Financial Ombudsman Service – friend or foe?

What is it?

The Financial Ombudsman Service (FOS) is:

• A consumer dispute resolution service available to banking customers¹ complaining of mis-treatment or maladministration by their financial services provider.
  
  
• An ASIC approved external dispute resolution scheme for financial services providers.  Membership to such schemes is mandatory for financial services providers arising from the Consumer Credit Protection reforms introduced during 2010.
  
  
• Free for consumers.
  
  
• Funded by its members, that is, financial service providers.  FOS’ costs to formally investigate a dispute can range between $5,000 - $15,000 per complaint and are payable directly by the financial services provider.

An alternative to court

A consumer can lodge a complaint with FOS instead of pursuing court proceedings against their bank. Consumers must first contact their bank about their dispute, and if it is not resolved by the bank’s internal dispute resolution process, the consumer can proceed with a FOS complaint.

FOS is a without prejudice forum.  It is not bound by rules of evidence or by any timeframes compelling a party’s compliance.  FOS will ask the parties to make submissions on their respective positions, to supply all relevant documents and to participate in mediation with a view to resolving the complaint before FOS starts a formal investigation.

If mediation is unsuccessfully, FOS will proceed to formally investigate the complaint and ultimately issue a determination. 

Effect on legal proceedings

If a consumer started proceedings and those proceedings heard and decided the matter, they can’t make a FOS complaint about the same matter.

However if a bank has started proceedings against the consumer – most commonly for recovery of possession of a mortgaged property or for payment of a borrower or guarantee liability – the consumer can lodge a FOS complaint.  In this event, with limited exception, the consumer’s FOS complaint requires the bank to put the proceedings ‘on hold’ until the complaint is decided, regardless of what stage those proceedings are up to.  The bank is also required to refrain from taking any steps to enforce its facilities or securities.

The bank can not re-enliven its court proceedings until FOS determines the dispute.  FOS’ determination is binding on the bank but not on the consumer; if the determination is made in favour of the consumer, the bank must discontinue its court proceedings (which will attract a liability to pay the consumer’s legal costs).

Dispute coverage

FOS considers complaints relating to all banking products (regardless of how they are documented or whether they are documented at all) including complaints relating to guarantees and indemnities, third party securities, break costs, hardship and allegations of maladministration by a bank.  FOS’ jurisdiction extends to complaints relating to managed investment schemes, life and general insurance products and superannuation funds.

The full range of disputes FOS can deal with are set out in its Terms of Reference (2010) (TOR).

Consequences for members

FOS’ terms of reference operate as a binding contract between FOS and its member banks.  FOS has discretion to take ‘any action it considers appropriate’ if a member bank breaches the TOR, including to expel it from the scheme.  We are not aware of any members deliberately breaching the TOR.

Lavan Legal comment

FOS is a consumer focused service.  It gives rise to an inherent tension between a bank’s rights to pursue legal and enforcement proceedings through the courts and the bank’s obligations under the terms of reference and Consumer Credit Protection reforms to unconditionally submit to FOS’ jurisdiction.

Consumers are increasingly seeking recourse through FOS, and seemingly are taking advantage of its perceived strategic benefit of ‘staying’ a bank’s legal proceedings whilst the complaint is considered.

However, the consumer continues to be liable for default interest, fees and charges accruing on their facility or security whilst the complaint is under consideration.  If the bank is successful, any initially perceived benefits of a FOS determination are likely to be eroded by a loss of equity in the security property and increased exposure to interest and charges.

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