If your business operates in the financial services sector in Australia, the chances are that the Financial Ombudsman Service (commonly known as FOS) has jurisdiction over some types of dispute faced by your business.
FOS provides a dispute resolution (DR) service which, in certain circumstances, can result in FOS making determinations which are binding on the financial services provider (but not the customer). There have recently been some concerns raised about the DR role played by FOS which, for some, has raised the question of whether the role of FOS in determining disputes requires review.
Background to FOS
FOS was established on 1 July 2008. It was formed by the amalgamation of the Financial Industry Complaints Service (FICS), the Banking and Financial Services Ombudsman (BFSO) and the Insurance Ombudsman Service (IOS). Subsequently, the Credit Union Dispute Resolution Service and Insurance Brokers Disputes Ltd joined FOS.
FOS is in fact a public company offering DR and other services to its members. According to its website, FOS has more than 16,000 members across the financial services sector including banks, credit unions, building societies, credit providers, general and life insurance companies and brokers, superannuation providers, fund managers, mortgage and finance brokers, financial planners, stockbrokers, investment managers, friendly societies, time share operators and authorised representatives. Its membership is clearly extensive and includes some of the biggest players in the sector and many household names.
The extensive membership arises because of the requirement that AFSL licencees and organisations holding credit licences must be a member of an external DR scheme approved by ASIC. This requirement also extends to authorised credit representatives.
The relationship between FOS and each of its members is governed by the FOS constitution and Terms of Reference (TOR) which, as amended from time to time, serve as the body’s procedural rules. FOS is funded by fees paid by members, which include an initial application fee, an annual fee and a further fee based on the volume of disputes handled concerning the member and the extent to which each dispute progresses before it is resolved.
The DR service provided by FOS
A useful summary of the FOS DR service was recently provided in FOS v Pioneer  VSC 172:
“In broad terms, the scheme operated by FOS enables individuals and small business clients to make a complaint against the member in relation to certain matters. If the matter falls within its jurisdiction, FOS may proceed to resolve the dispute in accordance with its [TOR] and Constitution as they apply from time to time. It does this by facilitating settlement discussions between the member and the complainant, by making recommendations and, in some cases, binding determinations as to what must be done to resolve the dispute. Its determinations are binding on the member if the complainant elects to accept the determination made by FOS.”
If the dispute proceeds to the end of the DR process, a determination is made and the complainant accepts the determination, that determination is binding on the member. Members cannot appeal determinations and must accept them. FOS can request that a formal written agreement be executed by the Member to reflect the outcome.
There are obvious benefits to complainants using the DR service provided by FOS. Those benefits include:-
- no adverse costs exposure, because fees are paid by the member and FOS is not able to award costs against the complainant;
- if the complainant is not happy with the outcome, they are not bound by it, and can pursue the matter through the courts to seek a different outcome; and
- the fact that FOS is not bound by the law (including legal rules of evidence) but rather is required to decide each matter having regard to law, applicable industry codes or guidelines, good industry practice and fairness in all the circumstances (TOR cl 1.3, 6.7 and 7.1).
Who can complain to FOS?
Given the wide-ranging powers of FOS to determine disputes without being bound by the law, it likely comes as some relief to financial service providers that not everyone can lodge a complaint with FOS. The DR process is restricted to individuals (including those acting in certain trustee roles) and small businesses (those with 20 staff or less or, in the case of manufacturers, 100 staff or less). There is also a monetary ceiling of $500,000 on the claims that can be considered by FOS (plus a range of further excluded claims – see TOR cl 5.1).
Does the current DR service require overhaul?
It probably comes as no surprise that many lawyers are troubled by the idea that a determination by FOS is binding on a member and cannot be appealed. They are even more troubled by the ability of FOS to determine disputes by reference to matters other than the applicable law – after all, in common law jurisdictions the role of an arbiter of disputes (a court) is to interpret the law, not to make it.
From a lawyer’s perspective, the role of FOS seems to encompass both the role of courts and the role of the legislature. Whilst one can see the attractiveness of a fast, cheap and efficient DR service such as that provided by FOS, is that outweighed by the rights foregone by members? Do members really want to continue to expose themselves to a DR process where the law is only one of many considerations in determining a dispute?
Issues highlighted by recent court decision
The Victorian Supreme Court recently determined a dispute involving the FOS DR service in Pioneer. In that case, the member was dissatisfied with the approach adopted by FOS to such an extent that it sought to terminate the contract it had with FOS. Ultimately the member failed but the case highlighted a number of issues members seem to have with the FOS, including whether FOS is required to:-
- correctly decide a question of law which it is required to decide;
- restrict itself to resolving consumer disputes, rather than acting as the equivalent of a court or hearing and determining disputes as if they were legal proceedings; and
- refrain from making a decision in a manner which no reasonable tribunal could properly come to on the evidence.
Whilst the member ultimately failed to establish that the above three points were terms of the contract between it and FOS that FOS had breached, the case highlights some of the key concerns that members might have with the role played by FOS.
What might a solution look like?
FOS is bound to operate in accordance with the TOR. The current provisions of the TOR became effective on 1 January 2014 and were approved by ASIC. One solution may be for members to agitate for changes to the TOR to restrict the broad ranging DR powers of FOS. Whether a restriction of those powers would be acceptable to ASIC (let alone obtain the necessary approval of other members) is another question entirely.
Another solution to address perceived procedural unfairness might be to introduce some limited rights of review or appeal for FOS members to, for example, the Federal Circuit Court of Australia. These would need to be carefully thought out but might include, for example, circumstances where there has been a denial of natural justice, a violation of due process, FOS acting beyond its remit or a manifestly wrong decision. In some respects this would reflect the practice in arbitrations (see, for example, article 34 of the UNCITRAL Model Law).
A further alternative approach, which is beyond the scope of this article, may be to consider alternatives to FOS. This would also require the approval of ASIC and it is by no means certain it would be forthcoming.