Australia: Internal and external dispute resolution for credit and financial service providers

In brief - Watchdogs cracking down on IDR and EDR procedures

Recent media releases and the Financial Ombudsman Services' (FOS) 2010-2011 Annual Review have confirmed that the federal government and its regulators are beginning an industry-wide crackdown on both internal dispute resolution (IDR) and external dispute resolution (EDR) procedures. Some key and systemic issues have been identified in the FOS Annual Review and the industry will be required to improve its systems both in the short and long term to comply with tighter regulatory requirements.

Dramatic increase in number of complaints

The FOS Annual Review noted a 27% increase in complaints lodged compared to the previous year. It was noted that "[d]isputes about credit products and services – especially home loans, credit cards and personal loans – have risen particularly sharply"2. The total number of disputes lodged at FOS during the past year came in at 30,283, which was over 6,000 more complaints than the preceding year and almost double the number of complaints lodged in 2007-2008.

FOS is one of two ASIC-approved EDR bodies with a high industry subscription. Both FOS and the other approved body, the Credit Ombudsman Service Limited (COSL), have adopted a proactive approach to informing members of their IDR and EDR obligations.3

At the time of this article, COSL had not released its Review of Operations for 2011, though in the 2009-2010 period it had received 1,154 complaints, being an 8.3% increase from the previous year.

The increase in complaints to both EDR bodies seems to be attributable to a number of factors, including recent tightening of consumer credit legislation, proposed amendments to financial services law and external events such as the Global Financial Crisis, among others.

A significant increase in consumer credit disputes at FOS (14,537 newly lodged in 2010-2011) has been the product of financial hardship complaints and the recent consumer credit legislation requiring banks and credit institutions to subscribe to an EDR body.

IDR & EDR obligations of Australian Financial Services Licence holders

It is well known that Australian Financial Services License (AFSL) holders are required under sections 912A(1) and (2) of the Corporations Act 2001 (Cth) to:

  • have an internal dispute resolution procedure that complies with standards and requirements made or approved by ASIC and which "covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence", and
  • be a member of one or more ASIC-approved EDR schemes which cover retail client complaints in connection with financial services covered by the license.

IDR & EDR obligations of Australian Credit Licence holders

Holders of an Australian Credit Licence (ACL) are also required, under section 47(1)(h) of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) to:

  • have an internal dispute resolution procedure that complies with standards and requirements made or approved by ASIC in accordance with the regulations and which "covers disputes in relation to the credit activities engaged in by the licensee or its representatives", and
  • be a "member of an approved external dispute resolution scheme".

Licence holders across the industry may elect the EDR body to which they will subscribe, but there is a universal requirement to establish and maintain an IDR procedure that will deal with disputes in a timely and efficient manner.

Dealing with disputes in the IDR stage

Given the recent introduction of stringent regulations for financial services and insurance and credit providers, IDR and EDR procedures will become the focus of regulatory scrutiny as an increasingly important and necessary frontline for dispute handling.

Although licence holders are generally aware of their obligation to comply with the regulations and standards imposed by ASIC, the IDR and EDR procedures for a licence holder should be kept under regular review to ensure they comply with the content of the regulatory requirements.

A key regulation is found in ASIC's Regulatory Guide 1654 which dictates the main requirements for a license holder's IDR system. The authors of the Australian Financial Planning Handbook5 cite a number of points that must be taken into account in managing IDR systems. Those points generally require:

  • commitment to an effective IDR system
  • fairness in the process
  • adequate resources
  • visibility and transparency of the process
  • accessibility to complainants
  • the ability to assist a complainant with their complaint
  • responsiveness to the issues and to a complainant
  • provided free-of-charge to complainants
  • fair and appropriate remedies, considering legal principles, codes of conduct and industry best practice
  • systemic analysis of complaints and the information gained therein
  • early identification of systemic issues or defects
  • accountability to senior management
  • regular and independent review of the IDR system6

These requirements are embodied in regulatory instruments and Australian/International Standards.7 Based on recent proposed legislative amendments8 and increasingly rigorous tests for license holders and other industry entities,9 it will be essential for financial, credit and insurance issuers or providers to review their IDR processes.

Early resolution of disputes

Regulatory Guide 165 imposes time limits for the resolution of disputes. Where a complaint has been lodged (whether implicitly or explicitly requiring a response), a licence holder must generally take the complaint through its IDR process and make a decision within 45 days. This timeframe is shorter for hardship complaints (21 days) and longer for trustee companies providing "traditional services" (90 days).

If the complaint cannot be resolved within the 45 day period, the licence holder is obliged to explain the delay to the complainant and refer the complainant to the licence holder's subscribed EDR body. Failure to comply with this requirement may be a further breach of the licence holder's duties.

The dictates of best practice are referred to in Regulatory Guide 165. Assuming a licence holder complies with their extensive dispute resolution obligations, the complaint can be managed at an earlier stage.

The FOS Annual Review notes that:

"[t]imely resolution is critical for both consumers and financial services providers....[and] one of our six major objectives for the 2011-2012 financial year is to eliminate and prevent dispute backlogs" (emphasis in original)10.

Practical implications for licence holders and complainants

From a practical perspective, the early and careful treatment of complaints at the IDR stage is more likely to lead to a better outcome for licence holders and complainants alike. Once the relevant matters in issue are identified and addressed, a licence holder can obviate ongoing liabilities and the potential for inflation of costs where complaints are protracted.

With particular regard to financial hardship complaints and the 21-day IDR requirement, prolonging a dispute can lead not only to a complainant's further emotional distress but could potentially cause the complainant further financial difficulties.

The federal government continues to amend and solidify the legislative packages that currently apply to financial services and credit and insurance providers. Given that the changes are geared towards consumer protection, it is important that the industry takes note and reacts accordingly. This will mean appropriate IDR processes, membership of EDR bodies and dealing with complaints in a timely and efficient manner.

For more information about commercial litigation, please see the website of CBP Lawyers or contact Gavin Creighton at or James Stanton at


1 The FOS 2010-2011 Annual Review is accessible online at:
2 FOS Annual Review at 20.
3 See COSL Member News Issue 33, accessible online at:
4 RG 165 is accessible on the ASIC website at:$file/rg165-published-20-4-2011.pdf.
5 Banister et al, Australian Financial Planning Handbook 2010-2011 (2010).
6 Id at [20 330].
7 See AS ISO 10002-2006.
8 Such as the Corporations Amendment (Future of Financial Advice) Bill 2011 (Cth). See CBP overview "Further checks and balances for financial planning" available online at:
9 See CBP overview of ASIC's recent proposed changes in "Research houses to be more tightly regulated under proposed ASIC reforms" available online at:
10 FOS Annual Report at 2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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