispute resolution body. These costs would be incurred by the firm regardless of the form of dispute resolution. For example, the firm would face similar (or possibly higher) costs in defending an action in the courts or Disputes Tribunal. Firms may experience increased costs if, as expected, this proposal results in an increase in complaints from consumers who would otherwise have been reluctant to complain through the courts or Disputes Tribunal. Improving ease of access to dispute resolution will undoubtedly increase the number of consumers seeking redress. This may be thought to also lead to an increase in frivolous or vexatious complaints, however the experience of existing schemes has generally been that these complaints can be weeded out quite easily.
The current Banking Ombudsman and Insurance & Savings Ombudsman schemes operate on annual budgets of approximately $1.2m and $1m respectively. They are funded through a combination of an annual levy on members (depending on the size of the firm) and a case levy for each complaint considered by the scheme. The funding formulas adopted by the existing New Zealand schemes, as well as similar schemes in other countries, vary quite widely and are designed to reflect the particular nature of each scheme's members. Note that a case levy does not always represent the true marginal cost of additional cases, but must be set at such a level that it does not affect the incentives facing members in their decisions to either settle or fight a complaint.
While it is difficult to quantify the expected costs and benefits of industry-based dispute resolution for financial providers, the fact that the banking, insurance and savings sectors have voluntarily established dispute resolution schemes suggests that those sectors have found the benefits outweigh the costs. Other sectors, such as financial advisers, have not voluntarily established such regimes; however, this may be because these sectors are more fragmented and difficult to reach industry-wide consensus than banking or insurance.
It is expected that the proposal would have benefits for financial providers through improved consumer/investor confidence in financial markets. This will promote more efficient markets and encourage greater participation by consumers in financial markets, with consequent benefits for financial providers.
As the proposal is broadly similar to the regulatory regime in Australia, this will make it easier for New Zealand firms to expand into Australia as they will be familiar with the compliance requirements they would need to meet in Australia. Alignment with Australian standards will also make it easier for dispute resolution schemes to build their capability, as they will be able to take advantage of experience from overseas.
Impacts on consumers
While the establishment of an industry-based dispute resolution mechanism would not impose any direct costs on consumers, it is likely that any additional costs to financial providers would be passed through to consumers.
Virtually all existing industry-based dispute resolution schemes are free of charge to consumers. Schemes also put very few formal obstacles in the way of consumers seeking to use their services. For example, most schemes allow consumers to make contact by telephone or through the internet.
The ease of access to current industry-based dispute resolution schemes can be contrasted with the court system, where consumers must pay a fee to lodge a claim. The official forms for lodging claims can also be confusing and intimidating for some consumers. This is especially beneficial for less educated consumers.
Access to industry-based dispute resolution will provide considerable benefits for consumers. For example, a free complaints service would enable consumers to obtain redress for small-value claims, as they would otherwise put up with the problem rather than commence court action. This is especially beneficial to low-income consumers. An informal dispute resolution style, in conjunction with an awareness-raising campaign, would be especially beneficial for less educated consumers. It is difficult to quantify the detriment currently suffered by consumers as a result of inability to access redress.
An increase in the number of consumer complaints would indicate an increasing degree of consumer sophistication. This has flow-on benefits for financial providers and the community in improving service standards in the industry. It may also flow through to more confident participation in financial markets by consumers, including, for example, encouraging saving.
Steps taken to minimise compliance costs
The existence of multiple dispute resolution schemes will allow firms to seek out the scheme which has the best fit. This will minimise costs for firms in complying with the scheme's rules.
The criteria for approval of a scheme have been designed with a principles-based approach so as to give schemes flexibility to meet the requirements in the best way for them, ie cheapest and most effective.
Impact on the stock of regulation
New legislation will be required to implement this proposal. This proposal links with the proposed new registration regime for financial institutions.
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