Court overturns AFCA ruling due to “absence of impartiality and independence”

In a decision with potentially broader ramifications for the Australian Financial Complaints Authority (AFCA), the NSW Supreme Court has overturned an AFCA ruling against a financial firm on the basis that AFCA may have lacked independence and impartiality.

The Court’s decision stemmed from failures by AFCA to follow its own complaints handling process and specific measures designed to ensure the independence of ultimate decision makers and the integrity of the process.

The implications of the decision are significant: it is an embarrassing failure by AFCA; creates a precedent that can be leveraged where there is any potential departure from key processes; and offers those defending financial firms additional procedural ammunition in defending complaints.

Most immediately, it raises the potential that other rulings by AFCA may have involved the same procedural failures, opening the door for complainants or financial firms to question those decisions.  This potentially opens the door to question other AFCA rulings.

The facts of this case

AFCA’s original decision against Notesco Pty Ltd, trading as IronFX, related to the customer’s trading in complex and high risk foreign exchange (FX) contracts for difference (CFDs), including margin FX contracts.  

The customer, an 83-year-old French resident, claims to have lost his entire life savings of over €300,000, and that he was contacted illegally and offered speculative investments while having absolutely no experience in them.

The proper AFCA complaints handling process includes as follows:

• A “Case Manager” will consider the matter and may issue a “Preliminary Assessment” with reasons and a proposed resolution, and invite the parties to accept it.
• If either party does not accept the preliminary assessment, the matter will get formally referred to an independent AFCA Decision Maker, i.e. an Ombudsman, to make a “Determination”.  
• Throughout this process, both the Case Manager and the Decision Maker are required to remain separate, independent and impartial, including in relation to each other.

However in this instance, the correct process was not followed.  

First, when considering the Preliminary Assessment, the Case Manager consulted an Ombudsman for his views.  Second, that same Ombudsman was appointed to consider the matter at the Determination stage, and to compound the problem further, the Ombudsman continued to exchange views with the Case Manager about the case.

In her judgment, Justice Kelly Rees found that:

Involving [the Ombudsman] in the preliminary assessment in even this cursory way had the potential to undermine his independence and impartiality when later called upon to make the Determination. …I consider that allocating the complaint to an Ombudsman who had already expressed a view – albeit cursory – on the preliminary assessment was contrary to the AFCA Rules.

The fact that the Ombudsman continued to exchange his thoughts with the Case Manager whilst reaching a Determination compounds the problem. …The separation between the preliminary assessment stage and the Determination stage was not observed.

As a result, the Ombudsman’s Determination was set aside remitted back to AFCA, to be determined by another Ombudsman who had no involvement in the Preliminary Assessment or the Determination.

Conclusion

What is not clear is whether this is an isolated procedural failure or a broader issue.  Regardless, it will increase the level of examination by parties to AFCA disputes of AFCA’s process, and increase their ability to challenge that process as it plays out.

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Anthony Jensen, Senior Associate &

Dan Mackay, Managing Director

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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