Presentation by Rob Everett to the Australian and New Zealand Ombudsman Conference 2014

I was once a banker and sometimes still find myself thinking in competitive terms.

If we were in business, a regulator like the Financial Markets Authority (FMA) – or our Australian counterpart, the Australian Securities and Investments Commission (ASIC) – would effectively be reducing your flow of clients.

In other words, if we do our job thoroughly, Ombudsmen – and Alternative Dispute Resolution Schemes (ADRs) – would have far fewer clients.

That is because a well-regulated system should produce fewer complaints and disputes.

For financial services here in New Zealand, the statistics on complaint numbers are hard to interpret at the moment because mandatory membership of an ADR scheme – for financial services providers – is relatively new.

  • It was required from 2010
  • That means a lot of firms have come into the schemes in only the last few years

So, not surprisingly, complaint numbers in New Zealand are up. By 16 per cent (or 356 cases) in 2013 for the New Zealand Banking Ombudsman, for example.

In Australia, the Financial Ombudsman Service (FOS) reports that, as we near the end of the long tail of the Global Financial Crisis, the number of new cases in Australia is actually slowing. Although if you look over a five-year period, complaints received by FOS are up 44 per cent, to 32,307, in 2013.

Overall, I think we can come to a couple of conclusions from the complaints data on both sides of the Tasman:

  • Retail financial services – which is a key area of interest for the FMA – continue to confuse and perplex clients
  • New products – even if relatively straight forward like KiwiSaver – and, indeed, new regulation, such as the anti-money laundering regulations –result in new disputes between clients and providers
  • People are getting to know about ombudsmen – and the alternative dispute resolution you provide – and are willing to call upon you.

As regulators and ombudsmen, it tells us something else – which is that we can be sure of having a long-term interest in each other.

Indeed, the job we all do – on behalf of consumers and providers - is getting bigger, not smaller.

The questions for us – as regulators and dispute resolution services– are threefold:

First, how do we do the right thing by consumers, ensuring they get access to the right service for their needs?

I am mindful here that ADR resolves problems one-by-one.

That is something that regulators do not do generally.

But it is a service in which we – regulators – have a big interest.

So – as regulators – we need you.

Second, how do we – as regulators – draw on what you are seeing, to ensure we uncover the systemic issues – the ones that are doing the most harm?

And, finally, how do we act preventatively?

That is to say, how do we raise the standards of conduct so that there are fewer problems – or, at least, fewer new ones – to solve in the first place?

Let me start with the third question.

Those of you here today, who are from New Zealand, probably know that we are implementing a new financial service regime, primarily through the Financial Markets Conduct Act 2013 (the Act).

The Act brings change right across financial services in New Zealand, ranging from new capital-raising arrangements to improvements in professional standards.

In regard to conduct, it brings a new fair dealing provision – a catch-all provision which applies right across financial services – and that prohibits misleading or deceptive conduct, and false or misleading representations.

I am often asked what the effects of the Act will be overall.

Over the long-term – say five-years – I anticipate one of the biggest changes will be a shift in culture in financial services.

I put it this way – and apologies to Bill Clinton and his 1992 campaign slogan:

“It’s the customer, stupid.”

Boiled down, the conduct provisions of the new Act say to professionals:

“Make sure you put the concerns of the consumer first. Always”

That does not just require truthfulness.

Indeed, we would expect that as a minimum.

It requires financial services professionals to go much further, and ask themselves questions such as:

  • Is this really the right product or service for this client?
  • Does this client really understand the downside risk and what that might mean to them in a material sense if that risk comes to pass?
  • Should I be advising this client on other actions they can take, such as risk mitigation?

Put another way – the entire financial services industry globally – and this must surely apply to many of the other sectors represented here today – needs to stop thinking about what the customer will pay for and start thinking about what they actually need and what will actually benefit them.

In retail financial services – there is a big difference between what people can be persuaded they want and what they actually need

Another feature to look at is whether customers’ use of the product actually fits with its design and the intended outcomes?

  • If not – is that a product design issue
  • A mis-selling issue?
  • An education issue?

In future, in New Zealand, you will have to be able to answer those questions – and others – in order to make the cultural shift we anticipate.

Some of the information that comes to ombudsman services can be and should be critical in helping the relevant industry and its regulators to identify and confront its weaknesses and errors.

Working out what questions the data is posing is not always easy but it is necessary

In Australia, the Federal and State Governments have taken similar action in order to change culture for the better.

The national consumer credit law (National Consumer Credit Protection Act 2009 (Cth)) – which has seen an entire sector that was previously unregulated come under ASIC’s licensing umbrella – is a good example.

The Australian Consumer Law 2010 (Cth) is another example, albeit one that stretches across every retail sector.

The Australian Consumer Law has brought in a comprehensive statutory consumer regime, applying in all the States and Territories, and modelled – in part – on the best consumer law in the world.

All of this is good news for regulators and ADRs.

Improved conduct should produce better outcomes for consumers.

The challenge for us is to ensure that cultural change does occur in the wake of statute – that the bar is actually raised.

In that regard, I welcome initiatives like the one undertaken by the New Zealand Banking Ombudsman – Deborah Battell – who reports regularly to the banks in her scheme on the trends in complaints.

