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Serpell, Andrew --- "Financial products and services: consumer rights and remedies" [2016] PrecedentAULA 28; (2016) 134 Precedent 4

FINANCIAL PRODUCTS AND SERVICES
CONSUMER RIGHTS AND REMEDIES

By Andrew Serpell

A consumer of a financial product or service may have a complaint and wish to seek a remedy in a wide variety of situations.

Examples include:

• the consumer has been given information about a financial product which appears to be misleading or deceptive;

• the consumer has received financial product advice which does not appear to comply with the law (for example, where the financial adviser may have breached the duty to act in the best interests of the client);

• the consumer is not satisfied with a credit contract they have entered into (for example, where the fees and charges applying under the contract are very high);

• the credit provider has refused to change a credit contract after receiving a hardship notice from the consumer;^[1]

• the consumer has participated in a review and remediation program, but is not satisfied with the outcome;^[2]

• the consumer has made an insurance claim which has been denied by the insurer; and

• the consumer has placed an order with a stockbroker which has not been fulfilled.

There are various mechanisms by which consumers can seek to have their complaints resolved and obtain a remedy. The main options for consumers considered in this article are as follows:

1. Lodge a complaint with an external dispute resolution (EDR) scheme.

2. Commence legal proceedings in court (or participate in a class action).

3. Claim against a compensation scheme.

EXTERNAL DISPUTE RESOLUTION (EDR) SCHEMES

Generally, a financial services licensee or product issuer that provides financial services or products to retail clients is required to be a member of an external dispute resolution (EDR) scheme approved by the Australian Securities and Investments Commission (ASIC).^[3] Credit licensees also need to belong to an ASIC-approved EDR scheme.^[4]

There are two ASIC-approved EDR schemes: the Financial Ombudsman Service (FOS)^[5] and the Credit and Investments Ombudsman (CIO).^[6] These schemes can consider a wide range of complaints about financial products and services made by retail clients. EDR schemes will consider complaints only where the complainant has previously sought to have the dispute resolved through the licensee’s or product issuer’s internal dispute resolution processes.

It is important to bear in mind that there is a separate dispute resolution process for superannuation-related complaints (for example, a complaint about the decision of a superannuation trustee to deny a disability benefit claim). These types of complaint are considered by a statutory body – the Superannuation Complaints Tribunal (SCT) – rather than an ASIC-approved EDR scheme.^[7]

There are many advantages for consumers in having their complaints dealt with by an EDR scheme. First, the consumer does not have to pay to have their complaint dealt with by the scheme.^[8] Secondly, it is not necessary for the consumer to prove (or even allege) a breach of any particular law in order to obtain a remedy from the scheme. A consumer complaint to an EDR scheme may be based on an alleged breach of legislation by the scheme member but it may, alternatively or additionally, be based on a breach of codes of practice^[9] or notions of good industry practice or fairness. All these factors will be taken into account by the scheme in making its decision in relation to the complaint.^[10]

Thirdly, the range of remedies available to consumers through EDR schemes is broad. Remedies which may be available (depending on the circumstances) include:

• the payment of monetary compensation to the consumer;

• the variation of the terms of a credit contract held by the consumer; and

• an order that the EDR scheme member meet an insurance claim submitted by the consumer.

Fourthly, where a complaint has been made to an EDR scheme, usually no action can be taken to enforce a debt owed by the consumer to the EDR scheme member until the EDR scheme has resolved the complaint.^[11]

Finally, the consumer is not required to accept the decision reached by the EDR scheme. Rather, he or she can reject the scheme’s decision and take some other action, such as commencing legal proceedings in court.^[12] However, a decision made by an EDR scheme is binding on the scheme member (assuming the consumer accepts the scheme’s decision).

However, it should be borne in mind, that while the jurisdiction of EDR schemes is broad, it is nevertheless limited in various ways. It is necessary to read the Terms of Reference (in the case of FOS) and the Credit and Investments Ombudsman Rules (in the case of CIO) to determine the precise jurisdictional limits of these schemes.

