Collective Forms of Consumer Redress and the Financial Ombudsman Service

1. Collective Forms of Consumer Redress and the Financial Ombudsman Service Professor Vicki Waye Law School Division of Business UniSA

2. Collective Redress • Small consumer claims are typically uneconomic to prosecute unless dealt with collectively to achieve scale • Class actions are one way of collectivising claim prosecution • But class actions are not necessarily the most efficient method. Some complain they are lawyer driven and impose high agency costs • Yet there are few incentives for pursuing collective ADR & many practical impediments

3. Collective Redress • Dealing with collective consumer claims on a quasi-regulatory basis is another method of responding to the collective redress dilemma • The aim of this paper is to examine the FOS investigation of systemic issues as an alternative to class actions and collective ADR

4. Class action costs • There is limited empirical evidence available. However on average cartel class actions last 1588 days (ie over 4 years); securities class actions over 3 years; and others 2 years involving many collateral procedural disputes. Legal fees are often higher than normal rates as a result of no win no fee agreements where a risk premium is charged by the representative law firm. Public notices must be published in daily newspapers. Where litigation funders are involved on average a premium of 30.67% will be charged against the class fund. Following settlement, costs of administering the class fund are also high (usually costing upwards of $1 million). • Mean costs of funded proceedings settled in the last 17 years per class member are $82,399

5. Class actions • Although costs are high there are significant incentives to initiate class actions quickly • These incentives relate to the business model of funders & lawyers which depend on securing as many class members as are willing to enter tri-partite contingency fee & funding agreements. Unless large numbers are willing to ‘sign up,’ litigation risk is too great compared with returns. Being first also scares away competitors.

6. Civil Dispute Resolution Bill No 2 2010 • Requires parties including those engaged in collective disputes to take genuine steps to resolve disputes prior to legal proceedings • Genuine steps includes exploration and participation in ADR (and as it applies to representative proceedings also to collective ADR)

7. ADR • The benefits of ADR are well known: - low cost - swift - educative (parties learn about each other’s interests) - high degree of control and participation of affected parties - results in mutually beneficial outcomes

8. Collective ADR • Many of the benefits outlined on the previous slide do not apply to collective ADR Eg there is little empirical evidence which shows that collective forms of ADR currently practised such as conciliation and arbitration are less costly or timelier than litigation. US evidence where collective arbitration of consumer disputes is more established suggests otherwise. • Moreover there are significant practical problems: - Co-ordination - Legitimacy of representation - Caps on compensation - Cost recovery - Lack of final and binding determination

9. Regulatory response • Regulatory or co-regulatory responses such as that undertaken by the FOS re: systemic issues are far more likely to lead to universal compensation and thus greater deterrence at lower cost • Otherwise collective ADR as envisaged by the Civil Dispute Resolution Bill 2010 should be confined to cases where claimholders have already entered into retainer and funding agreements – eg where a class action is on foot or about to be initiated

10. Pure regulatory approach to demand for collective redress • Financial Services Act 2010 (UK) provides that FSA has rulemaking powers which will compel financial service providers to establish collective consumer redress schemes detected breach • Rule making subject to extensive public consultation; cost-benefit analysis & appeal

11. Co-regulation- FOS & ASIC • Rests on the idea that regulation should be shared between business & govt. so as to improve the quality of compliance and enforcement. • Also based on the view that sole reliance on a regulator like ASIC is likely to be inadequate • However, although supplementing ASIC’s role with class actions has improved levels of consumer redress (at a high cost) this has not lead to universal recovery

12. FOS – advantages compared to pure regulatory approach • Access to vast database of complaints • Access to industry • Timely • Cost • Confidential (greater levels of co-operation with industry) • Emphasis on resolution

13. FOS - disadvantages • Independent consumer voice is not visible in respect of systemic investigations • Because of confidentiality requirements accountability is perceived as limited • Indeed these 2 factors themselves may encourage the initiation of class actions

14. Recommendations • Govt. to consider establishing Consumer Advocate. Otherwise consumer interests to be represented more clearly re: investigation of systemic issues • Greater public availability of information re: FOS deliberation and disposition of systemic issues