She also runs mystery shopper surveys to see what sort of advice is being provided, and includes that in her reports to members.

I note the FMA is about to sign an Memorandum of Understanding (MOU) with the Banking Ombudsman, so we can benefit from her insights into the New Zealand sector, on a systematic basis.

We’re planning MOUs with the other New Zealand ADRs as well.

For our part – as a regulator – we have to ensure our focus shifts too, from enforcing and applying the law, to include that plus assisting financial services professionals to adjust to the new culture.

I wanted to return to my first question, which is how we ensure consumers get the right sort of help when they need it.

The results of the New Zealand Ministry of Business, Innovation and Employment (MBIE) report into ADR – published last year – are concerning.

As I noted earlier, in New Zealand, financial services providers were required by law from 2010 to be a member of an ADR scheme.

There are four schemes, including a reserve scheme that covers any firm that doesn’t elect one of the others.

The equivocation about ADR – expressed by financial services providers in MBIE’s report – was high.

  • About 60 per cent of those surveyed were unsure about the value of their membership, or believed that membership was not good value for money.
  • More than half the providers surveyed were unsure as to whether ADR produces fair outcomes for complainants.
  • More than 56 per cent were unsure as to whether ADR produces fair outcomes for providers.

Those numbers are too high.

Providers who lack confidence in a system – at least to the degree expressed in MBIE’s survey – are less likely to tell consumers what they are entitled to.

We have to build confidence in ADR – among providers – if consumers are to enjoy the benefits of it.

I think one aspect – for providers – lies in recognising the independence of ADR practitioners.

You are not there to act as customer advocates.

You are there to help all sides solve the problem, and to do so satisfactorily. “Trust us to be fair”.

I know that you recognise that.

But I suspect that many new participants in ADR, at least in New Zealand, don’t understand that point.

On the consumer side, MBIE’s report revealed a different picture.

  • Unprompted awareness of ADR, among consumers, is low.
  • Only one in ten consumers are able to name at least one financial services dispute resolution agency.
  • Six out of ten consumers recognised an agency when prompted.

However, I find those numbers less concerning than the results from providers.

Arguably – the key for consumers is not whether they know you exist.

It is can they find you when they need you.

That, of course, leads us back to providers, and their willingness to tell consumers what they are entitled to.

The place where we have the most work to do is within the industry, with people who provide financial services and financial advice.

Indeed, that is an aspect of the cultural change I mentioned earlier – fully recognising that consumers are entitled to take their case to someone else when things go wrong and a firm has exhausted its internal processes.

ADR is no longer an add-on in New Zealand.

It is now a fixture, and one that consumers are entitled to by law.

The second question I raised was how we – regulators – draw on the insight of ADR professionals, and ombudsmen, into systemic issues.

As the CEO of a regulator – and a former bank executive – I think we can see most of the big targets – the problems that really stand out.

It is the less noticeable, on-going problems - where people are less likely to complain – perhaps because they regard it as part of the norm – or where the complaints are about modest sums - that are harder to spot.

In Australia, the Australian Competition and Consumer Commission (ACCC) cites the problem of so-called mobile premium phone services.

Teenagers were signing up to short-code mobile phone services – they started with the prefix ‘19’ – that seemed to come at a quantifiable, headline price.

In fact, they were signing up for services that cost much more – downloads of horoscopes and screensavers, which were often hard to terminate once they started coming.

Later, Mum and Dad got the bill for the service, which was sometimes hundreds of dollars.

The cost per consumer was modest, at least in the scheme of things.

But across many consumers it was a major problem and very costly.

Indeed, the Australian Telecommunications Industry Ombudsman (TIO) received 14,000 complaints in one year.

Eventually, the ACCC, with the Ombudsman, and the Aussie telcos, found a solution.

But – in the meantime – a lot of consumers were frustrated.

And the telcos had spent thousands of hours trying to resolve the complaints.

As a regulator, that is the type of problem I would like to hear about, and early on.

Addressing a problem like that – quickly – saves resources.

The ACCC took some court cases over premium mobile.

Court time is a resource you want to use very carefully as a regulator, because it is among the most costly and slowest of interventions.

And early action reduces the number of consumers who are affected.

Indeed, early action – on these types of widespread, less obvious problems - is the key. We would rather prevent than cure.

I want to finish with a couple of comments about how ombudsman services can raise standards in their relevant industry and I know from talking to a couple of you that this is dear to your hearts.

The complaints data (and especially trend data) that you see and hold as ombudsmen is, or ought to be, like gold-dust to providers of retail services and to their regulators.

Everyone should be focused on understanding where end-users of retail products get disappointed and why. Consumers are not always right but it cannot be the intention of businesses facing them to be sanguine about disappointed customers.

Correcting these issues and disappointments should be a business priority and not a burden. Some of what I saw in my short spell as regulatory consultant in the UK taught me that you can tell an awful lot about a financial institution from the way it handles complaints. We at the FMA will be paying close attention to the governance, management and resourcing of such areas in the bigger providers. Hopefully this will make them more receptive to a collaborative relationship with their ombudsmen.

Thank you for the opportunity to speak to you today, I look forward to a productive and constructive engagement – both personally and speaking on behalf of the entire FMA - with you over the coming years.