The types of complaint which cannot generally be considered by these schemes include:

1. complaints about the amount of a fee, insurance premium, charge or interest rate – unless the complaint concerns non-disclosure, misrepresentation or incorrect calculation, or breach of legal obligation or duty;

2. complaints about investment performance – unless the dispute concerns non-disclosure or misrepresentation or other unlawful conduct;

3. complaints about the management of a fund or scheme as a whole; and

4. complaints which have already been dealt with, or are being dealt with, by a court or another ASIC-approved EDR scheme.^[13]

Further, there are limits on the amount of monetary compensation that EDR schemes can award to consumers. The general monetary compensation limit in respect of disputes lodged on or after 1 January 2015 is $309,000.^[14] Accordingly, where the consumer’s claim significantly exceeds this amount, it may be necessary to consider initiating legal proceedings in court.

LEGAL PROCEEDINGS

A consumer may decide to commence legal proceedings (or participate in a class action) where a cause of action can be established.^[15] Relevant legislative provisions which give rights to consumers are contained in the Corporations Act 2001 (Cth), the National Consumer Credit Protection Act 2009 (Cth), and the Australian Securities and Investments Commission Act 2001 (Cth).

Consumer rights under the Corporations Act 2001 (Cth)

Chapter 7 of the Corporations Act 2001 (Cth) provides a number of legal remedies for consumers of financial products and services. The terms ‘financial product’ and ‘financial service’ have very complicated definitions.^[16] In general terms, Chapter 7 applies to products such as shares, debentures, deposit products, derivatives, insurance products, managed funds and superannuation. Chapter 7 does not apply to consumer credit. Where a remedy is available, it is commonly sought in the Federal Court of Australia, a State Supreme Court or a lower court (subject only to the lower court’s jurisdictional limits relating to the amounts or value of property with which the court may deal).^[17]

One important consumer remedy to note is the right to seek compensation for loss suffered because of a breach of the duty of a financial adviser to act in the best interests of the client when providing personal advice.^[18] Specifically, compensation may be sought against the provider of the financial advice (if the advice provider is a licensee) or the responsible licensee (if the advice provider is a representative). This remedy applies in relation to personal advice provided to a consumer as a retail client on or after ‘application day’ (usually 1 July 2013).^[19] It should be emphasised that, in order to obtain a remedy, the consumer must be able to establish that the best interests duty has been breached and that there is a causal nexus between the breach of duty and the loss suffered by the consumer.

Another potentially important consumer remedy is the right to seek compensation for loss suffered as a result of being provided with a product disclosure statement (PDS) which is ‘defective’ – that is, where the PDS contains a misleading or deceptive statement, or where there is an omission from the PDS of required material.^[20] In order to obtain a remedy, it must be established that the PDS given to the consumer was defective and that there is a causal nexus between the defective PDS and the loss suffered by the consumer. These issues were considered in Woodcroft-Brown v Timbercorp Securities Limited (In Liq),^[21] a class action for damages based on losses allegedly caused by the failure of Timbercorp to provide adequate PDS information about the risks of investing in various horticultural and forestry-managed investment schemes. In that case, Judd J decided that the PDS was not defective. Further, his Honour was not satisfied that the plaintiffs had invested in reliance on the PDS and decided, therefore, that they were not entitled to damages (even if the PDS was defective).

Consumer rights under the National Consumer Credit Protection Act 1989 (NCCP Act)

The NCCP Act provides a vast array of legal remedies for consumers who enter into credit contracts. Some of these remedies are contained in the body of the Act, but many important remedies are contained in the National Credit Code (which is a Schedule to the NCCP Act).^[22]

Where a remedy is available under the NCCP Act it may generally be sought in the Federal Court of Australia or a superior court or lower court of a state or territory, subject to the court’s general jurisdictional limits, including limits as to locality and subject matter. A remedy may also be sought in the Federal Circuit Court in certain cases.^[23]

A consumer wishing to commence legal proceedings may elect to use the small claims procedure in the circumstances specified in s199 of the NCCP Act. These circumstances include the following:

(a) Where the consumer seeks compensation (not exceeding $40,000) in respect of loss suffered as a result of a breach of a civil penalty provision of the NCCP Act.^[24] This remedy may be sought, for example, where the responsible lending provisions have been breached by the credit provider.

