Consultation on the Industry wide EDR for Business Credit disputes: AFCA

Yesterday the government opened a 17 day consultation window for input into the design of the Australian Financial Complaints Authority, and its operations.

As the consultation papers explain, AFCA is the single external dispute resolution scheme that will replace three existing schemes: the Financial Ombudsman Service, the Credit & Investments Ombudsman, and the Superannuation Complaints Tribunal.

For lenders, the most significant change is the increase in jurisdiction.  Currently, there is a cap of $309,000 on the compensation that FOS can award.  It is proposed that AFCA will have jurisdiction over small business credit facilities up to $5 million, with a compensation cap of $1 million.  Notably, there is no limit on disputes about the validity of guarantees supported by security over a guarantor’s primary place of residence.

The dual reference – facility limit amount as well as compensation cap – highlights that outcomes will not necessarily be limited solely to compensation.  In 2016/17 FOS received 2,772 complaints about lender responses to claims of financial difficulty, and many of those complainants would have been seeking slower or different recovery processes rather than compensation.

There will be some non-bank lenders (those who aim above the micro-business market with say a minimum loan of $500,000) who currently operate mostly outside the current FOS jurisdiction, who will find that AFCA has significant coverage in the future.

The consultation paper notes that AFCA has a specific objective to deploy ‘a consistent approach’ to determinations.  Elsewhere the paper references that FOS currently has regard to ‘applicable industry codes’ and ‘good industry practice.’  Taking those together, might AFCA have scope to decide that the Code of Banking Practice should apply to Bank and non-Bank lenders alike?

Responses are sought by 20 November 2017.

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