The Credit and Investments Ombudsman (CIO) has rejected the key recommendation of the interim report into Australia’s three financial sector Ombudsman schemes as pro big bank at the expense of non-bank financial service providers and small business customers.
The interim report, prepared by a panel led by Professor Ian Ramsay, recommends, among other things, that there should be a single industry Ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes) to replace CIO and the Financial Ombudsman Service (FOS).
CIO’s CEO, Mr Raj Venga, observed that “not only did the Ramsay review fail to make the case for its proposed single Ombudsman scheme, it ignored the weight of evidence that small businesses would be better served by their own limited scope statutory tribunal for disputes outside the existing remit of CIO and FOS."
“This is a political compromise designed to head off an all-encompassing statutory tribunal. It will create a new giant quasi-regulatory bureaucracy which will be geared towards large institutional players, such as banks and insurers, who attract the vast majority of complaints, not small financial service providers.
Mr Venga described the recommendation as “vexing, considering CIO members have not perpetrated the various financial planning, life insurance and farm foreclosure scandals that have prompted the Government to commission the Ramsay review."
“This is a solution looking for a problem.”
“Australia deserves better. A single monolith Ombudsman scheme is likely to be inefficient in the absence of competitive pressures, complacent about innovation and continuous improvement and incapable of responding quickly to market changes. Like most monopolies, there will be little or no imperative to improve service levels for consumers and keep costs down for financial services providers.
Industry submissions to the Ramsay review indicate that only the big banks and their two associations support a single Ombudsman scheme. Twelve other industry associations and a number of individual submissions, including two leading fintechs, representing about 97% of all financial services providers do not.
“Well intentioned as the recommendation may be, it will serve to entrench the status quo of an inefficient and uncompetitive financial system dominated by oversized incumbents, and is neither in the interests of consumers and small businesses nor small financial services providers. It disregards the fact that the existence of two ASIC-approved Ombudsman schemes in the finance sector – CIO and FOS - has provided significant outcomes for both consumers and their financial services providers,” said Mr Venga.
Significantly, the recommendations have also ignored the weight of evidence previously provided to the Review into Impairment of Customer Loans by the Joint Parliamentary Committee on Corporations and Financial Services (JPCCFS).
“Specifically, the recommendation that the monetary limits and compensation caps for the new Ombudsman scheme should be increased, including for small business disputes, entirely misses the point," said Mr Venga.
He commented that “this is not an issue of not having jurisdiction to deal with small business complaints; it is an issue of not having the appropriate skill set and judicial powers to deal with them.
“Ombudsman schemes are not well suited to deal with larger small business complaints as they tend to be much more complicated and legalistic in nature. For example, Ombudsman schemes are not able to subpoena documents, summon witnesses, take evidence on oath, investigate criminal fraud or cross-examine witnesses on the statements or documents they have given.
“These powers are absolutely necessary to properly address the power imbalance between bank and small business customers that was raised in the JPCFSC report. These powers are available to, and more appropriate for, a statutory tribunal, not an Ombudsman scheme,” Mr Venga concluded.
“Over the years, the co-existence of CIO and FOS has driven significant changes in the finance sector. CIO was the first EDR scheme to undertake a number of best practice initiatives which were eventually adopted by FOS. In 2007, for example, CIO extended its remit to include complaints about financial hardship. This was followed by FOS. Now financial hardship complaints make up 30% of all complaints in financial services.
“CIO’s next initiative was to require a lender to cease all enforcement action once it received a complaint about them: this is 25% of all complaints we receive. Further, because of CIO, consumers are no longer precluded from approaching either Ombudsman scheme where legal proceedings have commenced. That’s another 10% of all complaints received.
“The fact is that consumers would have been left out in the cold and denied access to justice had there not been two ASIC-approved Ombudsman schemes. The separate existence of CIO and FOS has allowed each scheme to benchmark its performance against the other. This obviously can’t be achieved if there is only one Ombudsman in the sector,” added Mr Venga.
Smaller financial services providers’ perspective
“A consolidation of CIO and FOS, as recommended, would mean financial services providers (FSPs) who are dissatisfied with service levels or costs have absolutely nowhere else to go. This is a poor regulatory outcome because they are legally required to join an Ombudsman scheme and fully meet the scheme's operating costs.
“A single Ombudsman scheme cannot effectively deal with the distinctive features of the various sectors in the financial system. CIO’s members, for example, will lose an Ombudsman scheme that has the specific knowledge, expertise and history of successfully resolving disputes in the non-bank sector.
“CIO’s 23,000 members, 97% of whom are sole traders and small businesses in the non-bank sector, would be forced to join a single Ombudsman scheme that would be geared towards the big end of town which generates the most number complaints and pays the most fees.
“Imposing a single scheme, designed and costed for the large incumbents who dominate the market, on smaller and more innovative operators would act as a barrier to increased competition in financial services more generally.
“Look at fintechs, for example. Their whole purpose is to challenge and disrupt established dominant players, similar to what Uber has done to the taxi industry.
“They can only do this by keeping their costs down and operating on thin margins. If their costs go up, they can’t pass on those costs to customers because, if they do, they won’t be able to compete on price with the major players enjoying the benefits of incumbency.
“They need for there to be at least two Ombudsman schemes. We all know that competition keeps costs down and drives accountability.
“The proposed solution to address the sins of the major banks will therefore do nothing more than entrench their dominant position to the detriment of consumers, businesses and the economy. A single Ombudsman scheme will serve their interests by imposing a ‘big end of town’ solution on smaller and more innovative financial services providers. This will damage their ability to compete with the major banks," warned Mr Venga.