Opening Address – David Locke, Chief Ombudsman and Chief Executive Officer
Welcome everyone. Thank you so much for joining us today as we take you through AFCA’s proposed new funding model.
We’re really pleased to finally be able to share the details of AFCA’s new draft funding model with you today. We think it’s a fair, transparent and equitable model that is supported by strong data and modelling. The plan is to roll this out from July of this year once consultation is completed.
Today’s webinar will cover the design and development of the proposed new funding model as well as an overview of the key changes and likely estimated impacts on each product group. We’ll also take a deeper dive into what this looks like for your sector so you can get a feel for what any changes look like.
We are very keen to hear your feedback on the model we’re proposing. We do appreciate that there may be a lot to absorb today, so please be assured that there will also be ample opportunities for you to provide further feedback over the next six-week consultation period once you’ve had time to digest and consider.
We’ve designed our consultation to be really focused on having direct conversations and good engagement with all of you, so we can identify any issues or concerns early and work to adjust them in a flexible and proactive way.
We have already been speaking directly with many of the peak bodies representing you as well as some of the bigger members – particularly those heavier users of AFCA – who will be more impacted by the changes we’re proposing.
Overwhelmingly, these have been really positive meetings and members and peak bodies are broadly supportive of the changes. But where we have heard feedback on areas we could improve, we’re already taking action. For example, early feedback indicated that an annual user charge invoice wouldn’t work for many members, so we are now exploring progressive invoicing throughout the year instead.
In terms of background – as you may be aware, since AFCA commenced handling complaints on 1 November 2018, it has been operating under an interim funding model that is a hybrid, based on aspects of the Credit and Investments Ombudsman and Financial Ombudsman Service scheme funding arrangements and the APRA [Australian Prudential Regulation Authority] levy model for superannuation trustees.
The interim funding model was only ever intended to remain in place for the first three years of AFCA operations while AFCA established an evidence base of complaint volumes and complexity in an expanded jurisdiction. COVID of course impacted our timeframes, as it did with so many other things in our lives.
It was also then prudent to delay the rollout of any new model until Treasury completed its Independent Review of AFCA in November last year to ensure the recommendations were reflected in the new design.
Designing the new model
The specific focus in the Independent Review on our funding model and design has been a rich source of feedback for us and we have used these insights, alongside feedback we’ve heard from members directly, to develop the proposed model we are sharing with you today.
One area we know our members have been very vocal about – and this is reflected in the Independent Review as well – is the impact that the current model and AFCA fees have on small businesses and the sector more generally.
So, while AFCA's interim funding model and fee structure has served the scheme well during our establishment phase, we, like our members, believe there are improvements that can be made to make it a fairer, more equitable model.
So far, the majority of feedback from peak bodies and larger members has been very complimentary and they can clearly see we are serious about addressing issues like cross-subsidisation and introducing a fair, user-pays system that rewards good performance and good IDR.
Developed with expert strategic partners
Developing a new funding model is no easy task, let alone one that must balance the impacts on members that range from very small sole traders through to big banks, working across multiple sectors and based on hugely variable factors like complaint volumes.
Given this complexity, we recognised how important it was that the new model was grounded in independent expertise and that was supported by a robust methodology.
We engaged PwC to partner with us as they have great knowledge in this area and we are pleased to have Martin Stokie from PwC here today. Martin developed the model and he will talk you through the process, as well as the new features and provide you with an overview of the impact we’re expecting to see in your sector.
As I mentioned, we’d then be very interested to hear your questions and any feedback that you’d like to raise.
Opening Address – Justin Untersteiner, Chief Operating Officer
In developing a model, we understood how critical it was to ensure that any new funding model was grounded in strong principles and strong foundations.
The principles we used to establish this draft model were those outlined in the 2017 Ramsay Review into the financial system external dispute resolution and complaints framework.
Examples of principles drawn from the Ramsey Review include:
- the need to minimise cross-subsidisation between sectors and between members
- ensuring the funding model is based on a user-pays system
- the system should incentivise good internal dispute resolution practices
- complaints should be free for consumers.
We asked PwC to undertake analysis to understand how aligned our current hybrid model was to those principles, and what we saw was that, with changes in the nature and types of complaints, over time cross-subsidisation had crept into the system.
We also saw some larger users were not paying their fair share for their usage of the system, and that burden was falling onto other members, particularly some smaller members.
In addition to the Ramsey Review principles, as David noted we also looked closely at the feedback and recommendations we received through the Independent Review of AFCA, and we took into account other feedback we have received from our stakeholders over the past three years.
Three key themes emerged from the Independent Review and other feedback that needed to be addressed under the design of a new model:
- The need to reduce the impact on small businesses, particularly those who don’t use the system frequently
- The need to reduce the complexity of the AFCA funding model
- The need to ensure we deal with complaints that clearly lack merit appropriately and as early as possible
Addressing those areas of feedback, we make a number of significant changes in the proposed model.
