1. Business Booming
2. AFCA gives more time to resolve complaints
3. Significant Event Response Plans – Is AFCA prejudging the Issue?
4. Two recent cases consider AFCA powers
5. Did the making of a decision by AFCA involve an impermissible exercise of judicial power contrary to the Constitution? – An important decision of the Full Federal Court of Australia
6. Another case illustrates just how hard it is to appeal AFCA determinations – IEL Case
7. Remit of AFCA in relation to loans made under Coronavirus SME Guarantee Scheme limited. (SMEG Loans)
8. Complaints about business loans repayment deferrals due to Covid 19 excluded from AFCAs Remit.
9. What happens when loan deferral periods end?
1. Business Booming
Speaking at a recent online forum the Chief Operating Officer of the Australian Financial Complaints Authority (AFCA), Justin Untersteiner, reported that AFCA had received over 3180 COVID-19 related financial complaints since the pandemic was declared in March 2020.
The breakdown is:
- banking and finance complaints – 1430
- general insurance complaints – 1070
- superannuation complaints – 610
680 of the banking and finance complaints relate to financial difficulty issues.
The majority of the complaints are in the areas to be expected, namely:
- loan break costs, where borrower seek to exit fixed rates in favour of lower variable rates;
- requests to extend payment terms;
- denial of travel insurance claims, and
- delays in early release of superannuation.
One outlier category of claim relates to disputed transactions which at first blush does not appear to be COVID 19 related. However, this could reflect an increase in the amount of scams and fraud. Alternatively, this merely reflects that people now have more time to actually examine their transaction records and with less money available – every dollar counts!
AFCA is predicting receiving more financial difficulty complaints in the next six to 18 months as Government support is wound down. Mr Untersteiner said:
“We expect to see more complaints from vulnerable consumers or others who struggle to repay mortgages or other debts as Government and sector support initiatives come to an end,” he said. “This won’t just be an issue for banking and finance, many will turn to their insurance policies to look for help, and in some cases, they will not be covered which will lead to disputes.”
“We also expect to see an increase in responsible lending complaints, disputes relating to scams, and a rise in business interruption insurance complaints, and additional complaints relating to early access to superannuation from June to September.”
2. AFCA gives more time to resolve complaints
Somewhat old news now, but it is important to be aware that AFCA has given consumers, small businesses and financial firms extra time to respond to complaints due to the COVID-19 pandemic.
Financial firms had 21 days to respond when notified by AFCA that a complaint had been lodged. That time period has been extended to 30 days.
In addition, when a matter reaches case management stage, AFCA is also providing as standard, a 21-day timeframe to provide an initial response.
The changes are a temporary measure which AFCA anticipates will be in place for up to six months but subject to review.
Internal dispute resolution timeframes remain unchanged.
3. Significant Event Response Plans – Is AFCA prejudging the Issues?
AFCA seems to have developed a liking for announcing and implementing “significant event” response plans.
It is understandable that AFCA did so in relation to the bushfire crisis late last year and early this year. But it is less understandable in relation to both:
- Coronavirus (COVID-19) being declared an “insurance catastrophe” in March 2020, and
- AFCA publicising that it had activated its significant event response plan in connection with the recent problems at ME Bank concerning the redraw issue on certain legacy loan products.
It is not that AFCA internally implements a significant event response plan to manage allocation of staff resources within the AFCA organisation. The concern is that by publicising such internal resourcing decisions this could well be interpreted by the public as a case of AFCA rejudging the issues involved.
With the insurance catastrophe declaration made by AFCA in March 2020 one could be forgiven for mistakenly believing that AFCA is actually touting for business. In the updated note from AFCA, reference is not only made to insurance disputes, but the release then goes on to consider other types of issues that may justify complaints made, such as financial hardship caused by lost credit cards and problems accessing cash through to being unable to make loan repayments. See below extracts:
Have you been affected?
If you have been affected by coronavirus (COVID-19), we encourage you to contact your insurance company.
For help with the claims process, or if you are unable to contact your insurance company, please call the Insurance Council of Australia disaster hotline on 1800 734 621.
How we can help you
AFCA offers free and accessible dispute resolution services to consumers and small businesses impacted by this event. If you have raised a complaint with your insurance company but you have been unable to resolve the matter, you can then come to us for assistance. Please note, we are only able to consider your complaint once you have raised the matter with your insurer.
