The Financial Ombudsman Service (FOS) has recently introduced numerous changes to its Terms of Reference (TOR) that will impact upon financial services providers (FSP) who become embroiled in a FOS dispute.
Some of the most important changes for FSPs include:
- FOS can of its own initiative join other FSPs to any existing dispute, regardless of when the dispute commenced
- FOS has discretion to allow FSPs to sell an asset that is the subject of a dispute
- FOS excludes disputes involving recovery of a debt from a small business involving a credit facility that exceeds $2 million
- FOS has reduced the timeframe for applicants to object to a determination by FOS that a complaint is Outside of the TOR (OTR) from a standard 30 days for all matters to as little as seven days in some circumstances.
JOINING OTHER FSPS
Concerns had been raised that FOS could not join another FSP in circumstances when proportionate liability may apply.1 While FOS had the power to require an applicant to lodge an additional dispute with a second FSP, and determine disputes together, this was considered to be indirect and inefficient.
FOS can now allow or require another FSP to become a party to a dispute if:
- the FSP is a current member of FOS
- FOS could consider the dispute against the second FSP if it were lodged separately
- joining the second FSP would cause a more efficient and effective resolution of the dispute.
FOS has indicated that it would join an additional FSP where a court may apportion liability for the loss claimed in circumstances where:
- the dispute is about a loss which the applicant claims was caused by one FSP
- the applicant’s claim may succeed
- the applicant may have a claim against another FSP in respect of the same loss
- it would be fair in the circumstances to consider the contribution of all FSPs to the applicant’s loss within the one dispute.
FSPs will have the opportunity to make submissions to FOS before being joined. A joined FSP has the same rights as it otherwise would and a subsequent determination will bind all parties if it is accepted by the applicant.
FOS may consider disputes where proportionate liability issues arise, and importantly for FSPs, FOS will take into account an applicant’s own contribution to any loss. However, proportionate liability issues can be factually and legally complex, and courts have taken inconsistent approaches.2 In view of that uncertainty, FOS has indicated that it would look for the outcome that is fair in all the circumstances. In circumstances where a determination may be binding on the FSP, FSPs may prefer to have such issues determined by the courts where possible.
SALE OF ASSETS
Previously, FOS could allow a FSP to freeze or preserve an asset the subject of a dispute, but could not allow the FSP to sell such an asset. FOS now acknowledges that in some disputes, it is in the interests of both parties for the asset to be sold to avoid holding costs or a deterioration in the value of the asset. FOS can now allow the sale of assets the subject of a dispute and will consider factors such as:
- whether the assets is at risk of being lost or damaged
- whether the FSP is already in possession of the assets
- if the value of the asset or the asset itself is likely to deteriorate
- if the holding costs make it uneconomic for the asset to be retained.
FOS considers that the discretion will be exercised in limited circumstances and has already stated that it will be rare that FOS would permit the sale of the principal place of residence and/or sole car unless ‘overwhelming reasons’ were provided in support. For the first 12 months only an ombudsman will be able to exercise this discretion, which suggests that FOS will use this power sparingly. Nonetheless, FSPs should consider this new discretion where there are depreciating assets or those with significant holding costs that could be sold.
SMALL BUSINESS EXCLUSION
FOS will now exclude small business disputes where the relevant credit facility exceeds $2 million. The exclusion will not apply where:
- the credit facility limit is less than or equal to $2 million, even if the balance owing is currently greater than $2 million
- recent variations have reduced the facility to less than or equal to $2 million
- where there are two facilities less than or equal to $2 million, even if the combined balance owing across the facilities is greater than $2 million
- where the dispute is not about recovery of a debt.
FOS’ experience suggested that businesses that have access to large credit facilities are well resourced, in a position to pursue a dispute through the Courts and that these disputes tended to require significant time and resources for FOS to resolve. The fact that FOS now seems more willing to exclude these types of disputes would appear to be a positive step for FSPs.
OBJECTION TO OTR ASSESSMENT
Previously an applicant had 30 days to object to assessment by FOS that the dispute was OTR. FOS could extend, but not shorten that timeframe, which created frustration for FSPs where the dispute was clearly OTR because, for example, the dispute had already been dealt with by a court.
Under the changes, the following objection periods apply:
- seven days where a dispute is OTR because the FSP has already obtained a court judgment dealing with the subject matter of the dispute
- 14 days when the OTR reason is ‘clear and straightforward’, for example where:
- the FSP is not responsible for the conduct that the dispute is about
- the amount of the claim is clearly more than $500,000 (the maximum claim an applicant can make)
- the applicant carries out a business and is not a small business
- the subject matter of the dispute is the same as a previous FOS dispute brought by the same applicant against the same FSP
- 30 days in all other cases.
FOS retains the discretion to extend these timeframes. The changes appear to strike an appropriate balance between applicants’ rights and the need for FOS’s processes to be streamlined and not unduly delay FSP’s attempts to recover from defaulting borrowers.
WHAT IT MEANS TO YOU
While FSP’s are likely to welcome the majority of these changes, the potential for a FSP to be joined to a dispute involving complicated issues of proportionate liability may be an unwelcome prospect. These and other changes commenced 1 January 2015 and FSPs should be aware of the new position. In particular, FSPs should consider disputes where there are deteriorating assets or those with significant holding costs and if so test whether FOS will allow those assets to be sold before final determination is made.