Industry has expressed two significant concerns about the operation of EDR schemes. Are the concerns justified?
Before discussing the issue, I must record that I am a director of Credit Ombudsman Services Limited (COSL) and the comments in this document are mine and do not reflect the view of COSL or the COSL Ombudsman.
There are two main External Dispute Resolution schemes (EDRs) used by businesses regulated by the National Consumer Credit Protection Act (NCCP Act) - namely FOS (Financial Ombudsman Services) and COSL. Both EDRs establish rules which to a large degree are dictated by ASIC's Regulatory Guides RG139 and RG165.
Entities that hold an Australian Credit Licence or are appointed as a credit representative must be a member of an EDR scheme. There are other industries that must also be subject to EDR, but they are not relevant to this discussion. Once a business is a member, it is bound by the rules of the EDR scheme. In the case of FOS, these rules are called the 'Terms of Reference' (TOR) and in the case of COSL they are called 'COSL rules'.
Although there are some differences between the rules of the two schemes, they are substantially the same. Industry members have a choice of which scheme to join and that choice will often be dictated by cost and service issue considerations.
Although financiers are generally only required to join an EDR scheme if they are regulated by the NCCP Act, some financiers may join voluntarily. Once a member joins an EDR scheme, not only is credit regulated by National Credit Code subject to the EDR's rules, but also any credit provided to an individual or small business (irrespective of the amount and irrespective of the purpose). Accordingly, the scope of finance transactions where disputes can be considered by EDR are much wider than merely finance regulated by the National Credit Code.
There are two key concerns that are frequently raised with me.
1. Time taken to resolve dispute
Any dispute is likely to take some time because the EDR scheme must make sure that both the consumer and the member have an adequate opportunity to put their case. There are often significant delays by both consumers and members in responding to the EDRs, and these delays in providing responses to the EDR contribute significantly to the delay in resolving the matter. However, it is difficult for the EDR to dismiss a dispute simply because of delay, and special consideration has to be given to assist consumers struggling to express their concerns.
A key step industry can take is to better publicise their IDR schemes. By having the complaints first go to IDR and ensuring that IDR deals with the complaint promptly and fairly, many references to EDR may be avoided.
2. Stay on proceedings
If a dispute is referred to EDR, the member must not take or continue any enforcement action until the dispute is resolved (subject to some minor exceptions). This is irrespective of whether the dispute is lodged before or after enforcement proceedings are commenced. A dispute can even be lodged after an undefended judgment has been entered.
There is also a stay when a dispute is referred to IDR. There is some evidence that some consumers and their advisors lodge a dispute with EDR to trigger the stay on enforcement, which is unnecessary given that lodgement with IDR has the same effect.
The MFAA is lobbying for the stay on enforcement to be qualified so that it does not operate in unfair circumstances. For example, the MFAA argues that a stay should not apply:
- in cases of complaints not relating to the enforcement;
- when the original loan is more than $1 million or the borrower has absconded, or the arrears exceed six months;
- when a court judgment has been entered (the consumer should not have two bites of the cherry); and
- if the EDR reference is not finalised within nine months of the complaint being lodged.
Is EDR fair?
Some commentators are concerned that EDR usurps the role of the courts. Certainly, EDR replaces the need for industry and consumers to go to court. In most cases, an EDR reference can be resolved faster and more cheaply than a reference to court.
It is important to remember some of the history. Compulsory EDR arises because in some states and territories there was already access to other courts and tribunals prior to the introduction of the NCC. Under that regime, consumers were able to air their complaints comparatively easily and cheaply. To a certain extent, EDR was created to replace these other courts and tribunals.
EDR is clear government policy, and when working well, it can benefit both members and consumers. It is fair for industry to take an interest in how EDR schemes operate and be proactive in ensuring their rules are fair and assist in developing schemes so that disputes are resolved promptly.
Surprisingly, often the greatest delay in resolving a dispute are members who fail to respond promptly – and then proceed to complain that EDR is slow!! Given a fair chance, my observation is that in the vast majority of circumstances, EDR can work well.
One issue of increasing relevance is whether it is appropriate for EDR to review hardship decisions. Generally, EDR staff are not trained in credit assessment and may not understand the risk and financial consequences to the lender of a contract being varied. The ease with which a written contract can be varied for hardship is a significant credit and commercial risk for financiers. Perhaps the answer is to limit EDR's review of hardship decisions to cases where there has been no fair review by the lender.
For more information, please contact:
t +61 2 9931 4927
This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.