AFCA deputy chief ombudsman June Smith
The Australian Financial Complaints Authority has published a report on the application of its “fairness jurisdiction”, explaining how the principle applies and setting out the steps it will take to ensure it is applied consistently and clearly.
The update is in response to a Treasury review of AFCA last year, which found “broad, ungrounded interpretations of fairness” in the ombudsman’s determinations.
The AFCA rules state that in its general jurisdiction it must consider what is “fair in all the circumstances”, having regard to legal principles, applicable industry codes or guidance, good industry practice and previous relevant determinations.
When dealing with superannuation complaints, the fairness jurisdiction is more circumscribed. AFCA must apply the approach set out in Section 1055 of the Corporations Act and may refer questions of law to the Federal Court.
This “fair in all the circumstances” basis for making decisions is what differentiates AFCA and other ombudsman schemes from courts and tribunals, enabling them to make decisions outside of a strict legalistic approach and facilitating a more expedient decision-making process.
It is consistent with the jurisdictions of its predecessor organisations, the Financial Ombudsman Service and the Credit and Investment Ombudsman, and has applied in external dispute resolution in Australia for more than 20 years.
But last November, a Treasury review of AFCA recommended that the ombudsman temper the application of its fairness jurisdiction, placing greater emphasis on legal principles and industry codes.
The review identified what it considered “broad, ungrounded interpretations of fairness”. One example involved AFCA awarding a 15 per cent increase in the payout to the complainant under a home insurance policy where the insurer had reached its maximum liability under the policy. The imposition of the uplift was not based on any provision in the policy documents, legal principles or industry codes, but rather was based on an assessment of the fairness that AFCA found the insurer owed to the complainant in the exercise of its discretion on the method of settlement under the policy.
The review said: “Applications of broad notions of fairness make it difficult for financial firms to have a clear understanding of the basis of AFCA’s future decision-making and therefore being able to establish the necessary systems and processes to ensure compliance.”
Treasury recommended that in making decisions, AFCA should consider what is fair in all the circumstances, having primary regard to the four factors identified in its rules: legal principles, industry codes, good industry practice and previous determinations.
Treasury’s view is at odds with an earlier, independent review that looked at such cases and found that awarding an uplift on an insurance payout, despite the terms of the policy, was a proper exercise of the fairness jurisdiction, just as it would be if AFCA reduced the amount payable to a complainant where the complainant failed to take reasonable care to avoid a foreseeable risk.
There have been a number of court cases that looked at AFCA’s jurisdiction, which have all recognised that it has a fairness jurisdiction.
AFCA deputy chief ombudsman June Smith said: “We recognise that fairness as a concept means different things to different people. We set out to ensure our staff understood the jurisdiction, could readily and clearly explain it and could consistently and transparently apply it.”
AFCA benchmarked its jurisdiction against the work of similar bodies in Australia and overseas.
It has stepped up external engagement on the issue, with a regular series of member meeting and forums.
Working with the University of Melbourne, it has developed an internal navigation tool to help ensure consistency of approach and understanding of AFCA’s role in the dispute resolution process.
The tool sets out a financial services provider’s key obligations, the principles of fair dealing and fair treatment, and lists key questions, including: whether the parties obeyed the law, whether they made promises they did not keep; whether the parties acted in good faith; and whether one party took unfair advantage of the other.