FOS requires greater discretion towards property developer claims

An independent review into the Financial Ombudsman Service’s (FOS) operations has recommended the external dispute resolution service should exercise greater discretion when deciding whether to refer claims from property developers to the courts.

The review, conducted by Melbourne-based consultancy Cameronralph Navigator, found the scheme’s scarce resources were being tied up in handling complicated complaints brought by small businesses – often property developers – that would be better handled through the courts.

FOS can only hear claims when the claim amount (not the loan) is for less than $500,000. It must refer claims in excess of that sum to the courts.

The external dispute resolution service can use its discretion to refer claims to the courts when the claim amount is uncertain, however the report found that FOS often did not use that discretion. It found property developers that had borrowed large sums, sometimes in excess of $5 million, were accessing the service.

Submissions to the review argued that commercial property borrowers accessing FOS were legally advised at the start of the loan, often well resourced and “more than capable of defending their position in count”.

The submissions argued that these borrowers were using FOS to delay recovery action and this diverted FOS’s resources from consumer matters.

Similar concerns were raised about farm debt disputes.

The property developer disputes that came before FOS were sometimes complex with a number of parties to the loans. The review reported that the issues could take years to resolve and might involve multiple disputes about maladministration, fees, interest rates, financial difficulty and the realisation of security.

The review recommended FOS should use its discretion more actively to exclude large and complex business credit disputes.

It also recommended FOS provide guidelines about what factors would be taken into account when it exercised discretion. The guidance should include “the number, quantum and complexity of the loans, the number of parties, the complexity of issues involved, whether the parties were legally advised at the time of entering into the loan and whether independently facilitated mediation by a qualified mediator had begun” the review reported.

The review was the first report into the operations and procedures of FOS since the external dispute service was formed out of the merger between five major ombudsman and complaints and dispute resolution schemes in July 2008.

It found that while FOS had met most of its targets, there was widespread frustration about how long it took the service to resolve disputes.

The Australian Securities and Investments Commission said it would work with FOS to implement the review’s recommendations.