AFCA – so what is fair?

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Rachel Erlich Senior Associate Linkedin

As I write this in May 2020, we are facing difficult times.  We are grappling with a global pandemic caused by COVID-19.  And, as we experienced during the global financial crisis, complaints appear to be on the rise.

Where a complaint cannot be resolved directly with a consumer (the complainant) and the financial firm is a member of the Australian Financial Complaints Authority (AFCA), the complainant may escalate their complaint to AFCA.

AFCA is a dispute resolution scheme for financial services.  It is not the regulator of the financial services industry.  That task falls to the Australian Securities and Investments Commission (ASIC).

AFCA is governed by its Rules which are approved by ASIC, and which form a part of a contract between the complainant, the financial firm and AFCA.

Provided that a complaint falls within its jurisdiction, AFCA can consider complaints in relation to:

  • credit, finance and loans;
  • insurance;
  • banking deposits and payments;
  • investments and financial advice; and
  • superannuation.

While you might expect AFCA to determine a complaint on the basis of legal principles alone, this is not the case.

The AFCA Rules require an AFCA Decision Maker to “do what the AFCA Decision Maker considers is fair in all the circumstances having regard to (a) legal principles; (b) applicable industry codes or guidance; (c) good industry practice; and (d) previous relevant Determinations of AFCA or Predecessor Scheme decisions”.

It’s not a surprise that AFCA’s ability to determine a complaint on the basis of fairness has caused much concern for financial firms.  It is conceivable that, despite complying with its legal obligations, a financial firm has a finding (Determination) made against it by an AFCA Decision Maker on the basis of fairness.  And since, 1 October 2019, AFCA names (and possibly shames) the financial firm in its published Determinations.

So, what is fair in all the circumstances?

AFCA has released Operational Guidelines that explain how AFCA interprets and applies its Rules.   In the Operational Guidelines, AFCA explains that the effect of its mandate to do what is fair in all the circumstances, is to “move decisions away from strictly relying on a legal interpretation of the applicable legislation or the terms and conditions of the disputed financial product to a decision which also contemplates fairness”.   Unhelpfully, neither the Rules nor the Operational Guidelines define or explain how AFCA will apply the principles of fairness to its decision making.

In June 2019, AFCA announced its Fairness Project.  AFCA explains that the purpose of the Fairness Project is to “provide a certainty about how AFCA assesses what is fair in a way that is clearly understood by all stakeholders”.

AFCA’s stakeholders include financial firms, ASIC and “key” consumer, community and industry organisations.

The AFCA Rules set out the principles that underpin the AFCA scheme.  One such principle is that AFCA will consult with its stakeholders on a regular basis.  AFCA was intending to release a consultation paper to seek formal feedback on its “proposed framework and fairness tool”.   Unfortunately, this consultation has been postponed due to COVID-19.

So, until the pressures of COVID-19 have passed, we are unlikely to have any formal insight into AFCAs “proposed framework and fairness tool”.   Until then, when reviewing complaints, you should consider whether your actions have been “fair” and not simply whether you have complied with your legal obligations.

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Author: Rachel Erlich (Senior Associate)