If you encounter difficulties relating to your insurance claims which you are unable to resolve directly with your insurer, you can register your complaint with us using our online complaint form or by calling 1800 931 678. More information about the process we follow to resolve complaints is available on our website.
Financial hardship
People affected by pandemics can experience both short-term and long-term financial difficulties, ranging from lost credit cards and problems accessing cash through to being unable to make loan repayments. Banks and other financial services providers generally provide assistance to customers in cases of genuine hardship.
If you encounter difficulties relating to a financial hardship application, you can make a complaint to us online, or call us on 1800 931 678.
In the ME Bank announcement, AFCA explains the rationale for declaring significant event response plans:
The significant event response plan is activated for events that can potentially result in significant numbers of related complaints coming to AFCA. It provides for early communication with relevant stakeholders and a more streamlined, expedited process for the resolution of related complaints.
To a reasonable person reading the AFCA announcement, the clear impression is created that AFCA is likely to uphold any complaints made. This may have the effect of reducing the likelihood of the financial firm and the consumer resolving matters direct and may also create unrealistic expectations on the part of the consumer.
AFCA states that by activating a significant event response plan, it is seeking early communication with relevant stakeholders and a more streamlined expedited process for the resolution of related complaints. However, this surely can be done effectively by consultation by AFCA direct with the financial firm/s and does not need to be broadcast to the world at large. If AFCA is concerned about the internal dispute resolution procedures of the financial firm then AFCA is able to consult direct with the firm/s without needing to involve consumers at a preliminary stage.
If, as AFCA states, AFCA activates a significant event response plan because AFCA believes that the event can potentially result in significant numbers of related complaints coming to AFCA, then that is an internal management matter for AFCA and again does not need to be broadcast to the world at large. In fact, by broadcasting the declaration to the world at large, all that AFCA is likely to do is to increase the number of complaints thereby compounding AFCAs resourcing problems.
AFCA needs to proceed with more caution when considering whether or not to publish to the world at large a decision made by it to implement a significant event response plan.
4. Two recent cases consider AFCA powers
There have been 2 recent court decisions which have upheld determinations made by AFCA.
These cases illustrate the limited grounds upon which financial firms may challenge APRA decisions. Under the AFCA rules Financial Firms agree to severely limit their right to appeal decisions made by AFCA.
These two cases are examined below.
5. Did the making of a decision by AFCA involve an impermissible exercise of judicial power contrary to the Constitution? – An important decision of the Full Federal Court of Australia
This was the issue that had to be decided in QSuper Board v Australian Financial Complaints Authority Limited [2020] FCAFC 55. (QSuper)
The issue in the QSuper case related to a Dr Lam who lodged a complaint against QSuper with AFCA claiming that he overpaid premiums for death and total and permanent impairment cover which he had acquired through his superannuation fund and was entitled to a refund. Dr Lam claimed that when QSuper introduced its new “professional” occupational rating on 1 July 2016 he wasn’t given adequate notice of the change, depriving him of the opportunity to avail himself of the new rating – thus saving on premiums.
AFCA ruled in favour of Dr Lam, finding that the changes made by QSuper were not adequately brought to Dr Lam’s attention and he was not given guidance on how he could take up the benefit of the reclassification.
Initially, it appeared that QSuper was asserting that AFCA’s decision was invalid because the powers purportedly exercised under s 1055 of the Corporations Act 2001 (Cth) (Corporations Act) contravened Chapter III of the Commonwealth of Australia Constitution Act 1901 (Cth) (the Constitution) by conferring the judicial power of the Commonwealth on a non-judicial body. Section 1055 of the Corporations Act sets out the powers of AFCA in relation to superannuation complaints.
That assertion then led to the intervention in the appeal of the Attorney General (Commonwealth) which happens as a matter of course when constitutional issues are raised.
QSuper later clarified its submission stating that it did not assert directly that Section 1055 contravened the Constitution, but instead that AFCA had impermissibly exercised the judicial power of the Commonwealth in that it made a decision on the issue of whether QSuper had complied with the notice (of change in policy terms) requirements of section 1017B(4) of the Corporations Act.
The Court considered upon what basis AFCA actually made its decision. It found that it did not make its decision based on whether there had been compliance with the notice provisions under section 1017B(4) Instead AFCA made its decision on whether QSuper had been unfair or unreasonable in its dealings with Mr Lam.
