The government has sharpened the teeth of its review into bank dispute resolution by asking it to make firm recommendations on a compensation scheme of last resort including providing redress for past disputes.
The move comes as a submission released by the banks on Thursday shows they are seeking to limit access to external dispute resolution (EDR) schemes by narrowing the definition of small business and restricting the size of disputes going into the schemes, which are designed to be more friendly to claimants.
The broadening of the terms of reference for the review being led by Melbourne University professor Ian Ramsay into EDR schemes comes after the government released a report by small business Ombudsman Kate Carnell which criticised the power given to banks by standard credit contracts and called for more protections for business borrowers.
The original terms of reference for the Ramsay inquiry, also announced by the government to stave off Labor's calls for a royal commission into the banking sector, had merely asked it to make "observations" on the compensation scheme of last resort, opening the government to criticism that the review was merely a political exercise.
A compensation scheme of last resort responds to claims against financial advisers whose professional indemnity insurance is insufficient to meet the claims, or against financial services companies that are wound up and so not able to pay valid claims.
The banks support setting up a compensation scheme of last resort but want it to only respond to future disputes and the amounts of compensation capped.
But the broader terms of reference announced on Friday call for the Ramsay review to make firm recommendations on the last resort scheme and suggest it might operate retrospectively. The government said on Friday it now wants Ramsay to consider "the merits and issues involved in providing access to redress for past disputes".
The government has also extended the reporting date of the Ramsay review by three months; its final report is now due with Financial Services Minister Kelly O'Dwyer by the end of June.
Caps in dispute
The definitions relating to the size of disputes qualifying for an EDR scheme and the size of company that can make use of them is now shaping up as one of the key issues of contention between banks and the inquiries.
Ms Carnell recommended the banks fund an external dispute resolution "one-stop shop" with a dedicated small business unit dealing with disputes relating to a credit facility limit of up to $5 million and with the power to award compensation of up to $2 million.
This is higher than the current limits on the Financial Ombudsman Service, which can only hear disputes of not more than $500,000 arising from a credit facility of not more than $2 million. Ms Carnell said "this excludes many small businesses".
The interim report of the Ramsay committee released in December said the small business monetary limits and compensation caps should be "higher than the current arrangements" but did not specify the amounts.
But in their submission to the interim report, released by the Australian Bankers' Association on Thursday, the banks are seeking lower limits than those recommended by Ms Carnell. This would have the effect of sending more disputes into expensive litigation, where the banks have an advantage in terms of the resources they can draw on to fight a claim.
The ABA wants EDR schemes to only apply to businesses with a credit facility limit of $3 million and with the power to award compensation of up to $1 million. These limits are higher than FOS's but would result in fewer businesses using the EDR scheme compared to the higher limits called for by Ms Carnell.
The banks also want to define small business narrowly, arguing a company is not a small business if one of these conditions are satisfied: it has 20 employees or more; its annual turnover is $5 million or more; the size of the loan is $3 million or more; the total credit exposure of the business including related entities to all credit providers is $3 million or more.
The panel led by Professor Ramsay released a statement on Friday morning saying it intends to release a separate issues paper on the last resort compensation scheme to seek the views of stakeholders. It will still provide the government with a final report on the issues contained in the original terms of reference by the end of March.
The ABA says a last resort compensation scheme represents "the final element of a significant reform program already underway to professionalise the financial advice industry, including implementation of the Future of Financial Advice (FOFA) reforms and higher professional, ethical and education standards".
"Establishing [such a scheme] covering financial advice is an important part of financial advisers forming a profession," the ABA said in its submission on the Ramsay interim report, despite identifying risks including potential moral hazard and possible distortions in government and regulator behaviour.
The interim Ramsay report in December recommended that the three established EDR schemes – the Financial Ombudsman Service, Credit and Investments Ombudsman and Superannuation Complaints Tribunal – should ultimately be merged into one.
The interim report also rejected the idea of establishing a judicial tribunal, which had been called for by Prime Minister Malcolm Turnbull and was a recommendation of the House of Representatives standing committee on economics' November report on the major banks.
However, Mr Ramsay's interim report said ombudsman structures were a better option than a tribunal because the process was less legalistic and more efficient for the customers making claims.
