The Australian Financial Complaints Authority should temper the application of its fairness jurisdiction, placing greater emphasis on legal principles and industry codes, according to a review of the financial ombudsman’s performance.
The Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, has released a Treasury review of AFCA, which makes 14 recommendations.
While its overall finding is that AFCA has performed well, the review calls for the imposition of some restrictions on its activities, including the exclusion of complaints from sophisticated investors, less involvement in investigating systemic issues and removal of the requirement that authorised credit representatives be members.
The document is typical of the approach of Treasury under Josh Frydenberg, who has displayed a consistent mistrust of regulators and other bodies within his portfolio orbit and a desire to limit their activities.
The review rejected most of the items AFCA put on its wish list in its submission.
The AFCA rules specify that it must consider what is “fair in all the circumstances”, having regard to legal principles, applicable industry codes or guidance, good industry practice and previous relevant determinations.
In submissions, some firms complained that AFCA determinations held them to a different or higher standard than the law required
The review said AFCA’s “fair in all the circumstances” jurisdiction for making decisions “is what differentiates AFCA from courts and tribunals, enabling it to make decisions outside of a strict legalistic approach and facilitating a more expedient decision-making process.
“In applying its fairness jurisdiction, AFCA is able to make a decision that is not strictly constrained by the application of legal principles, as long as the decision is what it considers to be fair in the circumstances.”
AFCA's fairness jurisdiction is consistent with the jurisdictions of its predecessor organisations, the Financial Ombudsman Service and the Credit and Investment Ombudsman, and has applied in external dispute resolution in Australia for more than 20 years.
The review identified what it considered “broad, ungrounded interpretations of fairness”. One example involved AFCA awarding a 15 per cent increase in the payout to the complainant under a home insurance policy where the insurer had reached its maximum liability under the policy. The imposition of the uplift was not based on any provision in the policy documents, legal principles or industry codes, but rather was based an assessment of the fairness that AFCA found the insurer owed to the complainant in the exercise of its discretion on the method of settlement under the policy.
The review said: “Applications of broad notions of fairness make it difficult for financial firms to have a clear understanding of the basis of AFCA’s future decision-making and therefore being able to establish the necessary systems and processes to ensure compliance.”
Treasury’s view is at odds with an earlier, independent review that looked at such cases and found that awarding an uplift on an insurance payout, despite the terms of the policy, was a proper exercise of the fairness jurisdiction, just as it would be if AFCA reduced the amount payable to a complainant where the complainant failed to take reasonable