Chapter 02 – Dispute Resolution

All holders of an Australian Financial Services Licence (AFSL) must provide dispute resolution services. This is a requirement under ASIC RG 165.

Broadly, dispute resolution procedures are divided into two types: internal dispute resolution services (IDRS) and external dispute resolution services (EDRS). As the name suggests, an IDRS is an AFSL holder’s internal process for dealing directly with complaints or disputes with people affected by it’s service. An EDRS is an external agency that seeks to resolve disputes between the AFSL and the complainant.

RG 165 defines a complaint as follows:

definition-of-complaint-and-dispute

When it receives or becomes aware of a complaint, an AFSL must first address that complaint via its IDRS. In most cases, the AFSL holder has 45 days in which the resolve a complaint via its IDRS. Within that 45 day period, the AFSL must provide a ‘final response’ to the complainant. This is a requirement of RG 165:

RG-165-90

A final response is generally not required if the AFSL resolves the complaint to the complainant’s satisfaction within five business days of receiving the complaint and the complainant has not requested a written response.

As the terms of the written response make clear, if the complainant is not satisfied with the outcome of the IDRS, they have the right to take their complaint to the EDRS. The AFSL holder must inform the complainant of this right and also how the complainant can go about accessing the EDRS.

This will be the second time that the AFSL holder will have informed the client about the EDRS. The first will have been in the AFSL’s financial services guide (FSG). All AFSL holders must include details about dispute resolution in their FSG. As of May 2016, Dover’s FSG states the following:

Dispute resolution

Dover provides a dispute resolution services to its clients. This obligation is a key tenet of the consumer protection principles of the Australian Financial Services Licensing system.

If you have a complaint about any services you should:

  1. contact your Adviser by telephone to explain your situation and let him or her know of your concerns. Your Adviser will do everything possible to resolve your complaint promptly;
  2. if this does not resolve your complaint, put your complaint in writing addressed to Dover Compliance at PO Box 209, Black Rock VIC 3193 where it will be objectively considered and discussed with you and your Adviser with a view to being settled as soon as possible to your satisfaction; and
  3. if your complaint is not resolved to your satisfaction by Dover, you can access our external dispute resolution scheme. Dover is a member of the Financial Ombudsman Service (FOS). FOS can be contacted on 1300 780 808. This is a free service to complainants.

Internal Dispute Resolution

Internal dispute resolution services must be maintained by every AFSL holder. Dover’s IDRS is contained in the compliance manual, which can be accessed by all advisers via the adviser portal section of the Dover website. The relevant section can be viewed via this link (click on the button below): 

Dover Compliance Manual

As outlined above, if the IDRS does not resolve the dispute to the satisfaction of the client, then the client can have the dispute passed up to the EDRS.

Providers of EDRS

All AFSL holders must be a member of an ASIC-approved EDRS. As of May 2016, there are only two approved providers:

Who Pays for EDRS

The AFSL pays for the services of the EDRS. There are two main forms of payment. The first is a registration fee. This fee is calculated according to the size of the AFSL holder. For example, the CIO charges a fee of $375 per annum, plus an extra $100 per annum for every authorized representative of the AFSL.

The second is a fee that is paid when a dispute arises. This fee is charged in various ways, depending on the level at which the dispute is being addressed by the EDRS. Again, the fee is payable by the AFSL holder.

What happens at an EDRS?

The two EDRS have slightly different but similar processes. The CIO process is explained here:

CIO

Where the EDRS gets its authority from

EDRSs are private companies. They do not have legal authority in the same way that ASIC, as a delegated representative of the Commonwealth does. Instead, EDRSs gain their authority from the contract that is formed between themselves and the AFSL holder. This contract includes an undertaking on the part of the AFSL holder to abide by the decisions of the EDRS. If an AFS did not abide by a decision, then it can be sued for breach of contract.

There can be an inherent problem here. An AFSL holder has no ability to negotiate the terms of the contract with the EDRS. From the point of view of the AFSL holder the contract is ‘take it or leave it.’ Combined with the fact that EDRS agreements are compulsory for AFSL holders (ASIC will not grant a licence for an AFSL if the holder is not a member of an EDRS), this creates substantial power for the EDRS.

The EDRS must be registered with ASIC. This should have the effect of ensuring that the EDRS does not misuse the substantial power afforded to it by the fact that AFSLs essentially must sign the contract with the EDRS. However, experience shows that the small number of EDRS providers gives them something of a seller’s power: ASIC is reliant on the existence of EDRS providers and the system would struggle if one or both of the current providers were to cease trading. This is likely to reduce the ability of ASIC to place any particularly stringent conditions on the EDRS. 

You can read a critique of the Financial Ombudsman Service here. 

Things to be aware of when it comes to dispute resolution

There are various things that advisers should be aware of when it comes to dispute resolution. These are:

  • There is no cost to the client at any stage of the process.While there is obviously merit to this – a client with a real grievance should not have to pay for the grievance to be resolved – this also means that there is no disincentive to a client to resist resolving a dispute at the internal level. This can impact, for example, on a client’s willingness to participate in and accept the outcome of an internal dispute resolution process.
  • The AFSL pays even when a dispute is resolved in its favour.
  • FOS, in particular, has a reputation for consumer advocacy.This can put the AFSL holder and the financial adviser at a disadvantage.
  • As a result, it makes sense to try to resolve complaints prior to them being escalatedto the level of the EDRS.

Avoiding disputes

Given the above, the key at all times is for an adviser to avoid disputes in the first place. The best way to do this is to adhere at all times to the best interests duty that arises from section 916B of the Corporations Act. If you have steadfastly operated in the clients’ best interests at all times, then the likelihood of a dispute arising is substantially reduced.

For further guidance, please download and read the FPA’s ‘Guide to Bulletproof Financial Planning,’ published in 2013, after the best interests duty was enshrined in legislation.

The Dover Group