That was sufficient to decide the appeal, but the Court went further and examined what would have been the position had AFCA directly examined whether or not QSuper had complied with the notice of change provision contained in section 1017B(4) On this issue the Court concluded (at paragraphs 186 and 187) that:
186 Even if it could be said that AFCA determined that QSuper’s Notice contravened s 1017B(4) and that was the sole and underlying reason for its conclusion that it ought exercise its powers under s 1055, it cannot be said that it was exercising judicial power. Its determination exhibited none of the indicia of judicial power. Moreover, the legally relevant circumstances of this case are indistinguishable from those which pertained in Breckler and the same result necessarily follows.
187 That being so it cannot be said that AFCA’s decision of 1 August 2019, was or involved an exercise of the judicial power of the Commonwealth. Nor can it be said that any of the provisions of the CA which establish the AFCA scheme and grant AFCA power to make determinations offend Ch III of the Constitution.
The effect of this decision is likely to be that AFCA will be freer to consider specifically whether legislative provisions have been complied with by a Financial Firm as part of its deliberative process in making a Determination, in addition to the issue of fairness.
6. Another case illustrates just how hard it is to appeal AFCA determinations – the IEL Case
This case illustrates yet again how difficult it is to challenge a decision of AFCA (and its predecessor FOS) The case Investors Exchange Limited v Australian Financial Complaints Authority Limited & Anor [2020] QSC 74 (IEL) involved a situation where AFCA made a determination that IEL pay over $60,000 compensation to a complainant.
IEL has failed to pay in accordance with the Determination and AFCA applied to the Court seeking specific performance of the Determination. IEL in response sought a declaration that the Determination was invalid, an order setting it aside or an order permanently restraining or staying AFCA from enforcing it.
AFCA succeeded in its application – IEL failed.
This case adopted prior decisions of courts in relation to AFCA’s predecessors. The Court made some useful observations on the limited grounds upon which decisions of AFCA may be reviewed. The Court also referred to the 1947 UK case of Associated Provincial Picture Houses Ltd v Wednesbury Corporation (Wednesbury case) Relevant observations made by the Court on this issue include those identified at the various paragraphs extracted below:
[24] A determination by AFCA is not susceptible to judicial review on administrative law grounds. AFCA is not exercising a public duty. Its power to make a determination is derived solely from the parties’ contract.
[27] The contract does not impose on the decision-maker an obligation of reasonableness of the kind implied in building and engineering contracts and some other commercial contracts. Instead, the applicable standard is unreasonableness in the Wednesbury sense. …The Wednesbury standard applies ……. the Court will intervene in the case of a decision which is so irrational or unreasonable that no reasonable body could properly have come to it on the evidence.
[28] It is not sufficient to engage unreasonableness in the Wednesbury sense that the decision-maker made an error of fact or law (such as an error in construing a
document) leading to an erroneous decision. It is not sufficient that the Court concludes that the decision is wrong. This is so even if the Court concludes that AFCA has misconstrued some legal rule in the process of reaching its decision.
[29] In simple terms, the decision can only be set aside on the grounds of Wednesbury unreasonableness if it is “one to which no reasonable tribunal could properly come on the evidence”.
[30] Other grounds may arise because the decision is inconsistent with the contract upon which it depends for its authority. This will be so, for example, if the decision is the result of bad faith, bias, fraud or dishonesty or is the product of a breach of the rules of natural justice. A determination is also amenable to court intervention if the decision-maker misconceived the task it was required to undertake or made an error which shows that the determination was not made in accordance with the contract. This last ground is not engaged simply because the decision-maker made an error in the process of reasoning or made a finding or conclusion which was unreasonable in some general sense of that word.
Despite the long line of cases validating AFCA’s interpretation of the scope of its powers and the basis on which those power may be exercised (including the importance of concept of “fairness”), challenges will no doubt continue to be made through the Courts. This is because the monetary amount of many determinations is often significant, providing an economic incentive to challenge. Further, many financial firms have not yet grasped fully the import of the concept of “fairness” in AFCAs decision making process. As a consequence of this failure, many financial firms will continue to believe that some determinations made by AFCA are “so irrational or unreasonable that no reasonable body could properly have come to it on the evidence”.
7. Restrictions on remit of AFCA in relation to loans made under Coronavirus SME Guarantee Scheme (SMEG Loans)
Following the issue of a notifiable instrument by the Federal Treasurer on 24 April 2020 which amended AFCA’s authorisation conditions, AFCA was required to amend its Rules. ASIC then directed AFCA to make the required amendments to its Rules without public consultation, given the urgency of the Government’s COVID-19 economic responses.
