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How the creation of AFCA will change the Insurance Industry

On 14 September 2017, the Federal Treasury announced the establishment of an Australian Financial Complaints Authority (AFCA)1.

It is a massive shift to the governance of financial issues in Australia, and one that the insurance industry needs to be aware of. 

What will AFCA do for Australian insurers and consumers?

AFCA is a dispute resolution body for financial products and systems, which will replace the three existing schemes:  the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).

The Authority will commence accepting complaints from 1 November 2018. By establishing AFCA, the government hopes to significantly improve how financial disputes are dealt with in Australia, including as to fairness, timeliness and effectiveness.

AFCA will nearly double existing financial limits, with a compensation cap of $500,000 and a total monetary limit of $1 million. This will provide both small businesses and consumers that suffer losses as a result of alleged wrongdoing, access to a free independent dispute resolution scheme for the resolution of their complaints.  

Additionally, small businesses will be able to apply for the resolution of disputes in circumstances where the credit facility is of an amount up to $5 million.  AFCA will cap the potential compensation for small businesses involved in such disputes at $1 million, almost triple the current respective monetary and compensation threshold.

 

What will happen to existing financial dispute resolution services?

To assist with a smooth transition to AFCA, FOS and CIO will continue operations post 1 November 2018, so that they can resolve all existing disputes. Membership of FOS and CIO will be required to be maintained for up to 12 months after AFCA’s commencement.

During the transition period, a memorandum of understanding between FOS and CIO will operate to preclude members from moving between schemes.

The SCT will continue accepting complaints until 31 October 2018, and will continue operating until around 2020, so that the backlog of complaints can be resolved.

The Minister for Revenue and Financial Services has confirmed that complaints lodged with the SCT would need to be finalised by the SCT, and will not be able to be transferred to AFCA. Additionally, if a complaint is lodged with the SCT and then withdrawn, it will not be able to be subsequently lodged with AFCA.

 

Change on the horizon for all financial disputes

AFCA’s superannuation determinations can be appealed to the Federal Court of Australia on questions of law.

William Roberts Lawyers has, since its inception, assisted insurers with FOS and CIO disputes, including by way of drafting submissions and providing advice as to determinations.

We have, in a similar manner, also assisted life insurers and trustees with SCT disputes. We have also advised and represented life insurers and trustees as to appeals of SCT determinations to the Federal Court of Australia on questions of law, pursuant to section 46 of the Superannuation (Resolution of Complaints) Act 1993

In light of the increase in the respective monetary and compensation limits that will come into effect with AFCA, financial institutions (such as insurers) will most likely see a significant increase in the volume of complaints that are lodged with AFCA compared to the number of complaints previously lodged with the FOS, CIO and the SCT.

This will likely result in a decrease, to some extent, in the volume of litigated matters involving financial institutions that pass through Australian courts.