A late submission received by the Senate Economics Committee inquiry into credit and financial services aimed at those at risk of financial hardship – ‘debt management firms’ may contain some solution to the regulation of what some call ‘untrustworthy advisers’, in particular those who purport to advise debtors on how to avoid the consequences of bankruptcy and liquidation, or to defeat their creditors.
The submission is from AFCA, the Australian Financial Complaints Authority being the new independent external dispute resolution (EDR) scheme for the financial sector, authorised under the Corporations Act. It has replaced the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT) for all new disputes from 1 November 2018.
AFCA has a broader coverage that the previous schemes, with a dispute limit up to $1m, and compensation up to $500,000; and in the case of small business credit disputes, up to $5m and compensation up to $1m.
Broadly, AFCA’s submission suggests it be given a role in relation to the licensing of debt management firms, which it defines as an organisation that ‘for fees, promises to assist consumers in financial hardship or with listings on their credit reports through debt negotiation, advising and arranging debt agreements, ‘repairing’ credit reports and developing and managing budgets’.
The Ramsay Review of May 2017 recommended that debt management firms be required to be members of AFCA, and thereby come under its authority. It acknowledged that further work would need to be undertaken to determine the most appropriate way to impose this requirement’. AFCA says that the government’s response to the report accepted this recommendation.
AFCA’s submission proposes that its licensing and regulation role extend to debt management firms where, it says, there are serious issues to address, in particular ‘in pockets of the industry subject to less rigorous regulation or where regulatory gaps exist’.
In recommending that all debt management firms be its members, consumers and small business with complaints against these firms would have access to free and timely EDR; conduct standards would be imposed on those firms, such as to act in the best interests of their clients, and to clearly disclose all applicable fees.
As with many if not most other submissions to the Senate Committee, AFCA supports financial counselling services as forming a ‘crucial part of the infrastructure of our financial sector’. They provide benefits including increasing financial capability and ‘reducing the risk that vulnerable and disadvantaged consumers will be targeted by predatory businesses’.
Readers will recall my earlier article on this issue – External dispute resolution and complaints framework, and “debt managers” – that there is in fact no uniform regulatory framework applying to the activities of debt management firms. Most of their services are not ‘financial services’ under the Corporations Act and they do not offer a ‘credit activity’ under the National Consumer Credit Protection Act 2009. Therefore, most are not required to hold an AFS licence and are not required to be a member of an EDR scheme. Instead, general consumer law prohibitions against misleading and deceptive conduct and unconscionable conduct apply.
ASIC has expressed its concerns about debt management firms but has noted its jurisdictional limits in regulating their conduct. There are regulatory gaps between the responsibilities of AFSA, ASIC and the ACCC.
‘Pre-insolvency advice’ is harder to pin down. It can be encompassed within debt management; indeed, entering bankruptcy or liquidation is a valid way of managing unpaid debt. Advice to directors during the “safe harbour” period under s 588GA Corporations Act is an aspect of debt management. Financial counsellors, lawyers and accountants validly give such advice. Debt agreement administrators also give such advice, but they are now to be more tightly regulated under reforms commencing in June 2019. Liquidators and bankruptcy trustees are more constrained in giving such advice under their professional code.
But the main concern is pre-insolvency advice given to debtors to transfer or hide cash and assets to prevent them being taken by the trustee or liquidator, or the creditors. This can be criminal conduct. Such advisers often come from the edge but may also include “professional” lawyers and accountants who are already regulated, including by their professional bodies. Such advice can also be grey, as to its legality or commercial morality.
How to separate out the good from the bad may be an issue.
The Senate Committee is to report by 22 February 2019. It has its first public hearing on 12 December, in Melbourne.