A new Section G has been inserted into the AFCA Rules. The new requirements apply to complaints received by AFCA in relation to loans made under the SMEG Scheme from 25 April 2020.
The rule changes sideline any issues relating to responsible lending obligations in relation to SMEG loans and excludes the possibility of AFCA considering any systemic error issues arising from SMEG loans.
New rules G2.2 and G2.3 provides:
G.2.2 When considering the complaint, AFCA and the AFCA Decision Maker must not take into account any decision made by the lender which relates to:
a) a decision to provide the SMEG Loan to the borrower; or
b) the amount of the SMEG Loan
G.2.3 In relation to decisions which AFCA and the AFCA Decision Maker can consider, they must consider the complaint on the basis that:
a) the lender was permitted to disregard the impact of COVID-19 when determining the financial situation of the borrower; and
b) the purpose of the SMEG Act is to encourage the quick and efficient provision of loans to borrowers as a response to the economic impact of COVID-19 on individuals, businesses and the Australian economy; and
c) the lender is required to comply with the terms of the SMEG Act (and any instruments, rules or conditions made as a consequence of that Act) in providing SMEG Loans to borrowers; and
d) the considerations in paragraphs (a) to (c) must be given priority by AFCA and the AFCA Decision Maker over other matters when making any preliminary assessment or determination.
8. Complaints about business loans repayment deferrals due to Covid 19 excluded from AFCAs Remit.
On 21 April 2020, the Federal Treasurer also amended AFCA’s authorisation conditions and required AFCA to amend its Rules to effectively limit the right of customers who have a business loan to complain about repayment deferrals agreed to by lenders due to the impact of COVID-19.
The changes are set out at section G.3 of the AFCA Rules.
The changes affect “business loans” which are defined to mean a loan provided to a small business (as defined in the AFCA Rules) which was not regulated under Chapter 3 of the National Consumer Credit Protection Act 2009 at the time the loan was made.
Note that Chapter 3 refers to “responsible lending” obligations.
The exclusion of business loans from AFCA’s jurisdiction applies in the following circumstances:
- a Business Loan (other than a SMEG Loan) was made by a lender to a borrower on or before 1 January 2020; and
- the lender agrees to provide the borrower with a deferral of loan repayments at any time in the period of 12 months after 25 April 2020, because the borrower has advised the lender that their business has been impacted by COVID-19 (Repayment Deferral); and
- the borrower accepts, and makes use of, the Repayment Deferral; and
- the borrower, or a person who was a guarantor in relation to the loan makes a complaint to AFCA in relation to a decision about a Repayment Deferral for the Deferral Loan.
In those circumstances AFCA may not consider any matters relating to the decision to grant the repayment deferral nor any systemic issues arising from or indicated by that decision (unless AFCA becomes aware that a serious contravention of a law may have occurred). Refer in this regard to Rules G.3.2 and G3.3.
9. What happens when loan deferral periods end?
Loan deferral periods will start ending in September 2020. What happens after that?
Because repayments were deferred, unless future repayments are increased, the loan term will necessity be extended. Will consumers be receptive to requests made by Financial Firms to increase repayments to keep the loan within its original term?
If a consumer is still suffering financial hardship, an application will no doubt be made by the consumer to the financial firm for relief. If the financial firm does not grant further relief, the consumer will be entitled to complain to AFCA. If the financial firm agrees the further deferral request, but on conditions, the imposition of those conditions can be challenged.
Unlike the situation with SMEG and business loans, AFCA has jurisdiction to consider complaints relating to the original decision by the financial firm to grant a repayment deferral in relation to a consumer loan and to investigate systemic issues arising from that decision. Many financial firms granted loan deferrals to consumers without seeking much information. How that approach will be regarded by AFCA long term remains to be seen.
Granting further deferrals is not a given, especially with a loan where there is a high loan to valuation ratio.
Enforcement action by financial firms after the loan deferral period ends will be difficult.
At this time there are no answers to these issues. However, one thing is certain, if a consumer cannot resume repayments at the end of the loan deferral period they will be likely to lodge a complaint with AFCA if the financial firm does not agree to grant further hardship relief.
At the start of the pandemic, the Council of Financial Regulators issued a statement of approach and AFCA aligned its approach to handling COVID-19 related complaints to be consistent with that approach. Prior to September 2020, a further statement and guidance will need to be issued by the Council of Financial Regulators and AFCA will again need to align its approach to complaint handling so that it acts consistently.
