EDR at risk from claims management industry

Australia's external dispute resolution system is in danger of being undermined by predatory "claims management" companies, the Financial Ombudsman Service has warned in its submission to the Financial System Inquiry.

FOS said regulators needed to guard against the emergence of the type of industry that has developed in the United Kingdom, where the UK FOS reported that 57 per cent of all disputes about alleged mis-selling of payment protection insurance it received in 2013 were lodged on behalf of consumers by claims management companies.

FOS chief ombudsman Shane Tregillis said there were several problems with the claims management companies.

They add costs for consumers, often charging high fees for services that would otherwise be provided free of charge by the dispute resolution services.

They tend make the EDR process more litigious, which adds to costs and may extend the time taken to resolve disputes.

And they threaten the co-operative nature of EDR schemes such as FOS.

Tregillis said: "We work on a co-operative basis with the applicants and the financial service providers, and we look for agreement between the parties wherever we can.

"If the involvement of a claims management company becomes the norm it would become a much more adversarial system and it would make the financial service providers less willing to co-operate."

Last year the Credit Ombudsman Service complained about the activities of credit repair agencies, saying they charged an average of A$1000 to fix errors in consumer credit files that consumers could fix themselves for free. COSL wanted these groups excluded from the new comprehensive credit reporting system.

The New South Wales Energy & Water Ombudsman published research on the activities of credit repair agencies in 2012 and made recommendations for better promotion of free consumer services.

Tregillis said claims management companies were a bigger potential problem because they undertook a much broader range of activities than credit repair agents.

The FOS submission said claims agents were emerging to fill a gap in the provision of services. "We are seeing a gap in the availability of financial counselling services. Consumers tell us about long delays in obtaining assistance from these services.

"Ongoing support of community based financial counsellors and legal services is a key aspect of the infrastructure underpinning financial sector dispute resolution.

"In the absence of community-based financial counsellors, there is a risk that a commercial claims management industry will develop.

"We urge the government and financial sector to work together to develop a sustainable basis for the provision of financial counselling and related services."

Tregillis said it was important for the inquiry to look at the circumstances of the financially disadvantaged and to affirm the importance of social infrastructure, such as financial counselling.