(b) Where the consumer seeks a court order to resolve a dispute about the amount of debt owing under a credit contract (where the value of the credit contract in question is not more than $40,000).^[25]

(c) Where the consumer seeks to have the terms of a credit contract changed by the court (where the consumer’s hardship variation request has previously been refused by the credit provider).^[26]

(d) Where the consumer asks the court to reopen an unjust transaction (where the value of the credit contract in question is not more than $40,000).^[27]

(e) Where the consumer seeks a court order in relation to an unconscionable fee or charge in a credit contract (where the value of the credit contract in question is not more than $40,000).^[28]

In small claims proceedings, the court is not bound by any rules of evidence and procedure and may act in an informal manner, without regard to legal forms and technicalities.^[29] In addition, where the small claims procedure applies, legal representation will be permitted only with leave of the court.^[30] Further, in small claims proceedings costs may be awarded against a party only if:

• the court is satisfied that the party brought the proceedings vexatiously or without reasonable cause; or

• the court is satisfied that the party’s unreasonable act or omission caused the other party to incur the costs.^[31]

Consumer rights under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)

The general consumer protection provisions relating to financial services are contained in Division 2 of Part 2 of the ASIC Act. These ASIC Act provisions operate to the exclusion of the Australian Consumer Law, which does not apply to financial services.^[32]

The ASIC Act provides a number of legal remedies for consumers. Where a consumer remedy is sought, proceedings may generally be brought in the Federal Court of Australia. Further, proceedings may be instituted in state courts subject to their jurisdictional limits as to locality, subject-matter or otherwise. Proceedings may also be brought in the courts of the territories.^[33]

Remedies under the ASIC Act may be sought in various circumstances, including the following:

• A consumer may seek a declaration that a contract term is an unfair term.^[34] A term of a consumer contract is void if the term is unfair, the contract is a standard form contract and the contract is a financial product or a contract for the supply, or possible supply, of financial services.^[35]

• A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the states and territories.^[36] Further, a person must not, in trade or commerce, in connection with the supply or possible supply of financial services, engage in conduct that is, in all the circumstances, unconscionable.^[37] A consumer may seek a remedy, such as damages, if this provision has been breached.^[38]

• A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive, or is likely to mislead or deceive.^[39] Again, a consumer may seek a remedy, such as damages, if this provision has been breached. Note that the general prohibition against misleading or deceptive conduct does not apply in relation to a disclosure document, such as a financial services guide, a statement of advice or a product disclosure statement. Separate provisions apply where such documents contain misleading or deceptive statements.^[40]

The role of ASIC

There are various ways in which ASIC may be able to assist a consumer wishing to enforce his or her legal rights.

First, ASIC may seek leave of the court to intervene, or to appear as amicus curiae, in existing litigation to which the consumer is a party. Note, however, that ASIC has stated that ‘we do not lightly intervene in matters where a case primarily concerns the personal legal rights and remedies available to the parties unless there is a broader regulatory benefit that may be achieved through our intervention’.^[41]

Secondly, ASIC may begin, and carry on, civil proceedings in the name of a person in appropriate cases.^[42] ASIC’s power to bring such an action arises only if:

1. there has been an investigation or compulsory examination (under the ASIC Act or the NCCP Act, as the case may be);

2. as a result of that investigation or examination, it appears to ASIC to be in the public interest to bring the proceedings;

3. recovery of damages or property is sought; and

4. the person in whose name the proceedings are to be brought has consented (unless that person is a company).

ASIC has indicated that it is ‘less likely’ to commence proceedings on behalf of a person where that person:

• has not already lodged a complaint with an EDR scheme;

• is already pursuing a private action funded by the plaintiff’s own resources;

• is pursuing a private action (including a class action) funded by a litigation funder or community legal centre;

• is participating in an existing class action; or

• has the ability to pursue one of these alternatives but has not yet done so.^[43]

Thirdly, ASIC may provide information or documents in its possession to private litigants. ASIC’s policy is that it ‘will generally assist litigants by providing information and documents if requested, subject to:

• avoiding potential prejudice to our investigations;

• any legal limitations on our ability to disclose confidential or private information;

• the rights of third parties affected by the provision of information’.^[44]

COMPENSATION SCHEMES

In certain specific situations, a consumer who has suffered loss may be able to lodge a claim with a compensation scheme. Notably, a consumer may lodge a claim with the Securities Exchanges Guarantee Corporation (SEGC) where he or she has suffered loss due to the non-completion of a trade on the Australian Stock Exchange (ASX), or due to the insolvency of an ASX member. For example, a claim could be lodged with the SEGC if the consumer had placed an order to buy shares on the ASX with a stockbroker, and had paid the purchase price, but had not received the shares. It is not necessary for the client to establish fraud in order to make a claim in these circumstances.