The first change we are proposing is to remove the Superannuation Levy, a legacy from the Superannuation Complaints Tribunal that transitioned to AFCA in 2018. We propose to move the superannuation sector onto to the same funding model as the rest of the industry. This was always anticipated.
We are also looking to significantly simplify the funding model to address the feedback we heard from our members about complexity. There are several changes we are proposing to increase the simplicity of the model.
You would be aware that every year we write out to all of our members and ask them to complete a survey. That survey seeks to understand the size and scale and type of operations that our members undertake. The information we receive back allows AFCA to determine the size of the registration fee for that member.
We have been told that process adds red tape and is time-consuming for businesses, and we agree. As a result, we propose to remove this process altogether – removing the tiered registration fee and introducing a flat registration fee for all members.
We have kept this proposed annual registration fee as low as possible at $375. For some licensee members that will be no change, as they have been paying that low $375 rate. The registration fee would be $66 for credit representatives.
The second change we are proposing is to simplify our fee schedule. The multiple levels of fees can be difficult to interpret, creating an administrative burden for our members. We are looking to move away from that to a simplified complaint fee schedule.
Importantly, we are also looking to reduce the cost of each of the fees as well. There will be significant reductions in the cost of a case management matter, for example, and in the cost of a determination.
Five free complaints
Probably the most significant change we are proposing is the introduction of five free complaints for all members, renewing every year.
This is a significant change and the one we believe will have the most positive impact for many of our members. It will reduce the cost of business for many lighter users of our system and it will mean a significant proportion of our members will now pay only the minimum fee of $375.
As for our authorised credit representative (ACR) members, they will continue to only pay $66 in registration fees. We are keeping that as low as possible.
In reducing complaint fees and in introducing five free complaints, we will offset that with a larger user charge – a charge that will apply only to the larger users of our system, those that have six or more complaints.
These members will pay a proportion of the total user charge based on their usage in the previous year. So, if a member represented 1% of complaints in the previous year they would pay 1% of the total user charge for the current year.
This change means we will minimise cross-subsidisation and this will truly be a user-pays system.
Members who have fewer complaints will be rewarded and those who have a high level of complaints or who tend to resolve complaints later in the process will pay more.
We believe that is a very fair system and it is absolutely consistent with the principles of the Ramsay Review.
Complaints lacking merit
The final key change I would like to discuss is how we deal with unmeritorious complaints to ensure firms do not feel pressure to settle complaints early even though they feel they have a strong case.
We are looking to make three key changes – two of them I’ve touched on already and one is an additional change.
The first is the introduction of five free complaints. We believe this will make a large difference for those who have a lower number of complaints. With no fee attached to those complaints, there won’t be a feeling of having to settle early because of the cost.
Second, as I mentioned we are also looking to reduce fees on individual complaints too.
But probably the biggest change – sitting outside the funding model but dovetailing in with the model – relates to a new process we introduced this year.
Last year we ran a pilot where we trialled new and more robust processes to better scrutinise complaints to identify early complaints where it is clear a financial firm has not been in error or, second, where the consumer has not suffered loss.
Where we identified that was the case we closed the complaint at the earliest stage. Because of the success of that pilot we have now rolled out this new approach across the whole of AFCA.
It is a fine balancing act, however. There are situations where vulnerable consumers, or consumers who don’t have English as their first language, may have difficulty articulating the complaint. That does not mean there is not merit in the complaint. We must ensure we don’t exclude these vulnerable consumers from the AFCA system.
At a macro level what these changes would mean, if introduced on 1 July, after our consultation, is that 95% of our licensee members would pay only $375. Our larger users would pay above that, based on their usage.
What it also means is that 98% of very small businesses, who represent many of our members, will pay only $375 as a licensee.
It means that one in five, or 20% of our total membership base, will see a reduction in fees – a reduction that recognises that many of those members were actually cross-subsidising some larger users in the system. We need to eliminate that cross-subsidisation.
Seventy per cent of our members will see no change and continue to pay $375. Some 99.9% of ACR members will pay $66. We are keeping that as low as possible.
There will be a small number – about 10% - that will see some form of increase in their fees and, again, that is the larger users of the system.
However, ultimately the amount a member has to pay above and beyond the low annual registration fee is totally within their control. Our user-pays approach incentivises firms to use internal dispute resolution to decrease complaints to AFCA. Firms can absolutely significantly reduce their fees and charges through improvements to their own processes and procedures in the internal dispute resolution space.
Our consultation process is seeking to collect feedback from our members over a six-week period. We have already met with key peak bodies, we have met with a large number of members in one-on-one meetings, we are running the current webinar series to walk through the funding model, and we will be publishing information about the proposed model on our website.
Through this consultation process we want to hear from our members and ensure we address issues that we may have missed, or concerns that our members have. We plan to review this feedback throughout April, make relevant changes and then publish the final model in May for commencement in July.