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New disclosure requirement could backfire

External disputes resolution schemes are worried that a new obligation requiring them to notify the Financial Markets Authority when they believe a law has been broken could lead to financial services providers being less willing to acknowledge their mistakes.

Tuesday, September 12th 2017, 6:00AM 6 Comments

The obligation is included in the Financial Services Legislation Amendment Bill, which is currently before Parliament.

Susan Taylor, chief executive of Financial Services Complaints Ltd, told the Financial Services Council conference that her scheme always tried to reach an early resolution when it received complaints.

“That’s usually in everyone’s best interests,” she said.

“Often we’ll seek to settle the complaint by way of negotiation or confidential conciliation with parties around the table. This is often best for everyone, they reach a settlement that the consumer is happy with and that also allows the adviser and often their professional indemnity insurer to reach a quick efficient settlement to walk away and put the matter behind them."

But she said there was a danger that could change with the new rule.

"If the provider or adviser knows that we're going to be required to report on them to the FMA, and potentially they could be named and shamed, there may be less willingness to come to the negotiation table and crunch out a settlement. They may want to defend their position to the last degree."

FSLAB has been amended as it progressed to make the obligation on dispute schemes stricter.

Originally, it required only that the regulator be notified if there was a series of material complaints.

But submitters said that was too high a threshold - even a serious material breach, as a one-off, would not have to be reported.

The bill was updated before it was introduced to the house, requiring dispute schemes to share information whenever there had been a material breach of financial markets legislation.


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Comments from our readers

On 12 September 2017 at 11:37 am Mr Slater said:
I agree with Susan’s concerns on this issue. It would be a great pity if a resolution that both the consumer and adviser wanted could not be reached because the adviser was fearful he/she may be reported to the FMA.

The proposed changes not only require that a dispute resolution scheme must report a breach to the FMA if an financial service provider (FSP) has been proven to contravene the legislation but also if the FSP “… may have contravened, or is likely to contravene…” will require reporting by the scheme.

This goes against some of the principles of alternative dispute resolution, in particular as pointed out by Susan, the confidentiality provisions of mediation/conciliation.

A mediator/conciliator currently has obligations in various forums concerning the reporting of a breach of the law if discovered during a mediation. However, this usually only occurs when one party makes a clear (and possibly serious) admittance of a breach.

To extend the reporting requirement to “may have or is likely to” in my view goes too far. Not only does the requirement attack the principles of alternative dispute resolution and deters parties from early resolution, it clearly goes against the mandate of ‘innocent until proven guilty’.

What remains unclear is the level of detailed information the FMA will require a scheme to report.

This is a matter that FDRS will be perusing with the regulators, as I am sure will the other scheme will also.

Trevor Slater
On 12 September 2017 at 11:53 am comment1 said:
Under S45A of the Financial Advisers act any AFA in a position of reasonably knowing a breach of the Act has occurred already has a duty to report this to FMA. Hence as long as they kept the same wording (rather than may or likely) then I would assume that this is just an extension of this. If someone is breaching the law then in the interest of the public and the industry wouldn't we want that party to be called to account so as not to further erode public confidence in the industry?
On 12 September 2017 at 10:57 pm Murray Weatherston said:
Your statement of the law is not true, I am afraid. s45A says an AFA "may" report a breach. That is well short of a duty or obligation to report.
FSLAB places an obligation on the EDRS - that is upping the ante enormously.
Susan and Trevor make very good points. MBIE should listen to them given their respective positions in EDRSs.
On 13 September 2017 at 8:27 am comment1 said:
Fair point Murray but for the reputation of advisers who are doing things right maybe as a professional industry it maybe it should be compulsory reporting. It doesn't have to be seen as a bad thing. It can mean that the adviser gets picked up early and can be corrected rather than have the error continue to be repeated and get exponentially worse.

As a ex member of the NZICA if an accountant did not report another accountant they knew was "breaching" then they ran the risk of getting into just as much trouble (for the non reporting) as the person who was "breaching".
On 13 September 2017 at 8:58 am dcwhyte said:
Compromising the integrity of the DRS process appears problematic. Australian legislation places the onus on the licensee/adviser to report any breach. Failure to do so is, in itself, a breach of the legislation and subject to penalty. That would surely be a more appropriate path?
On 13 September 2017 at 10:03 am Mr Slater said:
There is a point that is being missed here. I don't see any problem in principle in reporting a known breach. However, the proposed legislative changes go much further and require a DRS to report even if there's the slightest possibility of a breach which has not been proven. That in my view extends the obligation too far and will very much impede the DRS to do their job i.e. resolve complaints via alternative dispute resolution processes.

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