It should be noted, however, that there is no industry-wide compensation scheme in the financial services industry. Accordingly, it is possible for a consumer to obtain an order against a financial service provider (from an EDR scheme or a court), but not actually be paid compensation by the provider. This problem is most likely to arise where the financial service provider has become insolvent.

CONCLUSION

The main options for consumers of financial services seeking a remedy are:

• to lodge a complaint with an EDR scheme;

• to commence legal proceedings (or to participate in a class action); and/or

• to claim against a compensation scheme.

In each case, it is necessary to determine the most appropriate option (if any) for the consumer. This will depend on a range of factors, including the nature of the complaint, the amount of compensation sought by the consumer, and whether a breach of the law can be established.

Andrew Serpell is a Lecturer in the Department of Business Law and Taxation, Monash Business School, Monash University. He researches in the areas of financial services, corporations law, corporate crime and judicial method. EMAIL: andrew.serpell@monash.edu.

^[1] A consumer may give the credit provider a hardship notice under s72 of the National Credit Code.

^[2] A review and remediation program is a ‘a project set up within an advice licensee to review personal advice, where a systemic issue in relation to the advice has been identified, and then to remediate those clients who have suffered loss as a result’: ASIC, Client review and remediation programs and update to record-keeping requirements, Consultation Paper 247, December 2015, para 32. An example of such a program is the Commonwealth Financial Planning Open Advice Review Program.

^[3] Corporations Act 2001 (Cth), ss912A(2), 1017G(2).

^[4] National Consumer Credit Protection Act 2009 (Cth), s47.

^[5] For information about the jurisdiction and processes of FOS, refer to the Financial Ombudsman Service Terms of Reference (FOS TOR): https://www.fos.org.au/custom/files/docs/fos-terms-of-reference-1-january-2010-as-amended-1-january-2015.pdf.

^[6] For information about the jurisdiction and processes of CIO, refer to the Credit and Investments Ombudsman Rules (CIO Rules): http://www.cio.org.au/cosl/assets/File/CIO%20Rules%209th%20Edition%20(18%20December%202014)(3).pdf.

^[7] The SCT is established under the Superannuation (Resolution of Complaints) Act 1993 (Cth). Note that the jurisdiction of the SCT is limited in various ways; for example, the SCT cannot consider complaints relating to self-managed superannuation funds (SMSFs).

^[8] FOS TOR, para 1.1; CIO Rules, rule 11.

^[9] See, for example, ASIC’s ePayments Code, which establishes a regime for recovering mistaken internet payments and which sets out the rules for determining who pays for unauthorised transactions: http://download.asic.gov.au/media/1337282/ePayments-Code-as-amended-from-1-July-2012.pdf.

^[10] FOS TOR, para 8.2; CIO Rules, rule 12.1.

^[11] FOS TOR, para 13.1; CIO Rules, rule 17.

^[12] FOS TOR, para 8.9; CIO Rules, rule 39.3.

^[13] FOS TOR, para 5.1; CIO Rules, rule 10.

^[14] FOS TOR, Schedule 2; CIO Rules, rule 9.

^[15] A cause of action may arise, for example, in contract, tort or under legislation. This article considers causes of action arising under legislation only.

^[16] Corporations Act 2001 (Cth), Divisions 3 and 4 of Part 7.1.

^[17] Corporations Act 2001 (Cth), ss1337B, 1337E.

^[18] Corporations Act 2001 (Cth), s961M. The expression ‘personal’ advice’ is defined in s766B.

^[19] Corporations Act 2001 (Cth), s1527. In relation to personal advice provided prior to ‘application day’, consumer remedies may be available if a breach of s945A of the Corporations Act (now repealed) can be established.

^[20] Corporations Act 2001 (Cth), ss1022A, 1022B.

^[21] Woodcroft-Brown v Timbercorp Securities Limited (In Liquidation) and Ors [2011] VSC 427.

^[22] The National Credit Code supersedes the former Uniform Consumer Credit Code (UCCC).

^[23] National Consumer Credit Protection Act 2009 (Cth), s187.

^[24] National Consumer Credit Protection Act 2009 (Cth), s178.

^[25] National Credit Code, s38(7).

^[26] National Credit Code, s74.

^[27] National Credit Code, s76.

^[28] National Credit Code, s78.

^[29] National Consumer Credit Protection Act 2009 (Cth), s199(5).

^[30] National Consumer Credit Protection Act 2009 (Cth), s199(6).

^[31] National Consumer Credit Protection Act 2009 (Cth), s200.